Executives know the importance of their companies’ reputations. Firms with strong positive reputations attract better people. They are perceived as providing more value, which often allows them to charge a premium. Their customers are more loyal and buy broader ranges of products and services. Because the market believes that such companies will deliver sustained earnings and future growth, they have higher market value and lower costs of capital. In an economy where 70% to 80% of market value comes from hard-to-assess intangible assets such as brand equity, intellectual capital, and goodwill, organizations are especially vulnerable to anything that damages their reputations. Damage to reputation is an enterprise-wide event that can lead to lowered stakeholder support, decline in financial performance, and a loss of goodwill with local communities as well as its ‘license to operate’ in key markets.
Most companies, however, do an inadequate job of managing their reputations in general and the risks to their reputations in particular. They tend to focus their energies on handling the threats to their reputations that have already surfaced. This is not risk management; it is crisis management – a reactive approach whose purpose is to limit the damage. Reputation risk management is about anticipating threats that may damage the company’s reputation capital.
A recent survey on global risk management, conducted by AON indicated that of the top 10 corporate risks managers see today, ‘damage to reputation’ has the highest threat to value. Although ‘damage to reputation’ tops the list of risks identified by senior managers, fewer than 50% of them claim to have a strategic plan in place for managing reputation risk. Most CEOs admit that their companies lack coordination with respect to who owns reputation risk, and responsibilities are fragmented among a wide range of business managers.
It is crucial that companies implement a Reputation Risk Management Process to objectively and systematically assess potential gaps between stakeholder perceptions and company behaviors. Vital to the success of the process is that a senior executive below the CEO is responsible and that a cross-functional team manages the reputation risks.
We can identify four steps in the Reputation Risk Management Process:
1. Identification of reputational risks- assessing the gap between stakeholder’s perceptions and beliefs and the actual performance of the company.
2. Prioritizing reputation risks and stakeholders- assessing the probability of risks and the impact of the risk on reputation.
3. Identification of effective means for mitigating risks and executing the risk strategy- assessing the best response strategy based on controllability of risk, the impact of risk on the business across stakeholders and the cost of implementing the strategy.
4. Monitoring changing beliefs and expectations-by closely monitoring changes in stakeholder’s beliefs and expectation that may affect reputation.
Ultimately, risk management is about both anticipating strategic issues and leveraging opportunities to engage with the company’s key stakeholders around topics and initiatives that are most relevant to them. Effective risk management is about aligning perception and reality.
A weak reputation that is not deserved is an opportunity to exploit. A great reputation that is not grounded in reality is a catastrophe waiting to happen.
