The first is that the issue is still seen as a frontier concept, and some companies have not worked out a process for addressing it – caught in the headlights, they do not move the agenda forward. The second comes from companies who argue that no special measures are necessary, since all reputational risk is ultimately the outcome of operational risk materialising. Since, these companies argue, operational risk is already being managed then, ergo, they have reputational risk covered.
Neither stance is persuasive, and certainly neither is defensible from the point of view of directors’ fiduciary duties to shareholders to protect (and grow) the assets of the company. (Not to mention other duties increasingly being introduced to take account of other stakeholders’ agendas). Directors’ inaction could eventually land them in hot water in terms of personal liability, but we shouldn’t see the reputational risk agenda as one simply of threat and downside. There are many positive reasons for taking steps to master this difficult challenge.
To start with, it is certainly true that reputational risk is generated as a result of other types of risk–not just of an operational nature–materialising. But devising an approach to managing reputational impacts with this perspective alone represents an inadequate management response. Reputational risk permeates, and pervades, all aspects of a company’s operations, and so reputational risk should be marbled throughout a company’s risk register. This means not treating reputational risk as a discrete risk category or classification, but understanding its presence in everything that goes on inside a company.
The main justification–or business case–why reputational risk should be modelled is because the underlying effect and impact of damaged stakeholder relationships can be more pervasive and longer-lasting than the immediate losses resulting from the crystallisation of the original (operational) risk. Companies which have suffered reputational hits have often taken years to recover, and the transaction costs associated with restoring damaged stakeholder relationships, and re-establishing business continuity, have to be factored in in addition to the operational losses.
Damage to a key stakeholder relationship could see good employees leaving, or customers taking their hard-earned money elsewhere, no longer prepared to give their custom, or the benefit of the doubt, to an organisation in which they have lost confidence. When a damaged reputation leads, ultimately, in non-performance, a fall in revenues, and the threat of the business plan being compromised, we can begin to understand why time needs to be devoted to this area.
A properly-initiated strategy helps to protect the value of the company – the deployment of reputational capital to protect the existing revenue streams and future earnings growth so highly prized by investors. Or, in other words, developing a deeper understanding of intangible stakeholder sentiments to deliver hard-edged business benefit.
Measuring reputational risk exposure, and acknowledging how much value might actually be at risk, allows management to make better-informed decisions about the nature and frequency of their interventions, and it also informs decisions on how much investment is justified in preventing and mitigating these risks. One thing is certain – the cost of preventative action is always less than that of mopping up afterwards.
