Gadook

How to Avoid Being Dragged Through the Mud

Today, intangible assets can account for 70% of the value of a business. These intangible assets include, among others, brands, employee loyalty, credibility, trust and reputation. In a world that has been rocked by corporate governance and audit scandals, reputation is now more important than ever before.

In late 2005, the Economist Intelligence Unit (EUI) produced a report entitled “Reputation: Risk of Risks” based on survey input from 269 risk managers in companies of varied size. EUI’s conclusions were that * Corporate reputation is a hugely valuable asset that needs to be protected * Serious reputational damage can occur simply as a result of perceived failures, even if those perceptions are not grounded in fact * Understanding how different aspects of an organization’s activities impinge on stakeholder perceptions is a vital aspect of protecting a company’s reputation * Many companies feel that their capabilities in managing reputational risk leave much room for improvement, but the high rewards of success should provide strong motivation for progress in this area * Incurring reputational damage can be fatal, but establishing a robust reputation can provide a strong competitive advantage

Reputation has always mattered. Managing reputation, however, has become a bigger challenge with e-mail and blogs that empower customers, suppliers, interest groups, investors and the media. The scope of external stakeholders’ concerns has also broadened to include employment practices, environmental impacts, human rights and community relations-which comprise what is now increasingly referred to as corporate social responsibility. Modern enterprises face reputational challenges stemming from operations around the world.

Reputational risk management addresses conventional risks as well as an organization’s relationship with its stakeholders, consistency in outward communication, corporate trustworthiness and management-employee ethics.

Reputation needs to be protected as well as built. Hence, there are two types of reputational risks: negative and positive. This is important for reputation risk management as the mindsets for addressing risks from a negative and a positive perspective are quite different. Negative risk involves thinking about what could go wrong. Positive risk is about creatively enhancing the company.

Negative risks lead to loss of reputation, loss of market share, financial losses and, sometimes, as in the case of Arthur Andersen, for instance, the demise of the company. Several private and public enterprises have been in the media limelight in recent years as a result of problems with their products (e.g., Menu Foods), their internal strategies and operations (e.g., British Petroleum) and the actions of their management (e.g., Enron).

For private sector enterprises, loss of reputation is not good for their business. For public sector entities, loss of reputation reduces influence and impact. Private and public enterprises suffer from negative risks due to having an attitude that “it won’t happen to us,” taking actions without wanting to acknowledge the consequences or thinking that “we can get away with it.”

Positive risks are those that enhance a company’s reputation, market share, share value and profitability. More and more private and public sector enterprises are managing (or taking) risks that integrate economic, social and environmental imperatives into their mission, strategies, business and culture.

For example, Toyota started producing smaller and greener automobiles before there was a significant market for such vehicles. Taking such risks requires assessing public opinion and market demands. In the case of automobiles, it appears to be paying off for Toyota. Competing dealers are currently concerned that they do not have the environmentally-friendly products that buyers are looking for. Enterprises sometimes fail to take positive risks because they are too inwardly focused and fail to see external trends and changes.

Generally, positive and negative reputation risks are of equal importance. Like so much in life, maintaining balance is essential. Enron seemingly focused on positive risks (opportunities), with little regard for negative risks. U.S. car manufacturers seemingly focused on negative risks (e.g., no scandals to date) with little regard for positive risks-otherwise they would not be experiencing a decline in market share.

The key steps to Reputation Management risk are to identify and assess the risks, make decisions and then follow through on the decisions.

Managing Negative Risks

What is your organization’s approach to managing negative risks? Are you reactive or proactive? Being proactive puts you in a position to mitigate or even avoid disasters, be ready when a disaster hits and seize opportunities to enhance your organization’s reputation. Where to start?

The first step is to identify the kinds of events that could befall your enterprise.