Reputational risk: Protecting your organisations most important asset

Reputational risk - BCM & Crisis Management

Your good name takes years to build, but how do you keep it? 

It could be a terrorist attack or natural disaster, a regulatory investigation or the exposure of a fraud, an IT security breach or embarrassing litigation. Companies are all too aware they are operating in risky times but tackling the underlying cause of a sticky situation may be only half the battle. 

While any of these scenarios could put an unhealthy dent in a company's bottom line, if mishandled they might prove fatal for an organisation's most important asset: its reputation. In the wake of scandals that have left the reputations of some high profile companies in tatters, reputational risk has climbed up the boardroom agenda. In a recent survey of many of the 500 biggest UK companies conducted by the Risk Advisory Group, reputational risk was identified as the most important risk to business, ahead of operational and market threats. 

The reason is simple.  “In a reputational incident you get massive swings in a company's share price, says Matthew Durdy, a director at Control Risks, the international business risks consultancy.  “Whether it recovers will have much to do with how the management handles it. As the collapse of Arthur Andersen showed, the loss of reputation can mean  you can't do business“ he says. But even for smaller companies that do not trade so obviously on a professional reputation, damage to a company's ethical standing might mean it is unable to raise essential funding, for example. 

Yet many companies still fail to grasp the wider reputational repercussions of the problems they encounter, focusing on the details of their problems but ignoring the wider picture of how their customers, investors and partners are perceiving them. 

Bill Waite, chief executive of the Risk Advisory Group, says the increasing aggression of US regulators has raised the stakes for all companies, even those outside the US.  “The biggest single driving issue in reputational risk is the repercussions of regulatory action, especially US long arm regulation. Threats to reputation might be put into three categories: those connected to events such as a natural disaster or power failure, those associated with crime such as a fraud, and those relating to business connections. "If you have a major incident but come out of it with analysts saying 'they handled it well' it can lead to a re-rating of the management" Mr Durdy insists that all these scenarios can be prepared for, and either headed off or their effects minimised should they happen.  “It is a science and you can be completely ready for it. He adds:  “The best companies have a good risk assessment process. 

Reputation then becomes one of those assets that they have to worry about. Such a scheme would have a mechanism that triggers the involvement of senior figures so that a prepared incident management plan can be put into practice. Being quick off the mark is likely to be essential, particularly in the age of internet and 24-hour television news. 

Many large companies routinely conduct disaster management exercises where they are confronted with a developing scenario and their responses are assessed by risk consultants. Organisations can, of course, keep their fraud prevention regimes up to scratch and investigate thoroughly any allegations as soon as they arise. 

An organisation's reputation can also take a battering if someone with whom it does business, a supplier or joint venture partner, for example becomes embroiled in a scandal. In addition, can a company be sure that the products it is sourcing from a particular supplier have not been produced by child labour? Mr Durdy says supplier screening is being used increasingly as a tool to head off potential reputational risk before organisations commit themselves to strategic relationships. 

The reputational aspect of disputes is also something that companies are having to become increasingly attuned to. Executives know they can win a court battle, for example with a disgruntled former employee claiming race or sex discrimination but still lose the public relations battle. 

Many are now using specialist consultants to handle their litigation PR, aware that the people watching from outside the courtroom can be more important than those inside. It is something that lawyers themselves are more sensitive to, says Mr Waite.  “Many law firms are having to be a lot more conscious in the sense of giving advice in the round, rather than giving purely legal advice. Corporate general counsel at many leading companies are also increasingly viewing themselves as general risk managers, rather than focusing simply on legal liabilities. That trend is far more developed in the US, though, where general counsel are more likely to sit on the board and be involved in the entire risk management process than their European counterparts. 

However, Mr Durdy warns that it is possible to worry too much about your reputation so that companies do not take the calculated risks they need to, for example by settling litigation too readily.  “That can make people risk averse, he says.  “If you shy away from those risks you are losing competitive advantage. In fact, a crisis situation could even prove beneficial, he argues, provided it is handled impeccably.  “If you have a major incident, but come out of it with analysts saying 'they handled it well', it can lead to a re-rating of the management. It can even be reputation enhancing. 

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