Reputation Risk

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Managing Risks to reputation – From theory to practice

Risks to reputation are not anymore part of the emerging risks; in fact, they have been on the risk management radar for over a decade now. However, the last year of this first decade of the 21st century seems to have seen a burst of incidents all over the economic spectrum that tainted the reputation of even well established companies. BP suffered their third blow of the decade with the oil spill in the Gulf of Mexico, Toyota product recall was a warning to the automobile giant that blog can be damaging, not to speak of the SEC suit against Goldman Sachs. If these may be PR disasters to some extent, it would be very casual to not investigate all those event in depths as the root causes are probably not in faulty communication, but rather in faulty operations, faulty governance, etc. Warren Buffett (Chairman and CEO, Berkshire Hathaway) warned long ago: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that you‘ll do things differently.” The teachings to draw from this quote are manifold. Firstly, it demonstrates that risk is a social construct [Douglas, Wildawsky, 1982]. Secondly, it shows that people tend to perceive it only as a threat and totally miss the dual aspect of risk. Thirdly, it implies that people should react and learn from past errors and improve their behaviour.

Therefore, it is not surprising that managing reputational risk has now become a major preoccupation for businesses in the private, public and not-for-profit sectors. In the aftermath of the Enron, WorldCom, the credit crunch and other corporate catastrophes, more stringent corporate governance and regulatory compliance requirements, strengthened regulator powers, the growing influence of pressure groups and rising stakeholder expectations have sharpened the focus on business reputation. Added to this, the advent of real-time global telecommunications and 24/7 media scrutiny can result in an apparently minor incident in a farflung part of a company’s operations hitting the international headlines and provoking a major crisis.

Enjoying a good reputation yields many rewards: not least the continuing trust and confidence of customers, investors, suppliers, regulators, employees and other stakeholders, the ability to differentiate the business and create competitive advantage. A bad reputation, conversely, can result in a loss of customers, unmotivated employees, shareholder dissatisfaction and ultimately the demise of the business itself.

The challenge of managing reputation and its associated risks is well illustrated by the Warren Buffett quote at the start of this chapter. Hard-earned reputations can be surprisingly fragile and can be tarnished or irrevocably damaged as a result of a moment’s lapse of judgement or an inadvertent remark. That is why it is so vital to manage risks to reputation as rigorously as more tangible and quantifiable risks to the business.

What is reputation?
The question is worth asking as there is still some confusion between brand and reputation. Here we reserve the word reputation to cover all aspects of the stakeholders’ perception of an organization whereas the name “brand” applies more to a specific product or service. Therefore, a company’s reputation may incorporate several brands and be influenced by them. It is therefore of interest to the “reputation scholar” to study brand building and maintenance. A recent study2 shed an interesting light on a five stage process stressing for brands attributes similar to those described here for reputation:

1 Jean-Paul Louisot is a Professor of Risk Management at Paris 1 Panthéon-Sorbonne University and Senior Director of Knowledge Resources – Insurance Institute of America, and Jenny Rayner is Director of consulting firm Abbey Consulting. 2 Leslie de Chernatony, “Towards the Holy Grail of Defining brand”, Marketing Theory, vol. 9, n° 1 – May 2009

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 Differentiation: how to...
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