Managing Risk to Reputation - A model to monitor the key drivers A key to long term solvency for insurance and reinsurance companies. April 29, 2011
ABSTRACT: Reputation is an intangible asset that directly aﬀects the market value of the ﬁrm. A good reputation evidences belief that the ﬁrm is on a sustainable course. Reputation is built on the trust established with all stakeholders through past behaviour. Reputation may prove more resilient that one might think, yet even minor misconducts, if repeated, can lead to downfall. The foundation of reputation management and of all the risks associated with it, whether upside or downside, can be summarised in one word: authenticity. We propose an operational model to deﬁne, measure and monitor the nine key drivers of authenticity, classiﬁed in three categories:
Intentions : Vision/promises to partners, CSR Proﬁle, Human capital; Actions : Leadership/governance, outreach, operations; Results : Sector proﬁle, Regulatory proﬁle, ﬁnance and value. The model presented here proposes metrics for each driver by aggregating data gathered by diﬀerent methods. The combination of the diﬀerent driver values is conducted through multi criteria analysis based on fuzzy measure, to ensure that the resulting index preserves all the information contained in the data. The process itself, and the result it delivers, is ideally guided by experts outside the enterprise, to ensure inter-organisational comparability. The process reveals threats and opportunities through iteration, and establishes a framework for understanding risks to reputation. Any Enterprise Risk Management (ERM) project that does not include risks to reputation ignores a meta-risk and is incomplete and invalid. KEY WORDS: Cindynics, Expectations, Opportunity, Perception, Reputation, Risk, Stakeholders, Threat, Trust, MACBETH method, Multicriteria decision aiding, Interacting criteria, Fuzzy logic, Choquet integral.
Warren Buﬀett (Chairman and CEO, Berkshire Hathaway) once said: ”It takes 20 years to build a reputation and ﬁve minutes to ruin it. If you think about that you’ll do things diﬀerently.” There would be manifold teachings to draw from this quote; but there are three standing out . Firstly, it demonstrates that risk is a social construct [Douglas, Wildawsky, 1982]. Secondly, it shows that people tend to perceive it as a threat and totally miss the dual accept of risk. Thirdly, it implies that people should react and learn from past errors and improve their behaviour. But is this what happens in real life? Since the beginning of the 21st Century managing risks to reputation has become a real preoccupation for businesses in the private, public and not-for-proﬁt sectors. A survey conducted by AON in 2007 rated damage to reputation as the number one global business risk, although half of the survey’s respondents said they were not prepared for it. After sliding behind the economic crisis in 2008 and 2009, risks to reputation regained their status in the 2010 edition of the survey. In the aftermath of the many corporate catastrophes that happened in the ﬁrst decade of this century, more stringent corporate governance and regulatory compliance requirements, strengthened 1
Risk to reputation
© April 29, 2011
regulator powers, the growing inﬂuence of pressure groups and rising stakeholders’ expectations should 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 developing into a far-ﬂung 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...
References: © April 29, 2011
© April 29, 2011
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