The key to managing reputational risk – part one

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Reputational risk is at the forefront of concerns for organisations with research continually showing it to be so.

Insurance group Aon’s 2012/13 Australasian Risk Survey found brand and image was the top risk concern of organisations for the fifth year running, while a survey by insurance group ACE found 81% of companies surveyed consider reputation to be their most significant asset. That same survey also found 92% of companies believe reputational risk is the most challenging category of risk to manage. And furthermore 68% said information and advice on how to manage it is hard to come by.

David Van, founder and managing director of reputational risk management consultancy the De Wintern Group, said there are numerous reasons as to why it has become such a headache for organisations.

“It is a very difficult risk to get your head around. It’s very complex and has attributes that are not like a lot of other risks,” Van told Corporate Risk & Insurance.

Reputation risk can rise internally, externally, upstream or downstream, Van explains, or it can even arise from a competitor doing something wrong.

That complexity is only part of why it has become a substantial risk. The presence of social media and the 24 hour news cycle have raised awareness and the significance of it.

“In the past if something went wrong you probably had 24hrs before the media found out about then probably 24hrs before they wrote about it so it was a much simpler risk to manage and a PR person with crisis manage skill could manage it. That’s not the case anymore,” Van said.

Reputation is also a poorly understood risk in part due to it having no established definition, according to the Ace Insurance Reputation At Risk report. This lack of definition means companies perceive it in different ways. As previously reported by Corporate Risk & Insurance some do not view reputation risk as its own category but instead an impact of other risks.

The report argues reputational risk is “defined by external perceptions”.

‘Reputation consists of a combination of perceptions held by external stakeholders, including the public and communities at large, its customers, suppliers, politicians and policymakers,’ it states, and adds it is therefore essential to understand how external stakeholders perceive them. The report recommends, to manage reputational risk, organisations need to monitor and measure their reputation on an on-going basis in all channels and in different markets.

Van however argues that while reputation does have a perception element, it is not an effective way to manage reputation as it is purely working historically.  He argues his definition of reputation, which is “the expectations that stakeholders have of how an organisation will impact them or their interests,” ensures better reputation management.

He explains this allows for forward thinking and for a degree of relativity. He uses airlines Qantas and Jetstar as an example to highlight expectation and relativity.

“It’s the expectations we have that shape their reputation because we don’t expect the same from JetStar as we do from Qantas,” he said.

“By changing that definition it allows every company to actually start setting expectations in line with what they can deliver for customers, clients, staff regulators and the full range of stakeholders and then testing perceptions to see if we are meeting them and thereby measuring and managing reputation.” 

Using this definition, reputational risk can then be assessed using the formula “Risks reputation = Perceptions – Expectations” Van adds.

To manage reputational risk Van recommends carrying out an audit of risks then assessing them, triaging those that pose imminent danger and then building in mitigation plans, following by monitoring and reporting.

It’s important not to assume because a risk doesn’t appear in other categories to overlook its reputational significance. Van said when assessing or auditing for reputational risk his company often find oversights by companies some of reputational risks that have already happened but have not come to light or caused any damage. He gives the example of companies moving profits to tax havens.  In 2008 he pointed this out to a multinational client as a reputational risk who had overlooked after finding it had no financial risk, legal risk or operational risk

“They’ve ticked the box on every other kind of risk yet there is still a massive reputational risk attached to it,” he said.

And reputational risk shouldn’t just be assessed on whether or not it would make the headlines. A risk can still exist regardless of whether bad publicity it brings it to the attention of a company.

“If you have done something to a client and they’re really annoyed and you haven’t identified that problem and fixed it and they are telling other clients that might never make a headline but you’re probably losing business because your reputation is being tarnished,” Van said.

Look out for Thursday’s newsletter for tips of effectively managing reputation risk.

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