Reputation risk: which category does it fall into?

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The importance of keeping a strong reputation has long been recognised by organisations. A survey by insurance group ACE found 81% of companies surveyed consider reputation to be their most significant asset while rival insurance group Aon’s 2012/13 Australasian Risk Survey found brand and image was the top risk concern of organisation’s for the fifth year running.

But when it comes to protecting an organisation’s reputation, which risk category should it fall under? There are a few schools of thoughts on the topic ranging from some considering it a risk category in itself, while others view it as a part of all other risk categories, to alternatively reputation risk is both its own issue and that of other risks.

Rod Farrar, director of Paladin Risk Management Services, argues that reputation is a consequence of poor management of operational and strategic risks.

Farrar cites the recent revelations of the Reserve Bank of Australia’s note printing businesses and Leighton Holdings as an example of reputation as a consequence of an operational risk and corruption risk.

To my way of thinking, it is not possible to simply identify the greatest risks to reputation. Organisations would be better served identifying their risks and identifying those where the risks to reputation are the highest,” Farrar told Corporate Risk & Insurance. “ For me, one of the dangers of assessing risk in only one consequence dimension (reputation), is that organisations may ignore other consequences such as legal action, regulatory fines, financial consequences (including reduction in share price) etc. which may in fact be of greater concern that the reputation impacts. 

Farrar adds reputation risk is no different to any other type of risk in terms of its identification, assessment or management – “it is just another risk where the reputation consequence may be above the tolerance of the board or the executive”.

Mike Purvis, Sydney managing director of global risk and business consulting firm Protiviti, believes reputation is an impact of a consequence that could come from any risk category.

“Categories of risks can be defined in various different ways – people but them into bigger buckets that are strategy, operational, financial and compliance, and other people break those lists down and have 20 categories that they might use in their business, but none of those would be called out as reputation risk in my mind,” Purvis said.

“It is quite a pervasive topic and should get consideration across all risk categories.”

However, AON Risk Services marketing manager, Duncan Khoury argues it is both.

“It should be considered as both a standalone risk and a key element that can impact both positively and negatively upon every other risk category,” he said.

Khoury said that from a risk management and risk transfer perspective, risks to an organisation’s brand and reputation need to be considered in isolation to other risks.

“Consider the rapid adoption and utilisation of various social media channels by the business community [for example] LinkedIn and Facebook – organisations need to have specific social media risk management policies in place, and these can’t simply be an ‘add on’ to your existing strategic [risk management] plans due to the dynamic nature of the medium/content concerned,” he said.

ACE insurance group financial lines manager, Australia and New Zealand, Jason Neu holds a different view stating that reputational risk is best considered as a component of other identified risks.

He adds it is also a risk that is hard to insure against as reputational damage is difficult to quantify, therefore it often comes under other categories.

“Having a proper insurance program will generally allow companies to take action to mitigate reputational risk,” Neu said. “For example if a company has robust business interruption insurance, it will have the resources to address a business interruption. The insurance won’t directly cover reputational risk, however the coverage will assist a company to promptly return to business as usual which will indirectly mitigate reputational damage.”

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