Reputations take years to build, but a moment to destroy. No wonder that Warren Buffett uttered these famous words – “It takes 20 years to build a reputation and 5 minutes to ruin it and if you understand this you will do things differently”
Reputations can be damaged for a number of reasons, including consumer perceptions that a company is unethical.
"Many reputation risks are the secondary result of other, more traditionally recognized risks," The Conference Board states. "For example, if a manufacturer produces an unsafe product, it may lose customers and is likely to suffer financial costs due to a product recall, both of which affect reputation." (See also my Powerlines newsletter Nr. 87 dated September 2009).
Thus it becomes vital for an organisation to decide whether they will treat reputation risk as a strategic risk or consequence of a risk.
Some studies show that the jury is still out on this. Studying the real reasons of reputation risk is important, as our experience have shown, using techniques such as reputation risk root cause analysis, which often shows that that reputation risk has its origins in areas such as the corporate culture, mismanagement of issues and/or relationships with stakeholders.
Reputation risk can be defined as the risk arising from negative perception on the part of stakeholders such as customers, shareholders, investors, analysts, other relevant parties or regulators that can adversely affect an organisation’s ability to maintain existing, or establish new, business relationships and have continued access to resources.
This is why, according to The Conference Board, increasingly more global companies are investing substantial resources to manage their reputation risk and, over the last three years, have increased their efforts to do so.
"Senior executives are acutely aware of how serious today’s reputational challenge is," according to McKinsey. "Most recognize the perception that some companies in certain sectors (particularly financial services) have violated their social contract with consumers, shareholders, regulators and taxpayers. They also know that this perception seems to have spilled over to business more broadly."
Although greater attention is being paid to reputation risks, findings from AON Corporation’s recent 2009 Global Risk Management Survey indicate that less than two-thirds of respondents have formally reviewed the "damage to reputation" risk or have a plan in place, even though it was in the top 10 risks list.
Similarly, The USA Conference Board determined that less than half of executives surveyed have reputation risk incorporated into a risk management function or another risk oversight program.
No matter a company’s current reputation, there are constructive steps it can take to move in the right direction. Charles Fombrun, founder and chairman of the private research and advisory firm Reputation Institute, explains that repairing reputation damage is a three-part process *:
1) identifying the factors and parties that contributed to the crisis;
2) developing initiatives that address those root causes; and
3) engaging with affected stakeholders to rebuild the reputation of the system as a whole.
1. Identify reputational risks. The Reputation Institute advises assessing the gap between stakeholder’s perceptions/beliefs and the company’s actual performance. Nearly 60 percent of The Conference Board’s respondents indicated that assessing the perceptions and concerns of stakeholders was an extremely or very significant issue, making it the highest-ranked challenge. The King Report 3 on Corporate Governance in South Africa also places the following responsibility on the Board of Directors of a modern company, namely that the Board should ensure that the company’s reputational risk is protected. (REPUCOMM, my consultancy use some proprietary techniques to uncover risk and threats seldom thought about or challenged).
2. Prioritize reputation risks and stakeholders. The Reputation Institute recommends assessing the probability of risks and the impact of the risk on reputation. Efforts are being made to quantify the value of reputation. A select group of companies is making progress in this area by working with specialist consulting firms to quantify the impact of reputation on share price, according to The Conference Board. We actually worked with a client to develop impact scales to measure these. (a Stakeholder Question – Does your Stakeholder Profiling plan include thought leaders, the voiceless and their representatives and new emerging stakeholder groupings in your field? Including stakeholders such as Generation Y, Millennials and new issue driven groups?)
3. Identify effective means for mitigating risks and executing the risk strategy. The Reputation Institute says to assess the best response strategy based on controllability of risk, the impact of risk on the business across stakeholders and the cost of implementing the strategy. According to The Conference Board, a company’s reputation should be considered during the preparation and execution of strategy and new projects, which hasn’t been the case in most companies. It is REPUCOMM’s professional opinion that an integrated crisis management & crisis communication response plan is a vital tool in this regard, since research has shown that those companies that respond the most positively to a crisis, weathers the storms best. Just like Noah built the Ark seven days before it rained. We also assist companies to plan and execute their Crisis Management & Communication response in a positive manner.(We have also developed a Crisis Toolkit that will enable companies to save time and resources in developing such a plan and response strategy)
4. Monitor changing beliefs and expectations. The Reputation Institute advises closely monitoring changes in stakeholders’ beliefs and expectations that may affect reputation. Media monitoring has become more sophisticated, providing more tools to assess good, bad or neutral coverage and its prominence. Social media are gaining influence, but most companies are slow to monitor and use this fast growing media tool. More consumers and investors are gathering information from blogs, online forums and social networking sites, but only 34 percent of Conference Board respondents said they extensively monitor such sites, and only 10 percent actively participated in them.
REPUCOMM recommends ongoing stakeholder research and monitoring of macro & micro environmental changes together with media monitoring and issue analysis.
"Ultimately," senior consultant Dr. Majorie Dijkstr writes at Reputation Institute, "risk management is about both anticipating strategic issues and leveraging opportunities to engage with the company’s key stakeholders around topics and initiatives that are most relevant to them.
Some questions to consider:
- Does your PR person serve on the Risk Committee?
- How often does the PR person, Risk and Compliance Officers do scenario planning & joint risk assessments?
- Have you educated and trained your senior executives in reputation building, the understanding of intangibles and the value of reputation as an asset as well as the protection of corporate reputation?
- Do your PR, Corporate Affairs & Corporate Communication staff understand Risk Management & Social Media; two vital tools to understand in Reputation Risk Management?
(Read my article – Building a Reputational Risk Avoidance system – Powerlines newsletter Number 44 dated 31 August 2003 – yes, I have been writing about this stuff long before it became in vogue)
Footnote: I will facilitate a Reputation Risk Management Master Class from the 19th – 20th October in Johannesburg, South Africa that will address many of these issues and strategies.
* REPUCOMM provides essential consulting solutions & educational support through the facilitation of two master classes addressing Stakeholder Reputation & Reputation Risk Mitigation. Most recently we consulted to; and assisted a large telecommunications company prior to its stock exchange listing to entrench reputation risk in its Enterprise wide risk management system.