“A good reputation is more valuable than costly perfume” Ecclesiastes 7:1 (The Holy Bible)
A few years ago, when CEOs had to answer the question “What are the major risks facing your organization?” many of them were quick to list political (environmental), operational, regulatory and human capital as the top four. Rarely did they consider the exposure of the organization to a risk that could be devastating in its impact – loss of reputation. This trend is changing as recent research on risk management by the Economist Intelligence Unit (EIU indicate that CEOs consider reputational risk as the highest ranking (52%) above regulatory (41%) and human capital (41%).
“A company’s reputation is perhaps its most valuable asset. Reputational risk is the possible loss of the organization’s reputational capital”- Financial Times. It is any risk to an organization’s reputation that is likely to destroy shareholder value and can be defined as the risk arising from negative perception on the part of customers, shareholders, investors or regulators.
Changes in business practices arising from increased focus on good corporate governance practices, statutory and regulatory requirements have made companies more vulnerable to reputational damage. Increasingly, the power of the press (and lately social media) has intensified the focus on corporate reputation.
Reputational risk when it crystalizes leads to negative publicity, loss of revenue, litigation, loss of clients (or customers), exit of key employees, share price decline and difficulty in hiring talent. It also hinders access to capital and if the organization is lucky to find funding, this comes at a premium. The loss of reputation does not only affect the corporate entity, it rubs off on individual directors, employees and indeed business partners. Some individuals have had their names sullied in high profile corporate scandals. In some cases, these individuals did not even play active roles in events that heralded the collapse of the institutions.
Exposure to reputational risk is essentially a function of the adequacy of the organization’s internal risk management processes, as well as the manner and efficiency with which governance structures respond to internal and external influences. An organization through its internal risk management processes should identify potential sources of reputational risk to which it is exposed. It is ultimately the responsibility of the Board of Directors to ensure that the apropriate framework to manage reputational risk is in place.
Again, the recent EIU survey found that 62% of companies interviewed stated that reputational risk was the most difficult risk to manage. Among the major challenges identified are categorization and quantification of reputational risk. In anticipating the occurrence of a reputation- damaging event, it is difficult to foresee the likely impact and the dimensions thereof. Oftentimes, a damage to reputation leads to the crystallization of other risks – credit, liquidity, market and legal.
The key elements in the management of reputational risk include; sincere and consistent enforcement of governance controls; enthroning and encouraging ethical conduct across the organization; statutory and regulatory compliance; continuous monitoring of threats to reputation; prompt and effective communication with all stakeholders; having in place a crisis management plan and a crisis management team.
Re-establishing reputation takes a long time. Oftentimes, the damage is permanent and irreversible. Companies need to pay more attention to and place sufficient value on corporate reputation as in the words of Ronald J. Alsop in his book ‘The 18 Immutable Laws of Corporate Reputation’ “a good reputation can enhance business in good times, become a protective halo in turbulent times, and be destroyed in an instant by people at the lowest or highest levels of the corporate ladder”.