The concept of “Reputation Risk” is relatively new – it has been around for about a decade and only more seriously examined in the last 2-3 years. Prescient as always, the Economist called reputation risk the “risk of risks” in 2007. But it was not until around 2013, that several major surveys found that executives and boards not only ranked reputation risk as one of their top concerns but also considered it to be a strategic risk — one that could have a dramatic or material effect on their business, prospects and overall organizational wellbeing. This was a clear reflection of significant events in the financial sector (involving many leading banks and investment banks), the tech sector (Google v. China), the automotive sector (Toyota’s faulty brakes), and the oil and gas sector (BP’s record oil spill), just to name a few.
We have approached this topic from various different angles – Len focuses on reputation and a more quantitative and metrics-based approach while Andrea explores the topic from a more qualitative, governance, risk and crisis management perspective. Both of us have been developing tools and resources on issues of risk and reputation, now we are focusing on what that means to the combined concept and reality of reputation risk.
Reputation Risk: What Is It & What Isn’t It?
We start our discussion by noting some of the more popular Reputation Risk definitions. We then make the claim that reputation risk management is risk management and lastly, we draw the distinction between reputation risk and crisis management.
What It Is – Below are several popular definitions that illustrate cross-functional efforts to operationalize the concept:
Measuring Operational and Reputational Risk: A Practitioner’s Approach
“Reputational risk is the risk of damaging the institution’s trustworthiness in the marketplace”.
Reputational risk is “the potential that negative publicity regarding an institution’s business practices, whether true or not, will cause a decline in the customer base, costly litigation or revenue reductions.” The Federal Reserve System Commercial Bank Examination Manual.
“Reputational risk is the possible loss of the organisation’s reputational capital. Imagine that the company has an account similar to a bank account that they are either filling up or depleting. Every time the company does something good, its reputational capital account goes up; every time the company does something bad, or is accused of doing something bad, the account goes down.” The Financial Times Lexicon.
Reputational risk is the “risk arising from negative perception on the part of customers, counterparties, shareholders, investors, debt-holders, market analysts, other relevant parties or regulators that can adversely affect a bank’s ability to maintain existing, or establish new, business relationships and continued access to sources of funding.” The Basel Committee on Banking Supervision.
The authors propose that reputation risk describes the threats to a company’s financial health. We believe that reputation management is a system aimed at managing the possibility of reputation failures and that reputation risk management done right is a system that mitigates reputation risk and builds long-term organizational resilience.
Reputation risk Management is not Crisis Management
Reputation risk management is definitely not and should not be considered to be crisis management. Reputation risk becomes subject to crisis management when and if a crisis emerges with reputational implications in which having a well-developed and ready to deploy crisis management plan and team is essential to successful reputation risk management.
Andrea Bonime-Blanc, JD/PhD &
Leonard J. Ponzi, PhD
Original Source: CORPORATE COMPLIANCE INSIGHTS