Reputational Risk

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Reputational Risk

• BCI International Risk Symposium
• Derek Atkins 4 November 2004

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AIRMIC

• Business continuity and reputation are top of
  the list of what risk managers see as the most
  important threats
• Nick Chown, Chairman

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What is Your Greatest Threat ?

• Business Interruption
• Loss of Reputation
• Product liability/ Tamper/ Brand protection
• Physical damage
• General liability
• Employee accidents
• Failure to change/ adapt
• Environmental pollution
• Professional indemnity
• Failure of a key strategic alliance
• (Aon Survey of 2000 CEOs)

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Quote 1

• If I lost all of my factories and trucks but
  kept the name Coca-Cola, I could rebuild my
  business. If I lost my name, the business would
  collapse.
• CEO, Coca-Cola

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Reputation

• What others think about you
• Intangible but, potentially, an enormous asset
• Wider concept than brand
• Takes years to build, but can be destroyed
  overnight

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Quote 2

• Reputational Equity a significant part of
  many successful companies share price is made
  up, not from tangible assets such as property,
  stock and reserves, but from the goodwill
  element. This includes various intangibles such
  as the potential future profit stream, the value
  of brands, but above all it is a factor of a
  companys reputation.
• Deborah Pretty, Oxford Metrica

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How can it be Damaged?

• Products Services - Andersen, Perrier
• Financial Performance - Vivendi,
  Marconi
• Executive Behaviour - NYSE. Tyco
• Employee Relations - BA, Fire Service
• Health Safety - Railtrack, ValuJet
• Environment - Exxon, Monsanto
• Customer Relations - Equitable, Hoover
• Supply Chain - Nike, The Gap

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Quote 3

• Our people must understand that, even in the
  most remote corner of the world a small incident
  can have massive repercussions. So if you think
  you are unimportant when it comes to Unilevers
  reputation you are not. Everyone is important.
  
• Antony Burgmans, Unilever

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Reputational Risk Our New Definition

• Failure to meet stakeholders reasonable
  expectations of an organisations performance and
  behaviour.

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Reputational Risk - Key Points

• All stakeholders
• Reasonableness
• Long-term as well as short-term
• Behaviour as well as performance

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Quote 4

• Corporations are often so focused on making
  short-term profits for their stockholders that
  they behave in ways that adversely affect their
  employees, the environment, consumers and even
  the long-term well being of the corporation.
• Lawrence Mitchell

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The Stakeholder Model
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Quote 5

• Management is responsible for satisfying the
  needs of the various stakeholders, and managing
  what should be six mutually beneficial
  relationships. It is a bit like the old circus
  act where you have to keep six plates spinning on
  the top of six different poles all at the same
  time
• Duncan Boyle, RSA

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Stakeholder Expectations

• Look at your company as others see you
• Expectations of stakeholders may conflict
• Focusing on one group at the expense of others
  creates RR
• Most companies control processes focus on
  shareholder driven financial performance measures

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Corporate Behaviour

• When the potential cost of RR is factored in,
  Ethical Best Practice (including CSR) may become
  cost effective
• Corporate behaviour needs to be defined,
  embedded, monitored and linked to performance
  assessment

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Quote 6

• Success in any activity that is done, at
  least partly, to meet the expectations of
  external stakeholders, requires positive
  conviction rather than a passive, box-ticking
  compliance mentality.
• 
  
• Tomorrows Company

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Risk Management

• Much risk management tends to concentrate on the
  traditional pure risks that are relatively easy
  to identify and insure
• RR often falls into the too hard box or is
  considered to be covered by addressing the other
  pure risks
• Much RR activity focuses on post-event crisis
  management
• Leading consultants advocate a more systematic
  approach with action before and after the event

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Quote 7

• A conventional risk assessment framework does
  not always address reputation risks adequately.
  It often produces an incomplete picture of
  susceptibility and escalation potential, has
  insufficient focus on the stakeholder
  considerations that drive the risks, and has
  insufficient system to direct and monitor risk
  management actions.
• David
  Abrahams, Marsh

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Requirement for an audited Operating and
Financial Review (OFR) to be included in the
Report and Accounts

• The Regulations require a description of
  principal risks and uncertainties facing the
  business to be includedA particularly important
  issue related to risk is the reputation of the
  business. This is inextricably linked to the
  licence to operate and is a critical value
  driver. Reputation may be won or lost through the
  ability to deliver consistently against explicit
  or implicit promises made to investors and other
  key stakeholders, including customers, suppliers
  and employees.
• The OFR - Practical Guidance for Directors,
• May 2004

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Reputational Risk Management A Way Forward

• Take ownership of reputation
• Understand its value
• Consider all stakeholders expectations
• Consider performance and behaviour
• Apply joined-up management
• Review and monitor as a discrete risk?
• Everyone must understand its importance

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Quote 8

• If the organisation is serious about
  safeguarding against reputational risk, every
  manager in every function should be thinking
  about the reputation dimension as well as the
  customer, cost and competitor angles they may
  already be attending to.
• Kaisen Consulting

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Reactions
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Reactions - Negative

• Sole purpose of a company is profit
• Too complex an idea
• Not a risk in itself
• Waste of time and money
• We have got policies on our intranet

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Reactions - Positive

• When reputation is valued, decisions do begin to
  change
• When CEO owns reputation, RR is taken seriously
• Concern about lack of moral education
• Concern about the societal role of the company