When most people hear about reputation risk, they often first think of large companies who haven’t demonstrated strong risk management practices. Target with its data breaches often comes to mind, or the banking industry’s missteps and eventual federal bailout of eight large banks. And rightfully so, because Target and the banking industry didn’t just put their reputations at risk, but also suffered measurable hits to their reputation – in fact, Reputation Institute has the data to show it. (Check out our briefs on Target and the banking industry.) But there are many reputation risks that impact companies and concrete ways that companies can manage reputation risk proactively rather than reactively.
Today I invited two of my colleagues, Nicolas Georges Trad and Michele Tesoro, to join me in a conversation about reputation risk. Nicolas and Michele specialize in reputation risk, advising Reputation Institute’s clients and authoring reports on the topic.
I’ve posed questions to Nicolas and Michele to outline what some of the top reputation risks are, but also to give advice to those companies that want to take steps now to effectively manage reputation risk.
Jamie Bedard: What are the top reputation risks that impact companies today?
Nicolas Georges Trad: These are the ones we’ve identified by looking at the biggest crises (50+) where we registered the largest drops in Pulse scores in the past 10 years from our RepTrak®database. These were identified looking at cross markets and industries. Looking more specifically at an industry or market might bring about other risks. They are not in order of importance.
CEO resignation after a financial scandal
Child labor in a supplier’s factory
Delayed reporting of defects
Fraud and abuse allegations
Homophobic comments of top management
Incoherent communication of corporate strategy
Labor strike in emerging market
Mandatory product recall
NGOs very critical against a plant
Bribery of Public officials
Repeated product recalls
Service changes and interruption
Unaware utilization of toxic packaging
Jamie Bedard: Why are reputation risks different than any other risk that a company focuses on?
Michele Tesoro: Risks to reputation are more difficult to manage than traditional enterprise risks because we are talking about perceptions. There’s more at stake with perceptions than enterprise risks because the intangible value is what is put at risk, which today is estimated at ca. 70% of market value of S&P500 companies.
Jamie Bedard: As enterprise value continues to shift more toward intangible assets, how does a company protect those assets from the impact of risk events?
Nicolas Georges Trad: Organizations, not just companies, should focus on understanding the organization’s level of “Readiness” and how exposed they are to risks. These two measures will help the company focus on mitigating the most important risks and be ready in the time of a crisis to protect themselves as much as possible.
Michele Tesoro: “Being Ready” includes knowing what stakeholders care about, what is high on their agenda. Those companies that “listen” to the external context continuously are in a much stronger position when it comes to protecting their value.
Jamie Bedard: When an issue happens what should a company do to minimize the impact on its reputation?
Nicolas Georges Trad: Traditionally, PR firms would tell you that you should 1) Know the issue and what position stakeholders are taking on it (which you do if you’ve followed the reputation risk management guidelines we just provided), 2. Provide just enough information to external parties – not necessarily full disclosure, and 3) Be honest.
Michele Tesoro: Also, if a company is managing reputation risks effectively, they know what corporate elements will be most criticized by stakeholders should each risk strike. It is incredibly powerful to know what to say and how to say it.
Jamie Bedard: Can a company proactively manage reputation risk?
Nicolas Georges Trad: Yes – but some risks can be managed (mitigated) more than others! Having predicted which risks the organization should be managing, the organization can now start working to try to prevent them from happening. This is done most effectively by working across functions with all stakeholder owners involved in the process.
Jamie Bedard: What are the steps that a company should take to effectively manage risk events?
Nicolas Georges Trad: We suggest following the same steps:
1. Identify events that can hurt your reputation
2. Analyze events for likelihood and to predict impact to reputation
3. Analyze organization’s readiness to prevent and minimize effect
4. Prioritize risks for importance
5. Mitigate risks
6. Monitor risks
Jamie Bedard: What are some of the industries that have been successful at managing reputation risk?
Nicolas Georges Trad: Traditionally, the pharmaceutical industry has been at the forefront of risk management due to the nature of its business. But also financial services – given regulatory requirements to report on reputation risks through Basel III – have taken important steps to work on reputation risks.