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Reputation Risk management

April 16, 2010

As risk management continues its evolution, reputation management is emerging as a key issue for all enterprises.

In a world economy that is both global and volatile, intangible assets have become a significant chunk of wealth of many companies. Although  some assets, like copyrights and licences, brands and leases, may be assessed, the composite ‘reputation’– defined here as the excess value over the total physical assets – can only be derived from the financial market’s evaluation of the company’s shares.

There are factoes that impact the long-term reputational standing of any organisation, and these apply to not-for-profit entities as well as to local authorities and public or private healthcare providers.

Managing reputation is therefore an essential part of the strategic role of the board of directors of a firm, who need to take into account all stakeholders, whose perception of the organisation will determine its reputation. Risks or uncertainties needto be addressed in a holistic systemic approach, as there is no such thing as reputation risks rather, all risks may impact on reputation. Thus the best management of risks to reputation is sound enterprise-wide risk management and governance, where all insiders are involved and external interests are taken into account.

When a crisis threatens, it is a time of exacerbated reputation volatility. Preparing a strategic redeployment plan is therefore the best way for management to be prepared to cope positively with the surprises of the future.

Take the case when WorldCom collapsed in 2002, its investors lost billions and so did shareholders of Citigroup. Markets punished the financial giant for its part in the financial scandal. Citigroup had risked its reputation by burdening itself with intimate business relationships with the fraud-ridden firms.

Then in the last two decades of the 20th century the world economy experienced what must be viewed now as a complete paradigm change. Globalisation is only the most visible part of the iceberg; in fact the rise of a ‘non-physical’ economy as a significant proportion of the world’s wealth is the most significant evolution. The value of intangible assets became the most significant part of the market value of any firm traded on the stock exchange. When compared to the value of the physical assets, the total value of the firm reached crests that ranged from ten to 100 times. The financial explanation is simple: the value of the firm is equal to the present value of the future stream of dividends expected from that firm, discounted at a rate which takes into account the level of risk and the expected growth.

Reputation, whether it exists or not, has a significant economic impact on the economy, representing probably between 60 and 70 per cent of developed countries’ wealth.

Considering above arguments, it’s is high time reputation risks were assessed and mitigated.

So let’s consider, what actually is reputation and what are the main risks to firm’s reputation ?

In the business environment, reputation reflects the perception, good or bad, that the different groups of people who interact willingly with or are affected by an organisation like the stakeholders, employess etc. – have of the company, basing their evaluation of its performance on the available information.

Reputation is thus not an product delivered by an agency, but rather a subjective composite assessment resulting from a number of factors, among which trust will be a key ingredient.

Therefore, managing or building a reputation over time will require an effort to be applied to all the components involved. However, it will revolve around efficient communication and long-term solid relationships inside and outside the organisation. It’s value can’t be underestimated – reputation can constitute a major competitive advantage in a turbulent world like today’s.

The benefits of effective reputation management summarised below are :

– improving relations with shareholders;

-creating a more favourable environment for investment and for access to capital;

-recruiting and retaining the best employees; attracting the best partners, both up-stream  and down-stream (customers);

-reducing barriers to development in new markets; securing premium prices for products and/or services;

-minimising threats of litigation and of more stringent regulation;

-reducing the potential for crises; and reinforcing the organisation’s credibility and the trust of stakeholders.

Reputation has always mattered, but the globalisation process linked with the acceleration of the circulation of information, best illustrated by the Internet – has made it a much more fluid commodity that needs to be managed carefully.

To conclude, at the very core of reputation risk management is a learning process that will flow throughout the organisation and extend beyond its main partners, employees, clients and suppliers and that unarguably is instrumental in boosting a firm’s overall standing in long term.

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Trusted by Fortune 500 Companies and 10,000 Students from 40+ countries across the globe, it is one of the leading International Training providers for Finance Certifications like FRM®, CFA®, PRM®, Business Analytics, HR Analytics, Financial Modeling, and Operational Risk Modeling. EduPristine has conducted more than 500,000 man-hours of quality training in finance.


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