Ask the Chief Executive Officer, Founder or Chairman of an organization about his key concerns and one thing which will never skip the list is the ‘Reputational Risk’. It is certainly a very challenging task to protect a firm’s reputation given the increasing competition in the market on one end and dynamic social and economic conditions of global market on the other.
Imagine a Rolls Royce standing in the street without a garage! I know it’s difficult to imagine that, but considering the value of an asset, ‘reputation’ or ’goodwill’, and the kind of risks it is exposed to, it is very much similar to the previous scenario. Tremendous development of global media and other communication channels, increased levels of regulatory controls are some of the issues which expose an organization to Reputational Risk.
The factor which leaves risk managers baffled about ‘Reputational Risk’ is that it is not possible to easily categorize and compute them. It is widely agreed that the root causes of the risks impacting the reputation of an organization are primarily derived from the market, operational or capital risks. While the root causes are still widely debated, it is more likely that the reputation takes a big hit primarily because of inefficient adherance to regulatory and legal requirements which is growing with time and ever increasing number and complexity of regulatory and legal requirements. Due to the numerous cases of immoral actions taken in the organization (in many cases by a very small group of influential individuals), it is can be considered as a major root cause of reputational risk. While legal, regulatory and unethical practices are certainly the forerunners, the quality of delivery of the product or service too follows closely in scenarios where failure to deliver to the basic industry standards leads to very high proportion of customer dissatisfaction multiplying the negative impact on the reputation. Being an ‘Employer of choice’ is also one of the critical aspects for an organization to survive with a clean reputation.
Imagine a Rolls Royce standing in the street without a garage! I know it’s difficult to imagine that, but considering the value of an asset, ‘reputation’ or ’goodwill’, and the kind of risks it is exposed to, it is very much similar to the previous scenario. Tremendous development of global media and other communication channels, increased levels of regulatory controls are some of the issues which expose an organization to Reputational Risk.
The factor which leaves risk managers baffled about ‘Reputational Risk’ is that it is not possible to easily categorize and compute them. It is widely agreed that the root causes of the risks impacting the reputation of an organization are primarily derived from the market, operational or capital risks. While the root causes are still widely debated, it is more likely that the reputation takes a big hit primarily because of inefficient adherance to regulatory and legal requirements which is growing with time and ever increasing number and complexity of regulatory and legal requirements. Due to the numerous cases of immoral actions taken in the organization (in many cases by a very small group of influential individuals), it is can be considered as a major root cause of reputational risk. While legal, regulatory and unethical practices are certainly the forerunners, the quality of delivery of the product or service too follows closely in scenarios where failure to deliver to the basic industry standards leads to very high proportion of customer dissatisfaction multiplying the negative impact on the reputation. Being an ‘Employer of choice’ is also one of the critical aspects for an organization to survive with a clean reputation.
Effective and timely communication is the most important remedy which will prevent or repair the impact of reputational risk. There are several instances when incidents leading to reputational risk have been managed with minimal impact through clear and appropriate communication. This not only helps manage external factors but also the critical and fluid asset in the form of employees. While the leadership team plays a very important role in the task of effective communication, it is equally important for an organization to make an appropriate investment in a formal and independent risk management body which can monitor all the above factors and recommend necessary preventive or mitigating steps to manage the reputational risk.
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Hey Bala, i completely agree that most of the Organizations are today prone to "Reputational risk" and need appropriate investment to protect this. This certainly depends a lot of the leadership team as to how they view this and what kind of importance is given.This is something which organizaions usally ignore and regret at a later point in time.
ReplyDeleteI agree with the importance of organizations understanding implications of reputation risk particularly in these times when speed of information - both good and bad - is so high.
ReplyDeleteThe important point though is to recognize that reputation risks need to be analyzed from stakeholder perspective. There could be trade offs that the management needs to carefully decide. For example, it is possible that something that might enhance the company's reputation from the perspective of customers, may actually cause dissatisfaction among shareholders. Also, companies need to understand that protecting reputation and enhancing reputation are two different things and would need different strategies.
Hi Laxman and Soubhagya,
ReplyDeleteThanks for your comments. I think you both have highlighted the right essence of this topic. Can't agree more...
Cheers, Bala
Reputation risk is a second order risk. You cannot really treat it or prevent it but what you can do is treat and prevent the root causes. While I agree it is important to have an effective PR plan in the event that the reputation comes into question (just look at how bad a job Tiger Woods is doing), the only way to minimize reputation risk is to minimize the root causes. This is why it is a second order risk.
ReplyDeleteTake a look at my post at www.riskczar.com
Hi Bala
ReplyDeleteNice article.But to add to that, organizations tend to ignore the importance of reputational risk.This happens due to factors such as, as they might have craeted their brand name in the market.But they dont foresee the future implications.The appetite for business compromises on reputation.The problem is that lack of involvement of top management in understanding the reputational issues.Yes this will have long term effects and this is just like infecting on cell by cell.
Bharath-Wipro