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Reputation: Risk of risks

How much damage have the following events inflicted on your company’s financial performance in the past? (% respondents)

Major

Minor

Non/negligible

Loss of reputation

28

36

36

Loss of key skills and talent 18

52

30

Employee fraud 15

35

50

Loss/theft of intellectual property 14

39

47

IT failures or electronic security breaches 10

40

49

Damage to physical infrastructure 7

36

57

Source: Economist Intelligence Unit, 2005

On the other side of the coin, those looking for investors are likely to find good reputation a key factor in attracting suitors. “Confident investors will pay a higher price for a piece of the action,” says Jonathan Clare, chief executive at Citigate Dewe Rogerson, a London-based public relations company specialising in financial and corporate communications. “If companies get their PR right, it will reduce the cost of capital.”

Financial services and energy sector companies appear to be most exposed to major financial damage through reputational risk. Other industries feel less exposed in this regard. For instance, more than one- third of government/public-sector respondents identified loss of key skills and personnel as having resulted in major financial losses. Among this group, reputational damage has resulted in major losses for only one-tenth. Since there is little reason to suppose that public organisations incur less reputational risk than private ones, the implication is that they are less susceptible to reputational damage. In professional services, reputational damage is the biggest single cause of major financial loss, but loss of key skills and personnel runs it a far closer second than in the other industries surveyed.

Danger points

For most risk managers, it is the failure to comply with regulatory or legal obligations that represents the biggest threat to reputation. This is supported by the relatively prominent position of the regulator as a driver of board-level focus on reputational risk, indicated above. Second on the list of potential sources of reputational damage is failure to deliver minimum standards of service and product quality to customers— although the gap is small. The risk that unethical practices in the organisation will be exposed is placed third, once again by a narrow margin. Security breaches figure quite prominently, as do failures of crisis management and risk by association with third parties.

Failure to hit financial performance targets scores only modestly. Given the importance of investors among organisations’ stakeholders, and the focus in modern investing on shareholder value, the relatively lowly position of meeting market expectations appears odd. It may reflect the fact that organisations perceive this to be a financial risk rather than a reputational one, although modern risk management theory would suggest that they should consider the reputational facet of financial performance more seriously.

© The Economist Intelligence Unit 2005

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