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Reputation: Risk of risks

School for scandal

A decade ago, faced with a financial squeeze that threatened its survival, Car- leton University in Ottawa picked a strat- egy designed for a quick increase in enrolments, the main pillar of which was to lower entry requirements. It was not subtle: “We took students that probably would not have made it into other uni- versities,” says Tony Lackey, manager, risk and insurance. The institution picked up the nickname, “Last-chance U”.

Enrolments responded, and funding, a function of student numbers, rose accordingly. But problems quickly

emerged. Although first-year lectures were stuffed, attendance soon dropped off. The financial problems persisted, and now the University was saddled with an unenviable reputation into the bargain.

The first challenge was one of recognition: “We asked students why they weren’t coming to Carleton,” writes Mr Lackey. It quickly became obvious that the institution’s poor reputation was putting off the better candidates.

Once the reputational problem had been added to the risk matrix—it immediately rose to the top of the list in the annual report prepared for senior management—the remedies were more straightforward. “We raised entry levels and worked to turn ourselves into a

research-intensive institution. We concentrated on attracting more funding and higher-level faculty,” Mr Lackey says. The students that did make it in were better treated. Student services— everything from food to buildings—was revamped.

The University is now clawing its way back up the national rankings—and reputational risk has fallen from first place to third on the annual risk report.

The Carleton case is a study in what happens when the reputational aspects of a strategic decision are not properly understood. “We were in financial trouble and we went downmarket,” explains Mr Lackey. “Nobody had tied the reputational impact into funding.”

The anecdotal evidence is that many do, and that share price is perceived as a key way of gauging the value of reputation. Mr Mander of Bank of Ireland Securities Services points out that the bank is particularly vulnerable to anything that depresses the share price. It has escaped the consolidation of the sector so far, but a reputational crisis would leave it “wide open to takeover”.

At the lower end of the scale, it is more interesting to look at the weight of respondents identifying reputational impact as minor. This suggests that, in general, both labour unrest and environmental breaches are considered unlikely sources of reputational damage. It should be noted, however, that if more environmentally-sensitive industries (such as oil, mining and timber) were represented in the survey this issue might be more highly ranked as a source of reputational risk.

The list of priorities changes when results for the

financial sector are separated out from the rest. Regulatory and legal non-compliance receive particular emphasis from financial organisations, presumably reflecting both the intensity of sectoral regulation relative to other industries and the key role that legal compliance plays in popular perception of banks, pension funds, insurance companies and the like. Standards of service sink to fourth place for this sector, below both exposure of ethical practices and security breaches—again, public trust in honest service appears to be the key, rather than public perception of the quality of that service.

In contrast, those in other sectors place the risk of failing to deliver minimum standards of service and product quality to customers as the principal threat to their reputations. Failure to comply with laws or regulations is a rather distant second, closely followed by the exposure of unethical practices. Towards the bottom of the list, non-financial sector respondents

© The Economist Intelligence Unit 2005

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