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Reputation: Risk of risks

Executive summary

P rotecting a firm’s reputation is the most important and difficult task facing senior risk managers, according to a new report by the Economist Intelligence Unit. In a survey of 269 senior executives, reputational risk emerged as the most significant threat to business out of a choice of 13 categories of risk. Fully 84% of respondents felt that risks to their company’s reputation had increased significantly over the past five years.

This report, which is sponsored by Ace, Cisco Systems, Deutsche Bank, IBM and KPMG, sheds light on the role of the risk manager in protecting corporate reputation. The findings are drawn from a global survey of senior executives, of which 36% are from companies in the financial services sector. Respondents from 18 other industries also participated in the survey.

The report’s main findings include the following:

  • Reputation is a prized, and highly vulnerable,

corporate asset. Reputation is one of the most important corporate assets, and also one of the most difficult to protect, according to executives in the survey. In the Economist Intelligence Unit’s Risk Barometer, a regular feature of the risk programme’s quarterly surveys, reputational risk emerges as the main concern for the majority of risk managers—ahead of regulatory risk, human capital risk, IT network risk, and market risk and credit risk. This preoccupation with reputational risk stems primarily from the fact that executives now see reputation as a major source of competitive advantage. But changes in the business environment have also made companies more vulnerable to reputational damage, with the development of global media and communication

© The Economist Intelligence Unit 2005

channels, increased scrutiny from regulators and reduced customer loyalty cited as three issues that expose companies to increased reputational risk. Four out of five executives say threats to their corporate reputations have increased significantly over the past five years.

  • Companies struggle to categorise and quantify

reputational risk. Fully 62% of companies say reputational risk is harder to manage than other types of risk. Problems in managing reputational risk include confusion over how it should be categorised; the lack of widely-accepted techniques to quantify such an amorphous risk; and the fact that there is no formal ownership of reputational risk, with responsibility spread amongst a wide range of business managers.

  • Compliance failures are the biggest danger.

Threats to reputation come from many sources. Companies worry particularly about exposure of unethical practices, and about failing to deliver minimum standards of service and product quality to customers. However, the biggest threat to reputation arises from compliance failures, with 29% of companies citing failures to meet regulatory or legal obligations as a major source of reputational risk.

  • CEOs are the top risk managers when it comes to

reputation. Everyone from the board down to ordinary employees has a role to play in guarding the company’s reputation. Ultimately, however, the CEO is regarded as the individual with primary responsibility for managing reputational risk by most executives in the survey. The chief executive is expected to set high

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