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Reputation: Risk of risks


T he most valuable asset in the capitalist economy is not cash, stock or buildings, but trust. This was the case in the days when banks competed with each other to disperse their un-backed notes among an ill-protected public. It is even more so today, with dizzying volumes of assets zinging daily through international financial markets faster than legal confirmation can be provided. Thus, although a shortage of cash can bring a company to its knees, it is more frequently a loss of reputation that deals the final blow.

It is curious, then, that while tools and techniques proliferate for managing monetary risks, the art of protecting reputations is poorly developed and understood. Most respondents to our survey agree that reputation is a primary asset of their organisation, and that the risks facing reputation have grown in recent years. However, they also acknowledge that reputational risk is harder to manage than other sorts of risk, largely because of a lack of established tools and techniques and confusion about who is responsible.

In short, reputation is an increasingly critical asset, but protecting it is one of the risk manager’s toughest jobs. Why? To start answering this central question, a definition of reputational risk needs to be established. The most popular is some form of the following:

Reputation declines when experience of an organisation falls short of expectation.

But this apparently straightforward description hides a wealth of subtlety.

© The Economist Intelligence Unit 2005

  • Whose experience? An organisation’s reputation

resides with a wide range of interested parties. Most important are the customers and investors, who between them provide the wherewithal that allows the organisation to function. At a second tier, regulators are key, setting and enforcing standards. Employees’ motivation feeds into productivity and service quality, and they are the human face of the organisation. The general public may be affected by the organisation’s actions, directly or indirectly, and may respond unfavourably if they feel their interests to be prejudiced. These groups are neither mutually exclusive nor independent of each other. Indeed, the feedback mechanisms between them require special attention from the guardians of reputation.

  • What experience? The face that an organisation

shows varies from stakeholder to stakeholder. Employees focus on pay and work conditions, and on the availability of training and opportunities for advancement. Such matters are only loosely correlated with the quality of service provided to customers. The experience of the latter may come via an intermediary—a retailer or business partner, for instance—whose own standards of delivery impinge on the impression formed by the customer, potentially to the detriment of the organisation. Investors may be focused more closely on shareholder value than on the quality of service being provided to customers, two factors that once again may be correlated only loosely. The regulator, meanwhile, may be scrutinising the organisation to ensure from a compliance perspective. In all cases, there may be a difference between what the organisation does and how its actions are

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