perceived. Reputations are as vulnerable to perceptions of failure as to failure itself.
Which expectations? If a stakeholder’s experience
of the organisation falls short of expectation, it will downgrade its opinion. But how were these expectations formed? Were they unrealistic to start with? Did they reflect factors beyond the organisation’s control, created perhaps by price- gouging competitors or by shifting social attitudes to matters such as environmental protection and equitable trading practices? Is an organisation being castigated because the sector in which it operates is under a cloud, or because it is being associated with a lawbreaking peer? Organisations may be punished not because of any failure on their part, but simply because they are being held to the wrong standard.
All these considerations greatly complicate the task of those whose responsibility it is to build, maintain or repair reputations. The responses to our survey, and the anecdotal evidence we have gathered, suggest that although risk managers are aware of the threats, their responses vary widely from sector to sector, and from firm to firm.
Priority No 1
Respondents to the regular Risk Barometer section in the survey place reputational risk clearly at the top of risk managers’ list of priorities. With an index score of 52, reputational risk is perceived as substantially more significant than regulatory risk and human capital risk, both of which score 41. IT network risk, which comes next, scores 35, while the risk management staples of market risk and credit risk score a modest 32 and 29, respectively.
There are several reasons why reputational issues have become more of a focus for risk managers in
Reputation: Risk of risks
How significant a threat do the following risks pose to your company’s global business operation today? (index score, where 100 = highest)
Reputational risk (eg, events that undermine public trust in your products or brand) 52
Regulatory risk (problems caused by new or existing regulations) 41
Human capital risks (eg, skills shortages, succession issues, loss of key personnel) 41
IT network risk (eg, network security breaches, IT systems failure) 35
Market risk (risk that the market value of assets will fall) 32
Credit risk (risk of bad debt) 29
Country risk (problems of operating in a particular location) 22
Financing risk (difficulty raising finance) 21
Foreign exchange risk (risk that exchange rates may worsen) 18
Natural hazard risk (eg, hurricanes, earthquakes) 18
Political risk (danger of a change of government) 18
Crime and physical security 15
Source: Economist Intelligence Unit, 2005
recent years. Respondents identify the growing role of reputation as a source of competitive advantage as the factor most likely to focus management attention on reputational risk. The development of global media/communication channels as a disseminator of reputationally sensitive information is rated second. The regulator comes next, with the imposition of higher standards of governance in the wake of the high-profile market failures of the past decade. Customer power—their readiness to switch supplier— is fourth in the list, ahead of governments’ greater propensity to intervene in defence of the public interest.
“It’s a buyers’ market,” says Derek Mander, head of finance & risk management for Bank of Ireland Securities Services. “In the past, if we failed to meet our service standards, we would sit down with clients
© The Economist Intelligence Unit 2005