Reputation: Risk of risks
How large an impact is each of the following factors likely to have in prompting an increased focus on reputational risk within your company? (index score, where 100 = highest)
Reputation is becoming a key source of competitive advantage as products/ services become less differentiated 59
Faster dissemination of ‘bad news’ through global media/ communication channels
Higher standards of governance imposed by regulators 43
Customers readier and more able to switch suppliers than ever 39
Increased willingness of governments to intervene in business on issues of public concern 33
Customers‘ increased focus on buying from ethical suppliers 26
Increased targeting of companies by pressure groups 24
19 Source: Economist Intelligence Unit, 2005
and reach a solution. Now, clients are more likely simply to change service provider.”
These changes in the business environment are driving most risk managers to see reputational risk as a critical issue. There is less agreement on how it should be addressed, or even whether it exists as a separate category of risk. The division between those respondents considering it a category of risk in its own right and those who view it as arising from a variety of other risks is virtually half-and-half. Nevertheless, most companies in the survey see reputational risk as a problem in need of its own, special solutions. Roughly three-quarters of companies disagree with the statement, “A well-run business doesn’t need to invest extra resources into guarding against reputational risk.”
Ian Beale, risk manager at Aegis plc in London, focuses on reputation and on the perceptions of investors, clients and employees, but does not manage reputation as a specific risk. “We concentrate on the root causes,” he says. “If these are managed
© The Economist Intelligence Unit 2005
well, then hopefully our reputation stays where we like it.” Aegis is a media group, whose companies are engaged in everything from traditional media to Internet and billboards, as well as media research.
Mr Beale finds it a “struggle” to think of what additional actions could be taken that are not already covered by good overall risk management. However, he emphasises that Aegis does spend time and energy making sure that the perception of the company is good. “We carefully consider who says what,” he says, and thought is given to the potential impact of actions on clients and employees. Since other executives describe these activities as the fundamentals of reputational risk management, it appears that much of the confusion here arises simply from definitions.
Doug Gafner, director of risk management at Hilton Hotels, considers reputational risk to be “more about getting everything else right” than a unique issue. Hilton, for example, does not buy brand risk insurance, even though it is one of most trusted brands in the US.
At the other extreme comes Dr Guruswami Raghavan, professor of finance at the SDM Institute for Management Development in Mysore, India. “Reputational risk is the starting point for all risk,” he explains. “If you have no reputation, you have no business.” Companies that see their brand as their primary asset tend to treat reputational risk as an issue in its own right, and devote special resources to managing it.
The potential of relatively minor failures of risk control to rebound on reputation means that, at the very least, risk managers must be aware of how an event might damage the company’s image. But these issues may also require a specific response. Many kinds of risk, in addition to the narrow threat they pose to the business operation, have a reputational element that must be managed separately, whether by managing stakeholder expectations via corporate