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Reputation: Risk of risks

communications or by establishing processes for quickly addressing crises when they arise.

Do you view threats to your company’s reputation as: (% respondents)

In some areas, the reputational aspect of a specific risk can be the predominant threat, and recognising this may call for a tougher response than might otherwise have been adopted. For instance, when selecting business partners or, in the case of a bank, major depositors, due diligence should weed out those whose financial backgrounds suggest an unacceptable likelihood of business interruption or default. But it may also uncover unsavoury facts about the potential partner, which, although not reflecting directly on their financial health, reveal a character with which the organisation may prefer not to be associated.

The business of choosing your trades is familiar to Nedia Miller, owner and founder of Miller CTA, a commodities trading adviser specialising in “crude oil and all the products”. In designing hedging strategies for major clients there is broad scope for unethical behaviour. “I’ve given up large clients rather than cross the line and risk my reputation,” she says. “The

A category of risk in its own right 52

Something that arises as a consequence of a variety of other risks 48

Source: Economist Intelligence Unit, 2005

financial cost [of legal sanction] is high, but the opportunity cost [of losing business because of a bad reputation] is even higher.” In this context, Ms Miller believes in the importance of personal ethics in protecting a firm’s reputation. New rules and guidance introduced since Enron’s collapse may help in the short run, “but unless there are ethics, it won’t work for long”.

intrusive role of those charged with policing the proper functioning of the market economy. “The intentions are good: it is an attempt to exorcise the decline of corporate values and to improve the public trust in corporate business and the market economy.”

sufficiently flexible to overcome occasional shortfalls in service. “The marketplace will eventually realise that over-emphasis on individual risk issues is an inefficient way of dealing with them, and place more emphasis on bilateral relationships,” he says.

But has the pendulum swung too far? For Mr Mander of Bank of Ireland Securities Services, the answer is an emphatic “yes”. The unforgiving focus on failures to meet standards is forcing organisations to dedicate valuable resources to protecting reputation, rather than on establishing relationships with clients and customers that are

He blames over-zealous regulators. “A lot of what we’re doing is driven by regulatory requirements rather than best practice,” he explains. However, he acknowledges that with new measures such as the Basel II revised international capital framework still in the pipeline, it will be some time before the pendulum reverses its swing.

7

Regulation meets reputation

Our survey respondents are more or less unanimous in considering that reputa- tional risk has risen sharply in recent years.

The reasons are many, but high- profile market failures such as those that brought down Enron and Worldcom are a big part of the story. “Regulators are regulating more,” says Mr Damasceno at ABN AMRO, pointing to the increasingly

© The Economist Intelligence Unit 2005

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