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Reputation: Risk of risks

The relationship with stakeholders is in itself a potential source of business failure. This is reputational risk pure and simple, and managing it implies both an awareness of how stakeholders feel about the organisation and a capacity to respond when the feedback is bad. Judy Larkin, director and co-founder of Regester Larkin, a consultancy specialising in reputational risk, emphasises this aspect. With a “more intrusive media, organisations must focus resources and time” on monitoring their environment.

In short, black-and-white descriptions of reputational risk as either discrete or dependent miss the point. Reputational risks can be viewed as independent in their effect on the organisation, but dependent in that reputational damage usually reflects a failure to deliver products and services as promised. There is also scope for managing reputation as a separate facet of the organisation, by surveying stakeholder opinion and adjusting the corporate message to address shortfalls.

The cost of reputation

Whether organisations are altogether comfortable with modern definitions of reputational risk, there is little doubt about the potential costs of failure to get to grips with it. Companies found reputational problems to be the most costly in financial terms, relative to a series of other risks. Among those who had faced reputational problems, 28% described the financial toll as major. Loss of key skills and talent, the next most severe problem, caused a major financial hit for only 18% of those affected (although it is worth noting that 52% identified this as a source of minor losses, making it the leading cause of financial losses among the sample overall).

The results reflect the manner in which damage to reputation can be more costly than the direct impact of the events that caused it. “The conventional areas of risk are like the visible part of an iceberg,” says Dr Raghavan. “Reputational risk is the larger part below the surface.”

Ethical business

the ethical investment market and the NGOs seeking to enforce ethical gover- nance.

Two fairly recent developments in the business environment, customer demand for ethical products and the rising influ- ence of pressure groups, are both signifi- cantly increasing firms’ exposure to reputational risk, according to at least one-quarter of respondents. This may be of some encouragement to a couple of groups whose activity revolves around the growing importance of reputation:

Among the former is Wayne Hawkins, a board member of Hunter Hall, a pioneering ethical investment firm based in Australia. His main interest is in safeguarding the company’s own good name. “An ethical fund manager lives or dies by their reputation,” he says.

For pressure groups, the challenge is to put the values of specialised funds such as Hunter Hall’s into general practice. The point is made by Craig Bennett, head of the Corporate


© The Economist Intelligence Unit 2005

Accountability Campaign at Friends of the Earth, a UK pressure group. “The potential of socially responsible investment is probably overdone. It is more interesting to see how mainstream investing is getting more responsible,” he maintains. In this, he believes the trends are firmly in favour of the activists. For instance, he identifies a growing realisation that more environmental regulation and legal obligation is on the way. “It is a train that is coming.” Companies that are ahead of the trend, the “forward thinkers”, will be the beneficiaries.

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