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Risk Management w March 2008

w Page 22

Reputational Risk

Measuring and Managing w continued from page 21

linguistics and artificial intelligence to identify and monitor emerging issues. Conceptually, the idea is closely related to the concept of “open source intelligence” in the area of national security. The idea is that in the context of emerg- ing issues, the shortcoming does not rest in the lack of information but in too much information. Unfortunately, much of the information is never aggregated to actionable intelligence. The “dots” were present, but not connected.

Measurement. What gets measured gets man- aged. While financial and operational risk can now be (largely) quantified, this is not the case for reputational risk. If companies engage in any measurement at all it is largely based on surveys or focus groups which make it difficult to obtain enough reliable data for a proper quantitative analysis.Two things are lacking: operational measures (similar to, customer satisfaction scores in marketing or quality measures in man- ufacturing) and financial measures that connect reputational with financial performance. Again, the sophisticated use of information technology provides a potential remedy.

As discussed on page 21, media coverage heav- ily influences the perception of customers and other stakeholders. While measuring their beliefs directly may be prohibitively costly and impractical, we can measure the opinions expressed in the media and third-party sources. This can be accomplished by using computer algorithms that are trained to identify positive or negative opinions using technologies not too dissimilar from a sophisticated spam filter. The effect of this approach is to generate quantita- tive data about a company’s reputation that can then be further analyzed.

For example, companies can compare the reputations of a given product in two different markets, measure reputational challenges over time, and assess whether a particular strategy has “moved the needle.” Once such measures

have been developed, they can be connected to a company’s financial performance using stan- dard event study methodologies. This allows an integration of reputational risk with other risk types.

Situational Assessment. Once critical issues have been identified and their impact mea- sured, managing such issues requires rapid and

reliable situational assessment. For example, in many cases issues are “owned” by only a few journalists. Also, journalists frequently rely on

the same group of experts that are then repeat- edly quoted. Companies need to understand who is an “ally” or an “opponent.” Of course, the list of opinion leaders, gate-keepers, etc. is both issue-and market-specific and therefore requires ongoing monitoring.

Given that the importance of managing reputa- tional risk is no longer much in doubt, compa- nies need to develop appropriate processes and capabilities. The following figure summarizes the key components of an effective reputational risk management system.

However, even if companies develop appropri- ate decision systems—and many do not—there is much less appreciation of the need to create intelligence systems that allow a quantification of reputational risk. Yet, the many reputatution- al crises suffered by corporations today make the need for such a system only too apparent. F

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