No smoke without fire

A damaged reputation can do untold harm to a company, with the actions of one person or a single event tainting the whole. Reputational risk management is essential but how can an organisation measure the equity of this intangible asset, asks Ana Paula Nacif

Top executives know that once a company's reputation is muddied, the chances of turning it around are very slim. It is one of the few threats that can destroy an organisation overnight. As a result, reputational risk occupies the minds of many top executives who are only too aware that intangible assets can have a massive impact on the health of their business.

There has also been increasing pressure on companies to show how good they are outside their balance sheets. Reputation, brand value, good will and future profit stream contribute to share prices as much as other tangible assets.

And yet experts claim that organisations are failing to manage their reputation in a way that reflects its true significance.

In October, the Aon Risk Management and Risk Financing Survey revealed that 81% of risk managers and finance directors at the UK's top 2000 organisations place reputation on their list of top five perceived threats to business.

But while most companies have sophisticated processes to monitor and manage their financial performance, Aon's survey found that only 28% carry out a risk audit of their brand and reputation. Mechanisms and systems to measure and monitor tangible assets are readily available, but what about measuring reputation equity?

When this question is put to experts in the field, it becomes clear there is no one way to measure reputation equity. Some companies opt for qualitative opinion-based surveys to test stakeholder perceptions, and others use quantitative measures of investor expectations and market perception.

Reputation at stake

So what practical advice can be given to risk managers and executives tasked with trying to measure and manage their organisation's reputation?

Dr Deborah Pretty, principal of Oxford Metrica, explains: "One way a company can start to measure its reputation equity is by analysing rigorously its shareholder value performance over a period of time. That yields insights as to the confidence investors hold in the senior management's ability to generate future cash flow and in the associated reputation equity."

She believes it is important for businesses to measure reputation equity because it helps to identify the drivers of reputation and monitor the efficiency of any reputation management programme.

But not everyone is keen on the sums-based approach. Peter Berring, director of group risk at De la Rue and deputy chairman-elect of the Association of Insurance and Risk Managers, argues that companies should not worry about measurements but should concentrate on impact.

"Businesses can get hung up about measures, especially financial measures. But reputational management is about assessing impact. Instead of trying to measure reputation in financial terms, companies need to look at the impact of risks and exposures. It is more about how you manage the process. If you get hung up about how many millions of pounds the business could lose, you also lose sight of the process. It is important to identify the types of triggers and then to manage them."

Matthew Hogg, underwriter at Kiln, agrees: "Some companies believe that they need to give some kind of financial value to reputation, but it is possible to manage reputation without putting financial sums against everything. The other side of it is that if a company starts to measure its reputation in financial terms, it has to keep it up. If the figures drop, the company will be criticised, pretty much in the same way it could be criticised for not measuring it in the first place."

The fact that reputation is multi-dimensional means that the way companies decide to manage it will vary according to their needs. Hans-Kristian Bryn, deputy chairman, Aon Risk Consulting, explains that there are three key elements to reputational management: brand equity risk, reputation risk and structural risk.

"Reputation is the trust factor, the values behind the brand," adds Colin Campbell, group insurance and risk manager, Arcadia. Therefore, if reputational risk management is about managing stakeholders' expectations and trust, organisations that are honest, transparent and effective communicators have a far better chance to improve and sustain their reputation equity.

Although good reputation contributes to the overall performance of an organisation, Ian Coleman, global leader of evaluation and strategic practice, Pricewaterhouse Coopers, emphasises that reputation is only an asset if it influences people's behaviour. "Reputation is contextual, does it matter to the stakeholder?"

As recent PR disasters have proved, if it does matter to the stakeholder, having a good and solid reputation beforehand is not enough for a business to survive the fallout of a crisis. And reputational risk management should be an integral part of any business strategy no matter how challenging that might be.

David O'Connor, risk management consultant at Tillinghast Towers Perrin, appreciates the difficulty organisations face. "Reputational risk management can be difficult at times because of the lack of tangibility. It can be hard to translate it into concrete actions."

Chris Waites, also a risk management consultant at Tillinghast Towers Perrin, adds that "in some ways it is much easier to have a disaster recovery plan. It is easier to formulate because it has a real and immediate effect, whereas softer type of issues are more difficult to anticipate and get people to focus on."

Get stuck in

However, in a world where reputational risks are ever increasing, there should be no excuse for senior management not to roll up their sleeves and really get on with it.

Dr Pretty says: "An excellent starting point for effective reputation risk management is to design a value framework. Such a framework should be consistent with the firm's strategic objectives and linked firmly to financial performance, in particular to shareholder value performance.

In addition, the framework should highlight the key drivers of reputation equity. There are a number of cash flow based metrics which can then be developed to calibrate the company's reputation equity."

Companies also need to make sure that they manage shareholder relationships.

"Maximising shareholder value is a good place to start," says Mr Waites.

"If there are other potential stakeholder conflicts with that premise, you need to address those and think about them. For example, in the property-casualty insurance business, regulators have a strong interest in unlimited amounts of cash flowing about in a company. But this is no good for the shareholder. This is an example where you have a definite conflict you need to manage."

Dr Pretty also believes that shareholder value is the key. "I disagree with the view that shareholder value creation is somehow inconsistent with effective stakeholder management. By seeking actively to create value for shareholders, a firm will need to also consider other stakeholders."

Even though reputational risk management could add value to the business, Mr Coleman puts the reason why reputation is not managed properly down to human nature. "It's that 'it won't happen to me' thought. People have this systematic bias and put blind spots around issues." He adds that the sheer amount of control and practical issues involved in reputational risk management can be daunting. "How can you command and control something where huge damage can be caused even by a relatively junior member of staff, who has no intention of causing any harm?"

He explains that prioritising threats, according to their likelihood and impact, can help organisations to focus on issues which present potential risk for reputation damage.

Paul Howard, group insurance and risk manager at Sainsbury's, believes that there are two major risks to reputation that need to be properly managed. "The major risk is not to live up to your standards. The second one is an ethical risk."

Effective reputational risk management also calls for a strong leadership from the top, at chief executive and board level, and it should be implemented across the organisation with a number of key management individuals playing their part. "Chief executives are ultimately responsible for reputation management," says Dr Pretty. "They must recognise reputation as a strategic asset that should be managed actively to create value."

Protect your good name

But even for the professional risk managers, trained and experienced in identifying, measuring and managing risks, reputation continues to cause more headaches than most threats to business.

"It can be difficult to make reputational risk management consistent across the whole organisation, and create embedded practices, so that it becomes second nature for everyone in the organisation," explains Mr Howard. "But, ideally, the organisation should live and breathe it."

Hurdles can be overcome by adapting practices and ensuring that they fit in with the organisation's objectives and culture. "What works well for one organisation may not work for another - it is all about managing expectations," stresses Mr Berring. "It is the same for every organisation, but the way it is delivered can be different." And he warns: "There is a pressure for businesses to deliver high profits in a short space of time, and the challenge is how much short-term profit can be delivered without damaging the long-term strategy - and the reputation - of a company.

If a company has an accelerated growth in two years, it may create false expectations. You cannot lose sight of the long-term strategy and must manage your growth properly."

PUBLIC SECTOR ORGANISATIONS

Reputation is just as important to public sector organisations as it is to their private counterparts. And these organisations, such as local authorities, are under constant public scrutiny. "It is much more difficult to change a bad reputation into a good one, than it is to build a good reputation from scratch", says Bob Cope, chairman of Alarm, the national forum for risk management in the public sector, who also points out that public sector organisations have been complacent about their reputation.

"They are not managing it adequately and they are not being proactive. They need to improve their act," says Mr Cope. He believes that best practice could help organisations manage and mitigate this risk. "They should have a contingency fund, capital resources to deal with emergencies and a business continuity plan. It is also important to have a media management plan in place. An integrated risk management strategy is part of good governance."

Mr Cope says that, even though public organisations are not there to make money, they should look more proactively at how their reputation can impact on their funding. "Things are changing and if you improve performance you are rewarded by government. To do well you need to send the right message to all stakeholder groups such as employees, community, suppliers and the government. It is a long-term issue, it takes a long time to regain trust, but reputation management should form part of an overall strategy to gradually turn the cynicism around."

For those working on the ground, managing reputational risk is about communicating the positives rather than concentrating on the negatives.

Mike Keating, workplace health manager at Belfast City Council, says: "The council gets blamed for an awful lot of things over which it has no control. We need to sell ourselves a lot better. We don't concentrate enough on communicating the stuff we do do well. It's not about major crisis, it's more about the day-to-day local issues." He also emphasises that, if local authorities are to improve their reputation, elected members will have to play their part. "Elected members want to keep a high profile and are quick to criticise the council for not doing something well enough. They need to look at what is happening borough-wide, not only in their own constituencies."

REPUTATION INSURANCE

Reputational loss is not insurable. Apart from the intellectual property and the conventional errors and omissions insurance, there is nothing much a company can do to recover losses incurred by reputation damage.

Or is there?

According to Matthew Hogg, underwriter at Kiln, insurance companies do have a part to play in reputational risk management and some organisations can indeed buy cover for reputational loss.

"4Front, our reputational cover, assesses the risks an organisation faces by defining specific loss events, which are directly related to the worst nightmares of the board or risk managers," he says, explaining that Kiln has a £10m underwriting capacity for reputational cover.

"We then write the business against those specific loss events according to the needs of each organisation. We also make sure that the management is taking reputational risk seriously and doing everything they can to manage their reputation." He adds: "It is also important to keep the insured 'honest' with the use of coinsurance and other such clauses."

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