Risk or reward?

In a world of shifting reputations, radical transparency and business uncertainty, corporations are held to a higher account: a glimpse into enhanced strategic reputation and risk management.

Reputation risk has long been explored for by academics, practitioners and professional bodies alike. In the last few years, senior leadership attention for the topic has increased significantly.

Perhaps driven by value-destroying scandals and failures of governance and the quest for greater purpose in the ‘age of radical transparency’ (see “Creating a culture of purpose” by Phil Riggins in Communication Director 04/2018), leaders are starting to wake up both to the potential of reputation to build superior sustainable financial value and the risk posed by reputation effects to the bottom line when there is a mis-match of expectations and factual experience among stakeholders.

Various CEO and leadership surveys conducted by McKinsey, PWC, Deloitte and KPMG have already pointed to the importance of reputation risk for business success. In addition to uncovering leaders’ recognition that reputation risk is important, these surveys agree that there is no clarity on how to measure and manage it.

Therefore, in partnership with the European Association of Communication Directors Working Group on Regulatory and Reputation Risk under the stewardship of Médard Schoenmaekers of Credit Suisse, we have built further on the understanding of reputation risk and explore what corporate communicators can do in the area.

We looked into previous reports, conducted over 30 in depth interviews with leading communicators and a handful of risk experts and leaders, ran a survey securing input from about 160 communicators across Europe. The emerging results were debated at a series of workshops in Berlin, Paris and Oslo.

The current topline emerging themes and exploration areas are summarised below:

For simplification purposes, we limited ourselves to these ‘building blocks’ of effective reputation risk management, fully realising that there will be other areas that may fall between the cracks or require their own focus. Also, some of these topics related to reputation risk will merit much more detailed attention for an individual organisation than others, all depending on where the greatest opportunities for enhancement lie. Let’s discuss each area briefly in turn.

1. Risk classification

Any organisation’s reputation is constantly at risk. Even if a company enjoys a stellar reputation for the things that matter most to its stakeholders and they are behaving in a manner that is amenable to and positively impacting future success, reputation risk management should be an integral part of running the organisation. The sources of potential disruption and reputation damage are rife, and the business impacts of not properly managing these risks can be severe. The media is awash with examples of seemingly reputable companies that have turned out to have systemic governance failures or compliance issues, or that have failed to react to changes in the external landscape.

"I think that many risks might always have a reputation dimension – people managing risk need to always put the reputation prism over it. More and more everything tends to have a reputation angle". Terhi Kivinen, Global Director Digital and Functional Communications, Royal DSM

Our research shows that although reputation risk management is important and gaining leadership attention, there is a persistent lack of clarity around what should be defined as a reputation risk, and what successful reputation risk management entails. Although only 46 per cent of respondents’ companies assess reputation risk as a standalone risk, consensus seems to be emerging that reputation risk is both a separate risk category and a ‘risk of risks’ that will merit sufficient attention.

2. Internal and external

One of our dominant findings is that there is a lot to be gained from exploring internal sources of reputation risk. Clearly the way employees behave, internal culture and management styles all have a massive impact on an organisation’s potential for risky conduct, with potentially damaging reputation and business ramifications.

The way in which issues and crises are handled can have a potential dampening or amplifying effect on reputation. This points to the need for organisations to focus not only on external issues and threats but to address internal aspects such as compliance, risk governance, culture and capability.

  • The largest portion of respondents (43 per cent) believe that most reputation risks emanate from inside an organisation
  • The top three reputation factors that contribute to a robust reputa tion are considered to be: good governance and compliance procedures (64 per cent), ethical business practices (56 per cent) and communication with stakeholders (54 per cent)

“For us important reputation risk areas are connected to issues that have a potential damaging effect on our business. Being as diversified as we are presents both many sources of potential risk to stay on top of but also means that the potential overall group damage associated with risks around a single product or category can be contained.” Håkon Mageli, Group Director Corporate Communication and Corporate Affairs, Orkla

3. Reputation intelligence

Early in our research it became apparent that ongoing monitoring and intelligence gathering is becoming an increasingly important part of reputation risk management. Having sufficient expertise to analyse and interpret this data was also viewed as essential. This is moving beyond simple tracking of one’s reputation among publics and selected audiences towards integrated analysis across various studies and datasets to understand what will drive future behaviour, the issues that stakeholders will care about in future, and what they expect from individual companies in addressing these topics. Reputation risk intelligence is rapidly becoming a business-critical factor in making better business decisions for the short, medium and long-term.

4. Risk governance

The research showed that having the appropriate governance structures and processes in place to manage and communicate reputation risk on an ongoing basis is essential. What this looks like in practice will be different for every organisation, but there are a number of principles that are universally applicable. These can include: treating risk management as an extension of the overall strategy, establishing who is responsible for managing reputation risk, ensuring adequate oversight of reputation among boards and executives, and laying out how reputation is governed both integrated with and alongside other risks within the business, such as strategic, operational and financial.

"Having a process in place for identification and early warning management is key. We need to measure it on an ongoing basis, in order to find evolving issues." Ger Peerboom, Corporate Communications Leadership

It is also important to establish where reputation risk management sits from a business function perspective. The corporate communication or corporate relations function may be the natural steward for all things related to reputation, but co-operation with other relevant functional areas such as compliance, human resources, marketing & sales, IT and operations is imperative for success. Our survey found that while 58 per cent of respondents said there was a process in place for collaboration between communications and other functions on reputational risk, 26 per cent said there wasn’t, and 15 per cent couldn’t say for sure. So, some room for improvement abound for a more collaborative approach.

"Reputation risk is a shared responsibility for all... That said, the chief executive is ultimately accountable for the vitality of the reputation and the behaviours and attitudes that support it. I don’t think that this can be delegated to others. For me, it would certainly be a red flag to delegate the management of reputation to the head of comms.” David Bowerin, Independent Consultant, previously Head of Strategic Marketing for Citigroup’s Global Corporate Bank

5. Culture

Although there will be specific individuals within a company for whom reputation management or risk management is their prime responsibility, our research shows that there is a huge opportunity to involve the broader employee base and tap into a greater sense of collective responsibility. Unquestionably, reputation risk is minimised by building a stronger sense of employee identification around core reputation drivers and empowering teams to take responsibility for both taking reputation implications into account in decision making and helping protect corporate reputation from harm in all interactions with stakeholders externally and internally.

"Reputation is owned by everyone – it can’t be boxed off. It is built on an ongoing basis – a person in a contact centre, and those on the frontline are key. Employee ambassadorship is important –whether everyone understands that they own it is a different thing." Raj Kumar, Global Director, Corproate Reputation and Brand Governance, Aviva

6. Leadership

In our study, 22 per cent of respondents identified strong senior leadership as one of the top 3 factors in contributing to a robust reputation. However, in our conversations it became clear that leadership is of paramount importance to setting the tone and guiding appropriate decisions that take potential reputation ramifications into account a priori.

Other studies have shown that leaders themselves are increasingly aware of the importance of reputation management for their ability to generate a successful future for their businesses, but that they are hampered somewhat by their lack of knowledge and capability around how to do this effectively. The research shows that there is a clear role for heads of corporate communication to play a role in building awareness and reputation acumen amongst leaders, especially now that they require it more than ever.

Embrace risk

If there is one overarching thing this project has taught us so far, it is to embrace risk. Perhaps justifiably so, we’ve been focussed in the past few decades (practically and academically) on making the business case for investing in reputation management and building a positive reputation as an intangible asset and as a source of competitive advantage. The thinking has been that we need to get the attention of leaders to show the upside of building a strong position for the company in the minds of its stakeholders and prove our added value. Getting a seat at the table. Nothing wrong with that in principle, and we have the evidence coming out of our ears that reputation management and corporate communication has a business benefit, if only leaders would listen.

But what’s the value of having a seat at this table if the table itself is disintegrating and corporate communication is left picking up the pieces? Company after company, senior leader after senior leader fall into scandals, unforeseen gaps and unmitigated risk areas. As the proverbial eyes and ears of the business, communicators’ main role must be to look around corners and both help prepare for and influence future operating environments – topic by topic, stakeholder by stakeholder. We must lead the way in mapping out, understanding, mitigating and managing future reputation risks for our businesses, starting with embedding a culture and mindset that takes these risks into account.

We hope these initial insights will give some food for thought for embracing strategic reputation risk management as a proactive essential management activity and help build better organisations that are held to a higher standard of account. The road ahead can be complex, but it can also be as simple as applying a dummy simple litmus test for corporate decisions: are we making a difference and addressing the issues that future generations will expect corporations to have solved? Acceptable versus irresponsible business risk taking lies in the balance of sacrificing future societal and environmental gains for immediate short-term returns– the hygiene factor of the future could be the reputation risk area that destroys your business today.

Dennis Larsen

Dennis Larsen is lecturer at BI Norwegian Business School and managing director of ReputationInc Oslo. Dennis has been working in the field of corporate communications and reputation management over 15 years both in academia and management consulting. He advises senior leaders internationally on strategy, reputation and internal culture and organisation.

Dr. Kerstin Liehr-Gobbers

As associate partner at ReputationInc, Dr. Kerstin Liehr-Gobbers advises multinational clients in the areas of brand and reputation strategy, stakeholder research, alignment and engagement and communication performance management. Her expertise comprises pharma, logistics, technology, financial services, media, telecommunications, the public sector and FMCG. Prior to joining ReputationInc, Kerstin was instrumental in establishing the reputation practice of a leading strategic communications consultancy in Germany. Before that, she set up the public relations arm of a European foundation, worked as an analyst for an M&A firm and as a research fellow at a Center for Applied Economic Research.