The Risk of Risks: Reputation Risk and Resiliency

Linda LOCKE

The Risk of Risks:

Reputation Risk and Resiliency

Linda Locke

Senior Vice President

November 2014

llocke@standingpartnership.com

Twitter: Reputationista

• The Economist Intelligence Unit survey: ‒ “Reputational risk emerged as the most significant threat to a

business.”

‒ Reputation is prized, and vulnerable

‒ Major source of competitive advantage

‒ Difficult to categorize and quantify ‒ http://www.acegroup.com/eu-en/assets/risk-reputation-report.pdf

• Zurich: ‒ 70% of consumers say they avoid buying a product if they don’t like

the company behind it

‒ Consumers are 350% more likely to purchase products from

companies they like and trust

‒ Executives say 60% of a firm’s market value is attributable to reputation ‒ http://static.knowledgevision.com/account/idgenterprise/assets/attachment/Zurich_092012_RiskManagement_KV/Rep

utational_Risk1.pdf

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The Risk of Risks

• Reputational risk a top concern for boards

‒ 63% of directors see reputational risk as top concern…and

concerns are growing

‒ Primary concerns cover product quality, liability, customer

satisfaction

‒ Secondary concerns: integrity, fraud, ethics

‒ Three-fourths of directors seek broad-based risk assessment…

and they want to know more

Third Annual Board of Directors Survey 2012 - Concerns About Risks Confronting Boards – EisnerAmp

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It’s what keeps boards up at night

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Why? A strong reputation can bring long-

term sustainability

Based on:

Financial stability

Accounting

conservatism

Corporate integrity

Transparency

Sustainability Source: Trust Across America

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Reputation advantage: Apple

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Reputation penalty: BP

• The intangibles can comprise more than 60% of a

company’s value

• Public perception impacts profitability, book value, sales

• Strong reputation can result in strong stock price growth

• Investors use reputation in purchase decisions

• Companies with a strong reputation can:

‒ Charge premium prices

‒ Hire the best candidates

‒ Attract the best business partners

• A strong reputation can be a competitive differentiator

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Why focus on reputation?

• Strategic risks: Which risk areas had/have/will have the

most impact on your business strategy?

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World of strategic risk is changing: Deloitte

41% Brand

28%

Economic Trends

26% Reputation

2010

40% Reputation

32%

Business model

27% Economic trends/

Competition

29% Economic trends

26%

Business model

24% Reputation/ Competition

Today 2016

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Reputation is the connective tissue between

business strategy and stakeholder perceptions

Financial

stability

Positive

societal

impact

Responsible

business

operations

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Two challenges to managing reputation

Reputation is not

owned by the

company; it can

only influence it

Reputation is built

by decisions made

across the

organization

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Companies are often not well-equipped to

manage reputation risk

Reputation literacy not

on the risk agenda

Risk literacy not on the

reputation agenda

• Reputation = judgments and perceptions of others

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Reputation is owned by stakeholders

‒ Customers

‒ Suppliers

‒ Investors

‒ Advocacy groups

‒ Regulators

‒ Policymakers

‒ General public

• Risk is predictable, if….

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The question is whether companies deliver

on the expectations of their stakeholders

‒ You know your

stakeholders

‒ You understand

what drives their

perceptions

‒ You are aware of

their values

‒ You listen to them

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Stakeholders expect resiliency

• Two sides of resiliency:

‒ Prevent conditions of risk

‒ Manage consequences of events

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Resiliency: Ability to adapt to a continuously

changing environment

Source – Carnegie Mellon Software Engineering Institute

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Risk = Hazard + Outrage (Peter Sandman)

Source: evolve24

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The most important objective of all

Build

enterprise-wide

reputation

competence

A resilient organization manages all types of

risk

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Ability to manage risks

and function/adapt

throughout the

lifecycle of operational

disruptions

Ability to maintain

good stakeholder

perceptions and

supportive behavior

at all times

Operational

Resiliency

Reputation

Resiliency

• The Enterprise Risk Management, Business Continuity and

Disaster Recovery teams all have reputation risk on their

agendas.

‒ They likely do not have data or baseline measurement

‒ So they guess at the likely impact of risk issues on reputation.

‒ Make them your allies.

‒ Offer to participate in their planning sessions.

‒ Help deepen reporting upward to include reputational risk data.

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Likely internal allies: ERM and/or BC/DR

Source: evolve24

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How to bring reputation into corporate risk

processes

Crisis/

Emergency

Management

Business

Continuity/

Disaster Recovery

Plan

Risk Assessment/

Business Impact

Analysis

• Reputation crisis

live event

management

• Dynamic event

monitoring and

reporting

• Message

management

• Post-event analysis

• Reputation crisis

plan development

• Scenario planning

• Tabletop exercises

• Live simulation

• Ongoing monitoring

• Stakeholder

analysis

• Reputation risk

assessment

• Risk training for

comms team

• Reputation training

for risk team

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Where to begin: Incorporate reputation into

risk management processes

Reputation resiliency platform

Develop

mitigation

strategies

Set the agenda:

Identify key risks

Monitor;

report to

c-suite/board

Build risk competency

at strategic level: Internal alignment

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What Enterprise Risk Management teams

require

Deliverables:

• Distinct, quantified reputation risk assessment

• Baseline measurement

• Integrated reputation risk reporting

Outcome:

• Defining reputation resiliency for organization

• Expanding view of risk to include non-market, non-

operational issues with impact to reputation

• Addressing broader issues of concern to board

• Business units that understand reputation risks shift

planning and design to accommodate stakeholder

perceptions

• Strategy that addresses drivers of reputation deepens

trust – and supportive behavior – among stakeholders

• Data that measures the reputational impact of crisis

response helps improve response next time

• Engaged c-suite and boards can focus investment on

managing, avoiding and mitigating risk

• Expands the number and influence of reputation

champions in the enterprise

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Reputation risk planning drives

organizational resilience

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Managing Reputation in Three Steps:

Understand Perceptions of Stakeholders

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Understand How you are Perceived Relative

to Competitors

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Understand the drivers that impact

perceptions

Antecedents of Risk

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Stakeholders expect companies to share

their values

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Stakeholders expect companies to share

their values

Gluttony

Sloth

Lust Wrath Hubris

Envy

Greed

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Values, vulnerabilities and outrage (See Business and Its Environment, David P. Baron, Pearson/Prentice Hall)

Hubris

Greed

Gluttony

Wrath

Envy

Sloth

Lust

Young

Elderly

Human Error

Media-Attractive

Abuse of Power

Lack of Responsiveness

Impoverished

The causes of outrage

“Do I put up

with this?”

“Do I put up

with this?”

Pressure Groups “Have I noticed

pressure groups

focusing on it?”

Awareness “Was there a

problem? Did you let

me know about it?”

Choice

“Did I choose to

take the risk or

was it imposed on

me?”

Nature “Is the risk natural

or man-made?”

Dread “Do I fear

this risk?”

Detectability “Can I touch/see it?

Is it quantifiable/

Containable?”

Media “Have I read about

it/seen it in the

news?”

Equity “What does the risk do for me?

Is anyone bearing the risk who

doesn’t benefit from it?” Scientific View “Do experts understand

it? Do they

agree/disagree about

it?”

The causes of

outrage

Source: Regester Larkin

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Lest we forget…

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Our ultimate goal is trust

Be trusted by the stakeholders

who matter

Building, protecting and

restoring reputations