Insight Corporate Excellence In order to keep in good health, one should undergo regular medical checks. And if one wants to maintain a good reputation, it is essential to track related risks. But what can be done to integrate management of reputational risks into overall management of corporate risks? According to Alberto Castilla Vida, Senior Manager of PricewaterhouseCoopers’ Consulting Division in Spain, integration of reputational risks into overall management of corporate risks is essential for anticipation and prevention of these risks. However, this integration is impossible without a strong risk awareness culture or sensitivity. This culture of awareness of the company risks should include one more element: sensitivity to reputational risks. This will constitute a full picture of risks that have to be managed by an organisation and will finally lead to integration and fusion of these aspects. A decisive role in this process will be played by the Board of Directors as well as the Executive Committee of an enterprise, which will be responsible for identifying events that may affect the organisation, keep related risks under control, and ensure reputational security in the process of achieving corporate objectives.
Insights 1 Not correlating the operation and the business with the management of reputation, on the one hand, is the best way of not optimizing it, even creating the conditions or laying the foundations which lead to a reputational crisis, a damage to the reputation of the company. Not measuring the risks, on the other hand, is to risk reputation, to risk losing it and to risk disappearing. Because of that, companies should not forget this aspect and integrate Reputation Management in their business models. For Alberto Andreu, Director of Reputation and Corporate Responsibility at Telefonica, there are three main reasons why an organization must face up to damage to its Corporate Reputation, which in the end can be summed up as one: not embedding in its operation the promise that the brand has announced to its interest groups (ultimately, because reputational risk is all that which ends up damaging a brand in one way or another): 1. Deception (saying A, when it was B) or disappointing the expectations of interest groups which expected something else. 2. Leading a double life, the lack of coherence and integrity. 3. Suffering from a lack of transparency (what you say and what you don’t say), not in the way of making a mistake, but in hiding or concealing information. Finally, reputational risk has to do with generating or not confidence in the medium-long run, and often it is linked to information which has the potential of exploding and remaining in the media depending on its own agenda setting or environment circumstances. Due to this reason A risk is produced as a consequence of a deception, a disappointment in expectations or a lack of transparency, because the brand promise is not present in operations. For this reason, companies need to measure these risks, monitor their reputation and use a good scorecard in decision making. Strategy Documents I09/2011 Avoiding unnecessary risks in order to strengthen and improve reputation: the reputation scorecard Metrics Insights Document prepared by the Corporate Excellence – Centre for Reputation Leadership with reference to, among other sources, the intervention of Alberto Andreu (Director of Reputation, Identity and Sustainability at Telefonica) and Jose Carlos Martinez Lozoya ( Corporate Reputation Manager at Iberdrola) during the sessions of the Corporate Reputation Program organized by the Corporate Reputation Forum and the Instituto de Empresa Business School in Madrid in January-February 2011.
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Insights 1
Not correlating the operation and the business with the management of reputation, on the one hand, is the best way of not optimizing it, even creating the conditions or laying the foundations which lead to a reputational crisis, a damage to the reputation of the company. Not measuring the risks, on the other hand, is to risk reputation, to risk losing it and to risk disappearing. Because of that, companies should not forget this aspect and integrate Reputation Management in their business models.
For Alberto Andreu, Director of Reputation and Corporate Responsibility at Telefonica, there are three main reasons why an organization must face up to damage to its Corporate Reputation, which in the end can be summed up as one: not embedding in its operation the promise that the brand has announced to its interest groups (ultimately, because
reputational risk is all that which ends up damaging a brand in one way or another):
1. Deception (saying A, when it was B) or disappointing the expectations of interest groups which expected something else.
2. Leading a double life, the lack of coherence and integrity.
3. Suffering from a lack of transparency (what you say and what you don’t say), not in the way of making a mistake, but in hiding or concealing information.
Finally, reputational risk has to do with generating or not confi dence in the medium-long run, and often it is linked to information which has the potential of exploding and remaining in the media depending on its own agenda setting or environment circumstances. Due to this reason
A risk is produced as a consequence of a deception, a disappointment in expectations or a lack of transparency, because the brand promise is not present in operations. For this reason, companies need to measure these risks, monitor their reputation and use a good scorecard in decision making.
Strategy DocumentsI09/2011
Avoiding unnecessary risks in order to strengthen and improve reputation: the reputation scorecard
Metrics
Insights
Document prepared by the Corporate Excellence – Centre for Reputation Leadership with reference to, among other sources, the intervention of Alberto Andreu (Director of Reputation, Identity and Sustainability at Telefonica) and Jose Carlos Martinez Lozoya ( Corporate Reputation Manager at Iberdrola) during the sessions of the Corporate Reputation Program organized by the Corporate Reputation Forum and the Instituto de Empresa Business School in Madrid in January-February 2011.
Insights 2
Avoiding unnecessary risks in order to strengthen and improve reputation: the reputation scorecard
one must differentiate between pure reputational risk (in this last sense) and the risks derived from the normal management of a company, the operational ones.
Operational and reputational risksBoth types of risk are intimately related: operational risk (derived from the operative or operation of a company) usually has a reputational impact, it becomes a non pure reputational risk, according to Andreu. It is the ordinary risk management carried out by departments which specialize in analysis and risk calculation in large organizations, under the umbrella of the Financial and Legal departments. Some classic operational risks (initially defined and managed by the financial sector) are:
Operational risks require 3 key elements in order to be managed correctly:
1. Culture: awareness within the organization regarding its importance.
2. Qualitative: management of indicators, evaluators, risk maps and structure.
3. Quantitative: management of the calculation of capital, quantification model and data.
Reputational risk is an accelerator of operational risk (due to the media and public component which it gives to operational risk) and also a risk in itself (derived from the public situation or the action of third parties, the stakeholders themselves or the competition/sector).
‘Reputational risk occurs in a company when the promise that the brand has announced to its interest groups is not embedded in its operation.’
Likewise, it is necessary at this point to differentiate between those aspects related to a failure in professionalism of a company (carrying out well that which it ought to do, its business), which we could associate with operational risk itself and its consequence in reputational risk (intangible management of the tangible), and those aspects related to an ethical issue, as we said earlier, of lies, deception or concealment, which we could associate with pure reputational risk (intangible management of the intangible).
For Alberto Andreu, both risks are important, to the extent that they impact negatively on the
confidence which the stakeholders have of the Corporate Brand, but especially in this last case, as confidence has a rational and emotional dimension, but it is due to this second reason or cause by which relationships of confidence themselves are created or destroyed.
Prevent and efficiently integrate risksThe most important thing is to know what an organization is faced with after an incident or event has occurred, a risk that has been activated, and for what a fundamental tool is risks map, although one of the usual problems is to define, especially in the pure reputational risks, whom these risks belong to, who is responsible for them.
Normally, that which is in no man’s land, which is in the middle and is situated in grey areas, tends to be a pure reputational risk which has no tutor of its own, someone clearly responsible within the organization – as there are many people in reality acting on them –, apart from credit risks (Financial), for example, or even web risks (Operational), which always have a father or mother that looks after them, there is always someone responsible for its management.
Another important aspect to anticipate reputational risks is to understand the tendencies of the market and its environment, what is going on in the market, what does the media say, the tendencies of social and ideological movements, anticipating how these elements can in the future become reputational risks.
Once more, risks map is key to achieve what we mentioned at the beginning, to integrate in the management of business the management of risks, seeing which are the derived risks, for example, of a network failure like Wi-Fi in a business such as Telefonica’s, or the risks which can have a global scope, like reputational or communication risks, and managing them in line with the principles of action defined within each organization.
Source: Telefónica; 2011.
Telefónica: Corporate policies
Share
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BusinessPrinciples
Honesty andconfidence
HumanRights
Integrity
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Law
Insights 3
Avoiding unnecessary risks in order to strengthen and improve reputation: the reputation scorecard
Integration is produced once one has a unique map, not a parallel one, looking for the managers of each risk and conferring responsibilities to each one, no risk can be without paternity, as well as clearly defi ning the reasons for the declaration of the event, the policy and the procedure to be followed.
At the same time, one must bear in mind that the origin of a risk can be delimited in a forecast, but not its consequences, both must be taken into account and, above all, avoid the greater risk, the disconnection between intangible areas and the management of the company itself.
Finally, the expectations of interest groups must be constantly evaluated and policies evolve in line with the management of the reputational risk model, a task in which Corporate and Reputational Intelligence, competitive, will be key when achieving it, honoring the fundamental double duty which every manager has: diligence and transparency.
A good reputational scorecardReputational scorecards are essentially a technique (an adaptation of balanced scorecards conceived by Kaplan) to analyze Corporate Reputation and map its main variables as perceived by its stakeholders. Key indicators are essential to manage reputation, but also to prevent and anticipate risks.
That is how the person in charge of Corporate Reputation in Iberdrola, Jose Carlos Martinez Lozoya explained it, who defended an integral management encompassed in the internal management of the company, its business, aligning the reputational scorecard with the strategic one, business indicators, economic and accounting ratios with reputational indicators.
For Martinez Lozoya, the key is analyzing and measuring the attitudes and favorable behaviors towards business in each dimension of reputation, as it is these last ones which convert themselves, fi nally, into business, into concrete attraction
and loyalty data for clients, employees, investors, shareholders, etc.
According to the Reputation Manager at Iberdrola, it is also important to develop an ‘ad hoc’ tool to measure the data of each company in appropriate terms, which make sense, within their own sector.
It should be possible to adapt the scorecard to the requirements of each organization in order to allow the assessment of data with that of its competition and obtain matching measures and, therefore, comparable (in SWOT format, gaps analysis or whichever other methodology used).
At the same time, data must be collected regularly, monitored (monthly, quarterly and annually), utilize that data which can be used as reputational intelligence, follow matters of specifi c interest or matters occurring at that time and integrate all of this in the scorecard with its indicators, as well as those of perception.
‘The key in a scorecard is analyzing, measuring and integrating the attitudes and favorable behaviors in each dimension with business data.’
With all this information, the Reputation Committee constituted in each organization must collect this data and be able to detect what has the potential of generating business, confi dence and, even, what does not generate anything, in order to eliminate those activities which do not contribute to create value in the company.
Conclusions: aspects to bear in mindBecause of all this, companies which mange well their risks, anticipate them and intercept them correctly, are in possession of a good risks map and a reputational scorecard, have a lower debt risk premium than their competitors and, at a time of recovery, grow faster.
Winston Churchill said that the price of greatness is responsibility, the bigger you are the more responsible you become. A global operation exposes one more. And new technologies make the world a smaller place and accessible to all in a short time. Hence the need to manage reputational risks in the most professional and strategic possible way.
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