Reputational Risk

Reputational Risk

Cass-Capco 4th Annual Conference

14th April 2011

Jenny Rayner Abbey Consulting

© Abbey Consulting 2011

The fragility of reputation

“ It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you‟ll do things differently “

Warren BuffettCEO Berkshire Hathaway

Reputation

“The beliefs or opinions that are generally held about someone or something

A widespread belief that someoneor something has a particular characteristic”

Compact Oxford English Dictionary© Abbey Consulting 2011


Reputation – image or reality?

“Image is reality. It is the result of youractions.

If the image is false and our performance is good, it‟s our fault for being bad communicators. If the image is true and reflects our bad performance, it‟s our fault for being bad managers.

Unless we know our image we can neither communicate nor manage.”

David Bernstein


So how is the financial services sector currently perceived?

Mervyn King, Governor of the Bank of England March 2011

Too many in financial services have thought “if it‟s possible to make money out of gullible or unsuspecting customers, particularly institutional customers, that is perfectly acceptable”

Good businesses “keep a clear vision of who their customers are, and are run by people who don‟t think they should simply maximise profits next week.”

In the past 25 years banks have increasingly “taken bets with other people‟s money”

“They didn‟t understand the nature of the risks they were taking”

The King Speech

The 2008 financial crisis was avoidable and caused by:

Dramatic breakdowns in corporate governance with too many firms acting recklessly and taking on too much risk

Systemic breaches of accountability and ethics at all levels. Mortgage-holders took out loans they never intended to pay; lenders made loans they knew the borrowers could not afford

Excessive borrowing and risk by households and Wall Street

Policymakers who were ill-prepared for the crisis and lacked a “full understanding of the financial system they oversaw”

Widespread failures in financial regulation, including the Federal Reserve‟s failure to stem the “tide of toxic mortgages”


US Financial Crisis Inquiry Commission January 2011


Risks to reputation

Nearly 2000 customer

complaints a day at Lloyds

Top five RBS bankers earn

total of £20m

Director leaked board secrets to tycoon, says Goldman chief

The World’s top 20 most reputable companies 2010

1. Google (US)

2. Sony (Japan)

3. The Walt Disney Company (US)

4. BMW (Germany)

5. Daimler/Mercedes-Benz (Germany)

6. Apple (US)

7. Nokia (Finland)

8. IKEA (Sweden)

9. Volkswagen (Germany)

10. Intel (US)


11. Microsoft (US)

12. Johnson & Johnson (US)

13. Panasonic (Japan)

14. Singapore Airlines

15. Philips Electronics (Netherlands)

16. L‟Oreal (France)

17. IBM (US)

18. Hewlett-Packard (US)

19. Barilla (Italy)

20. Nestle (Switzerland) Reputation Institute -

Global Reputation Pulse Study 2010

“ Am I bovvered? “

Do you care about your business‟s reputation?

Or are you too big to fail?


The tangible consequences

“ While reputation is „intangible‟, damage to an institution‟s reputation (and the resulting loss of consumer trust and confidence) can have very tangible consequences – a stock price decline, a run on the bank, a ratings downgrade, an evaporation of available credit, regulatory investigations, shareholder litigation etc.”

G Stansfield , Some thoughts on reputation and challenges for global financial institutions: The Geneva Papers, 2006



The effect of stakeholder trust

2011 Edelman Trust Barometer


The more you are distrusted the more your reputation may suffer

2011 Edelman Trust Barometer

Fines – who cares?

“The threat of fines from the FSA are seen as a footling expense, just another cost of doing business, no different from paying the quarterly phone bill. The embarrassment factor no longer counts for much, alas. There is not much shame in being on the receiving end of a fine. Only the size of the fine has come to matter. In some areas, this has proved laughably inadequate in producing better behaviour.”


The Times, 7 July 2009


Citigroup’s reputation was tarnished and their Japanese private bank closed

As senior staff there had put

“ short-term profits ahead of the bank‟s long-term reputation ”

Charles Prince, Citigroup Chief ExecutiveOctober 2004

but they survived!


So should I be bothered? The consequences

UBS subpoenaed over alleged

manipulation of inter-bank rate

So should I be bothered? What’s changed?

Public anger: backcloth of public spending/job cuts

Criticism of government policy: „soft‟ on banks

Increased government scrutiny

Creation of the Independent Commission on Banking

Threat of increased regulation/structural reform

The influence of social media

Growing investor/rating agency interest

Mandatory disclosure of “principal risks and uncertainties” in listed company annual reports

Regulator wielding of reputational sanctions © Abbey Consulting 2011

The impact of reputational sanctions

“We observe that the penalised firms‟ stock prices experience statistically significant abnormal losses of approximately nine times the fines and compensation paid. We interpret the fall in equity market value in excess of mandated payments as the firms‟ reputational loss”


Regulatory Sanctions and Reputational Damage in Financial Markets J Armour, C Mayer, A Polo, University of Oxford (March 2011) Based on sample of the entire population of regulatory enforcement actions by the FSA and LSE against publicly-traded companies from 2001 – January 2011


What makes a good reputation?

When alignment is achieved between:

An organisation‟s purpose, goals and values

Its conduct and actions

The expectations and experience of its stakeholders


The reputation equation

Reputation =

experience – expectations

Oonagh Mary Harpur


Defining reputational risk

Any action, event or circumstance

that could adversely or beneficially

impact an organisation‟s reputation

Reputational RiskImpact

The key goals of reputation risk management strategy

1. Identify and minimise factors that could damage reputation (threats) and identify and exploit factors that could boost reputation (opportunities)

2. Identify gaps between stakeholder experience and expectation and bridge them by:- improving business strategy/performance/behaviour and/or - influencing stakeholder beliefs and expectations sothey are more closely aligned with reality and what the business can realistically deliver

3. Ensure processes are in place to enable the business to respond and ride out the storm if an unforeseen crisis hits (crisis management contingency plan)



As reputation is based on perception, not necessarily reality, risks to both reality and perception must be actively managed

Reputation

A dual approach to managing risks to reputation

Reputation must be built both:

„inside-out‟ and „outside-in‟

‘Inside out’

Define a clear vision and values backed up by policies and procedures that guide behaviours and decision-making throughout the business and its supply chain

Tell your stakeholders what you stand for, what your goals are and how you plan to achieve them – so they know what to expect

Ensure the reality matches the vision - and can withstand scrutiny - so expectations are met



Identify your reputational ‘hotspots’

Financial Performance& long-term investment

value

Corporate Governance & leadership

Regulatory compliance

Delivering customer promise

Workplace talent and culture

CorporateResponsib-

ility

Communic-ations& crisis

management

Employees

Customers

Suppliers

Communities

Investors

Regulators


Pinpoint potential vulnerabilities and zones of opportunity

Spotting major „mismatches‟

Strategy vs expectations Performance vs objectives True intentions vs „spin‟ Real vs published risk exposures Compliance „in letter‟ vs „spirit‟ Minimal disclosure vs transparency Product reality vs marketing claims „Easy-win‟ incentives vs stretching

targets

Mind the gap!


Promote an ethical culture

Stephen Green, Chairman, HSBC in a BBC interview7th October 2009

“The [banking industry] collectively owes the real world an apology for what has happened and it also owes the real world a commitment to learn the lessons……[some of those lessons are] about governance and ethics and culture within the industry…

You can‟t do all this simply by setting rules and regulations. You have to expect the leadership…to nurture a real culture of ethics and integrity and that‟s actually a continuing priority, perhaps the greatest priority of all as far as I am concerned for the boards of banks.”

http://www.penguinbooksindia.com/upload/Stephen green.jpg


Make reputation risk managementeverybody’s business

Executive directors Non-executive directors Management Public relations Internal auditors Risk and insurance

managers All other employees Business partners

…All must play their part in moulding and upholding

corporate reputation


Stay „in tune‟ with your stakeholders through dialogue and engagement

Systematically track their evolving perceptions and expectations so strategy is recalibrated, gaps are minimised, emerging issues are spotted early and opportunities are exploited

„Outside-in‟


Develop a reputation risk barometer

Use independent objective data to track stakeholder perceptions and expectations

Design KRIs (Key Risk Indicators) to provide early warning of emerging risks and changing risk exposures

Developing Key Risk Indicators to Strengthen Enterprise Risk Management, COSO, December 2010

Overcoming the barriers to successful reputation risk management

Poor awareness of the true value of reputation as a key intangible asset – so not a key business focus

Lack of understanding of sources of reputational risk – so don‟t identify and manage risks actively

Lack of clarity on ownership – seen as PR issue

Underestimating the impact of risks to reputation due focus on short-term impacts – leading to wrong risk priorities

Neglecting reputation risk upsides – so not exploiting opportunities

Not using stakeholder data to inform strategy © Abbey Consulting 2011


The concept isn’t new

“The way to gain a goodreputation is to endeavour to be whatyou desire to appear “

Socrates, 469-399 BC


But to succeed you may need to change – and do things differently

“ Warning signs that a patient may not be suitable for cosmetic surgery include: expectations of an appearance enhanced beyond possibility; unrealistic expectations of lifestyle/career/relationship effects; an unwillingness to change the behaviour that led to the problem.”

Plastic surgery information service

Is your organisation a suitable patient?

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Reputational Risk

Economy & Finance