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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
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
7
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
10
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
11
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
33
Lest we forget…
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Our ultimate goal is trust
Be trusted by the stakeholders
who matter
Building, protecting and
restoring reputations