From a risk oversight standpoint, a company’s reputation management is inextricably linked with its risk management and crisis management. Effective identification and management of risk can identify major threats to reputation and ensure they are reduced to an acceptable level. Effective response plans and teams can minimize reputation damage when threatening events occur. Together, these two disciplines are fundamental to managing reputation risk.
The organization’s culture sets the tone for protecting reputation. When organizational blind spots exist, causing executive management to miss warning signs that something is wrong or isn’t working which objective parties can see easily from a mile away, reputation is clearly at risk. A reputation-preserving culture often encourages a strong control environment, a balanced incentive compensation structure, clear accountability for results, open communication, transparent reporting, continuous process improvement, and a strong commitment to ethical and responsible business behavior.
Reputation risk management begins with an effective risk assessment process. From a reputation standpoint, it is important to consider the following factors in addition to significance of impact and likelihood of occurrence: (a) velocity to impact once an event occurs, (b) persistence of the impact, and (c) resiliency of the company in responding to the event. These criteria help management identify threats to reputation.
A complicating factor in managing reputation risk is the boundaryless enterprise. Uncompensated risks sourced across the value chain can be sources of reputation risk. These risks require attention because they offer the potential for catastrophic events that have significant downside with little or no upside potential, and can cause severe damage to reputation. They include “stop-the-show” supply chain disruptions, mega warranty costs and/or product recalls, or headline-grabbing environmental, health and safety exposures. Lead content, toxic materials, impure ingredients and other inputs provided by suppliers that fail to meet specifications set by the laws and regulations to which a company is subject can damage that company’s brand image and reputation.
For such significant uncompensated risks, prevention is the prescription. Effective due diligence when evaluating strategic suppliers, channel partners and M&A candidates can be time well spent.
With regard to opportunities for enhancing reputation, innovation can be vital. Organizations that are known for their differentiating strategies, distinctive products and brands, proprietary systems, and innovative processes are more likely to possess a strong, sustainable reputation. They also acquire, develop and retain the best people, providing the cornerstone for enhancing and protecting reputation.
Often, reputation damage is a result of unmanaged risks. Strategic error and financial surprises can result in lost investor confidence. Significant operational issues can lose customers and market share. For example, quality failures and breakdowns as well as high-profile security breaches can severely affect reputation. Non-compliance with laws, regulations and/or contractual arrangements can result in penalties, fines, increased costs and lost revenue, calling into question the “tone at the top.” For public companies, financial reporting is a highly visible compliance risk.
Crisis management is an integral component of effective reputation management. Rapid and effective response to sudden, unexpected events can enhance reputation, as astute observers know that even the most respected organizations can be tested. In a great many instances, it is not the event itself that impairs a company’s reputation irreparably, but rather the quality of the company’s response to that event following its occurrence. Accordingly, it is a management imperative to build a crisis management capability for high-impact, high-velocity and high-persistence risks. A world-class response to a severe crisis is vital to the company’s ultimate recovery from it, and is enabled by a crisis management plan updated and tested periodically by a designated crisis management team that is properly trained and supported by a communications plan pre-approved by legal.
In addition, the organization should have a clear view how it deploys the media to inform and educate the market and the industry. To that end, social media offers a new model for connecting with markets and customers and obtaining insights for improving processes and products. In today’s environment, a company must be watchful for parties squatting on its brands or using them for nefarious purposes. Top-level domains, social network sites and news sites all are potential sources of online traffic where potentially damaging commentary on the company’s products and services may exist. Companies must know how to use social media tools effectively in times of crisis.
Jim DeLoach has more than 35 years of experience and is a member of the Protiviti Solutions Leadership Team. His market focus is on helping organizations succeed in responding to government mandates, shareholder demands and a changing business environment in a cost-effective and sustainable manner that reduces risk to an acceptable level. He also assists companies with integrating risk management with strategy setting and performance management. Jim also serves as a member of Protiviti’s Executive Council to the CEO.