Regrettably, like so many other terms used in the risk profession, it is misused and leads to wrong conclusions and approaches on how to treat the exposure.
In fact, damage to reputation is the result of one or more risks. In other words, it is like so many exposures; it is scenario driven and can only be understood, valued and treated correctly in this context.
So what is this confusion about? I see it as simply putting the cart before the horse. The cleanest way to view risk is in the context of cause and effect. Here's a simple construct: Causes of loss lead to risk events, which result in impacts or consequences.
An example in the context of reputational exposure would be: car part fails due to manufacturing defect > car line suffers major recall > manufacturer/dealers lose sales. Or, cause > event > effect or driver > risk > impact. Thus, reputation is not a risk but an impact or effect from a risk, the result of a specific cause.
While some would say it's just semantics, job No. 1 in effectively managing risk and driving a risk aware and engaged culture is implementing a common language that enables a consistent dialogue.
So now that we're clear on what the risk is, we can intelligently discuss this exposure. Reputation or brand protection has become a critical issue in the wake of the financial crisis of the last two years. There are numerous examples of the fallout of the failure to attend to this exposure. The best examples are probably Lehman Brothers or AIG.
Of course, there are numerous past examples, most notably Enron from a "don't do it that way" perspective and Johnson & Johnson (the famous Tylenol crisis) from a "do it that way" perspective. In the former case, a stellar long-term reputation was obliterated by a small group of powerful people having made only a few decisions. In the latter, a whole company culture responded effectively, prevented any long-lasting negative impact.
Arguably, the best reputation protection strategies in the world might not have produced any different result for Enron. One CEO I know labeled Enron a crisis of integrity. I agree, but integrity is only one element at the heart of reputational exposure. Or more broadly, the culture of the company really is central to protecting the brand. A culture of corruption will of course eventually bring all companies down. But if we view culture as the values and principles that govern employees' behaviors, then it quickly becomes clear why culture is central to managing risks to reputation and brand.
Senior management and especially boards are increasingly asking to understand reputational exposure and the strategies and tactics for managing them. It is critical to any comprehensive risk management program to ensure that a tight, thoroughly vetted program be in place for every organization that values their reputation and believes it holds substantial value as a part of overall company valuation.
Estimating that value then, is another important element of understanding and managing this exposure. Experts have emerged who can help develop a methodology for establishing that value and assessing both the ways to mitigate the exposure as well as value the return proposition for investing in this activity. This could be some of the best money spent in managing your company's most significant risks.
CHRIS MANDEL is the enterprise risk manager for a leading financial institution and a former president of the Risk and Insurance Management Society.
March 1, 2010
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