Breaking down reputational risk at the company

Brokerage giant Aon has revealed damage to reputation/brand as one of the top-ranked global business risks that are being formed by technological advancements including social media, along with economic and geopolitical trends. Over the past few years, even though defective product, dishonourable business practices or corruption have been the key reputation wreckers, new media technologies have greatly amplified their negative impact, making companies more vulnerable.

Reputational risk, usually known as reputation risk, is generally understood as the uncertainty prevailing due to which a good reputation has chances of becoming a 'stigmatised' blemish or being reduced in some or the other way. In fact, technically there exists a reverse risk of improvement of bad reputation which implies risk could not be a threat but an opportunity. This is often seldom seen as reputation risk, but is considered more likely to be a 'stroke of luck'. Hence, reputation risk is generally considered to be a risk of value reduction and not as value increment.

In the age of Twitter or viral videos, damage to reputation could occur because of an inappropriate tweets by an executive, or a video by an employee complaining "proof" about sexual harassment or discrimination.

On a related note, fake news, which started as a way to influence elections on social media, has begun to spill over to the corporate world. Perhaps it comes as no surprise given the recent examples of the United Airlines' passenger removal episode and major advertisers seeing their commercials played on YouTube hate videos -- reputation can have a lasting impact on an organisation. Businesses can no longer rely on their usual risk mitigation or risk transfer tactics as traditional risks evolve.

The risk to reputation originates by a misalignment of values; the organisations' inability to meet the expectations of the stakeholders, thereby, delivering either notably higher or lower expectation. Reputation being a relational concept, this failure can exhibit itself in a variety of ways from a small disappointment to the extent of extreme indignation. The risk is completely value-based (the way relationships are) rather than being cost-based and hence cannot be conveyed like this. Stakeholders hold expectations and any damage to the relationship with them depends on the extent of deviation of the behaviour from their expectations; If the trust is completely lost and cannot be regained, would be the likely response to what is mentioned above; for example, an act of major fraud, especially in an institution such as a charity where trust is implicit. In contrary, if there is a situation of the trust being questioned indicating the stakeholders' disappointment, it is possible to recover given time, money and some forgiveness.

Believing that local problem would stay local, generally underestimates the ability of the bad information to travel faster. An incident potentially able to cause damage may be avoided through quick action and luck, whereas if necessary action has not been taken in time, it could result in adverse consequences. Thus, reputation risk indicates a risk to trust value in a relationship and the cost involved is the cost of recovering the trust lost. Most analysts associate this cost as a drop in the share price or the market capitalisation. However, it is not the whole picture. Share price simply represents the reputation with a particular group at a particular time and excludes the damage that would happen to the future cost in the form of reduced future revenue, employee morale and confidence of the supplier. Hence, the short-term damage can be seen in financials, but no one knows the long-term damage on account of customers switching to other brands.

One way to protect this trust is expectation management. Aligning the expectations with performance implies that there can be no risk and hence no surprises (mantra followed by transparent organisations).

Every relationship has expectations that may or may not turn up to be correct. When they turn out to be correct, there are no surprises. In case they don't, there create surprise. Thus, all depends on the expectations formed at the outset.

Since the management of this type of risk is challenging and still mostly in a developing state, especially concerning quantitative measures of reputation risk, companies should give uttermost important by either transferring, avoid, manage or mitigate risk through two most interesting areas for reputation risk, i.e. ethics and associations.


(The writer is Associate Professor at the Institute of Management, Christ University)