Avoiding unnecessary risks in order to strengthen and improve reputation the reputation scorecard


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Insight Corporate Excellence

In order to keep in good health, one should undergo regular medical checks. And if one wants to maintain a good reputation, it is essential to track related risks. But what can be done to integrate management of reputational risks into overall management of corporate risks?

According to Alberto Castilla Vida, Senior Manager of PricewaterhouseCoopers’ Consulting Division in Spain, integration of reputational risks into overall management of corporate risks is essential for anticipation and prevention of these risks. However, this integration is impossible without a strong risk awareness culture or sensitivity.

This culture of awareness of the company risks should include one more element: sensitivity to reputational risks. This will constitute a full picture of risks that have to be managed by an organisation and will finally lead to integration and fusion of these aspects.

A decisive role in this process will be played by the Board of Directors as well as the Executive Committee of an enterprise, which will be responsible for identifying events that may affect the organisation, keep related risks under control, and ensure reputational security in the process of achieving corporate objectives.

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Avoiding unnecessary risks in order to strengthen and improve reputation the reputation scorecard

  1. 1. InsightsStrategy DocumentsI09/2011MetricsAvoiding unnecessaryrisks in order to strengthenand improve reputation:the reputation scorecard A risk is produced as a consequence of a deception, a disappointment in expectations or a lack of transparency, because the brand promise is not present in operations. For this reason, companies need to measure these risks, monitor their reputation and use a good scorecard in decision making. Not correlating the operation and the business reputational risk is all that which ends up damaging with the management of reputation, on the one a brand in one way or another): hand, is the best way of not optimizing it, even creating the conditions or laying the foundations 1. Deception (saying A, when it was B) or which lead to a reputational crisis, a damage to disappointing the expectations of interest groups the reputation of the company. Not measuring which expected something else. the risks, on the other hand, is to risk reputation, 2. Leading a double life, the lack of coherence to risk losing it and to risk disappearing. Because and integrity. of that, companies should not forget this aspect 3. Suffering from a lack of transparency (what and integrate Reputation Management in their you say and what you don’t say), not in the business models. way of making a mistake, but in hiding or concealing information. For Alberto Andreu, Director of Reputation and Corporate Responsibility at Telefonica, there are Finally, reputational risk has to do with generating three main reasons why an organization must face or not confidence in the medium-long run, and up to damage to its Corporate Reputation, which in often it is linked to information which has the the end can be summed up as one: not embedding potential of exploding and remaining in the in its operation the promise that the brand has media depending on its own agenda setting or announced to its interest groups (ultimately, because environment circumstances. Due to this reasonDocument prepared by the Corporate Excellence – Centre for Reputation Leadership with reference to, among other sources, theintervention of Alberto Andreu (Director of Reputation, Identity and Sustainability at Telefonica) and Jose Carlos Martinez Lozoya( Corporate Reputation Manager at Iberdrola) during the sessions of the Corporate Reputation Program organized by the CorporateReputation Forum and the Instituto de Empresa Business School in Madrid in January-February 2011. Insights 1
  2. 2. Avoiding unnecessary one must differentiate between pure reputational confidence which the stakeholders have of therisks in order to risk (in this last sense) and the risks derived Corporate Brand, but especially in this last case, asstrengthen andimprove reputation: from the normal management of a company, the confidence has a rational and emotional dimension,the reputation operational ones. but it is due to this second reason or cause by whichscorecard relationships of confidence themselves are created Operational and reputational risks or destroyed. Both types of risk are intimately related: operational risk (derived from the operative or operation of a Prevent and efficiently integrate risks company) usually has a reputational impact, it The most important thing is to know what an becomes a non pure reputational risk, according to organization is faced with after an incident or event Andreu. It is the ordinary risk management carried has occurred, a risk that has been activated, and for out by departments which specialize in analysis and what a fundamental tool is risks map, although one risk calculation in large organizations, under the of the usual problems is to define, especially in the umbrella of the Financial and Legal departments. pure reputational risks, whom these risks belong to, Some classic operational risks (initially defined and who is responsible for them. managed by the financial sector) are: Normally, that which is in no man’s land, which is in • Internal: financial, legal, technological, human. the middle and is situated in grey areas, tends to be a • External: natural disasters, regulation, suppliers. pure reputational risk which has no tutor of its own, someone clearly responsible within the organization – as there are many people in reality acting on them Operational risks require 3 key elements in order to –, apart from credit risks (Financial), for example, be managed correctly: or even web risks (Operational), which always have a father or mother that looks after them, there is 1. Culture: awareness within the organization always someone responsible for its management. regarding its importance. 2. Qualitative: management of indicators, Another important aspect to anticipate reputational evaluators, risk maps and structure. risks is to understand the tendencies of the market 3. Quantitative: management of the calculation of and its environment, what is going on in the capital, quantification model and data. market, what does the media say, the tendencies of social and ideological movements, anticipating Reputational risk is an accelerator of operational how these elements can in the future become risk (due to the media and public component which reputational risks. it gives to operational risk) and also a risk in itself (derived from the public situation or the action of Once more, risks map is key to achieve what we third parties, the stakeholders themselves or the mentioned at the beginning, to integrate in the competition/sector). management of business the management of risks, seeing which are the derived risks, for example, of ‘Reputational risk occurs a network failure like Wi-Fi in a business such as in a company when the Telefonica’s, or the risks which can have a global scope, like reputational or communication risks, promise that the brand has and managing them in line with the principles of announced to its interest action defined within each organization. groups is not embedded in its operation.’ Telefónica: Corporate policies Likewise, it is necessary at this point to differentiate ders Cost between those aspects related to a failure in hol um hare Honesty and ers professionalism of a company (carrying out well S confidence that which it ought to do, its business), which we could associate with operational risk itself and Goverment Suppliers Respect for Integrity the Law its consequence in reputational risk (intangible Business management of the tangible), and those aspects Principles related to an ethical issue, as we said earlier, of lies, deception or concealment, which we could associate HumanEm with pure reputational risk (intangible management y Rights plo iet of the intangible). Soc yees For Alberto Andreu, both risks are important, Source: Telefónica; 2011. to the extent that they impact negatively on the Insights 2
  3. 3. Avoiding unnecessary Integration is produced once one has a unique map, and loyalty data for clients, employees, investors,risks in order to not a parallel one, looking for the managers of each shareholders, etc.strengthen andimprove reputation: risk and conferring responsibilities to each one,the reputation no risk can be without paternity, as well as clearly According to the Reputation Manager at Iberdrola,scorecard defining the reasons for the declaration of the event, it is also important to develop an ‘ad hoc’ tool to the policy and the procedure to be followed. measure the data of each company in appropriate terms, which make sense, within their own sector. At the same time, one must bear in mind that the origin of a risk can be delimited in a forecast, It should be possible to adapt the scorecard to the but not its consequences, both must be taken into requirements of each organization in order to allow account and, above all, avoid the greater risk, the the assessment of data with that of its competition disconnection between intangible areas and the and obtain matching measures and, therefore, management of the company itself. comparable (in SWOT format, gaps analysis or whichever other methodology used). Finally, the expectations of interest groups must be constantly evaluated and policies evolve in At the same time, data must be collected regularly, line with the management of the reputational monitored (monthly, quarterly and annually), risk model, a task in which Corporate and utilize that data which can be used as reputational Reputational Intelligence, competitive, will be intelligence, follow matters of specific interest or key when achieving it, honoring the fundamental matters occurring at that time and integrate all of double duty which every manager has: diligence this in the scorecard with its indicators, as well as and transparency. those of perception. A good reputational scorecard ‘The key in a scorecard is Reputational scorecards are essentially a technique (an adaptation of balanced scorecards conceived by analyzing, measuring and Kaplan) to analyze Corporate Reputation and map integrating the attitudes its main variables as perceived by its stakeholders. Key indicators are essential to manage reputation, and favorable behaviors but also to prevent and anticipate risks. in each dimension with That is how the person in charge of Corporate business data.’ Reputation in Iberdrola, Jose Carlos Martinez Lozoya explained it, who defended an integral With all this information, the Reputation management encompassed in the internal Committee constituted in each organization must management of the company, its business, aligning collect this data and be able to detect what has the the reputational scorecard with the strategic one, potential of generating business, confidence and, business indicators, economic and accounting ratios even, what does not generate anything, in order to with reputational indicators. eliminate those activities which do not contribute to create value in the company. GfK Roper: Financial Services Corporate Reputation Scorecard Conclusions: aspects to bear in mind Because of all this, companies which mange well Range: 0 - 100 their risks, anticipate them and intercept them Supportive Behaviors correctly, are in possession of a good risks map and a reputational scorecard, have a lower debt risk Personality Traits premium than their competitors and, at a time of recovery, grow faster. Evaluation on Attributes Winston Churchill said that the price of greatness Overal Impressions is responsibility, the bigger you are the more responsible you become. A global operation exposes Awareness / Familiarity one more. And new technologies make the world a smaller place and accessible to all in a short time. Source: GfK Custom Research Notrh America, 2011. Hence the need to manage reputational risks in the most professional and strategic possible way. For Martinez Lozoya, the key is analyzing and measuring the attitudes and favorable behaviors towards business in each dimension of reputation, as it is these last ones which convert themselves, finally, into business, into concrete attraction Insights 3
  4. 4. ©2011, Corporate Excellence - Centre for Reputation LeadershipBusiness foundation created by large companies to professionalize the management of intangible assets and contribute to the developmentof strong brands, with good reputation and able to compete in the global market. Its mission is to be the driver which leads and consolidatesthe professional management of reputation as a strategic resource that guides and creates value for companies throughout the world.Legal NoticeThis document is property of the Corporate Excellence - Centre for Reputation Leadership and has as its objective to share businessknowledge about Brand, Reputation, Communication and Public Affairs Management.This document is directed exclusively towards its addressee and contains confidential information, subject to professional secrecy, whosedisclosure, copy or non-authorized use is against the Law. If you receive this document by mistake, let us know immediately and erase itwithout keeping a copy.Corporate Excellence - Centre for Reputation Leadership is the owner of all the intellectual property rights of the images, texts, designsand any other content or elements of this product and has the necessary permission for its use, and therefore, its copy, distribution, publicrelease or transformation is prohibited, without express authorization from the owner.