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The Risk of Risks: Reputation Risk and Resiliency Linda LOCKE

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The Risk of Risks: Reputation Risk and Resiliency
Linda Locke
Senior Vice President
November 2014
llocke@standingpartnership.com
Twitter: Reputationista

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•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/Reputational_Risk1.pdf
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The Risk of Risks

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•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

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•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
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Why focus on reputation?

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•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

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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

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Companies are often not well-equipped to manage reputation risk
Reputation literacy not on the risk agenda
Risk literacy not on the reputation agenda

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•Reputation = judgments and perceptions of others
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Reputation is owned by stakeholders
‒Customers
‒Suppliers
‒Investors
‒Advocacy groups
‒Regulators
‒Policymakers
‒General public

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•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

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•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

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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

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•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

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•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

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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

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The causes of outrage
“Do I put up
with this?”

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“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

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Lest we forget…

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Our ultimate goal is trust
Be trusted
by the stakeholders
who matter

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Building, protecting and restoring reputations