This article discusses how reputation risk has become a major concern for company boards. It notes that a company's reputation can be destroyed quickly online, and that stakeholders increasingly demand boards take responsibility. The article provides recommendations for boards to improve their independence and oversight of reputation risks, including establishing scorecards to monitor key issues, conducting crisis training, and ensuring independent access to senior management beyond just the CEO. It emphasizes that protecting a company's reputation is crucial for maintaining shareholder value in today's environment.

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BOARDS BEWARE:
REPUTATION HAS FAST BECOME A
MATERIAL STRATEGIC RISK
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2. 2 www.riskandcompliancemagazine.comRISK & COMPLIANCE Jul-Sep 2016
PERSPECTIVES
PERSPECTIVES
BOARDS BEWARE:
REPUTATION HAS FAST
BECOME A MATERIAL
STRATEGIC RISK
BY HARLAN A. LOEB
> EDELMAN
C
onsider this scenario: You are the
independent board chairman of a global
automaker that is winding down a recall
in multiple countries. The CEO has received
considerable praise from shareholders and media
for the transparency and operational rigor of the
recall process and the favourable terms of customer
settlements, both of which have kept the automaker
competitive throughout a highly public event. You
have just received an email from an internal hacker
with verified documentation that three years before
the recall was initiated, the human resources
department provided the CEO with results of a global
compliance survey, which was not shared with the
board. Most notably, the data reveals that 40 percent
of the workforce would not report wilful misconduct
to management, including major quality concerns
both in production and sourcing, for fear of reprisal.
The hacker is demanding that you fire the CEO in the
next 24 hours or this information will be shared with
the relevant exchanges and major media.
You have just arranged a special meeting of
directors by phone to deal with this explosive risk to
the company’s reputation and competitive standing.
What does the board do?
This is an increasingly common scenario and
mirrors several dicey entanglements involving a CEO
and his or her board. In the last year, for instance, the

3. www.riskandcompliancemagazine.com 3RISK & COMPLIANCE Jul-Sep 2016
CEO of a leading online travel agency resigned after
a hidden affair with an employee triggered a board
investigation led by independent directors.
Reputational risk, however, goes far beyond the
issue, real or perceived, of CEO misconduct. This
particular disclosure scenario simply illuminates the
growing number of blockbuster reputation issues
that boards of directors grapple with increasingly
– from cyber crime, corruption, mismanagement,
shareholder activism and regulatory and compliance
issues to market-moving social media wildfires,
among others. All of these can prove to be
reputation busters, especially in today’s speed-
of-light digital world where a damaging rumour or
report spreads globally within hours. In a flash, a
company’s reputation that took years to establish
can self-destruct in minutes. Consequently, boards
BOARDS BEWARE: REPUTATION HAS FAST BECOME A ... PERSPECTIVES

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PERSPECTIVES
and their performance on reputation risk governance
stand at centre stage.
Directors recognise this changing boardroom
landscape. Reputation risk dilemmas have
skyrocketed more than 1000 percent over the last
five years. Their costs have risen by more than 70
percent in the last decade, and the biggest fallout
has been the loss of revenue, according
to a Deloitte Consulting study. Directors
also know the worth of a company’s
reputation. On average, more than 25
percent of a company’s market value is
attributable directly to its reputation, a
World Economics study concluded.
But boards and directors are not
often prepared to handle reputation
risks. Take the issue of activist
investors. A National Association of
Securities Dealers’ survey found that
almost half of boards are unprepared to respond
to them. One reason is that companies and top
management do not often even give boards the
clear reporting metrics on reputation risk issues. The
Schillings law firm, in a survey of CEOs and senior
function heads among the Financial Times Stock
Exchange 350 Index of companies, found only 17
percent measure and report directly to the board on
reputation risk factors.
Why reputational risk has exploded
Boards today must grapple with reputational
issues because stakeholders increasingly demand
that they take charge. Many do not trust CEOs and
senior leadership to deal adequately with damaging
issues. Our 2016 Trust Barometer, an annual global
survey, found that the general population trusts
business as an institution more than it trusts its
leaders. Less than half the public say they have trust
in the board of directors or the CEO.
The latest Trust Barometer helps explain this
distrust. It involves a confluence of disquieting
issues. First, since the recession, a tremendous
cynicism and mistrust in large institutions has
developed, especially among millennials that now
comprise the largest generation. Second, the
BOARDS BEWARE: REPUTATION HAS FAST BECOME A ...
“Boards and directors are not often
prepared to handle reputation risks.”

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PERSPECTIVES
information explosion has made fact and opinion
interchangeable.
Third, scepticism of business innovation grows
as well as expectations of governments to enact
additional regulation. By a margin of two-to-one, the
general population believes the pace of innovation is
too rapid. Along with these factors, there has been
an inversion of the classic pyramid of influence as
peer-to-peer discussions overtake the influence of
elites.
This may well reflect that the general public now
relies more on self-affirming online communities
and television news and less on newspapers and
magazines. Case in point: our Trust Barometer finds
that the most credible source of information on
social networking sites is ‘my friends and family’, a
source considered much more believable than CEOs
and government officials.
Unfortunately, for reputational risk, this means that
companies and boards are guilty until they prove
themselves innocent. It underlines the tremendous
liability that boards and companies face as the
public’s distrust in them persists.
What can boards do?
Because directors and their performance are
under unprecedented scrutiny, they must adopt a
blueprint that generates bona fide independence.
Obviously, this doesn’t mean CEOs don’t matter. But
stakeholders increasingly demand that boards be
high-performing and independent.
Below are key ingredients to improve board
independence, gleaned from working with
companies to help develop and employ such
measures that, in effect, also seek to deliver greater
transparency from a board.
First, establish a quarterly scorecard of leading
indicators to maximise corporate performance that
include at least four operational centres. They are:
(i) human resources – for employee engagement,
morale and talent issues; (ii) operations – for
manufacturing, service and customer performance;
(iii) risk – for enterprise, IT security/breach
preparedness and reputational matters; and (iv)
communications – for external reputational purposes
to gauge online and social/traditional media factors.
Second, conduct stress-test training of directors
for crisis and other material events. Boards find that
such training forces them to challenge corporate
and leadership values in times of crisis, to provide
dispassionate points of view and to assess the
degree of their ‘independence’.
Third, adopt internal and external assessments
of the directors at least annually to gauge how
effectively they are performing their roles against the
objectives and goals they have set for themselves
and the company. At large international corporations,
the governance and nomination committees conduct
these evaluations with the help from outside experts.
Fourth, ensure that boards have independent
access to key senior management besides the CEO,
chief operating officer and general counsel – say, the
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PERSPECTIVES
head of HR, chief risk officer, chief information officer,
and chief communications and marketing officers.
Finally, set term limits, say eight years, for
independent directors so they avoid becoming
too chummy with management over time. Many
companies set a maximum age for a director
– often 72 to 75 – but only 12 percent of boards
have term limits for directors, reports a 2015
PricewaterhouseCoopers survey. The average term
for a director has been 8.6 years, reports Spencer
Stuart.
Boards must remember that shareholder value is a
dependent variable. It turns on all those reputational
elements that comprise how well a company
performs. A truly independent board stands a
better chance of protecting all those interests while
maintaining stakeholder trust – and the company’s
reputation.
And about that opening scenario: What did the
board do? They retained outside counsel to represent
them. They immediately alerted regulators, the CEO
and the whistleblower that a full investigation was
underway to determine whether the survey data
could in any way be linked to the root causes of
the recall. All of the findings were subsequently
presented to the regulators and, while there was no
clear evidence establishing a legal connection to
the sources of the recall, the CEO resigned to little
fanfare. RC&
Harlan A. Loeb
Global Practice Chair, Crisis & Reputation
Risk
Edelman
T: +1 (312) 240 2624
E: harlan.loeb@edelman.com
BOARDS BEWARE: REPUTATION HAS FAST BECOME A ...