Reputational Risk

Reputational Risk
Cass-Capco 4th Annual Conference
14th April 2011

Jenny Rayner Abbey Consulting

The fragility of reputation
“ It takes 20 years to build
a reputation and five
minutes to ruin it. If you
think about that, you‟ll do
things differently “

Warren Buffett
CEO Berkshire Hathaway

© Abbey Consulting 2011

Reputation
“The beliefs or opinions that are
generally held about someone or
something

A widespread belief that someone
or something has a particular
characteristic”

Compact Oxford English Dictionary

Reputation – image or reality?
“Image is reality. It is the result of your
actions.

If the image is false and our performance is
good, it‟s our fault for being bad
communicators. If the image is true and
reflects our bad performance, it‟s our fault
for being bad managers.

Unless we know our image we can neither
communicate nor manage.”
David Bernstein

So how is the financial services
sector currently perceived?
Too many in financial services have thought
The King Speech “if it‟s possible to make money out of gullible or
unsuspecting customers, particularly institutional
customers, that is perfectly acceptable”

Good businesses “keep a clear vision of who their
customers are, and are run by people who don‟t
think they should simply maximise profits next
week.”

In the past 25 years banks have increasingly
“taken bets with other people‟s money”

“They didn‟t understand the nature of the risks
they were taking”
Mervyn King, Governor of the Bank of England
© Abbey Consulting 2011 March 2011

The 2008 financial crisis was
avoidable and caused by:
 Dramatic breakdowns in corporate governance with too many
firms acting recklessly and taking on too much risk
 Systemic breaches of accountability and ethics at all levels.
Mortgage-holders took out loans they never intended to pay;
lenders made loans they knew the borrowers could not afford
 Excessive borrowing and risk by households and Wall Street
 Policymakers who were ill-prepared for the crisis and lacked a
“full understanding of the financial system they oversaw”
 Widespread failures in financial regulation, including the
Federal Reserve‟s failure to stem the “tide of toxic
mortgages”
US Financial Crisis Inquiry Commission
January 2011

Risks to reputation

Top five RBS bankers earn
total of £20m

Director leaked board secrets
to tycoon, says Goldman chief

Nearly 2000 customer
complaints a day at Lloyds

The World’s top 20 most
reputable companies 2010
1. Google (US) 11. Microsoft (US)
2. Sony (Japan) 12. Johnson & Johnson
3. The Walt Disney Company (US)
(US) 13. Panasonic (Japan)
4. BMW (Germany) 14. Singapore Airlines
5. Daimler/Mercedes-Benz 15. Philips Electronics
(Germany) (Netherlands)
6. Apple (US) 16. L‟Oreal (France)
7. Nokia (Finland) 17. IBM (US)
8. IKEA (Sweden) 18. Hewlett-Packard (US)
9. Volkswagen (Germany) 19. Barilla (Italy)
10. Intel (US) 20. Nestle (Switzerland)
Reputation Institute -
© Abbey Consulting 2011 Global Reputation Pulse Study 2010

“ Am I bovvered? “

 Do you care about your business‟s reputation?
 Or are you too big to fail?

The tangible consequences
“ While reputation is „intangible‟, damage to an
institution‟s reputation (and the resulting loss
of consumer trust and confidence) can have
very tangible consequences – a stock price
decline, a run on the bank, a ratings
downgrade, an evaporation of available credit,
regulatory investigations, shareholder
litigation etc.”

G Stansfield , Some thoughts on reputation and challenges for
global financial institutions: The Geneva Papers, 2006

The effect of stakeholder trust

2011 Edelman Trust Barometer

The more you are distrusted the more
your reputation may suffer

2011 Edelman Trust Barometer


Fines – who cares?
“The threat of fines from the FSA are seen
as a footling expense, just another cost of
doing business, no different from paying the
quarterly phone bill. The embarrassment
factor no longer counts for much, alas. There
is not much shame in being on the receiving
end of a fine. Only the size of the fine has
come to matter. In some areas, this has
proved laughably inadequate in producing
better behaviour.”
The Times, 7 July 2009

Citigroup’s reputation was tarnished and
their Japanese private bank closed
As senior staff there
had put

“ short-term profits
ahead of the bank‟s
long-term reputation ”

Charles Prince,
Citigroup Chief Executive
October 2004
but they survived!

So should I be bothered?
The consequences

UBS subpoenaed over alleged
manipulation of inter-bank rate


So should I be bothered?
What’s changed?
 Public anger: backcloth of public spending/job cuts
 Criticism of government policy: „soft‟ on banks
 Increased government scrutiny
 Creation of the Independent Commission on Banking
 Threat of increased regulation/structural reform
 The influence of social media
 Growing investor/rating agency interest
 Mandatory disclosure of “principal risks and
uncertainties” in listed company annual reports
 Regulator wielding of reputational sanctions

The impact of
reputational sanctions
“We observe that the penalised firms‟ stock
prices experience statistically significant
abnormal losses of approximately nine times
the fines and compensation paid.
We interpret the fall in equity market value
in excess of mandated payments as the
firms‟ reputational loss”

Regulatory Sanctions and Reputational Damage in Financial Markets
J Armour, C Mayer, A Polo, University of Oxford (March 2011)
Based on sample of the entire population of regulatory enforcement actions by
the FSA and LSE against publicly-traded companies from 2001 – January 2011

What makes a good reputation?
When alignment is achieved
between:

 An organisation‟s
purpose, goals and values

 Its conduct and actions

 The expectations and
experience of its stakeholders


The reputation equation

Reputation =

experience – expectations

Oonagh Mary Harpur


Defining reputational risk

Any action, event or circumstance

that could adversely or beneficially

impact an organisation‟s reputation

Impact
Reputational Risk

The key goals of reputation risk
management strategy
1. Identify and minimise factors that could damage
reputation (threats) and identify and exploit factors
that could boost reputation (opportunities)
2. Identify gaps between stakeholder experience and
expectation and bridge them by:
- improving business strategy/performance/behaviour
and/or
- influencing stakeholder beliefs and expectations so
they are more closely aligned with reality and what
the business can realistically deliver
3. Ensure processes are in place to enable the business
to respond and ride out the storm if an unforeseen
crisis hits (crisis management contingency plan)

A dual approach to managing
risks to reputation
As reputation is based on perception, not
necessarily reality, risks to both reality
and perception must be actively managed

Reputation must
be built both:
„inside-out‟ Reputation
and „outside-in‟


‘Inside out’
 Define a clear vision and values backed up by
policies and procedures that guide behaviours
and decision-making throughout the business
and its supply chain
 Tell your stakeholders what you stand for,
what your goals are and how you plan to achieve
them – so they know what to expect
 Ensure the reality matches the vision - and can
withstand scrutiny - so expectations are met


Identify your
reputational ‘hotspots’
Financial Corporate Regulatory Delivering Workplace Corporate Communic-
Performance Governance compliance customer talent and Responsib- ations
& long-term & leadership promise culture ility & crisis
investment management
value
Employees

Customers

Suppliers

Communities

Investors

Regulators


Pinpoint potential vulnerabilities
and zones of opportunity
Spotting major „mismatches‟

 Strategy vs expectations
 Performance vs objectives
 True intentions vs „spin‟
 Real vs published risk exposures
 Compliance „in letter‟ vs „spirit‟
 Minimal disclosure vs transparency
 Product reality vs marketing claims Mind the gap!
 „Easy-win‟ incentives vs stretching
targets

Promote an ethical culture
“The [banking industry] collectively owes
the real world an apology for what has
happened and it also owes the real world a
commitment to learn the lessons……[some
of those lessons are] about governance and
ethics and culture within the industry…

You can‟t do all this simply by setting rules
and regulations. You have to expect the
leadership…to nurture a real culture of
ethics and integrity and that‟s actually a
continuing priority, perhaps the greatest
priority of all as far as I am concerned for
the boards of banks.”
Stephen Green, Chairman, HSBC in a BBC interview
© Abbey Consulting 2011 7th October 2009

Make reputation risk management
everybody’s business
 Executive directors
 Non-executive directors
 Management
 Public relations
 Internal auditors
 Risk and insurance
managers
 All other employees …All must play their part
 Business partners in moulding and upholding
corporate reputation

„Outside-in‟
 Stay „in tune‟ with your
stakeholders through
dialogue and engagement

 Systematically track their
evolving perceptions and
expectations so strategy is
recalibrated, gaps are
minimised, emerging issues
are spotted early and
opportunities are exploited


Develop a reputation risk barometer
 Use independent objective
data to track stakeholder
perceptions and
expectations
 Design KRIs (Key Risk
Indicators) to provide early
warning of emerging risks
and changing risk exposures

Developing Key Risk Indicators
to Strengthen Enterprise Risk
© Abbey Consulting 2011 Management, COSO, December 2010

Overcoming the barriers to successful
reputation risk management
 Poor awareness of the true value of reputation as a
key intangible asset – so not a key business focus
 Lack of understanding of sources of reputational
risk – so don‟t identify and manage risks actively
 Lack of clarity on ownership – seen as PR issue
 Underestimating the impact of risks to reputation
due focus on short-term impacts – leading to wrong
risk priorities
 Neglecting reputation risk upsides – so not
exploiting opportunities
 Not using stakeholder data to inform strategy

The concept isn’t new

“The way to gain a good
reputation is to
endeavour to be what
you desire to appear “

Socrates, 469-399 BC


But to succeed you may need to change
– and do things differently
“ Warning signs that a patient may not be
suitable for cosmetic surgery include:
expectations of an appearance enhanced
beyond possibility; unrealistic expectations
of lifestyle/career/relationship effects;
an unwillingness to change the behaviour
that led to the problem.”
Plastic surgery information service

Is your organisation a suitable patient?

Reputational Risk

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