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What is Reputational Risk?
As a starting point, make sure your organization defines reputational risk—the most common attributes include:
• An interpretation or perception of an organization's trustworthiness or integrity
• That the reaction involves stakeholders
• That there is an impact on brand, influence, earnings or value
• A negative impact that results in some loss (for example, revenue, clients, engagements, employees, brand value)
• That the effect can be immediate or gradual
Pulling together these elements, think of reputational risk as the potential risk of losses, damage to brand, or another adverse effect arising from actions or inaction that could negatively impact stakeholders’ perception of the company. Those actions or inaction intersects strongly with corporate communication of policies, responses to customer and public concerns, and willingness or resistance to adopting best practices.
What types of triggers are there for reputational risk?
Next, identify reputational risk events based on the types of scenarios or triggers that can impact the organization's reputation. Examples of trigger categories to help identify reputational risk events include:
• Products and Services: Issues that can negatively impact stakeholders’ outlook on delivery or quality of products and services. In addition to issues such as labor practices, materials sourcing, and environmental impact, consider health and safety aspects of manufacture, packaging, and delivery at all points of production and the health and safety aspects of customer service.
• Employment and Workplace: Issues that can negatively impact stakeholders’ view of employment and workplace practices. Workplace policies and procedures can influence consumer and public perception of a company's brand, especially during crises; decisions about action or inaction regarding updating the employee handbook and relevant policies (e.g., sick leave, remote work) need to account for the reputational risk of a perception as having a negative workplace environment.
• Governance: Issues that can negatively impact stakeholders’ outlook about an organization's internal controls. Economic, public health, and other crises will eventually expose gaps and problems with auditing and operational processes, regulatory compliance, and other areas of reporting.
• Corporate Citizenship: Issues that can negatively impact stakeholders’ outlook about an organization's corporate citizenry. Companies’ various responses to the economic and human impact of the Covid-19 pandemic provide a clear illustration of how corporate action and communication will reflect back on the corporate reputation.
• Leadership: Issues that can negatively impact stakeholders’ outlook on leadership's abilities to achieve goals and strategies.
• Crisis Management: Issues that can negatively impact stakeholders’ outlook about ability responses to address emergencies. Failure to respond efficiently and with the abovementioned risks in mind is difficult to recover from, and would be nearly impossible to recover from twice.
• Financial Performance: Issues that can negatively impact stakeholders’ outlook on an organization's business viability. Risk identification and proper preparation for the highest-risk, highest-likelihood possibilities (see Reputational Risk Matrix) will influence the cascade of decisions necessary during a crisis; financial concerns and projection of a company's ability to continue operating, providing products/services, and maintaining its existing geographic footprint will be elevated.
What are the consequences of having little or no reputational risk controls?
• Greater damage than for an organization that has a reputational risk program, even if the organization has done very little to contribute to the initial issue
• Significant negative impact on share price, earnings, and/or the balance sheet, and the less measurable impact of continuous brand degradation
• Cascading reputational damage, and additional financial consequences, as a result of mishandling a reputational crisis than the initial incident itself
Who should own the reputational risk program?
Every employee (and third parties as based on contractual terms) should be accountable, but ultimately reputational risk management starts at the top. Strong board oversight is vital to sustaining reputation, and as a result, the board's presence in the program should be prominent.
Senior management/executives should also support and promote the program and in turn compel their line managers to do the same.
The program should not be an operation of a control group, such as Legal, Risk, or Compliance, solely. The program should be a cross-functional responsibility with visible ownership and ongoing support from the highest levels of management.
• Engage senior management to set the tone from the top in supporting reputational risk as part of the organization's culture and overall governance.
• Employ a proactive approach to identify, better understand and mitigate risks to reputation, including risks that arise out of global circumstances.
• Be prepared to demonstrate a thoughtful approach to protect the organization from lasting damage to its reputation and brand.
• Regularly assess potential damage to the reputation of known effects (loss of revenue, share price declines, customer loss, etc.), and potential unknowns such as a social media backlash impact on the brand.
• Engage a cross-functional team to help Identify scenarios and quantify their impact on your reputation as well as the success of proposed response measures.
• Continuously promote corporate actions aligned with full legal and regulatory compliance as the best safeguards against reputational challenges.
In the end, your organization's reputation resides on an ongoing commitment to promote and maintain an ethical culture that is best maintained through a dedicated framework such as a Reputational Risk Program. Such a program will be most effective if integrated into existing corporate programs, which, depending on an organization's operations and regulatory scheme, might include oversight of: significant transactions (based on transaction amounts); mergers and acquisitions; new product development processes; crisis management and communications protocols; escalation processes; periodic assessments; governance, risk and compliance protocols; code of conduct; employee handbook; conflict of interest measures; and third-party governance structures.