Crisis management

Crisis management

What is reputational risk and how does it affect businesses?

Article by Katarzyna Saganowska, Head of Risk and Compliance at TMF Group: Company reputation has become an increasingly well-understood issue for boards and executives. For this reason, more and more companies are aware of reputational risk and are wondering how to measure this reputation risk, that can affect their business.

I observe that the boards need more precise assessment and qualification of reputation risk. To predict how it is evolving and the negative impact posed by certain issues. All this to support better decision making and the balance of risk appetite versus reward.


What is reputational risk?


In current international and national business landscape, reputational risk is a tangible, quantifiable business concern. It can be measured, and undeniably has a link to financial value, among other KPIs. A simple adverse media check proofs that no industry is safe from consumer condemnation and dynamic shifts in public perception. Manufacturing and Tech companies have come in for criticism for not eliminating exploitation in their supply chains. Also financial institutions are called out for manipulating the markets and ordinary retailers see drop in sales when customer data is lifted in cyber-attacks.


Is quantification of reputation risk possible?


As the awareness and need for reputation risk management has increased, also the sophistication of the tools available constantly develops. The main reason is the wealth of secondary research data from publicly available sources such as social media, as well as online and broadcast channels, allow companies to listen and understand the thoughts and feelings of their different stakeholders. This incredibly rich set of data paired with some automated learning techniques enables the structuring of previously unstructured data and by adding weighted sentiment measures to this, companies can very quickly build a picture of the risks they face as an organization, prioritize such by current impact and severity, apply mitigating measures (if required).


Why reputational context is a ‘king’?


This reputation risk profile already represents an enormous step forward for businesses in terms of getting some control of the issues and events that constitute an actual or potential threat to company’s reputation. Taking into account rather obvious fact that the data is not static and nor are the issues, a simple conclusion is that context, as ever in analytics, is a king. Identifying an individual organization’s reputation risk profile, is crucial however it may be that the key issues identified at the very top of such list are simply the cost of doing business in a given sector. For example, Oil and Gas firms are likely to be targeted on environmental grounds, while insurers will frequently face complaints over lack of payouts. It shouldn’t necessary mean that these are the biggest reputational risks for all firms in these sectors.


Last but not least to mention are the risks on which a company is negatively differentiated compared to its peers that are the most toxic. In a simple words – if your company is seen as significantly out of step on environmental, social or governmental issues relative to your peers, then there is the potential for activists or single-issue NGOs to target you on this matter. Therefore a simple conclusion is that the understanding not just your own reputation risk profile but also where you sit on each of your risks relative to the sector, is the key to spotting potential vulnerabilities which may initially be further down the list of immediate priorities.


Is managing the reputation risk in real-time possible?


With your reputational risk footprint measured and your relative risk exposure mapped, you have your baseline in place. By using these baseline values, companies can monitor any variance in their risk profile relative to these norms and be automatically alerted to this, allowing for earlier intervention and risk mitigation. Nowadays, despite the fact reputation has its own long reputation of being impossible to measure, with the right combination of data sources, machine learning techniques and a detailed understanding of how reputation functions, basically any company can both quantify and manage its reputation and risks related to it, in real-time.


Is it possible to prevent reputational risk?


While reputational risk can’t be fully controlled, it can certainly be positively influenced. The rapid growth of digital media and communication channels has given an influential voice to a wider range of stakeholder groups – and also the entrepreneurs should be ready to decide whose opinion matters most when it comes to preserving your company’s reputation. It is certain that companies that are transparent in their communications tend to recover more quickly. The interconnected world where everyone has the ability to express, an authentic, transparent and consistent communication is the best attitude a company in question should follow.


Why good reputation matters?


Companies with strong positive reputations attract better people. They are perceived as providing more value, which often allows them to charge a premium. The surveys proof that their customers are more loyal and continue to buy broader ranges of products and services. At the same time the market believes that such companies will deliver sustained earnings and future growth, they have higher price-earnings multiples and market values and lower costs of capital. Moreover, in an economy where majority of global market value comes from hard-to-assess intangible assets such as brand equity, intellectual capital, and goodwill, organizations should be especially vulnerable to anything that damages their reputations.


Author: Katarzyna Saganowska, Head of Risk and Compliance, TMF Group. The article previously was published in Focus On Magazine.