Is reputation really everything?

Historically, organisations have understood the risks relating to their assets, people, liabilities and finances, as they were easily measured. But reputation is the risk that can be the business breaker. The risk has always been there, but the interconnectivity of our world has increased its potential impact on an organisation.

LinkedIn, Facebook, Twitter and the 24/7 news cycle allow the dissemination of bad news, rumours, misinformation and libel to spread across the globe in an instant. Activists, disgruntled customers and angry former employees can launch damaging attacks through blogs, message boards and websites.

Reputation risk can arise from failure to comply with regulatory obligations, to deliver expected products or services, or to hit financial performance targets. Then there’s everything from unethical practices, labour unrest and environmental damage, to product liability, bullying and poorly worded advertisements.

The nightmare scenario for a chief executive might be a tainted product, a deadly accident or a humiliating scandal. Within days, or even hours, a carefully cultivated brand is threatened and a sparkling corporate reputation is at risk of being ruined.

Bad things happen to even good organisations, but it isn’t necessarily the bad things themselves that destroy reputations. Often the deciding factor is how an organisation responds when something goes wrong. Early detection of a reputation risk or event is vital. If an organisation addresses an issue early, the results of its response can be monitored and an appropriate strategy set. If the crisis is handled well, the organisation may even enhance its reputation. If managed badly, it might never recover.

A critical part of any organisation’s strategy should be a clearly articulated policy toward managing reputation risk through open communication. Furthermore, companies should consider embedding reputation risk management in an enterprise risk management (ERM) programme that addresses all aspects of an organisation’s risks. In addition to providing a platform for managing reputation risk across an organisation, ERM helps companies avoid surprises that can threaten reputations, and aids in identifying emerging risks. Risk assessments can be used to review current operational risks, as well as identify interdependencies and contingent risks – situations that can produce the chain reactions that are the precursors of catastrophic losses.

While there isn’t necessarily a ‘loss of reputation’ policy available, policies such as product recall can provide some cover. Mitigating the risk through a supply-chain risk analysis might also be worthwhile.

Hidden dangers
Sometimes the risks related to the supply chain might be difficult to see at first glance. For example, Hong Kong clothing companies are no longer manufacturing domestically, but are exposed through their supply chains. The recent building collapse in Bangladesh highlighted just how quickly consumers respond and move away from your brand when your reputation is damaged.

Bloomberg recently uncovered a potentially illegal tungsten mine in Colombia that, if found to exist, could have implications for everything from high-end sports cars to mobile phones. Organisations complacent in buying Colombian tungsten could face a consumer backlash. The recent strike and delay in reaching a workplace agreement at Hutchison’s Hong Kong port highlighted the importance of reputation in the region.

The place an organisation operates in can also pose reputation risks. Hong Kong’s reputation draws investors, students, workers and tourists. A loss of this appeal could result in reduced tourist numbers, which would affect businesses such as retailers, restaurants, hotels and airlines. The flow-on effect on the rest of the economy could be enormous.