^{1. Reputation: risk of risks}

An Economist Intelligence Unit white paper sponsored by Ace, Cisco Systems, Deutsche Bank, IBM, KPMG

Executive Summary - please click here to download for free the complete paper

"Protecting a firm’s reputation is the most important and difficult task facing senior risk managers, according to a new report by the Economist Intelligence Unit. In a survey of 269 senior executives responsible for managing risk,reputational risk emerged as the most significant threat to business out of a choice of 13 categories of risk. Fully 84% of respondents felt that risks to their company’s reputation had increased significantly over the past five years. This report, which is sponsored by Ace, Cisco Systems, Deutsche Bank, IBM and KPMG, sheds light on the role of the risk manager in protecting corporate reputation. The findings are drawn from a global survey of senior executives, of which 36% are from companies in the financial services sector. Respondents from 18 other industries also participated in the survey. The report’s main findings include the following:

Reputation is a prized, and highly vulnerable, corporate asset. Reputation is one of the most important corporate assets, and also one of the most difficult to protect, according to executives in the survey. In the Economist Intelligence Unit’s Risk Barometer, a regular feature of the risk programme’s quarterly surveys, reputational risk emerges as the main concern for the majority of risk managers—ahead of regulatory risk, human capital risk, IT network risk, and market risk and credit risk. This preoccupation with reputational risk stems primarily from the fact that executives now see reputation as a major source of competitive advantage. But changes in the business environment have also made companies more vulnerable to reputational damage, with the development of global media and communication channels, increased scrutiny from regulators and reduced customer loyalty cited as three issues that expose companies to increased reputational risk.

Companies struggle to categorise—let alone quantify—reputational risk. Risk managers are divided on whether reputational risk is an issue in its own right or simply a consequence of other risks. The latter view predominates where there is a tradition of well-structured risk measurement and management. In industries where risk managers feel they have identified the key first-tier risks facing their business, they may be more inclined to consider reputational damage as simply a failure to manage these risks properly. In contrast, in sectors where first-tier risk is less quantifiable they are more likely to see reputational threats as a class in their own right.

Compliance failures are the biggest source of reputational risk. The biggest threat to reputation is seen to be a failure to comply with regulatory or legal obligations. Failure to deliver minimum standards of service and product quality to customers is a close second. The risk that unethical practices in the organisation will be exposed follows closely behind. However, failure to hit financial performance targets scores only modestly. Both labour unrest and environmental breaches are also considered an unlikely source of reputational damage. SMEs lag behind on reputational risk. Bigger companies undertake more reputational risk management activities. For instance, four-fifths of respondents from organisations posting revenue in excess of US$10bn have implemented processes for crisis management, compared with just one-half for companies with revenue of US$1bn or below. Only half of SMEs formally monitor external perceptions of their companies, versus 61% of larger companies." (...)

Tags: online reputation management, reputational risk, reputational damage, economist intelligence unit, corporate assets, reputational risk management, reputation survey, social media, communication channels