A damaged reputation can do serious financial harm; it can put you out of business. You would expect that reputation risk, which has the potential for causing a devastating impact, would be part of all leading risk management classifications and frameworks. Surprisingly, this is not the case. Reputation risk is not part of the extensive framework for enterprise risk management (ERM) proposed in 2004 by the Committee of Sponsoring Organizations of the Treadway Commission, a consortium of five international accounting associations. Other risk management frameworks, such as Basel II, also exclude reputation risk.
One reason why reputation risk is not taken into consideration in these frameworks is that it is not easy to measure. Reputation is truly intangible and is based on the external perception of the stakeholders. But in today’s world, where intangible assets such as goodwill, intellectual capital, and brand equity count for the biggest part of a company’s market value, managing reputation risk becomes a crucial exercise to ensure sustainable success.
Reputation distinguishes itself by being cumulative; it is built over time based on the organization’s past performance and behavior. Thus reputation can be a strong competitive advantage by stabilizing an organization’s market position. In particular, when competing against new market entrants, reputation can be an invaluable asset. But at the same time, reputation can be damaged with a single event or—especially in the internet era—in a very short time.
A recent survey from the Conference Board Reputation Risk Research Working Group, polling 148 risk management executives from major corporations, demonstrates increased awareness of the importance of reputation risk management. More than 80 percent said their companies are making a substantial effort to manage reputation risk and have increased focus on this area in the last three years. At the same time, less than 50 percent of executives said reputation risk was part of their ERM.
Stakeholder relationship management is at the core of integrating reputation risk in an organization’s risk management processes. All stakeholders’ expectations and perceptions about the company need to be identified. This enables organizations to explore the gap between the company’s reality and its reputation. Corporate objectives and stakeholder requirements need to be aligned. If either one changes and misalignment occurs, reputation is at risk. Embracing transparency is the best way to manage the image of a company.
Oracle Vice President and Fellow Frank Buytendijk, Senior Strategist Toby Hatch, and Chief Enterprise Performance Management Strategist Thomas Oestreich work with executives worldwide to create and share thought leadership.