The recent scandals at a number of prominent banks have underscored the need for steps to be taken when a bank is at the centre of considerable negative publicity. Deon Binneman of PIC Solutions offers some insights
Reputational risk management is a form of risk management that may be unfamiliar to many credit and risk managers. Many companies do not proactively manage their reputational risk and tend to act in a reactive manner. It is interesting to note that BP Amoco has directors with a direct responsibility for this form of risk management.
Companies have come to realise that reputation is an asset that needs to be managed proactively. These companies have realised that the scrutiny under which business operates, the amount of information in the hands of consumers and other members of the public, makes reputation a vital asset, and in some industries the most important asset. After all, what goes through the mind of a stakeholder when he sees a company's secrets exposed by an investigative news programme with a large primetime television following?
Important decisions by stakeholders are invariably based on trust. Good reputations are built on good actions and policies that earn stakeholder trust. Before there is any communication, there must be reputation substance. Executives who examine their own role as a stakeholder with other organisations will realise that trust is at the core of product choices. People buy what they trust. And when people invest in a share, they buy what they trust. Companies have shares that are highly regarded, not only because of the investment opportunity, but also because of their reputation to deliver on their promises.
What is a reputation?
Reputation is the net result of the interactions of all the experiences, impressions, beliefs, feelings and knowledge that all stakeholders have about a company. What is it that consumers really come into contact with when they encounter the company? Certainly, it is the company's brands, products and services. However, at the end of the day, it is a company's reputation. It is often difficult to separate corporate reputation from corporate brands. Brands are what a corporation does. Reputation is what a company is. Put slightly differently, reputation is the world's ongoing evaluation of the total sum of a company's brands, services, citizenship and actions.
Intangible assets
In today's new economy the value of intangible assets are replacing traditional measurement values such as investment in buildings. According to Baruch Lev, the Philip Bardes professor of accounting and finance at the New York University's Leonard N. Stern school of business, traditional accounting processes are becoming increasingly irrelevant. Lev argues that traditional accounting practices cannot capture the new economy in which intangible assets create value: ideas, brands, ways of working, corporate reputation and franchises.
Lev groups intangible assets into four categories:
Assets that are associated with product innovation, such as those that come from a company's research and development efforts;
Assets that are associated with a company's brand which let it sell its products and services at a higher price than its competitors;
Assets which are structural in nature. Better, smarter, different ways of doing business, that can set a company apart from its competitors;
Assets that are monopolies, companies that enjoy a franchise, or have substantial sunk costs that a competitor would have to match.
To use an example, Lev calculated using a technique called 'knowledge earnings,' Microsoft has knowledge assets worth $211 billion. Now compare that with DuPont's assets. DuPont's knowledge assets are worth only $41 billion, yet it has more employees than Microsoft and Intel put together.
Lev added that, "To claim that tangible assets should be measured and valued, while intangibles should not, or could not, is like stating that 'things' are valuable, while 'ideas' are not." It is thus becoming clear that there is a shift from dependence on tangibles such as physical and financial assets to brands, employee loyalty, public trust and management credibility.
Burston-Marsteller, one of the world's largest PR companies, found in a survey that reputation has a multiplier effect to such an extent that people will be seven times more likely to have consumers buy their products or services at a premium price, will be five times more likely to have their stock recommended and be four times more likely to be recommended as a good place to work.
Asset management has become such a sophisticated industry, with both local and international players active, even in emerging markets like Africa. Yet reputation is an asset that still needs to be managed. Its impact on share prices and standing in the marketplace is immense. On the other hand when Russia and China welcome McDonald's it was because their reputation, not hamburgers, paved the way.
The importance of reputational risk management
The issue at stake is that companies have to put into place programmes and practices that will safeguard their reputation. Even the larger consultancies are entering this market with the PriceWaterhouseCoopers' of this world opening their own local offices specialising in reputational risk management.
Recent incidents highlighted in the media certainly show this need. That is why companies need to make senior managers or directors responsible for reputational risk. Reputation management is not public relations. Reputation management goes beyond the traditional parameters of marketing, customer service, public relations and communications. Thousands of companies every year get so caught up in the need to do traditional public relations programmes that they fail to take reasonable steps in advance to ensure they are truly credible. They put the well-known sizzle before the steak. Rather than enhancing their organisation's reputation, they end up hurting it. Efforts that start out to build trust end up adding to mistrust.
Matching reputational risk to organisational reality
Matching the reputation goals with the organisational reality requires you to look at a variety of issues before you launch any PR programmes. Companies need processes that will identify vulnerabilities and help prevent reputation problems from arising. Unfortunately the PR department does not always have the clout to do this.
Another problem is management's expectation that good public relations 'after the fact' can fix what ails them. But this type of thinking is wrong and leads to reputation problems, not solutions. The truth is this: even the best public relations programs cannot overcome flawed policies, bad results or inappropriate actions.
Indeed, the issue of reputational risk management is broader and deeper than the conventional words and pictures of public relations. Reputation management needs public relations input along the way. The public relations staff provide input to reputation policy and carry out that policy. A PR person should be on every senior management team. It is the responsibility of that team, particularly the chief executive, to set parameters for policy. BP- Amoco realised this and appointed directors with reputation responsibility.
Reputational risk management is far more holistic than traditional customer service programmes in that it considers the company's relationship with all stakeholders within the context of a range of relationships any of which may, in specific instances, supersede the relationship with consumers in priority. Moreover, it considers the impact of all of the company's activities on those relationships rather than focusing entirely on the brief interface between company and consumer. These might include the sourcing of materials and choice of suppliers, production processes, transportation methods, and the disposal of waste materials.
Reputational risk management is a proactive and systematic approach to identifying issues that currently affect a company or will affect it within the next 12 to 36 months. Like it or not, a company's policies and actions are shaped and developed in anticipation and reaction towards political, economic, social and technological forces.
It is also a process of casting a look internally and examining procedures, policies and issues that could impact and damage the company's reputation. It involves an in-depth look at the quality of management, financial soundness, use of corporate assets, community and environmental responsibility, quality of products or services, long term investment value, innovativeness, and the ability to attract, develop and keep talented people.
Companies need programmes and processes that will help them to manage their reputation proactively. After all their share price and community standing is dependent on it. Henry Williams once said, "In 30 seconds I destroyed 20 years of hard work".
This article was written for PIC Solutions by Deon Binneman, managing partner at Repucomm.
© Banker Middle East 2008
