Reputation has long been a key concern for the leaders of companies. That’s no surprise given that over a third of corporate value is down to brand and reputation. In fact, 87% of executives also say reputation is their most important strategic risk.
What is a surprise, in an age of 24-hour news and mass adoption of social media and smartphone technology, is that in many corporates it is not clear who has responsibility for managing this strategic risk.
On the one hand, Corporate Affairs Directors (CADs) are responsible for managing corporate reputation. They have the expertise in managing the stakeholder relations that give rise to reputational risk, and which are vital to mitigating it.
However, due to the volume of issues they’re managing or how reputation is viewed within the organisation, all too often their focus is on mitigating live issues rather than predicting and modelling future risk.
On the other hand, Chief Risk Officers (CROs) have the responsibility for incorporating reputational risk and impacts in the firm-wide risk management process which ultimately leads to the disclosure of principal risks to investors and stakeholders. The Financial Reporting Council specifically places reputation at the heart of its definition of ‘Principal Risk’ so underscores this as a Board-level issue.
CFOs, Finance Directors and CROs therefore have the best visibility of the commercial and financial impact of a reputational issue or risk. But too often they lack the awareness of the stakeholder landscape to effectively model the financial impact of a reputational issue.
Of course, the corporate affairs and risk functions interact but, is that interaction enough to both protect and enhance company value? How often do they genuinely collaborate in partnership on reputation, which by their own admission is business-critical? How can reputation risk management become an essential part of the business decision-making process and associated due diligence?
There are many examples where reputation risk has undermined significant investments and decisions by businesses. John West had its tuna products delisted by Tesco in response to activist pressures over the firm’s fishing practices. Volkswagen’s push to sell diesel cars in the US was materially undermined when regulators uncovered “defeat device” emissions testing software in millions of its vehicles.
These cases serve as cautionary tales for many executives. They also highlight an issue with many firms’ approach to mitigating reputation risk: too often reputational concerns are addressed only in the breach and not earlier in the decision-making process. The challenge is to ensure that these concerns are considered and incorporated into the business case supporting key decisions, not just tackled after the event.
This is critically important for key decisions such as launching new products, changing sourcing strategies or initiating M&A activity. Building a rigorous commercial analysis of reputation risk into business cases and strategic planning will undoubtedly help Executive Committees make better decisions.
But, if it is clear that reputation risk management should be an intrinsic part of the business case planning for key decisions (e.g. capex investments), for most firms it is less clear what that should look like in practice. How can companies carry out effective reputational due diligence around key business decisions to protect and enhance company value?
The good news is that the expertise will, to a greater or lesser extent, already exist in most companies. The issue is that the required skills and capabilities are typically spread across different functional siloes. To be effective in evaluating and quantifying reputational risks, firms need to be able to capitalise on the capabilities of both the Corporate Affairs and Risk teams.
Collaboration between these functions should be part of business as usual. In many companies, though, such a day-to-day partnership approach does not come easily. However, the benefits to each team should not be under-estimated. A singular and aligned approach will put both functions more directly at the heart of the decision-making and strategic planning processes, and in closer interaction with the core of the business. The outcome should be better, more informed decision-making by the Executive Committee and Board.
Some basic actions can bring significant and long-lasting benefits. For example: work together to identify upcoming decisions where early consideration of reputational impact will be beneficial to creating a better risk and value perspective; work jointly to assess the quality and rigour of existing data and quantification around reputational risk; and run joint briefing sessions with the Executive Committee and the Board to demonstrate the value of an aligned reputational risk management approach.
The case for updating the existing approaches to reputational risk management is strong. We can only see upside both from a functional value contribution as well as corporate value protection and enhancement perspective. Corporate Affairs and Risk functions working in tandem can deliver an enhanced ‘service’ and a new source of competitive advantage for companies. That’s the opportunity ahead.
Headland Consultancy and H-K Bryn offer reputational risk analysis and conduct collaborative workshops to facilitate effective working between Corporate Affairs and Risk functions. The new approach brings together reputation management expertise with analysing and modelling the commercial impact of reputation risk.