Supply Chain

Reputational Risk: Put Someone in Charge and Act Quickly

While this type of risk is widely discussed, surprisingly few companies really do what’s necessary to avoid damage to one of their most important a...
Caroline McDonaldOctober 8, 2012

Reputational risks lurk everywhere, as was plain to see in 2011, when companies were stung by a plethora of natural disasters and such other events as Greece’s debt crisis, accounting irregularities, service disruption, and computer hacking.

But too often, companies wait until their reputation is damaged before they make a bona fide effort to assess their risks, according to one expert on the topic. Another problem is that at most companies, no one is dedicated to tracking and controlling this particular kind of risk.

According to the Aon-sponsored Reputation Review 2012 report, issued by Oxford Metrica, among the 10 companies that suffered the most reputational damage in 2011, 2 lost almost 90% of their value, 7 lost more than a third, and only 1 has recovered to the point where its value is higher than it was before last year’s events.

“Companies need to identify what creates that extra value for them,” says Randy Nornes, executive vice president with insurance broker Aon Risk Solutions. If a public company has a book value of $100, “but its market value is $150, there is $50 of excess value coming from something,” he says. “It’s usually because [analysts’ and investors’] expectation for the future is bright and positive.” A lot of last year’s reputation “losers” were great firms, he adds, but they were too slow or misdirected in their response.

While reputational risk is widely cited as a major risk category, “it has no owner: there’s no such thing as a chief reputation risk officer,” observes Nornes. “And there are so many areas within a company where that risk can reside.”

It is very commonly manifested in the supply chain. For many years, the main focus of supply-chain managers has been efficiency: how much cost can be removed, Nornes says. But that approach does not consider “how much risk-taking those cost savings might have pushed into the system.”

That insight may fall through the cracks because supply-chain managers often manage only a segment of the chain. Few organizations “have someone looking at the supply chain from the beginning of the process all the way to the final sale to the customer,” says Nornes. “If you have a game plan, you can make an adjustment.”

Reputational risk is greater than ever because of social media and the 24/7 nature of news, which make it tough for a company’s message to stay ahead of a big story. When an event requires a public statement, if the company hasn’t already ironed out how to incorporate the opinions of company attorneys into what such a statement says, and hasn’t thought out how to negotiate internally what may be said, the reaction will be unacceptably slow, Nornes says. If it turns out that what’s said is “too watered down, then people will fill in the blanks on their own.”

But while common belief holds that it’s major media events, like the BP oil spill in the Gulf of Mexico, that cause most problems, many reputation-damaging events “start out small,” like something an employee might say to a customer that is taken the wrong way, he says.

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