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BBC NEWS: Trading on your reputation

By Jeremy Scott-Joynt
BBC News business reporter
Trust is a fragile thing.
For companies as much as for individuals, it can be a slow, hard job to convince the world that you're safe to talk to, deal with or rely on. Then – in the blink of an eye – a chance event, or a misjudgement, can rip your reputation to shreds. And once gone, rebuilding it can sometimes be impossible. No wonder, then, that the number of people managing reputational risk is mushrooming.
But compared with other risks – of giving bad credit, of becoming the victim of fraud, of falling foul of the regulators – how can one measure something so nebulous as a reputation?
And is it really possible to manage a reputation?
It's certainly mounting up the agenda.
In Switzerland, for instance, the mounting row over Iran's nuclear ambitions and the prospect of sanctions means some of its legendarily discreet banks are turning away Iranian government money.
There can also be the more direct risk of misrepresentation: a reputation attack.
“Identity theft of the brand, and bogus investment products purporting to be from that brand can be a real issue,” says Bill Cleghorn, corporate investigations partner at RSM Robson Rhodes.
Similarly, a firm can be assaulted through rumour, slander – or selective leaks.
But more general threats to reputation are common too: caused by staff mistakes and misdeeds, bad policies or planning, or mishandled crises.
A recent survey by the Economist Intelligence Unit found that of the top managers it interviewed, 90% said their firm's reputation was one of the most valuable things it possessed.
Indeed, they ranked the risk to reputation as more of a threat than regulatory problems, human capital issues such as employee fraud or misbehaviour, or IT breaches.
And three-quarters said reputational risk needed extra investment.
What works?
That said, however, there is a difference of opinion about how to go about tackling the issue.
For some, reputational risk is a thing in and of itself – something which needs to be addressed directly.
“It helps to tease out softer issues which can impact your reputation,” says Jenny Rayner, a consultant and writer on risk management. “That can be a really good sanity check.”
Reputational: 54%
Regulatory: 41%
Human capital: 41%
IT problems: 35%
Market risk: 32%
Credit risk: 29%
Source: Economist Intelligence Unit

Particularly in the PR and marketing sides of big businesses – the idea that risk management is something separate and special is proving rather popular.
For a concept which, unlike other risks, is frustratingly hard to measure, the temptation can be to attach money and faces to the issue as a means of keeping control – and that causes concern.
“Reputation doesn't lend itself to the quantitative, process-driven way risk management is normally packaged,” says Mike Power, Professor of Accounting at the London School of Economics.
“You can't manage it directly. But being weak human beings we tend to put a department and a budget behind it – and that can be why it gets discredited.”
A damaged reputation is an outcome, rather than a cause, he argues – and it's the causes that need to be managed.
Otherwise risk management itself can become a cause of reputational risk, by triggering defensive and over-reactive thinking.
Similarly, a concern about reputation as a thing in itself can pervert decision-making, some warn.
“What if there are things going on which will besmirch your reputation if discovered?” says Mike Porter, from risk consultancy Detica.
“Attacks on your reputation are one of the things that can happen, but risk goes much wider than that. It's not enough to justify someone's job as a reputational risk manager.”
The reputational dimension
Still, reputations can and do suffer – and therefore need protection.
The secret, it seems, is simply to expand what well-prepared companies should already be doing.
Alongside the process of working out where they are vulnerable to financial loss – which usually means determining both how likely a given event is, and what impact it has – they should consider the reputational impact too.
The key, says PriceWaterhouseCoopers partner Glen Peters, is to avoid separating it out, and instead simply build a reputation dimension into the auditing process which large corporations ought already to be undertaking.
“It's not a perfect science,” Mr Peters says.
“But you would go a long way towards making a more resilient business if you were to highlight the potential impacts of risks to reputation.”
Internal auditors, he says, are the people to entrust with collating this kind of threat: not as something separate, but as an extra means of gauging all the other risks that a company is likely to encounter.
Running scared?
The implications of this kind of thing can be far-reaching – and it's a tall order to implement it across an entire organisation.
There's a cautionary tale of a company which, every year, asked its managers to rate the risks they feared on the basis of potential financial damage.
Then one year, they added the reputational dimension.
The result: a list several times as long, and with impact several times as severe.
And the company's response?
It ditched the reputation exercise. Some things, it seems, are just too scary to contemplate.
You can't manage reputation directly… But being weak human beings we tend to put a department and a budget behind it (Mike Power, LSE)
This is the second in a series of articles on risk in 2006. Next: the systemic risks to capitalism from crime and corporate misbehaviour.
Story from BBC NEWS:
Published: 2006/02/12 16:24:42 GMT

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