Airmic: 'Closing the Gaps on Reputational Risk Management'

WASHINGTON, Oct. 8 -- Airmic, the Risk and Insurance Management Society, and the RepTrak Jointly issued the following report entitled "Closing the Gaps on Reputational Risk Management":

Here are the excerpts:

Foreword

RIMS, Airmic and The RepTrak Company launched a joint effort in 2019 to answer the question: Why are risk professionals struggling with reputational risk management, and what are the missing elements they need? Over the past year, we interviewed more than 40 risk managers from across the United States and Europe. We had dialogues with subject-matter experts, professors and thought leaders. We held working group meetings to discuss good practices and challenges, and conducted follow-up interviews to understand what is working inside organizations today and where improvements are needed. We also conducted research to define the impact of specific risks on reputation and organization performance, and what drives the corporate reputation of leading global brands and how they are perceived across the largest economies.

We would like to thank all the interview and focus group participants for their contributions.

Introduction

In this digital age, organizations operate at a faster pace when making decisions, building a culture of experimentation, fast adoption and openness, and in attracting, motivating and retaining relevant talent. Reputation--like data, knowledge and intellectual property--is an increasingly important intangible asset. Even though intangible assets are progressively more valuable and critical as drivers of competitive strength, they tend to be overlooked by an organization's executives. To complicate matters, boundaries and reputation issues are more complex, uncertain and ambiguous. Past experience shows that organizations are most resilient when leadership works closely with risk professionals to find optimal ways of creating and protecting value that are tied to tangible and intangible assets, particularly when risks associated with intangible assets are at times "hidden" or "emerging."

Reputation Drives Business Value

To succeed, organizations need customers to buy products, regulators to allow them to operate, financial analysts to recommend investments, media to report on success stories, and employees to deliver on purpose and strategy. The big question is: Why do all these groups want to take these supportive actions? The answer is simple--they want to trust organizations that will deliver on the promises they make to them. That is what reputation is all about. People support organizations with strong reputations; the organization's purpose is fulfilled, sales go up and market share increases. The best talent is drawn to and remains loyal to firms with great reputations, and employees tend to be more productive and innovative. The financial market rewards great reputations with more investments and recommendations. And regulators are inclined to give organizations the benefit of the doubt and allow them to operate. Reputation drives all these key performance indicators and so should be managed and protected with rigor, supported by data-driven analysis.

In today's world, organization value is measured by intangible assets, much more so than by the hard assets of the past. In a 2015 Ocean Tomo study, intangible assets represented more than 80% of the value of S&P 500 companies. Perceptions of corporate brand, reputation and intangible assets directly tie to the financial valuation of an organization, and recent and anticipated changes in global accounting rules and securities reporting will further drive the recognition of their value and importance. Corporate winners offer more potential for stability in uncertain times, thereby intensifying the value of intangible asset risk management in today's climate of increased uncertainty and volatility.

Concurrently, social media can turn minor issues-- whether true or not--in remote parts of the world into major crises at the corporate level. Issues that previously would have remained local are now broadcast to a much broader and interconnected stakeholder audience in real time. Given that the success or failure of organizations can sometimes pivot on a single online post, organizations are more aware than ever that merely reacting is not enough. Organizations need to horizon scan, scenario model, develop time-sensitive triggers and exercise leadership with the agility and authority required to achieve an effective rapid response to emerging reputational risks.

As organizations manage issues arising from the COVID-19 pandemic, they face increasingly interconnected and complex risks. Reputational risk takes on even greater importance. On one hand, leaders might believe they will be forgiven by customers and other stakeholders who understand how the crisis has impacted just about every person and organization around the world. On the other hand, leaders can be caught between following government guidelines assiduously (where not doing so would pose a human and ethical risk) and delivering on their core mission. How do leaders and risk professionals balance these multifaceted considerations in such a prolonged crisis?

Previous studies from RIMS and Airmic suggest that the risk community continues to struggle with reputational risk and with reputation as an intangible asset. There is a clear gap between what senior executives and risk professionals know is important to manage and the work that is being done.

This paper puts forward frameworks for risk professionals to work strategically with others within their organizations to measure and tackle reputational risks today--especially with corporate communications, with whom they currently have little to no interaction.

The Challenges

Risk professionals today face six challenges when it comes to understanding and addressing risks to reputation:

1. Unclear definition of reputation. What is reputation and how does it relate to brand and trust?

2. Confusion on the categorization of reputational risk. Is it a risk in its own right, or a causal factor of other risks?

3. No commonly agreed upon, consistent measurement of the business impact from specific risks to reputation. How do organizations measure and quantify the impact of issues on reputation? How do organizations account for the potential business impact in the financial assessment of an issue, to make sure they focus on the right issues?

4. No framework for linking the strategic, operational and tactical aspects of reputational risk management. How do organizations get data to support all three levels?

5. An absence of integrated ownership and accountability across organizations. Do reputational risks sit with corporate communications, risk management or the issue owners?

6. Slow development of solutions for risk transfer. Can reputation be insured?

In the following sections, we will provide our assessment of each challenge, and as well as some answers to solve them.

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Foreword ... 4

Introduction - The COVID-19 effect ... 17

1. What Is Reputation? ... 11

2. Is Reputation a Risk? ... 15

3. Measuring the Impact of Reputational Risks ... 17

4. Linking Strategy, Tactics and Operations ... 19

5. Developing a Framework for Ownership and Accountability ... 23

6. Reputational Risk Financing ... 27

7. Conclusion ... 31

Annex A: Reputational Risk Management: Case Studies ... 32

Annex B: A Data-Driven Approach to Reputation Risk Management ... 34

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Conclusion

Traditionally, risk is dealt with by risk experts, while reputation tends to be managed by the corporate affairs or corporate communications teams. When those two teams work in silos, without any meaningful collaboration, risks can develop and remain undetected until it is too late, and an organization can find itself as headline news. Greater collaboration is required between risk and corporate communications and corporate affairs professionals. These professionals collectively need to restructure their thinking and to build early-warning systems, using the most up-to-date data, that detect reputational risk and an approach to crisis management that can respond with agility and decisiveness.

Reputation drives business value, and reputational risks can potentially be catastrophic for any organization. This puts risk professionals at a crossroads, where they can follow one of two paths: the first, where they have the responsibility but no influence and control; or the second, where they can contribute value to the organization by leading implementation of a structured, data-driven and systematic approach to reputational risk that draws the whole organization together around a common framework.

We hope this guide to reputational risk will encourage and help more risk professionals to travel the second path.

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REPORT: https://www.airmic.com/sites/default/files/Closing-the-Gaps-on-Reputational-Risk-Management.pdf

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