The tale of the Trojan Horse in a surprise military attack has warned generations against becoming so easily duped. Persisting as a symbol of stealth and risk in today’s always-on, digital-first society, the equine name now describes a particularly insidious form of malware. Whether subtle or overt, risks such as data breaches, geopolitical tensions, global pandemics, increased tensions over human rights and the resulting hostility growing within our society impact organizations’ bottom lines in ways we have never seen before.
Clearly, it’s not just the amount or speed of information that complicates things for corporate boards and C-suite leaders. Even as corporations work increasingly harder to tackle large societal issues to improve our way of life, the risks — and the financial losses associated with them — continue to pile up. But the challenge goes beyond business and operational risk to include something more critical: reputation.
The Growing Impact
The World Economic Forum has estimated that, on average, more than 25% of a company’s market value is directly tied to its reputation. A negative corporate reputation harms investor trust, erodes a company’s customer base and hinders sales. It also directly correlates with increased costs for hiring and retaining top talent, which worsens operating margins and prevents higher returns.
Despite the impact reputation has on corporate value creation, however, studies show that board directors aren’t doing enough to manage reputation risk. Steel City Re, for example, reported that reputation-linked losses at public companies increased by more than 300% in 2018 over the prior year, leading to billions of dollars of lost revenue. More recently, Boeing’s purported $8 billion in losses after the grounding of its MAX 737 jets and Facebook’s $5 billion fine by the FTC over privacy protection signal that this number is only rising.
So, with statistics like these, why aren’t corporations doing more?
It’s not because board directors don’t understand the risk. The Reputation Institute 2019 Leader Study reported that 67% of all businesses see reputation as critical to their success, but only 36% feel they are ready to manage reputation proactively.
The answer lies partly in the intangible and unpredictable nature of reputation risk.
I Can’t Hold It – Therefore It’s Not Real
Board directors understand strategic risk because it’s tangible, measurable and predictable; therefore, it is controllable. After all, vigilance against risk can be traced back to early civilizations like that of Sparta in ancient Greece, known for its formidable military defense. With the majority of funds allocated to its military, the city-state had enjoyed a long history of leaving battle undefeated. Yet, Spartans’ risk management still fell short with the Trojan Horse, leaving them vulnerable to infiltration by their better-prepared rival.
As corporate boards worked to guard against financial losses — especially following the accounting scandals of the early ‘90s — they have stacked the deck with lawyers, compliance experts and risk officers to develop business strategies that ensure enterprise resilience.
Reputation risk, on the other hand, can be unpredictable. It’s based on stakeholders’ interpretations and perceptions about an organization over time and therefore viewed as something that can’t be controlled. Still, opinions matter more than ever in today’s 24/7 news cycle and, if not nurtured, can lead to catastrophic results for corporations and their leaders.
The role of communications
When confronted with a reputation crisis, board directors and C-suite leaders face countless challenges, including communicating in a way that minimizes negative impact. One thing is certain in today’s business environment: Boards without experienced communication experts sitting at the table are putting themselves at increased risk of having a reputation issue turn into a full-blown crisis.
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Experienced communication experts bring the ability to interpret market feedback, influence media, build relationships with investors and governments, and shape convincing stories that inspire action in their stakeholders. Moreover, they combine strong business acumen with the ability to communicate in ways that can put out the fire.
Steps for managing reputation risk
While intangible and often difficult to quantify, reputation risk remains a key consideration for every business. Here are some fundamental measures business leadership should take to ensure their understanding of reputation risk and their preparedness to manage it.
1. Make reputation a strategy, not an objective. Reputation risk management needs to be front and center when it comes to strategy-setting. When business leaders factor reputation risk into their planning, as integral a component as operational and financial business risk, they foster a more strategic view of how to undertake that risk, prepare for it and guard against it. Tying reputation risk to operational and financial business imperatives such as sales, market share, freedom to operate, regulatory fines and M&A activity makes it more tangible – and its business impact easier to quantify.
2. Conduct a risk audit. Conduct a reputation risk assessment to establish the baseline for your company’s image and determine its vulnerabilities. This helps define public perception of your company as well as the industry in which you operate.
Employ insights, media relations and digital and social media specialists to develop a list of internal and external issues that currently impact reputation and freedom to operate, spelling out the scope of each issue and the associated risk-reward scenarios for your business and industry.
3. Establish a process. Once you’ve identified the risks, outline triggers and create decision trees for escalating these issues throughout the organization. Media monitoring and social listening tools can observe spikes in conversation volume, changes in online stakeholder sentiment and negativity in influencer comments, and they can feed this information into dashboards for easy analysis.
4. Make reputation a Board imperative. In today’s climate, it’s not always possible to foresee a reputational crisis before it occurs. Reputation risk is ever-changing and not always based on fact and sound reason. It can even be tied to events or bad decisions made by others. Boards must embrace their role as the guardians of reputation and engage their Chief Communications Officers to create the requisite communication strategies for managing reputation risk. This includes having a detailed crisis response plan in place to aid leaders in managing information and responses during a crucial time or event, when immediate actions can help avoid adverse consequences.
Even the sharpest eye in the C-suite can overlook the severity of risk in an unforeseen announcement, accusation or natural circumstance that threatens to mar reputations. But thoughtful preparation and training with expert communicators can neutralize its impact if or when it arrives. Brands that confront reputation risk with proactive measures and include it as a core part of their strategy can safeguard their reputations against an unexpected crisis – and protect their businesses from its heavy toll.