A Spotlight on Reputational Risk
Reputational issues for persons and entities alike have always been important, even in the time of Shakespeare. Othello uttered, in despair, the words “Reputation, reputation, reputation! Oh, I have lost my reputation! I have lost the immortal part of myself, and what remains is bestial.” The importance of reputation is certainly alive and well in the corporate world today, with the spotlight on this issue intensifying for most companies.
This intensity has arisen as a result of a number of factors. The stakeholders who are interested in a company’s activities are now more diverse – expanding from the traditional base of shareholders and investors to include customers, suppliers, business commentators, employees, community and special interest groups to name a few. The beliefs of society has changed (and will continue to change), with companies now being expected to proactively manage their ESG issues (Environmental Social & Governance) and be socially responsible corporate citizens. Additionally, stakeholders are now better informed, better organised and better connected in the digital age in which we live, and are able to effectively voice their concerns about the conduct of a company very quickly (go ‘viral’) and to a very large audience.
A number of regulators are now requiring companies to take more of a proactive approach in relation to the management of ESG issues. For example, the ASX Corporate Governance Principles (4th edition) note that listed companies should disclose whether they have any material exposure to ESG risks and, if so, how it manages or intends to manage those risks. The ASIC has also updated two Regulatory Guides (RG228 and RG247) to provide guidance on climate-risk disclosure by companies. Legislation has also been introduced to mandate various standards for the corporate world, including for example, the recent introduction by the Federal Government of the Modern Slavery Act 2018; the enhancement of the whistle-blower regime in the Corporations Act to provide more avenues for whistleblowing of corporate misconduct and better protection for whistle-blowers; and Victoria and Qld have laws making wage theft (underpayment of staff) a criminal offence. So there is plenty of public scrutiny of, and interest in, corporate behaviour from many angles.
Having a strong corporate reputation has lots of benefits for a company – a loyal customer base, a reliable supply chain, motivated employees as well as support by the business world and the broader community – all of which are likely to lead to higher and more sustainable earnings. The converse of this is that a company with a poor reputation will generally be underperforming and struggle to achieve financial stability and longevity. However, this risk area for companies can often be fickle – as corporate reputations can seemingly be destroyed overnight (rightly or wrongly) by a damaging event. There are many examples of this in the press, most recently the NZ Government and the adverse impact that NZ’s significant dairy industry is having on the environment; to BHP destroying around 40 significant ancient Aboriginal sites in WA to expand its Pilbara mine; to the Cambridge Analytica scandal where Facebook failed to protect the private data of over 87 million of their users. Along with the damage to the corporate brands of Australia’s banking sector through years of poor financial advice and dubious charging regimes, as well as a number of companies being flushed out for underpaying their staff (‘wage theft’). Once a corporate reputation is damaged, there is significant business interruption and cost involved, and it’s often a long road to restore that reputation. The process at that later stage will also then involve a more ‘reactive’ management of this issue, with ‘crisis management’ processes then kicking in.
So the challenge for companies is how best to manage this valuable asset. As corporate reputation is an intangible asset, it is harder to manage, let alone to quantify the financial impact of a damaged corporate reputation. In a number of recent surveys undertaken of risk managers, C-suite and board directors, the majority agree that corporate reputation is a high strategic risk and are aware of the potentially serious consequences for a company if its reputation is damaged. However, there are divergent views on how best to manage this somewhat nebulous risk.
Management of reputational risk requires a multi-faceted and proactive approach and importantly, there needs to be a focus on the longer term, rather than just having a shorter term focus on profits. In addition, companies will need to tailor the management of their ‘reputation’ to suit their particular business. So it’s a complex area and there is no easy way forward to managing reputations risk. As a starting point, there needs to be support from the top that recognises corporate reputation is a critical issue for a company, which will include ensuring that adequate resources are devoted to implementing and strengthening governance frameworks and processes to manage this risk. It is an issue that requires Board oversight and monitoring, as well as treating reputational risk as a strategic issue that is included in a company’s business planning processes. Having a constructive culture with a clear set of values that promotes ethics and compliance in the organisation is another critical component, and must be supported from the top and nurtured.
At a more operational level, companies need to spend ongoing time and money to understand their key stakeholders and their drivers. This process would include undertaking regular reviews of the types of issues that could derail a company’s corporate reputation and analysing this to understand what is likelihood of these issues arising, what are the consequences of this for the company and what actions can be taken to mitigate this (i.e., a risk management approach). Some companies are structuring remuneration packages to include a component that is linked to how effective the management of corporate reputation and ESG issues have been. It is good for a company to inform their stakeholders of their corporate strategy regarding ESG issues and what actions are being taken by the company to promote ESG issues in their business operations. However, stakeholders will hold companies to account with their published corporate position, so this reporting needs to be authentic. And if one of these ‘damaging’ issues does arise, having in place a strong crisis management plan that can be activated quickly to deal with a corporate reputation crisis is a ‘must have’.
So there are many tools in the kit that are available to manage reputation risk, but this doesn’t make this task any less challenging. A final thought – companies need to be clear, intentional and authentic about the management of their reputations.