Why businesses need to get serious about reputational risk

Com­pa­ny rep­u­ta­tions are in the spot­light like nev­er before. From hav­ing a voice on the impor­tant issues of the day, such as #MeToo, Black Lives Mat­ter and the envi­ron­ment, to deal­ing with social media com­men­tary and respond­ing to third-par­ty attacks such as cyber­crime, build­ing and pre­serv­ing a good rep­u­ta­tion is key to busi­ness suc­cess.

But when it comes to busi­ness trans­for­ma­tion, rep­u­ta­tion­al risk can be for­got­ten. Why? Some exec­u­tives are focused on the bot­tom line, but don’t realise rep­u­ta­tion is intrin­si­cal­ly linked to val­ue, while oth­ers may think about the risks too late and then it becomes a reac­tive, rather than proac­tive, strat­e­gy. 

In its 2020 Rep­u­ta­tion­al Risk Man­age­ment Sur­vey Report, Willis Tow­ers Wat­son found 68 per cent of clients have no frame­work in place for rep­u­ta­tion­al risk. And yet 86 per cent are con­cerned about loss of income and a reduced cus­tomer base due to rep­u­ta­tion­al risk.

At its heart, a good rep­u­ta­tion means a more healthy organ­i­sa­tion. Investors want to feel good about the busi­ness­es they are buy­ing and they also know that one with a bad rep­u­ta­tion is worth less. Employ­ees are more like­ly to stay when they are hap­py with their employer’s actions. And cus­tomers will only stay loy­al if they enjoy every aspect of a brand.

“All three groups are becom­ing more con­scious of rep­u­ta­tion. It’s tough to build a good rep­u­ta­tion and easy to lose it,” says Jonathan Arm­strong, part­ner at Cordery Com­pli­ance, part of Lex­is­Nex­is.

Importance of reputational risk

The new media land­scape is fast paced and hard to con­trol. More and more young peo­ple are get­ting their news from social media, where a sin­gle tweet or post has the poten­tial to cause sig­nif­i­cant rep­u­ta­tion­al dam­age to a firm. The dan­ger can come via an influ­encer or a dis­grun­tled cus­tomer. But it can also come from the com­pa­ny itself, per­haps in a social media cam­paign or the way it responds to cus­tomers. 

Burg­er King’s tweet that “Women belong in the kitchen” on Inter­na­tion­al Women’s Day faced a back­lash on social media and was con­sid­ered a whop­per of a blun­der. Accord­ing to Dun­can Gal­lagher, senior direc­tor and head of cri­sis for Europe, Mid­dle East and Africa at Edel­man, it also shows that no com­pa­ny is immune from mak­ing mis­takes. 

“Burg­er King nor­mal­ly has a great rep­u­ta­tion on social media, but this was tone deaf. It could have an impact. On sales? No. But rep­u­ta­tion? Yes. And then it’s just this ‘drip, drop, drip’ and you’re on the back­foot. It will mean more focus on Burg­er King, it could affect future cam­paigns and there could be more scruti­ny on, say, how it treats women in the work­place,” says Gal­lagher.

An easy way out of the per­ils of social media could be to not engage and stay silent. But that is also a major risk. The most suc­cess­ful firms must have a voice.

Arm­strong notes: “Pre­vi­ous­ly, rep­u­ta­tion was often about not doing things. But cor­po­ra­tions are now expect­ed to step in, for exam­ple on Black Lives Mat­ters, to fill voids left by gov­ern­ments.”

Perils of ignoring reputational risk

Fail­ing to address rep­u­ta­tion­al risk prop­er­ly dur­ing busi­ness trans­for­ma­tion can have many con­se­quences, the worst being the trans­for­ma­tion fails and the com­pa­ny ulti­mate­ly col­laps­es.

Accord­ing to Gal­lagher, the suc­cess of any trans­for­ma­tion hinges on rep­u­ta­tion. “Whether it’s a restruc­tur­ing or a refo­cus­ing, rep­u­ta­tion­al risk needs to be brought in ear­li­er, ide­al­ly at the plan­ning stage. Then you can have a coher­ent team work­ing to mit­i­gate risk. It doesn’t mat­ter if you have amaz­ing prod­ucts, if you fail to com­mu­ni­cate the trans­for­ma­tion prop­er­ly to all stake­hold­ers, your rep­u­ta­tion can take a hit.”

He adds that last year rep­u­ta­tions were tar­nished when firms had to adapt dur­ing the pan­dem­ic. “In the ear­ly days of the COVID cri­sis, some com­pa­nies didn’t do a good job at reas­sur­ing staff about being fur­loughed and there were eth­i­cal ques­tions about which firms repaid fur­lough cash. None of them destroyed their rep­u­ta­tions, but the ones that looked after their com­mu­ni­ty and their staff are the ones that will ben­e­fit over the long term,” he says.

Gar­ret Gaugh­an, head of the glob­al prop­er­ty and casu­al­ty hub at Willis Tow­ers Wat­son, says firms need to get bet­ter at con­nect­ing the dif­fer­ent teams that look after rep­u­ta­tion. “Cor­po­rate comms look after the brand, risk man­age­ment looks after mit­i­gat­ing and trans­fer­ring risk, and then finance looks at the finan­cial and oper­a­tional risks. These func­tions tend to oper­ate in iso­la­tion or com­mu­ni­cate infre­quent­ly around a risk that is dynam­ic and has real-time veloc­i­ty,” he explains.

Gaugh­an believes things are improv­ing, though. Boards are start­ing to appoint one of their mem­bers to specif­i­cal­ly look after rep­u­ta­tion and some are now link­ing ele­ments of board-lev­el remu­ner­a­tion to rep­u­ta­tion­al impact.

He points out there are sig­nif­i­cant rewards for firms that cre­ate and com­mu­ni­cate a coher­ent strat­e­gy: “Apol­lo, the pri­vate equi­ty house, recent­ly saw an uplift in its share price to the tune of $800 mil­lion because it had clear­ly artic­u­lat­ed to the mar­kets its rep­u­ta­tion­al risk man­age­ment strat­e­gy.”

Key reputational risks to watch out for

Key risks to be mind­ful of in 2021 include cli­mate change, sus­tain­able devel­op­ment, safe­ty stan­dards (in the wake of the Gren­fell fire inquiry), Chi­na, Brex­it, cyber­se­cu­ri­ty and the future of work after COVID. There is like­ly to be a big focus on Chi­na in the run-up to the G7 sum­mit in June, which is tak­ing place in Corn­wall. 

The spot­light is like­ly to shift to cli­mate change in Novem­ber, when the Unit­ed Nations Cli­mate Change Con­fer­ence, COP26, is held in Glas­gow. There may be scruti­ny of which organ­i­sa­tions have signed up to the net-zero pledge and are actu­al­ly stick­ing to it.

Post-COVID there will be mul­ti­ple deci­sions for busi­ness exec­u­tives to make. These include whether to allow flex­i­ble work­ing and if so how; how to mon­i­tor employ­ee pro­duc­tiv­i­ty and their well­be­ing, par­tic­u­lar­ly if they’re work­ing from home; and deci­sions on for­eign busi­ness trav­el.

Arm­strong high­lights some issues that com­pa­nies have fall­en foul of recent­ly. Google took a hit to its rep­u­ta­tion when a black researcher said she was fired after crit­i­cis­ing the company’s diver­si­ty efforts. There have also been calls to boy­cott fash­ion retail­er Boohoo over mod­ern slav­ery alle­ga­tions regard­ing its sup­ply chain, while dat­ing app Grindr was fined €10 mil­lion by the Nor­we­gian Data Pro­tec­tion Author­i­ty in Feb­ru­ary for shar­ing high­ly sen­si­tive infor­ma­tion and not com­ply­ing with the Gen­er­al Data Pro­tec­tion Reg­u­la­tion. 

As a final point, it’s worth reflect­ing on the knock-on effects of a dam­aged rep­u­ta­tion. It is esti­mat­ed that Uber spent half a bil­lion dol­lars try­ing to restore its rep­u­ta­tion after com­ing under attack due to its tax affairs and treat­ment of work­ers, which led to threats or actions to with­draw their licences in some cities, includ­ing Lon­don. It has just announced a climb­down on the sta­tus of dri­vers in the UK and will now pay them a min­i­mum wage, hol­i­day pay and pen­sions. It’s a move that will sure­ly cost them mil­lions more.