It explains the factors that affect the level of such risks and then explores how a company can sufficiently quantify and control them. All companieslarge or smallshould care about staying above their awareness threshold. Interviews with them can also be a good way of identifying issues that may not yet have appeared on the companys radar screen.

For example, performance-improvement targets based only on a companys results for the previous year are meaningless if competitors are performing at a much higher level. Since the reputation of a company is a function of others reputations in its industry and the relative reputation of the industry overall, having the complete context is essential for assessing volume and prominence of coverage, topics of interest, and whether the view is positive or negative. They were initially on board when GSK led a group of pharmaceutical companies in suing the South African government after it passed legislation in 1997 allowing the country to import less expensive, generic versions of AIDS drugs covered by GSK patents. CommPro.biz is a B2B digital publisher, professional development and event production firm serving corporate communications professionals,including the advertising, investor relations, marketing, public relations and social media sectors. They have the credibility and control some of the resources necessary to do the job. If a reputation is unjustifiably positive, the company must either improve its capabilities, behavior, and performance or moderate stakeholders perceptions. Sometimes, particular events can cause latent concerns to burst to the surface. However, the company didnt tell the unions. When the reputation of a company is more positive than its underlying reality, this gap poses a substantial risk. About Us Establishing a positive reputation through the media depends on several factors or practices, according to research by the Media Tenor Institute for Media Analysis (founded by coauthor Roland Schatz) in Lugano, Switzerland. People holding top spin jobs, such as the heads of marketing and corporate communications, fall into this category. There are numerous examples of once-acceptable practices that stakeholders no longer consider to be satisfactory or ethical. Character is like a tree and reputation like its shadow. Assessing reputation, evaluating reality, identifying and closing gaps, and monitoring changing beliefs and expectations will not happen automatically. One of the most noteworthy is Extensible Business Reporting Language (XBRL). Their customers are more loyal and buy broader ranges of products and services. That is not risk management; it is crisis managementa reactive approach aimed at limiting the damage. The process outlined in this article will help managers do a better job of assessing existing and potential threats to their companies reputations and deciding whether to accept a particular risk or take actions to avoid or mitigate it. So the primary challenge is focus: recognizing that reputational risk is a distinct category of risk and giving one person unambiguous responsibility for managing it. All of these actions are important to understanding and managing reputational risks. Monitor the web Sign up for Google alerts so youll be notified if a customer posts a critical review and you can move quickly to make things right. Three things determine the extent to which a company is exposed to reputational risk. Contingency plans for crisis management are as close as most large and midsize companies come to reputational-risk management. Give them an easy way to voice their grievances before they take their complaints online. One company might include customers purchases of extended warranties in its revenues, while another might not. If, however, the gap is large, the time required to close it is long, and the damage if stakeholders recognize the reality is likely to be great, then management should seriously consider lowering expectationsalthough this obviously needs to be done in careful, measured ways. This is a modest expense compared with the value at stake for many companies. And if Ibellances performance dramatically improves during the rest of the year, they would be wise to investigate again. Christopher Cox, the chairman of the Securities and Exchange Commission, is determined to address such limitations and accelerate the widespread adoption of XBRL. It will be difficult for Merck to rebuild its reputationespecially since its share of voice has decreased to 5.5%. They introduce three factors (the reputation-reality gap, changing beliefs and expectations, and weak internal coordination) that affect the level of such risks and then explore several ways to sufficiently quantify and control those factors. Three questions need to be addressed: What is the companys reputation in each area (product quality, financial performance, and so on)? Similarly, periodic surveys of experts in different fields can identify political, demographic, and social trends that could affect the reputation-reality gap. A companys reputation is also vulnerable if the media are focused on just a few topics, such as earnings and the personality of the CEO. Thats a big problem, say the authors. Yet, much to the frustration of the Big Three, consumers remain skeptical. They can provide information on such things as the total number of stories, the number per topic, and the source and author of each story. Mercks travails after the problems with Vioxx illustrate the consequences of a company inadequately managing its position in the media. Computer Associates, Enron, Rite Aid, Tyco, WorldCom, and Xerox are some of the well-known companies that have fallen into this trap in recent years. Toward that end, he announced in September 2006 that the SEC will invest $54 million in an interactive data system based on XBRL, which will represent a quantum leap over existing disclosure technologies. (For more detail, see the HBR List item Here Comes XBRL, HBR February 2007. Media Tenors research suggests that a company needs to have at least a 35% share of voice in order to keep the proportion of negative stories to a minimum in normal times. In virtually all well-run organizations, individual functional groups not only have their fingers on the pulses of various stakeholders but are also actively trying to manage their expectations. BP appears to be learning this the hard way. Merck is embroiled in thousands of lawsuits over the arthritis drug, which it pulled from the market in 2004. The CEO, the vice president surmises, since that is who oversees the firms elaborate crisis-response system and is ultimately responsible for dealing with any events that could damage the companys reputation. The risk management VP says that reputational risk is not included in the long list of risks for which he is responsible. Reputation is distinct from the actual character or behavior of the company and may be better or worse. Merck was ill prepared to defend its reputation when the Vioxx crisis hit. It is up to the CEO or the board to decide whether the risks are acceptable and, if not, what actions should be taken. It takes many good deeds to build a good reputation, and only one bad one to lose it.Benjamin Franklin. Be social Claim the social profiles that makes sense for your business and regularly publish updates on them to expand your digital footprint. However, the company manages reputational risks only informallyand unevenlyat the local and product levels. The controversy has raised patients and doctors expectations that drug companies should disclose more detailed results and analyses of clinical trials, as well as experience in the market after drugs have received regulatory approval. Of course, few companies would choose the latter if there were any way to accomplish the former. This is not risk management; it is crisis managementa reactive approach whose purpose is to limit the damage. (See the exhibit Merck: The Perils of a Low Profile.). Most companies, however, do an inadequate job of managing their reputations in general and the risks to their reputations in particular. Taxonomies for specific industries must be developed; software for downloading and analyzing XBRL data is still at an early stage; and EDGAR Onlines offering includes European companies only if their shares are listed on a U.S. exchange (although an XBRL taxonomy does exist for international financial reporting standards, used by all members of the European Union and a number of other countries). For example, reputation-reality gaps concerning financial performance often result in accounting fraud and (ultimately) restatements of results. The third is the quality of internal coordination, which also can affect the gap. The first is whether its reputation exceeds its true character. Gauging the organizations true character is difficult for three reasons: First, managersbusiness unit and functional heads as well as corporate executiveshave a natural tendency to overestimate their organizations and their own capabilities. Reports Of course, organizations that actually meet the expectations of their various stakeholders may not get full credit for doing so.

XBRL-formatted financial statements are already available from companies such as EDGAR Online, but these early offerings have limitations. Their natural inclination is to believe the praise heaped on their companies and to discount the criticism. However, in the absence of agreement on how to define and measure reputational risk, it has been ignored. Another was the leak in a corroded pipeline at its Prudhoe Bay oil field in Alaska that occurred a year later and forced the company to slash production in August 2006. A version of this article appeared in the, A Framework for Managing Reputational Risk. When coverage is above the awareness threshold and is positive overall, the companys reputation benefits from individual positive stories and is less susceptible to being damaged when negative stories appear.

Finally, expectations get managed: Sometimes they are set low in order to ensure that performance objectives will be achieved, and other times they are set optimistically high in an attempt to impress superiors or the market. Prevent bad reviews Customers often rant online as a last resort. The controversy cost CEO Donald J. Carty his job. Furious when they found out, the unions revisited the concessions package they had approved. When 269 executives were asked in 2005 by the Economist Intelligence Unit who at their companies had major responsibility for managing reputational risk, 84% responded, The CEO. This means that nobody is really overseeing the coordination process. Regulators, industry groups, consultants, and individual companies have developed elaborate guidelines over the years for assessing and managing risks in a wide range of areas, from commodity prices to control systems to supply chains to political instability to natural disasters. For this reason, use great website building software like. Consider the 135-page framework for enterprise risk management (ERM) proposed in 2004 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), a group of professional associations of U.S accountants and financial executives that issues guidelines for internal controls. If one group creates expectations that another group fails to meet, the companys reputation can suffer. In the United States, once-acceptable practices now considered improper include brokerage firms using their research functions to sell investment-banking deals; insurance underwriters incentive payments to brokers, which caused brokers to price and structure coverage to serve underwriters interests rather than customers; the appointment of CEOs friends to boards as independent directors; earnings guidance; and smoothing of earnings. Obvious candidates are the COO, the CFO, and the heads of risk management, strategic planning, and internal audit. This volume, which must be continual, varies somewhat from company to company, depending on industry and country but not on company size. The sharp drop in stories about insurance brokers getting incentive payments from underwriters illustrates how the media can help relegate a hot topic to the back burner. Understanding the factors that determine reputational risk enables a company to take actions to address them. Senior executives tend to be optimists and cheerleaders. Although all are useful, a detailed and structured analysis of what the media are saying is especially important because the media shape the perceptions and expectations of all stakeholders. Third, managers can influence the mix of positive, negative, and neutral stories by striving to optimize the companys share of voice: the percentage of leading-media stories mentioning the firm that quote someone from the organization or cite data it has provided. These displays are a big improvement over the spreadsheets now widely used, which often make it difficult for even the most financially sophisticated executives to spot important anomalies and trends. In addition, top management and the board should periodically review the risk-management process and make suggestions for improving it. . The timing of unrelated decisions also can put a companys reputation at risk, especially if it causes a stakeholder group to jump to a negative conclusion. (The companys due-diligence process includes the evaluation of problems that could affect reputation, including pending lawsuits, weak product-testing procedures, product-liability concerns, and poor control systems for detecting management fraud.) To bridge reputation-reality gaps, a company must either improve its ability to meet expectations or reduce expectations by promising less. Regulators, industry groups, consultants, and individual companies have developed elaborate guidelines over the years for assessing and managing risks in a wide range of areas, from commodity prices to natural disasters. Open response questions can be used to elicit new issues of importanceand thus new expectationsthat other questions might miss. Firms with strong positive reputations attract better people. The temptation is to respond to them with resignation and conclude: No matter what we do, people wont like us, so why bother? The reason executives should botherthrough redoubled efforts to improve reporting and communicationsis that their fiduciary obligation to close such reputation-reality gaps is as great as their obligation to improve real performance. Being tough-minded about both will enable a company to build a strong reputation that it deserves. These include environmental activists; groups concerned about wages, working conditions, and labor practices; consumers rights groups; globalization foes; and animals rights groups. Request reviews Ask happy customers to review your company to counterbalance or suppress negative feedback. The authors provide a framework for actively managing reputational risk. This pharmaceutical firm is not alone. This article provides a framework for proactively managing reputational risks. After the announcement of Vioxxs withdrawal, the average number of stories per month mentioning Merck more than tripledbut 60% of the stories that appeared through September 2006 were negative and only 13% positive. Strong relationships and credibility with the press are crucial to attaining a large share of voice and are especially important during a crisis, when a company really needs to communicate its point of view. As is the case in assessing reputation, the more contextual, objective, and quantitative the approach to evaluating character, the better. However, stories about an explosion at BPs Texas City refinery, alleged tax evasion in Russia, and job cuts in Europe took their toll in 2005, when positive and negative coverage were roughly equal. It has an ERM system for managing operational and financial risks, as well as hazards from external events such as natural disasters, that is loosely based on the COSO framework. Various techniques exist for evaluating a companys reputation. But more often than not, these groups do a bad job of sharing information or coordinating their plans. (See the exhibit BPs Sinking Image.) One was the explosion and fire at its Texas City refinery in March 2005 that killed 15 people and injured scores of others. Some new tools should help address these issues. Then who is responsible? Investor Relations (with varying degrees of input from the CFO and the CEO) attempts to ascertain and influence the expectations of analysts and investors; Marketing surveys customers; Advertising buys ads that shape expectations; HR surveys employees; Corporate Communications monitors the media and conveys the companys messages; Corporate Social Responsibility engages with NGOs; and Corporate Affairs monitors new and pending laws and regulations. A companys overall reputation is a function of its reputation among its various stakeholders (investors, customers, suppliers, employees, regulators, politicians, nongovernmental organizations, the communities in which the firm operates) in specific categories (product quality, corporate governance, employee relations, customer service, intellectual capital, financial performance, handling of environmental and social issues). So does the general counsel, whose job of defending the company means his relationship with stakeholders is often adversarial and whose typical response to media inquiries is no comment., The chosen executive should periodically report to top management and the board on what the key reputational risks are and how they are being managed. Designed by Digital Pomegranate, CommPRO Global, Inc But in 2001, GSK shareholders did an about-face in reaction to an intensifying campaign waged by NGOs and to the trial proceedings, which made GSK and the other drug companies look greedy and immoral. For example, Monsanto, a developer of genetically modified plants, was badly burned by its failure to anticipate Europeans deep concerns about genetically modified foods. This new tool not only analyzes every line in a story but also places the coverage of a company within the context of all the stories in the leading media (those that set the tone for the coverage of topics, companies, and people in individual countries). Poor internal coordination also inhibits a companys ability to identify changing beliefs and expectations. A version of the Internet standards technology Extensible Markup Language (XML), XBRL allows each piece of information in a financial statement to be electronically tagged so that it can be quickly and cheaply pulled into analytical software. In defining operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, the Basel II framework, issued in 2004 and updated in 2005, specifically excludes strategic and reputational risks.