It is widely accepted that one of the major indicators of reputational risk is negative feedbacks from customers. This might lead to think that an effective way to tackle risk is to build an effective media intelligence.
As a matter of fact, when reputational risk arises in such a form, a damage to the firm’s reputation has already occurred. A shift would be, therefore, needed from envisioning risk as something to manage to envisioning risk as something to prevent.
The article focuses on the preconditions of risk. That is to say, on those critical business areas whose weakness increases the chance to incur reputational risk. The work aims to answer the following questions:
- How can reputational risk be defined?
- How can the chances for risk to occur be measured?
- How can risk be addressed?
The work is divided in three sections. The first section provides a brief outline of the actual state of the art on how to manage, assess and managing reputational risk. The second addresses the issue of how to define risk and proposes a possible framework to assess the chances for risk to occur. The third section provides some concluding considerations.
Section 1 – The state of the art
Drawing on a study by the World Economic Forum, Deloitte explains that ‘on average more than 25% of a company’s market value is directly attributable to its reputation’ (Deloitte, 2014, p. 2).
The large majority of the executives surveyed by Deloitte (2014), agrees that reputation: a) is a priceless and strategic asset; b) is driven by a wide range of business risk to be actively managed; c) involves the whole board and C-suite.
Nevertheless, most companies still appear to be focusing on managing threats as such threats emerge – which is crisis, rather than risk management. Furthermore, despite considerable efforts have been done to define risk in a wide range of areas, there is no agreement on how to define and measure reputational risk (Eccles R.G., Newquist S. C., Schatz R., 2007).
Deloitte’s survey presents very accurate and thorough insights into what executives think of reputation, how they perceive it and place it among the firm’s priorities. It also identifies key elements that shape reputation risk. Among these elements is the way of measuring the company’s performance. Still, Deloitte does not present the reader with any model to assess and calculate reputational risk.
In their attempt to provide a definition of reputational risk, Eccles, Newquist and Schatz (2007) identify three elements that might indicate whether a company is exposed to such a risk.
First, the gap between the reputation that a company managed to build and its true character and behaviour. Since reputation is distinct from the company’s real character and behaviour, the authors explain, ‘when reputation is far more positive than its underlying reality, this gap poses a substantial risk. Eventually, the failure of a firm to live up to its billing will be revealed, and its reputation will decline until it more closely matches the reality’ (p. 3). To give an example, several major disastrous events occurred in the years 2005-2006 that severely damaged BP’s attempts to portray itself as a corporation that cares about the environment.
Second, changing beliefs and expectations among stakeholders – meaning investors, customers, suppliers, employees, politicians, regulators, NGOs, and the communities in which the firm operates. One example is Merck pharmaceuticals failure to disclose the potential of its painkiller Vioxx to cause heart attacks and strokes.
Third, weak internal coordination. As the authors put it, when poor coordination between different business units and functions occurs, so that one group creates expectations that another group fails to meet, reputation can suffer (p. 6). ‘A classical example is the marketing department of a software company that launches a large advertising campaign for a new product before developers have identified and ironed our all the bugs’.
The authors propose a three-phase method to manage reputational risk: 1) evaluate reality; 2) close gaps between the firm’s reputation and real behaviours; 3) monitor changing beliefs and expectations. A fourth step is putting one person in charge of the whole monitoring-assessing-managing process. Phases 1 and 3 are based on quantitative analysis of both qualitative and quantitative data – a strong emphasis being put on media analysis and the building of an effective media intelligence.
Yet, a framework for analysis is still lacking.
Section 2 – A possible definition of reputational risk and framework for assessment
Media analysis, stakeholder surveys, focus groups and public opinion polls surely are useful ways to assess a firm’s reputation. Yet, these methods cannot provide any indicator of reputational risk, nor they can provide any estimate of the potential risk, for they can only picture reality as it is. That is to say, once the risk has already occurred and is turned into a reputational damage.
In fact, the model I propose does not focus on the descriptors of risk, but on the preconditions of risk. Therefore, risk can be defined as that complex of failures in critical areas that increase the chance for the firm to incur reputational risk.
I considered five factors that I deem of critical importance for a five star hotel, though they may well work for other types of firms operating in different markets.
- Availability and functionality of a marketing department. The marketing department should be in charge of the monitoring of the market sentiment, observing and checking the changing of beliefs and expectations among costumers, consumers and other stakeholders, providing guidelines as to how to develop the brand’s products accordingly, assessing the gap between the firm’s reputation and actual behaviour, and producing market analyses based on quantitive and qualitative data – other than the whole process of identifying market segments and building appropriate campaign to target them. Failing to do that might result in exposing the firm to increasing reputational risk.
- Availability and functionality of a sales department. It is widely acknowledged that too often marketing and sales departments work independently from one another; which increases the the chance of incurring reputational risk. Although they require specific kinds of knowledge and expertise, the sales department and the marketing department need to coordinate their actions, for uncoordinated action may pose a serious threat to the firm’s efforts to create value.
- Quality of service and customer experience. The ability to offer a positive customer experience entails the quality of service and vice versa. It also implies the relationship between the product and the customers, from the moment he/she becomes aware of the brand, to the moment when he/she develops the intention to buy, to the moment when such intention is converted into sales, and, eventually, to the moment when the customer uses the product and becomes consumer. Failing to deliver a high quality service and positive customer experience might result in a severe brand reputation damage.
- Level of digital maturity. The level of digital maturity entails the quality of service and customer experience. It also involves the availability of a well designed web site along with a highly responsive mobile version, a social media presence to be coherent with business and marketing objectives, and the capacity to create a positive dialogue with prospects. It also involves the capacity to collect, interpret, organise and manage the data that the various social media and digital platforms provide – which entails the availability and functionality of a marketing department.
- Efficiency level of horizontal and vertical communication within the firm. The capacity to communicate information between and within the different business units (respectively, horizontal and vertical communication) is paramount to an efficient internal coordination. As we have seen, ‘if one group creates expectations that another group fails to meet, the company’s reputation can suffer’ (Eccles and al, 2007, p. 6).
These, I believe, may constitute some of the preconditions to build and maintain a positive firm reputation. Unmonitored, unmanaged and unaddressed failures and weaknesses in one or all these areas can determine unwanted reputation damages.
As the framework I built is about identifying the firm’s weaknesses in critical areas, Malcom McDonald and Hugh Wilson’s model of SWOT analysis (2016) can provide a viable tool to measure and assess the possibility for a firm to incur reputational risk. The framework works as follows.
How the framework works
- Identify from a minimum of 4 to a maximum of 6 Critical Success Factors CSFs). Differently from a proper SWOT analysis, CSFs constitute here elements without which the business performance of a firm might severely suffer.
- Assign each CSF a weighting so that the sum equals 100.
- After a careful assessment of the strength/weakness of each CSF, score them on a scale 1 to 10, where 1 = poor and 10 = excellent.
- Calculate each CFS’s coefficient by multiplying the weighting by the score and dividing the result by 100.
- Add up each coefficient. The difference between the sum obtained and 10.0 is the potential risk, or we may call it the risk range, that a firm might incur.
Like in the example above, it is possible to benchmark estimates about one’s company against estimate about a competitor’s company.
Section 3 – Conclusions
The article questions the common definition of reputational risk as residing in its immediate manifestations, e.g. negative feedbacks from customers and prospects – which indicate that reputational damage has already occurred. This work proposes, instead, an interpretation of reputational risk based on the preconditions for risk to arise. This approach allows the identification of weaknesses in critical business areas so to prevent risk. In other words, an approximate estimate of the chances for a firm to suffer from reputational risk. The framework I presented is based on McDonald and Wilson’s model of SWOT analysis.
Business Owner at 3o – Triple O Marketing & Communication
Deloitte, (2014), 2014 global survey on reputation risk, October.
Eccles R.G., Newquist S. C., Schatz R., (2007), Reputation and its risks, Harvard Business Review, February.
McDonald M. and Wilson H., (2016), Marketing Plans. How to prepare them, how to profit from them. Chichester: Wiley.