Top of Mind: Getting Serious About Reputational Risk

Recognition of reputational risk as an issue that companies need to address is on the rise, but acceptance still varies widely in the business community. "A lot of companies could easily measure credit risk or market risk and understand that; it's more tangible to them. [Reputation risk] is not as easily understood or easily measured historically -- and that's the struggle a lot of organizations are dealing with," says Alex Zmoira, business development risk manager at Chicago-based GE Healthcare Financial Services.

The need for businesses to protect their intangible assets is growing. New mandates for corporate governance and changes in regulatory oversight as well as increasing investor demand for transparency are making their mark. Stakeholders are paying closer attention to how companies conduct their business, and their perception of the organization is critical.

Ladd Muzzy, director of enterprise risk management at Aon, a risk management and insurance brokerage firm headquartered in Chicago, says that companies' responses to the rapidly changing competitive environment have the potential to create reputational risk factors. "[The fact that] people are able to do things quicker with information that they get faster into places they haven't been before creates the possibility that a reputation risk event will occur," he says.

To successfully manage reputational risk, companies need to employ both diagnostic and metric analyses. One component of their diagnostic work is to develop an understanding of the company's stakeholders and their interests and create what-if risk scenarios from their concerns, Muzzy recommends. Zmoira says that businesses should map out all risks and their interdependencies as well as their potential effects on reputation. On the metric side, one yardstick GE uses is the concept of net promotor score to gauge how stakeholders feel about the company. "It's a simple and powerful message to track and measure," he says.

Zmoira emphasizes that non-crisis risks are as important to identify and measure as potential crisis risks. For example, a system conversion could go astray, affecting how vendors are paid. That seemingly minor event could create customer satisfaction issues that snowball into reputational risk if those key stakeholders perceive that the company is difficult to do business with. "That kind of reputation is very difficult to shake," he says.