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Friday, 19 August 2011

Thinking intelligently about the future: understanding and managing reputational risk

“It takes 20 years to build a reputation and five minutes to ruin it.” - Warren Buffett

I’ve decided to commence this post with possibly the most overused quote in the world of reputation management. But I have a good reason for doing so. As events as recent as the UK riots and the News of the World scandal testify, Buffett’s aphorism remains as relevant as ever.

‘So what?’ you may ask. We’re all well aware that reputations can crumble as quickly as the proverbial cookie. But what can be done about this, apart from putting well thought out crisis management plans in place?

Quite a lot, actually. The answer lies in a crucial but often little understood concept—that of reputational risk.

Understanding Reputational Risk

I’ve come across various definitions of reputational risk over the years, some needlessly complicated, but I often find it useful to start by thinking about reputational risk simply as a broad range of uncertainties that could have an impact, positive or negative, on an organisation’s reputation. From this simple definition, two important points can be gleaned:

(1) Reputational risk encompasses both threats AND opportunities. Reputational risk management is therefore not just about preventing disasters or crises from occurring, but also about being well positioned to leverage opportunities which may emerge in the short or long term future.

(2) Since the components that drive an organisation’s reputation are both multi-faceted and constantly shifting, so too are the sources of reputational risk. They can emerge from something as specific as compliance (or non-compliance) with a particular regulation, to something as broad as the way in which an organisation responds to changing stakeholder perceptions and societal trends.

In the aftermath of the BP, Toyota and Hewlett-Packard reputational crises of 2010, an article in the Wall Street Journal astutely observed that:

Reputational risk is…one of the most potent dangers that any company faces. It is also, unfortunately, one of the most elusive…Of those who took part in [a recent] poll, 80% claimed that reputational risk is their top concern. However, only 43% believed that they have formal and well-managed plans in place to tackle it.

The problem is clear: It is easy to identify and measure the impact of the damage wrought to a reputation after a crisis. But it is far more difficult to predict when and – more importantly – how a reputation might be tarnished in the future.

Reputational risk is certainly important, but is it really that intractable or difficult to mitigate? As the article in the Wall Street Journal reminds us, it is impossible to predict the future. It is, however, possible for organisations to equip themselves to better manage reputational risks (and on the flipside, to seize reputational opportunities) by thinking more intelligently about the future.

Thinking Intelligently About the Future

Rapidly changing business (and wider) environments continuously bring about new challenges to surmount, and new opportunities to seize. While these emerging issues will differ in scope (e.g. global vs. industry or place specific), level of certainty, and impact (to name but a few variables), they are not insurmountable, and can, to a lesser or greater extent, be taken into account, planned for, and even altered.

Emerging global issues which we are facing now include:
• Growing number of consumers in emerging economies
• Changing consumer tastes and expectations
• The rise of China and India
• Shifts in the economic balance of power
• Increasing regulatory zeal
• Increasing scrutiny on businesses
• Faster and easier access to information
• Rapid technological changes
• The rise of social media
• Changes in interdependence and competition between and within industries
• Competition for scarce resources
• Global warming

The key to maintaining, protecting, and even enhancing a company’s reputation in such a dynamic, uncertain and unpredictable context lies in:
• Placing reputation, which stems from a multiplicity of behaviours, perceptions and attitudes, at the heart of the business (and not in the hands of one individual or department)
• Understanding evolving reputational risks and opportunities, and envisaging multiple possible futures, such that the business is well placed to deal with a variety of future scenarios and uncertainties, no matter how good or bad.

There exist a number of robust methods and tools enabling organisations to do just this. They range from simple one day workshops (using, for example, creative ‘backcasting’ and ‘visioning’ techniques) to longer term scenario planning and simulation exercises. And at the more complex, expert-led end of the spectrum, tools such as the Delphi method and morphological analysis often prove useful in solving complex and seemingly intractable problems.

What is needed at the outset is a commitment to “future proof” an organisation in an integrated, sustained manner, as well as a willingness to “think outside the box” and challenge official, taken for granted versions of what the future may hold. Organisations which equip themselves to think ahead of the curve in this way are better placed to maximise opportunities and mimimise risks, enhancing their reputational assets in the process.

By Gauri Mahtani, Consultant, ReputationInc

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