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The meltdowns of Arthur Andersen, Enron, WorldCom and others clearly demonstrate the amount of damage that can be done to an organization once its reputation has been sullied. It is particularly significant because the more diverse and physically spread an organization is, the more it becomes immune to risk, and yet the more it becomes exposed to the possible consequences of damaging its reputation.
Developing and implementing an organization- wide plan to combat reputational risk is an essential component of any overall operational plan. This is essential for any market strategy, in any market sector, with any product, service or venture partnership. A predesigned and implemented reputational risk strategy is especially necessary with activities that involve global product and service provisions, international emerging market strategies, the provision of cross-border financial and fiduciary services, entry into joint ventures or any business partnership that places organizational name and integrity in the hands of any foreign entity.
Once a challenge to reputation has surfaced, even subsequent exoneration may not translate into an organization easily returning to its former market position. Consider the charges of Russian money laundering leveled against the Bank of New York (BONY) in 1999. Only minor violations were ultimately revealed, and a few middle level managers were sentenced to short prison terms. No executive or Board culpability was found and the bank was not held liable for any questionable transactions. Yet six years later, BONY has still not recovered its lost market share in the administration of American Depository Receipts, is no longer the dominant issuer of Russian equity certificates to American markets, and has lost its position as a facilitator of syndicated loans for projects in several emerging markets.
Reputational risk encompasses a myriad of elements that confront an organization and its ability to conduct operations in all aspects of activities. Some of these elements are internal in origin and impact, others are external. The risk to institutional credibility and name cut to the very ability to survive in a competitive environment. Yet few organizations are prepared to meet this problem. Few are even taking the necessary initial preventative steps to minimize its likelihood. Once an organization has projected even the potential that its products and/or services are unsafe or unreliable, or even worse, that there were incompetent, corrupt or self-serving people in high positions, no amount of crisis management or public relations consultants can prevent fallout.
Reputational Risk Management can only be effective if it operates throughout the organization, systemically rather than as a behind the scenes specialist function to be activated only in emergencies. RRM must be present and must have a major and ongoing influence on senior management. A well executed RRM program will have spin-off benefits that can, by themselves, improve corporate performance, quality of service, and, even profitability. Reputation is an intangible and difficult asset to quantify. Yet its loss is always painfully calculated in lost market share, declining productivity and sales, and a longer-term sacrifice of organizational pride and purpose. The articulation of an RRM program applies both a preventative and a reactive approach to reputational concerns. It both anticipates developments and prescribes what ought to be done if risk elements emerge. An RRM program also requires attention to both internal and external elements.
Internal elements involve those within the organization and reflect matters relating to personnel policies, business strategies, management responsibilities, the articulation and pursuit of organizational goals and objectives, as well as the early identification and isolation of reputational risk developments.
External elements involve an organizational strategy to minimize reputational risk factors emerging from venture and foreign partners, domestic and foreign governments, global financial networks, foreign regulations and practices, the activities of intermediary parties, as well as the actions of foreign nationals involved in projects but not under the direct control of the organization implementing RRM.
Each phase of a successful RRM program requires a clear articulation of organizational goals, objectives and operational parameters, the development of an early detection system, a recognized and comprehensible method of dealing with risk, and a direct method for all parties to work in synergy.
Reputational protection and corporate integrity are not matters to be applied reactively. Reputational risk management is not the product merely of public relations campaigns. It emerges from an organization-wide requirement protecting an organization's single most important asset. The RRM approach provides for that protection.
"If executives can identify a problem, they can prevent it; and
the least expensive crisis is the one that is addressed beforehand."
Jim Kartalia, CEO, Entegra