GRC Professional - February 2015 Edition | Page 26

HOW TO
GUIDE

REPUTATIONAL RISK

Social media and a 24 hour news cycle mean a crisis moves quickly
and unpredictably. How can you protect your reputation in a
crisis? How costly is reputational damage? Daniel Sheehan

A robust,
evidence-based
reputation
strategy will
minimise the
likelihood of a
critical event
turning into
a reputation
crisis and will
maximise the
probability of
recovery.

In the first three months of 2014, General
Motors ordered the recall of 2.6 million small cars
because of faulty ignition switches that have been
linked to at least 32 crashes and 13 deaths since
2005. General Motors share price fell around 20%
in that time, wiping off more than $10 billion off
the company’s valuation. While some of that loss
market value can be attributed to the estimated $1.5
billion in costs from the recall, investors were more
concerned about the reputational impact of the
scandal. Was General Motors’ reputation for safety
damaged? Will consumers lose trust in the brand?
Similarly, in Australia in February, two brands of
frozen mixed berries were withdrawn, as five cases
of hepatitis A linked to the product were confirmed
in New South Wales and Victoria. The Nanna’s
berries came from China and Chile and were distributed by Patties Foods. The brand was sold with
the unfortunate slogan, ‘the taste you can trust.’
Patties Foods’ share price slumped 15% on the first
trading day after the incident.
For General Motors and Patties Foods, it was
a stark lesson in the true cost of reputation risk.
Reputation risk is difficult to measure because,
rather than being an identifiable risk, it is an
outcome of all other business risks. Because of cases
like General Motors and Patties Food, companies
are concerned increasingly about the consequential
effects that escalating reputational issues can have.
When a reputation risk spirals out of control,
there can be a wide range of negative impacts.
However, revenue and brand value are the most
important. A recent survey from Deloitte confirms
reputational issues have a strong impact on
customer confidence, brand value and a company’s
bottom line. The survey also found that 88% of
executives explicitly focus on reputation risk as a
key business challenge.
The 2014 Reputation at Risk survey found that
only 19 % of companies award themselves an “A”

24 GRC Professional • February 2015

Key elements that shape reputation risk
Setting expectations
Stakeholder expectations are established based on:
• Company history
–– Backward-looking
–– Company track record and performance
• Company strategy
–– Forward-looking
–– Established by the company
–– Communicated to the public

Measuring performance
Perceived performance is driven by:
• Actual performance: reputation is mostly (but not
entirely) determined by what a company does, not
what it says.
• Communication: effective communication with
stakeholders and the media can help shape
opinions and reputations.

Reputation impact
An event’s effect on reputation can be positive or negative:
• Reputation opportunity. The company exceeds
expectations and its reputation is enhanced.
• Reputation risk. The company falls short of
expectations and its reputation is damaged.
Source: Deloitte

grade for their ability to manage reputational risks.
In all, 39% of companies rated the maturity of their
reputation risk management programs as either
average or below average. Yet such programs are
critical both to the bottom line and to an organisation’s ability to rebound from a hit to their
reputation. Respondents from companies that had