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Managing Reputational Risk

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Heroin .. To soothe a tickly cough?
From 1898 through to 1910 heroin was marketed as a nonaddictive morphine substitute and cough medicine for children ….

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Perhaps the most iconic example of a pathological reputation effect is that of the sinking of the Titanic, the myths surrounding its construction and the unswerving belief held by many at the time in its infallibility as a sea-going vessel. [Kewell 2007]

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What is reputation?

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What people say about reputation
„You can‟t build a reputation on what you‟re going to do‟ Henry Ford In today‟s economy, “70% to 85% of market value comes from hard to assess intangible assets” Robert , Scott and Schatz

„It takes 20 years to build a reputation and 5 minutes to ruin it‟ Warren Buffet, US Financier

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What people say about reputation
„If you lose dollars for the firm, I will be understanding. If you lose reputation, I will be ruthless.‟ (W. Buffet)„ „Our assets are our people, capital and reputation. If any of these are ever diminished, the last is the most difficult to restore.‟ (Goldman Sachs Business Principles)

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A corporate reputation is a collective representation of a firm’s past actions and results that describe the firms’ ability to deliver outcomes to multiple stakeholders. It gauges a firms’ relative standing both internally and externally. (Fombrun /Foss: Developing a Reputation Quotient, 2000)
Reputation is public information regarding a players’ trustworthiness. A players’ reputation reflects the information that third parties have on how trustworthy his behaviour has been in the past. (Ripperger 1998)
Source: seminar paper http://www.soa.org/files/pdf/lsprng07-001-rochette.pdf

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Reputation & business continuity management
In US, a recent survey showed that 70% of a company’s value comes from its organisational reputation and product brands. Noted 6 clear areas in which people justified their feelings about a particular company:  Emotional appeal. How it is liked and respected.  Products and services. Their quality, innovation and value.  Financial performance. Its profitability and prospects.  Vision and leadership. A clear vision and leadership style.  Workplace environment. Staff morale, quality and management.  Social responsibility. How it deals with stakeholders, employees, communities and the environment.
Source: Woodcock (2006) http://www.continuitycentral.com/feature0335.htm

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Determinants of Reputational Risk
Reputation Reality Gap: When an organization’s reputation exceeds its actual character, reputational risks are increased. Changing Beliefs & Expectations: Shifting expectations and beliefs of stakeholders can widen (or narrow) the reputation gap. Quality of Internal Coordination: Poor coordination of decisionmaking between business units and functions increases reputational risks.
Robert , Scott and Schatz (2007)

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But is this true for all companies and businesses?

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Regulatory definitions + other business elements:
 Loss value of key suppliers.  Increased cost of regulatory actions.  Financial impact of rating agencies’ decisions.  Financial impact of litigation resulting from new  Products

Consider the positive sides of reputation: Reputation can be enhanced following a well-managed crisis!
 Example: Tylenol, Sept. 11
Rochette M (2007)

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Think: „So what‟s the worst thing I could read or hear about my business?‟

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http://www.thesmokinggun.com/enron/enronethics2.html

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Oops ……

http://www.thesmokinggun.com/ enron/enronethics2.html

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The firm lost nearly all of its clients when it was indicted, and there are over 100 civil suits pending against the firm related to its audits of Enron and other companies. In addition, its reputation was so badly tarnished that no company wanted Andersen's name on an audit. Even before voluntarily surrendering its right to practice before the SEC, it had many of its state licenses revoked. It began winding down its American operations after the indictment, and many of its accountants bolted to other firms. From a high of 28,000 employees in the US and 85,000 worldwide, the firm is now down to around 200 based primarily in Chicago.

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Northern Rock has been one of the fastest growing British banks. But it's now set to become famous for reasons it would rather keep quiet. It's become the first bank in years to seek emergency funding from the Bank of England in its role as 'lender of last resort' [BBC Business News Sept 2007]

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The denial curve (Davies 2004)

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What goes wrong (Davies 2004)

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Effective crisis management
Rayner (2003) p.99

Businesses are more likely to take corrective action before a crisis erupts if everyone involved with the business:
• Understands the business‟s values, strategic objectives and underpinning

policies • Is alert to the major potential sources of risk in their specific business context • Knows where to turn for help and advice on a course of action • Knows where to refer risks that are beyond their „freedom to act‟ or risk exposure limits

• Contributes actively to a continuous flow of information on potential threats & opportunities to the business and it‟s reputation

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Effective crisis management
Rayner (2003) p.206

Develop scenarios: what could happen next? Establish response: how should we react? Challenge: what could go wrong? Define roles: who should do what?

Raise awareness: do they know what to do?
Train: can they do it under pressure?

Plan – Test – Learn – Re-plan

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A reputation response plan

„One of the great lessons about any type of contingency planning is that crises rarely happen exactly as anticipated, and therefore the less detailed, more flexible plans generally prove to be far more effective in a real crisis than the detailed, prescriptive ones‟ [Davies D (undated)]

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The aim in embedding risk management

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Johnson & Johnson and the Tylenol crisis
On September 29, 1982, 12-year-old Mary Kellerman of Elk Grove Village, Illinois, woke up at dawn and went into her parents' bedroom. She did not feel well. To ease her discomfort, her parents gave her one Extra-Strength Tylenol capsule. At 7 a.m. they found Mary on the bathroom floor. She was immediately taken to the hospital where she was later pronounced dead.

J&J issued a massive recall of 31 million Tylenol bottles, costing approximately $125 million and set up a crisis hotline. In fact the cyanide that caused several deaths had been methodically introduced into bottles on store shelves - the culprit was never established.

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Davies D (undated) Reputation Risk Management – a Holistic Approach Id-Risk Rayner J (2003) Managing reputational risk: leveraging opportunities, curbing threats IIA Risk Management Series Robert G. E., Scott C. N, and Schatz R Reputation and Its Risks, Harvard Business Review, February, 2007 Rochette M (2007) REPUTATION RISK - Also known as the Cinderella Asset! [source: http://www.soa.org/files/pdf/lsprng07-001-rochette.pdf accessed January 14 2008] Kewell B (2007) Linking Risk And Reputation: A Research Agenda and Methodological Analysis Risk Management (2007) 9, 238 – 254