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The Top Priority for Every Board: A Strong & Sustainable Reputation

Legal, Finance, Governance and lately, Inclusion, are viewed as just “topics for monitoring” in many boardrooms. Yet when a problem strikes under any of these headings, it is an ominous first step into potential crisis. At a larger scale, the hit to your company’s reputation often causes long-term damage to the relationship with your stakeholders.

Reputational risk poses the greatest strategic risk to any business as it can quickly wipe out billions of Ringgits in market capitalization, even impose sweeping changes into the leadership of a company.

It’s not all bad. The good news is, if Reputation is managed properly, it can give a company unparalleled opportunity and cutting-edge competitiveness.

“So, every Board-room should ask the question whether the company has adequate tools and
expertise in place to exercise effective Reputation Risk Assessments”

Reputation risk is not new but what has changed is how vital reputation risk has become to the overall health of businesses – and how difficult it can be to manage.

In a digital world where bad news spreads more quickly than ever before, a company’s reputation can suffer severe and sometimes irreparable damage in the blink of an eye. Worse, companies are now being held accountable for everything that happens in their entire global supply chain.

“On average, more than 25 percent of a company’s market value is attributable to reputation[1]”

With 79% investors in the Asia Pacific region prioritizing ESG[2] investments and the rise of shareholder activism, reputation risk has become the number one strategic business risk. Boards no longer have the luxury to sit back and monitor, behaving as though their overall responsibility for corporate governance has been met. Examples exist aplenty of goods being barred or detained in wrangles over failure to meet critical ESG reporting in the manufacturing and export sectors, resulting in reputational harm and financial loss.

“To identify Reputational Risks, the Gap between Promise and Reality must be identified”

One of the most common mistakes is the belief that a good reputation can be built from inside the company alone. Yet, reputation is actually a perception from internal and external stakeholders, based on the PROMISE that the company makes toward its stakeholders. If we are perceived as having a bad reputation it means that we are perceived as falling short of our promises while a good reputation is the result of when stakeholders perceive that a company matches or even exceeds its PROMISE.

If we fall short of our PROMISE, we must either put actions into place to close the gap or we must reduce our PROMISE.

However, the reputation has to be mirrored with the reality of the company. This reality or RECOGNITION represents the effective skills and strengths of the company. Often, a company is much stronger than its reputation, but the opposite also exists. The bigger the gap between the perceived PROMISE and the RECOGNITION, the bigger the problem for the company.

The visual below identifies all the possible Gaps between Reputation and Reality

Once the Reputation (Promise) and Reality (Recognition) are mirrored, the severity of Reputational Risk becomes swiftly identifiable.

 

“Perception into Reality”

For Stakeholders, Perception creates Reality and the actual truth of a company’s state is often of secondary importance. Whether someone likes and desires a Brand is mostly based on fed information from the media, individual perceptions and what other say about the company. Therefore, the realistic Knowledge of a company’s management about the strength and weaknesses of the company is solely a tool to be used to position accurately the stakeholder’s perception.

“Brand Reputation faces an ever-changing environment”

We have to accept that Stakeholders constantly change their expectations, regardless whether such expectations are reasonable or not, they will affect the reputation of a company. The global pandemic has shown a dramatic change in how we operate and communicate with each other.

Traditional hierarchies are dissolving and stakeholders interact without boundaries, creating tremendous change.  Fundamental questions are being raised about the role of government and business.  There is intense focus on the balancing an interrelationship of health, economy and other basic priorities. Perhaps, most important are the rising grievances and conflicts over blame and accusations of social injustice toward the corporate world.

“We have seen many major trends occurring prior or since the beginning of the Pandemic. One to mention especially is increased Business & Shareholder Activism”

Business & Shareholder Activism is on the rise, demanding the delivery of core societal purpose. We have witnessed how companies came under harsh scrutiny for their business behaviour at the peak of the pandemic. Stakeholders have time and again challenged whether companies really did step up to the plate in fairly treating their workers and consumers.

It must be understood that such activism is not based on actual facts but rather on broader sentiments of the stakeholders who are constantly taking in biased information from multiple sources.

No business wants to nosedive in reputation such as the banks did after the 2008 crash. Businesses with strong values, having a well-articulated societal purpose that they deliver will be the winners of post-COVID.

“Hate and Love for the same Brand is a common thing”

Risk management experts believe reputation consists of two variables, not one. “How loved you are is virtually unrelated to how hated you are”. For example, a retailer can impress shareholders and the financial market by the company’s profit, but other stakeholders might be negative toward its treatment of employees or its diversity policy. Amazon anyone?

“Know the Reputation Risk of Your Business – It can save a Company’s Life”

Reputation Risk Management is complex yet fundamental to the continued existence of any business. Executing appropriate Risk Assessments, choosing accurate monitoring systems and having a dedicated team to manage reputational risk lays the groundwork for a more proactive approach toward managing reputational risks, clearing the path for a prosperous success.

 

By Felix Heinimann, CEO, EBM (Essential Business Malaysia) Sdn. Bhd.

 

1 Harvard Business Review, “Reputation and Its Risks” Robert G. Eccles, Scott C. Newquist, Roland Schatz

2 Deloitte & Touche LLP, “Reputation Risk as a Board Concern”, Henry Ristuccia, Michael Rossen

3 https://www.cnbc.com/2021/03/04/sustainable-esg-investments-surged-in-asia-pacific-in-2020-msci.html