Is Reputation Risk Manageable?
Many people would put reputation risk at the top of their list of the most important risks to their firms.
However, their very next conclusion is that since a good reputation is something that you either have or you do not, then it is not very manageable. By thinking of Reputation Risk as a cliff, there seems to be very little to monitor or manage. There are several problems with this view. First of all, reputations can be destroyed in many ways. Think of a reputation as a glass and a spill of water from the glass as a busted reputation. The glass can be made to overflow all at once with one big pour of water from a large pitcher, or it can be made to overflow by a long slow steady set of small drips.
Usually hits to the reputation are caused by problems that come from other risks that the organization faces. Each risk of the firm should be examined and the degree to which a reputation problem might arise from the risk identified. Moderate risks that have a significant potential reputational hit probably should be elevated to be treated among the major risks.
The incidence of the small hits to reputation can and should be tracked. The impact of these events upon the reputation also can and should be monitored. They are monitored by constantly checking with customers and potantial customers about the reputation of the firm.
So if these hits to reputation are tracked, then actions to improve reputation can be undertaken and efforts redoubled when these hits reach a critical level. This means figuring out the ways to take the water back out of the glass.
Also, the other major way to manage reputation risk is to plan ahead for the response to major reputational problems. One of the major differences between situations where firms have been devastated by reputation damaging events and firms that have quickly recovered from similar events is the degree to which the firm has a rapid and sure-footed response to the event. These types of repsonses can only come from advance planning and preparation. That is not to say that a firm must anticipate every possible reputation damaging event. However, it is important to anticipate a wide range of events. The anticipation and advance planning may prove to provide the exact plan for a specific event that comes up, but more likely what the exercize will provide is some experience in formulating the types of responses needed. Managers who have participated in these exercizes will be more likely to perform as needed when the real reputation hit happens.
Finally, there is one type of reputation risk that is real, but is used often as a red herring to distract risk managers from the main reputational risks as described above. This is the risk from an undeserved blow to reputation from the mdeia, regulators or courts. This is something that can and should be anticipated, but should not be an excuse for not anticipating the other and usually much more likely reputation risks that can come from within the firm.