REPUTATIONAL RISK

By Emmy Pirkko-Muandingi
March 2014
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Agood reputation has both tangible and intangible benefits. It is important for stakeholders, from customers to employees to feel good about an organisation, and it is important to build a good reputation to sustain an organisation though the tough times. This article will is going to look at reputational risk and its consequences to an organisation.

 

What do we mean by reputational risk?

 

Reputational risk is defined as a number of threats/hazards affecting the relationship and trust of investors, suppliers, customers, employees and even shareholders of an organisation. Reputational risk can also be based on people’s perceptions of the performance and behavior of an organisation and its employees.

 

Why is reputational risk important?

 

Each and every organisation strives to create and maintain good reputation especially when it comes to the media world. Important factors that brought about the importance of reputational risk includes public communication, access to information, mobility of customers and suppliers, competitiveness, media scrutiny and job mobility. Organisations therefore need to adopt an open communication policy with its employees and the public in order to boost its reputation.

 

The reason why organisations like MVA Fund, Olthalver & List are continuously featuring in awards such as the Deloitte Best Company to work for is because of the trust, confidence and belief instilled by these companies in their workforce.  The awards do not only boost institutional reputation but it also enables institutions to become the employer of choice. Employees are the face of any organisation as they serve the customer and most of the media frenzy of based on their conduct, thus by instilling trust, confidence and belief in employees a company is indirectly instilling this principles into society at large.

 

Institutional public reputation is defined by the organisational brand were an institution is required to walk the talk. Institutional public reputation is in one way connected to the values of an organisation, one good example is; Woolworths who over the years have kept their promise to earn the trust of their customers by not compromising on quality with a recent incident were they recalled a certain sandal brand that was a health risk because of certain safety features, though the sandal was already in production and in stores.

 

This trend is more popular with companies that have built reputation on their brands which are closely associated with the organisations such as Toyota, Aston Martin, BMW and Ford Motors to mention but a few. These brands are built on trust as customers rely on the word of the maker on issue of quality and safety. A single mistake can lead to mistrust leading to a ruined reputation of that company and in some cases closure of that company.

 

It is very common to hear people talking of how safe a certain brand of a car is or how strong a certain brand of shoe is, this phenomena is a result of the belief  customers have in that product which in a way was created as a result of the trust they have with this organisation. Thus most of the companies will pull out all strings to safe guard their public reputation even if it means recalling stock worth millions.

 

Poor reputational risk can impede the sale of goods and services, job attraction especially for high caliber employees, deter prospect investors and business partners, and it can also affect the institution’s borrowing capacity. It is therefore highly imperative for organisation especially SMEs to manage reputational risk through honesty and trust to ensure good publicity and good standing in society. For large organisations, the tone of integrity, honesty and transparency must be set from the top, through institutional values and behaviour in order to create a positive image.

 

What should companies do to manage a reputation crisis?

 

Companies need to create a good reputation through soft capital that will enhance the value of the company. Additionally cultivating intangible assets such as reputation will enable the company to gain sustainable competitive advantage. Management has a responsibility towards the company shareholders to identify reputation crisis symptoms and manage them effectively.

 

The symptoms could be lack of information, growing consumer and supplier mistrust in a company, political and commercial pressure, internal conflict between the board and management as well as increased negative publicity from the media. In addition to the above, a negative workforce is in itself is worse than the bad publicity so it is imperative that management also pays attention to its workforce to ensure that all the negativity within the organisation is addressed.

 

Institutional reputation should form part of an organisation’s ongoing undertaking and should not be viewed as a short term crisis management. It is of utmost importance for companies to acknowledge that reputation is a valuable asset that needs to be actively managed. Nowadays brands are associated with leading figures example Virgin Group which is associated to its founder Sir Richard Branson, locally we have seen Namibia Breweries LTD in one of its popular brand, Windhoek Lager teaming up with renowned African footballer, Didier Drogba.

 

This is not only to attract customers or retain exist ones but as a strategy of entering new markets because Didier Drogba is a reputable brand in itself and many people would want to be associated with it. Therefore individual reputation and behaviour of the leading figure will have a directly impact on the group brand and the organisation at large.

 

Another common practice on managing reputation risk is for an organisation to take a collective approach across the whole entity by instilling the brand into its employees so they practice it in their day to day activities. Events such as trade fairs, knowledge sharing platforms, news conferences and public campaigns are some of the avenues companies can utilize to spread the message.

 

The 21st century has seen a fast growth in terms of information and communication technology (ICT), reputation protection thus has to be moving at the same pace as in real time so as to cope with public scrutiny. This should be effectively managed through the company website, links to other sites as well as fast and adequate response to electronic queries. Additionally the organisation need to educate its employees, shareholders, customers and suppliers on the importance of reputational risk and what they have to do to avoid it.

 

Lastly the most important factor to consider in an organisation is that reputational damage leads to negative publicity, loss of revenue, loss of valuable customers, loss of investors, litigation cases, share price decline and exit of key employees. Hence it is imperative to emphasise the value of continuously monitoring and managing reputation to stay ahead of competition year in and year out. PF