Economic crisis puts reputational risk in the spotlight

Among the many repercussions of the global economic crisis is a shift in the risks faced by all companies in an environment which has dramatically changed in the short space of one year. Risk management itself may not be anything new, but the risks today are very different from years past, as Ernst & Young’s Business Risk Report for 2009 indicates.

“Corporate risk needs to be managed very carefully at the best of times, and even more so in a downturn. It therefore comes as no surprise that reputational risk features in this year’s top 10,” says Mandla Moyo, Director: Business Risk Services at Ernst & Young.

Last year, reputational risk featured at number 22. The rapid elevation indicates the impact of changing market circumstances, dominated by the financial crisis, on the relevance of reputation.

In today’s market, having a sound financial reputation could, in fact, be seen as a matter of sheer survival.

“After all, one only needs look to the shredded reputations of numerous US banks and financial institutions to understand the importance of managing this risk effectively. Clearly, these entities failed to take cognisance of the fact that governance failures are regarded as most damaging to reputation.”

Public perception of an organisation is also a major contributor to reputational risk. Although the nature of the risk has not altered recently in the oil and gas industry, for example, increasing public concern around climate change is impacting the reputations of companies within this sector.

“An oil company perceived to be failing to respond to climate change while its core product is viewed as a substantial driver of the problem could easily suffer a serious knock to its corporate image,” says Moyo. Consequences of a poor corporate image include higher borrowing costs and failure to attract top employees.

Such a situation is comparable with what has happened in the financial services sector, he says. “With the collapse of several of the oldest US institutions towards the end of last year, confidence in the sector has plummeted. The banks created the problem and were the victims of it.”

He stresses the relevance of confidence. “As long as customers have confidence in an organisation, they will be happy dealing with it. Therefore, if a company is transparent in its operations and provides open and honest communication with the market, people will tend to trust it, even where the news may be negative such as in the case of product recalls,” says Moyo.

“On the other hand, allegations of fraud, insider trading and other ethical lapses – as has been witnessed in the US, with the collapse of Fannie Mae, Freddie Mac and Lehman Brothers – can erode an organisation’s reputation beyond the point of repair.”

He says this should make it obvious that managing business reputation can never be considered a second or third tier priority. Reputational risk is, Moyo argues, directly related to corporate governance and business ethics. As a result, he advocates regular due diligence, strong corporate governance and compliance processes and corporate transparency as vital aspects in managing and mitigating reputational risk.

“Another key issue lies in how the business deals with any ethical lapses,” he says. “Anti-bribery and anti-corruption programmes are playing an increasing role in ensuring ethical business conduct, but effective reputation risk management must begin at board level.”