Reputational Risk and Its Prominence in the Business Strategies of Companies

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    Since corporate reputation became an essential asset for the survival of companies, the term “reputational risk” has begun to be valued with more relevance in the business strategies of companies. The value of business intangibles has skyrocketed in recent years, and corporate reputation has positioned itself as the ideal management tool, especially in a constantly changing environment like the current one.

    The ‘Approaching the Future 2022’ study, carried out by the Corporate Excellence Center for Reputation Leadership, shows that 28.2% of companies are focusing on incorporating reputational risk into their global risk models, as well as on the design and implementation of strategies for reputation improvement (25.9%).

    But do companies and their boards of directors really understand what reputational risk is, and how it should be managed? The book ‘Dictionary of Reputation’, written by the father of reputation, Justo Villafañe (RIP), is the one that gives us the most agreed definition and accepted by the majority of professionals specialized in the subject. “Reputational risk can be considered any contingency, linked or not to the value chain of a company, that negatively affects the satisfaction of the expectations of its stakeholders, in a manner serious enough to lead to a response by any of these that severely undermines its corporate reputation.

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    In this way we can deduce that the concept of this risk will always revolve around the stakeholder, and originates from incorrect behavior on the part of the company. And that, the pure risks or and the derived risks must be differentiated. In other words, the origin of reputational risk stems from incorrect corporate behavior, which leads to the dissatisfaction of stakeholder expectations, generating a negative response, ending with an impact on the company’s reputation.

    Business news and reputational risk management

    Currently, the business ecosystem takes reputational risk management very seriously even the boards of directors analyze it as a priority in the risk management reports of the companies they represent. “More than 83% of senior managers surveyed by WTW say they take reputational risk seriously and rank it among the top 5 risks for their company”; extract from a recent report by Willis Towers Watson.

    In addition to the previous data, it also shows that one of the main reputational risks is the mistreatment of employees and customers, as well as issues related to ESG criteria; “Mistreatment of employees and customers (72%) which could include physical attacks or racial or sexual discrimination. Environmental, social, and governance (ESG) risks (69%), which can range from plastics and pollution to corruption or child labor in the supply chain”.

    Managing reputational risk

    As I mentioned before, the key to effective reputational risk management is always to place stakeholders at the center, so that everything revolves around them, and we can rely on the development of 3 basic stages:

    • The first will always be prevention, response and control.

    • The second, develop the identification of risks to the reputation of the company, brand or organization.

    • The third, the valuation that we generate through the level or scale of risk established (valuation of the economic impact, even).

    Let’s remember that it is key to develop a complete map of reputational risk scenarios with the greatest impact and probability of occurrence. It is very important to have the support of the company’s Risk Department, to generate an accurate IP Matrix (impact/probability), as well as the support of other areas of the company, be it Compliance, Sustainability, Human Resources, etc.

    In this way, we can work on the structure of a contingency plan to establish roles and responsibilities for decision-making, assessing at all times, the risk tolerance that exists.

    A business “hyper risk”

    Reputational risk is subjective in nature, which makes it highly difficult to prevent and manage. It can even be a great enhancer of the effect of other risks, which makes it a hyper risk, and could unleash a major crisis for any company, even lead it to ruin, regardless of its size or market.

    Mitigating reputational risk involves lessening the blow when a threat occurs, essentially anticipating the problem. Reputational crises are just a click away for any company, especially in a hyper-connected and hypersensitive VUCA world in which they coexist. The corporate reputation expert Pau Solanilla has already said: “the question is not if you are going to have to manage a reputational crisis, but when and how”, book ‘The Republic of Reputation’.

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