Managing reputational risk

Eneni OduwoleJan. 2009

Contents

• What is reputation?• Attributes of reputation• How can reputation be damaged?• What is reputational risk management?• Attributes of reputational risk management• Benefits of reputational risk management• Managing reputational risk• Rating reputational risk• Indicators of levels of reputational risk

What is reputation?

• It is :– an intangible asset– not a brand – the sum total of all stakeholders’ experience – public information regarding an organization’s

trustworthiness

• It also assures:– premium value growth opportunities to shareholders

(value growth resulting from managerial experience, innovation, intellectual property)

– continued comparative advantage

Attributes of Reputation

Reputation

Long term Financial

performance

Healthy work

culture & good

corporate governance

Regulatory complianceEffective

crisis managemen

t

Top notch human

capital & talent

management

Excellent client

services, new

products/services & pricing

Socio-environmen

tal responsibilit

y

How can reputation be damaged?

• Actions that result in stakeholders lose of trust and confidence

• Public perception of organization’s standards drop• Sudden change of management; no succession planning• Adverse regulatory reports and sanctions• Increased incidences of fraud• Consistent unfavourable ratings• Continued decline in share price

What is Reputational Risk Management?

• It is the current and prospective impact on earnings and capital arising from negative public opinion

• It measures the change in perception of a company

• It is linked with customer expectations regarding an organization’s ability to conduct business securely and responsibly

Attributes of Reputational Risk

Reputational Risk

Affects ability to establish

new relationships

Affects ability to continue

servicing existing

relationships

Could crystallize into

increased litigations

Results in increased financial

losses if not well managed

Affects customer

base & market share

Is present throughout

the organization

Involves and affects all

stakeholders

Benefits of Reputational Risk Management

• Identifies key risks that can affect an organization's reputation adversely

• Assesses potential impact • Ensures timely and appropriate response to adverse public

criticisms• Enables a good work culture is promoted by Management• Ensures effective communication and disclosure to all

stakeholders• Promotes commitment and trust between all stakeholders

Managing Reputational Risk

• Understand the value of the organization's reputation • Treat reputational risk management holistically; understand

inter-relationships within the business• Have effective internal control & enterprise risk management

frameworks• Identify and prioritize relevant risk factors; communicate key

risk areas to Management• Ensure that an effective business continuity management plan

is in place• Build a culture of recruiting excellent people and effective

people management practices

Value your

Customers

Rating Reputational Risk

• Reputational Risk can be rated as:

Low

Moderate / Medium

High

Indicators of levels of Reputational risk

• Indicators of Low risks include:Management is aware of privacy issues and uses customer information responsibly

Internal Control / audit and risk management are fully effective

Exposure from reputational risk is expected to remain low in the foreseeable future

Management fosters a well supported sound culture across the organization

Management fosters a well supported sound culture across the organization

Management adequately responds well to market or regulatory changes

The firm adequately self-regulates its risks

Losses from fiduciary activities are low (whether no. of accounts, volume of assets, increased litigation or customer complaints)

Indicators of levels of Reputational risk (co’td)

• Indicators of Moderate / Medium risks include:Management understands privacy issues and generally uses customer information responsibly

Internal Control / audit and risk management are generally effective

Exposure from reputational risk is expected to increase in the foreseeable future

Management fosters a well supported sound culture across the organization

Management has a good record of correcting problems

Management adequately responds well to market or regulatory changes

The firm adequately self-regulates its risks

Losses from fiduciary activities are manageable (whether no. of accounts, volume of assets, increased litigation or customer complaints)

Indicators of levels of Reputational risk (co’td)

• Indicators of High risks include:Management is not aware of privacy issues and may use customer information irresponsibly

Internal Control / audit and risk management are generally ineffective

Increased exposure from reputational risk is expected to continue in the foreseeable future

Management fosters a well supported sound culture across the organization

Management has not initiated or has a poor record of correcting problems

Management does not anticipate or adequately respond to market or regulatory changes

The firm’s self-regulation of its risks is insufficient

Losses from fiduciary activities are significant (whether no. of accounts, volume of assets, increased litigation or customer complaints)