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Reputational Risk

A word from leavinglaw

"One can survive everything nowadays, except death,
and live down anything, except a good reputation" - Oscar Wilde

Every firm is concerned about their reputation in the markets they serve. Any loss of confidence or reputation can severely impact on their share price and can in extreme cases contribute to the failure of the company. Business reputation is established by gaining and retaining the confidence and trust of the stakeholders in the business: customers, suppliers and employees, as well as shareholders.

Reputation is important to any enterprise as an intangible but highly prized asset. Due to its imprecise nature, reputation is one of the most difficult assets to quantify, hardest to protect and manage. Nonetheless, in this era of corporate scandal, breakdown, and heightened risk to corporate reputations, managing reputational risk is vital. It can be thought of as the “goodwill of the business” and is often seen as a key source of competitive advantage. Studies have found as much as 50% of a company's share price is derived from its brand, goodwill and value in the minds of customer. While the processes and procedures for managing reputational risk may differ, there is general agreement that reputational risk management is supported by "the plans, processes and practices, which engender and sustain the trust of all and each category of corporate stakeholder".

Reputational risk is the one risk for which CEOs have direct and individual responsibility, though many other risks have reputational elements embedded in them. Changes in business practices arising from increasing governance, legal and regulatory influences, have made companies more vulnerable to reputational damage. Equally, the power and intrusiveness of media and communications industries has intensified the focus on corporate reputations.

Whereas regulatory compliance may be more prescriptive, managing reputational risk is broader and more strategic. It has been essential to establish a reputational risk profile and framework for managing risk, creating adequate policies and procedures throughout the organisation.

While the CEO may be directly responsible for the management of reputational risk, more and more companies designate an individual (such as a 'Chief Risk Officer' or 'Head of Reputational Risk') to monitor and manage the company's reputation. This individual would normally report directly to the CEO, and be charged with the task of communicating vulnerabilities associated with a company's brand and identify potential weaknesses in the very fabric of the organisation. (At this point, the management of risk should ultimately rest with the business personnel that manage the processes, who have real knowledge and are best suited to implement mitigation strategies and manage the risks going forward.)

Reputational Risk officers themselves very often have either a legal background, accountancy or MBA. Given the increase in frequency of corporate crises and scandals, it is an area more firms are taking seriously, as increasingly reputational risk is becoming a profession in itself. A risk officer will often have been general counsel, or the roles could be combined. You also see many more CSR (Corporate Social Responsibility) positions advertised. A firm's CSR committee will often be chaired by the head of legal/general counsel.

The Global Association of Risk Professionals (GARB)'s Financial Risk Manager (FRM) certificate has been expanded into a 2 level examination in response to new demands on the industry, and become a benchmark for risk managers in the financial sector. Courses are offered (at BPP in London for example) starting in each May and November from 2010.

Also see 'Actuary' and 'Risk Management'.

Global Association of Risk Professionals
Minster House
42 Mincing Lane
Tel: +44 (0) 20 7397 9630
Fax: +44 (0)20 7626 9300
Email: careercenter@garp.com
Link: http://www.garp.com

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Whilst every care has been taken to ensure the accuracy of this information at the time of posting, the information is intended as guidance only. It should not be considered as professional or legal advice.

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