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Don’t Want to be the Next Keurig, Uber, or VW? Include Reputation Risk in Your ERM Framework

New research from Wisconsin School of Business offers approach to ensure firms have truly comprehensive plans to anticipate crises

By Wisconsin School of Business

November 20, 2017

In a world where social media can turn a piece of bad news for a company into a firestorm of coverage that can threaten brands or destroy corporate reputation, a little bit of planning can go a long way. While many companies engage in enterprise risk management (ERM), many don’t include reputation risk as part of that essential planning process, as managing reputation risk is relatively new to the field of ERM and measuring the value of reputation has been a challenge.

New research from the Wisconsin School of Business at the University of Wisconsin–Madison provides a framework to help companies manage their reputation as part of an organized corporate strategy to limit the effects of risk on capital and earnings.  Joan Schmit, Wisconsin School of Business professor of risk and insurance and American Family Insurance Distinguished Chair of Risk Management and Insurance, along with Nadine Gatzert of Friedrich-Alexander University Erlangen-Nürnberg, took a holistic approach to the topic, adding reputation risk to the overall ERM approach and giving companies a solid approach when facing a public perception crisis.

“In a 24/7 news cycle fueled by social media commentary that can turn false information into widely accepted truths in an instant, companies need to be ready to respond quickly, effectively, and accurately,” says Schmit. “In addition to identifying four key elements of a comprehensive ERM plan, we sought to highlight the importance of identifying key stakeholders and the need for continued monitoring of technological advances and communications platforms such as social media.”

Schmit adds, “The closer a company is to acting in a way that matches its public image, the more likely it is to maintain its intended reputation. The Volkswagen emissions scandal hit that company hard because it was positioning itself as a global environmental leader in the auto sector, when the stories hit. The difference between reputation and reality, caused large disruptions to the company’s reputation.”

The research identified four areas to be included as part of an integrative ERM plan:

  • Risk strategy-identifying key stakeholders who can help shape a firm’s long-term strategic goals and objectives, while defining a firm’s “risk appetite” or how much risk a firm is comfortable accepting.
  • Risk assessment-gaining a full picture of a firm’s exposure and vulnerabilities to risk through risk identification, measurement, evaluation, response, and monitoring.
  • Risk governance-establishing structures and building processes within a firm that allow for adequate risk strategy, assessment, and treatment, such as audit and compliance functions and business continuity plans.
  • Risk culture-creating a solid culture or environment within a firm that emphasizes risk awareness, accountability, and integrity across all facets of the organization and in daily operations.

Enterprise risk management increases firm value by improving an organization’s efficiency. It helps to identify and monitor for issues that could do damage to a firm or stop it from meeting its goals. Schmit said identifying and measuring those potential issues, including those that could damage a firm’s reputation, will make it easier to respond effectively to a triggering event or incident, allowing a company to make decisions that keep it moving forward.

“An organization’s reputation has always been valuable, but what’s new today is how vulnerable that reputation is due to the widespread use of social media and changing norms,” says Schmit. “The same conditions that increase risk may also provide opportunities to protect and enhance reputation if companies have an effective communication strategy, strong governance, and an expansive risk culture. We hope this framework provides the support for delivering an effective ERM plan that can enhance an organization’s reputation.”

The paper, “Supporting Strategic Success Through Enterprise-Wide Reputation Risk Management” will be published in The Journal of Risk Finance.