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Faculty Insights

Incorporating Reputation Risk Leaves Nothing to Chance

By Wisconsin School of Business

October 31, 2017

Joan Schmidt
Joan Schmit, American Family Insurance Distinguished Chair of Risk Management and Insurance and professor at the Wisconsin School of Business. PHOTO: PAUL L. NEWBY II

In 2013, former Toronto mayor Rob Ford found himself in hot water. No stranger to controversy during his mayoral term, Ford had been caught on tape smoking crack, among other things. His notoriety ran rampant, and T-shirts proclaiming “Ford Nation” using the Ford Motor Company’s official logo started popping up everywhere. Even though the items were created by fans and not by Mayor Ford himself, the auto company moved swiftly to protect its trademark and detach its reputation from the beleaguered politician. It was a perfect case study in risk management.
Enterprise risk management (ERM) increases firm value by improving an organization’s efficiency. Brent Pickens, director of global risk management for Bemis Co. Inc., recently referred to ERM as providing an organization’s leadership with peripheral vision, meaning leadership needs to be focused on the drive forward. ERM keeps tabs on what could cause the organization to be blindsided and therefore unable to achieve its goals. Identifying and measuring these potential issues allows the firm to make decisions that keep it moving forward. If a firm has planned well, it will be prepared to respond effectively to a trigger or incident, like in the case of Ford Motor Company.

Joan Schmit
WSB Professor Joan Schmit

Implementing effective ERM for reputation risk is particularly challenging for a number of reasons. One is that reputation itself is difficult to grasp. How do we measure its value? Another challenge is that the potential to damage reputation can generate from myriad situations. Reputation is damaged when an organization is accused of overcharging clients, selling products unfit for the consumer, making comments outside the social norm, appearing unable to fulfill its financial obligations, and many other situations. Furthermore, social media requires immediate response to issues that are announced in the public. How do we quantify those potentials and prepare for them in an efficient and reasonable manner?
In general, the closer an organization is perceived as fulfilling its public image, the more likely it is maintaining its intended reputation. Deviations from expectations are what can cause harm. For example, when Volkswagen (VW) was found to have misrepresented the emissions standards of cars sold in the U.S. it was pursuing a strategy to be “a global economic and environmental leader among automobile manufacturers.” Consumers purchased VW cars because of their belief that they were supporting sustainability. To learn otherwise caused large disruptions to the company’s reputation.
Managing issues surrounding reputation risk is relatively new to the field of ERM. Past literature has tended to focus on measuring reputation, not what a firm can do to manage reputation as a part of its corporate strategy. In my work with co-author Nadine Gatzert of Friedrich-Alexander University Erlangen-Nürnberg, we took a holistic approach to the topic by adding reputation risk into the overall ERM framework, creating a comprehensive plan for firms to bolster their strategic success.
Our integrative ERM plan includes these four key elements, summarized in brief:

  • Risk strategy: Identifying key stakeholders who can help shape a firm’s long-term strategic goals and objectives and 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.

Along with these four primary elements, our research also underscores the importance of identifying key stakeholders, understanding the complexity and layered nature of events on a firm’s reputation, and a need for continued monitoring of technological advances and communication mechanisms such as social media. Social media has expedited the need for firm preparedness and brought a whole new dimension to the question of reputation risk management. In an instant, millions can find out about an incident via tweet or interpret an inaccuracy as gospel. In a 24/7 news cycle, firms need to be ready to respond quickly, effectively, and accurately. It may be one of the few areas in life where relying on our instincts—thinking on our feet and shooting off a reply—won’t do us any favors.
Reputation is essentially a social construct, one that shifts and evolves over time as society changes. A comprehensive ERM framework that incorporates reputation risk gives firms a jumping off point for further strategic innovation as well as solid footing when on the shaky ground that is public perception. Anything less is putting their future at risk.
Read the paper “Supporting Strategic Success Through Enterprise-Wide Reputation Risk Management” published by The Journal of Risk Finance.

Joan Schmit is the American Family Insurance Distinguished Chair of Risk Management and Insurance and a professor in the Department of Risk and Insurance at the Wisconsin School of Business.