The Risk of Risks:

Reputation Risk and Resiliency

Linda Locke

Senior Vice President

September 2014

Twitter: Reputationista

1

Whom do you love?

• The Economist Intelligence Unit survey:‒ “Reputational risk emerged as the most significant threat to a

business.”

‒ Reputation is prized, and vulnerable

‒ Major source of competitive advantage

‒ Difficult to categorize and quantify‒ http://www.acegroup.com/eu-en/assets/risk-reputation-report.pdf

• Zurich:‒ 70% of consumers say they avoid buying a product if they don’t like

the company behind it

‒ Consumers are 350% more likely to purchase products from

companies they like and trust

‒ Executives say 60% of a firm’s market value is attributable to reputation‒ http://static.knowledgevision.com/account/idgenterprise/assets/attachment/Zurich_092012_RiskManagement_KV/Rep

utational_Risk1.pdf

2

The Risk of Risks

• Corporate inversion: Walgreens plans move to

Switzerland to escape U.S. taxes

• Two Stocks to Profit as Corporate America Rushes

Abroad

• Bangladesh Factory Collapse: Death Toll Climbs Past

1,000

• Cruise Line’s Woes Are Far From Over as Ship Makes

Port

• For Homophobia-Free Pasta, Buy American

3

You know it when you see it, but do you

know how to measure/manage it?

4

Reputation = judgments and perceptions of others

Customers

Suppliers

Investors

Advocacy groups

Regulators

Policymakers

General public

5

The question is whether clients deliver on

the expectations of their stakeholders

Risk is predictable, if….• You know your

stakeholders• You understand

what drives their perceptions

• You are aware of their values

• You listen to them

6

Reputation risk is present when we do not

deliver on stakeholder perceptions

• Reputational risk a top concern for boards

‒ 75% of directors see reputational risk as top concern…and

concerns are growing

‒ Primary concerns cover product quality, liability, customer

satisfaction

‒ Secondary concerns: integrity, fraud, ethics

‒ Three-fourths of directors seek broad-based risk assessment…

and they want to know more

Annual Board of Directors Survey 2014 - Concerns About Risks Confronting Boards – EisnerAmp

7

What keeps boards up at night?

Situation

The French bank had ~ $30B in trades between 2002 - 2009 with Sudan,

Iran, and Cuba, prohibited by US banking regulations.

Costs: Fines of ~ $9B; guilty pleas, suspension of ability to clear dollars,

criminal conviction.

Impact: Analysis by Consensiv.com:

• Rock bottom reputation premium

• Peak reputation value risk

• Net reputational health of only 10% of the company's potential.

• Equity down about 9% ($7.5B) since the beginning of the year with

loss attributable to reputation around $5B.

8

FINANCIAL TIMES: Biggest threat to BNP

Paribas could be to its reputation 6/30/2014

• FT: The bank’s oil financing deals may be seen as

propping up the government of Sudanese President Omar

al-Bashir, who has been indicted by the International

Criminal Court for alleged war crimes.

Branding

• BNP PARIBAS: The bank for a changing world

• Committed to being a responsible bank

• Being prepared to take risks, while ensuring close risk

control

• Following a strict ethical code

9

Why is this a reputation risk?

• Strategic risks: Which risk areas had/have/will have the

most impact on your business strategy?

10

World of strategic risk is changing: Deloitte

41% Brand

28% Economic Trends

26% Reputation

2010

40% Reputation

32% Business model

27% Economic trends/

Competition

29% Economic trends

26% Business model

24% Reputation/ Competition

Today 2016

11

A strong reputation can bring long-term

sustainability

Source: Trust Across America

Based on:

Financial stability

Accounting

conservatism

Corporate integrity

Transparency

Sustainability

12

Reputation advantage

13

Reputation penalty

• The intangibles can comprise more than 60% of a

company’s value

• Public perception impacts profitability, book value, sales

• Strong reputation can result in strong stock price growth

• Investors use reputation in purchase decisions

• Companies with a strong reputation can:

‒ Charge premium prices

‒ Hire the best candidates

‒ Attract the best business partners

• A strong reputation can be a competitive differentiator

14

Why reputation matters

15

Reputation is the connective tissue between

business strategy and governance

Financial

stability

Positive

societal

impact

Responsible

business

operations

16

Two challenges to managing reputation

Reputation is not

owned by the

company; it can

only influence it

Reputation is built

by decisions made

across the

organization

17

Clients are often not well-equipped to

manage reputation risk

Reputation literacy not

on the risk agenda

Risk literacy not on the

reputation agenda

• Reputation = judgments and perceptions of others

18

Reputation is owned by stakeholders

‒ Customers

‒ Suppliers

‒ Investors

‒ Advocacy groups

‒ Regulators

‒ Policymakers

‒ General public

• Risk is predictable, if….

19

The question is whether clients deliver on

the expectations of their stakeholders

‒ You know your

stakeholders

‒ You understand

what drives their

perceptions

‒ You are aware of

their values

‒ You listen to them

20

Stakeholders expect resiliency

• Two sides of resiliency:

‒ Prevent conditions of risk

‒ Manage consequences of events

21

Resiliency: Ability to adapt to a continuously

changing environment

Source – Carnegie Mellon Software Engineering Institute

22

Risk = Hazard + Outrage

Source: evolve24

• Get input from reputation and crisis managers on sources

• Bridge the gap between reputation and risk literacy

• Help clients manage traditional risks better to reduce the

likelihood of a reputation risk event

23

What should insurers do?

• Reputation measurement

‒ Use custom or third party survey of key stakeholders that cover

major dimensions of reputation, as well as key attributes

‒ Identify what drives reputation for each stakeholder group

‒ Compare results by stakeholders

‒ Compare results to competitors

‒ Share results from board level down, throughout organization

‒ Build messaging plan that incorporates the drivers of reputation

24

Measuring reputation

25

Identify the dimensions of reputation

How do

you make

me feel?

Source: Reputation Institute

• Reputation risk assessments

‒ Facilitate a dialogue with senior leadership to identify issues that

cause risk to reputation

‒ Map out likelihood vs. expected impact of each issue

‒ Build proactive plans to address high impact/high probability

issues

26

Conduct risk assessments

Probability

Low High

Impact

Low

H

igh

• Reputation monitoring

‒ Budget for a platform that can track the public dialogue about the

company and its competitors

‒ Find a program that identifies drivers of negative emotion,

including outrage, so you can set priorities, identify trajectory of

risk

‒ Build a regular reporting program to track how perceptions have

changed and identify when to signal to the c-suite that risk is

serious

27

Monitor stakeholder perceptions

Source: evolve24

• Diagnostic gap analysis: Compare perceptions of internal

and external audiences

‒ If internal audience thinks the company meets/exceeds

expectations, while external stakeholders think it performs

weakly, it may be an opportunity for expanded communications

‒ If external audiences think the company performs well but

internal audiences think it doesn’t, it is likely a risk waiting to

blow up

28

Conduct a gap analysis

• Forcefield analysis

‒ Identify the forces that oppose/help the

company achieve its reputation goals

29

Help the company understand the externalities or

forces that impact its aspirations

Reputational Goal:

How you want your

stakeholders to

perceive you

Driving ForceFOR

ReputationGoal

Score 1-5

Driving ForceAGAINST

Reputational Goal

Score 1-5

• Scenario planning

‒ Identify scenarios that have or are likely to cause risk

‒ Consider how the organization appears from the outside in

‒ Create plans that reflect the POV of key stakeholders

‒ Lead tabletop exercises to test plan; identify weaknesses

‒ Develop messaging platform that shifts with likely follow-on

events

30

Identify the scenarios likely to impact

stakeholder perceptions

• Internal alignment: Build enterprise-wide reputation

competence

‒ Turn employees into advocates. Help them answer the question

of what positive impact the company has on society.

‒ Create reputation champions through all the business units. Help

them integrate reputation risk planning and mitigation into their

work.

‒ Share data. Offer analysis of new products, major changes in

customer service, M&A, expansion.

31

Create enterprise-wide alignment

• Finding internal allies: ERM + BC/DR

‒ The Enterprise Risk Management, Business Continuity and

Disaster Recovery teams all have reputation risk on their

agendas.

‒ They likely do not have data or baseline measurement, so are

guessing at the likely impact of risk issues on reputation.

‒ Make them your allies. Offer to participate in their planning

sessions. Help flesh out their reporting upward to include

reputational risk data.

32

Build bridges

A resilient organization manages all types of

risk

33

Ability to manage risks

and function/adapt

throughout the

lifecycle of operational

disruptions

Ability to maintain

good stakeholder

perceptions and

supportive behavior

at all times

Operational

Resiliency

Reputation

Resiliency

34

Opportunity to bring reputation into risk

management processes

Reputation resiliencyplatform

Develop

mitigation

strategies

Set the agenda:

Identify key risks

Monitor;

report to

c-suite/board

Build risk competency

at strategic level: Internal alignment

• Examine SEC filings for references to reputation risk to

determine what worries your leadership. Also, examine

competitors’ filings.

• Examine all the negative sentiment expressed publicly in

the past 12 months. Rank by degree of negativity,

credibility of source, likely impact.

• Engage the Enterprise Risk Management and Business

Continuity teams to see what they have included in their

plans for reputation risk. Make them your allies. Offer

reputation risk impact analysis.

35

Where do I start?

• SEC mandated in 2005 that firms include risk factors in

Form 10-K to present “the most significant factors that

make the company speculative or risky.”

• Business literature suggest directors/executives consider

reputation a primary source of market valuations.

• One analysis of Reputation Risk Materiality* showed:• Energy: Disclosers outperformed non-disclosers

• IT: Non-disclosers had a 60% lower ROE

• Consumer: Disclosers underperformed, with 33% lower ROE

*http://consensiv.com/wp-content/uploads/2013/09/Significance-of-Reputation-Risk-Materiality-Disclosure-for-Public-Companies1.pdf

36

SEC reporting on reputation risk not yet

rigorous or consistent

• Business units that understand reputation risks shift

planning and design to accommodate stakeholder

perceptions

• Strategy that addresses drivers of reputation deepens

trust – and supportive behavior – among stakeholders

• Data that measures the reputational impact of crisis

response helps improve response next time

• Engaging c-suite and boards can result in focused

investment for managing, avoiding and mitigating risk

• Expands the number and influence of reputation

champions in the enterprise

37

Reputation risk planning drives

organizational resilience

The causes of outrage

“Do I put up

with this?”

39

Stakeholders expect companies to share

their values

40

Stakeholders expect companies to share

their values

Gluttony

Sloth

LustWrath Hubris

Envy

Greed

41

Values, vulnerabilities and outrage

Hubris

Greed

Gluttony

Wrath

Envy

Sloth

Lust

Young

Elderly

Human Error

Media-Attractive

Abuse of Power

Lack of Responsiveness

Impoverished

“Do I put up

with this?”

Pressure Groups“Have I noticed

pressure groups

focusing on it?”

Awareness“Was there a

problem? Did you let

me know about it?”

Choice

“Did I choose to

take the risk or

was it imposed on

me?”

Nature“Is the risk natural

or man-made?”

Dread“Do I fear

this risk?”

Detectability“Can I touch/see it?

Is it quantifiable/

Containable?”

Media“Have I read about

it/seen it in the

news?”

Equity“What does the risk do for me?

Is anyone bearing the risk who

doesn’t benefit from it?”Scientific View“Do experts understand

it? Do they

agree/disagree about

it?”

The causes of

outrage

Source: Regester Larkin

43

Our ultimate goal is trust

Be trusted by the stakeholders

who matter

Building, protecting and

restoring reputations