Manage risk before it manages you

Companies need to demonstrate that they can manage their reputation before a crisis hits, or it could have an impact on their value.

Chris Scott
Chris Scott

The past decade has provided numerous examples of reputation harm impairing the long-term value of companies, but where in the past the investment community may have viewed reputation damage as a temporary issue, increasingly analysts and investors are looking at how companies manage their reputation when determining how they will value its stock.

The connection between reputation and value has long been implicit; however stimuli continue to change how stakeholders are impacted. Research suggests the investment community req­uires something tangible it can point to when it comes to reputation management. If a company cannot demonstrate its processes and competency for identifying and managing reputation issues across the business, its value will be impacted.

It is often thought the relationship between company value and reputation is the risk of being penalised when something goes wrong. In fact, investors are penalising companies for failing to adequately demonstrate that they can manage reputation.

The investment community’s desire to look to the future means they are prepared to put past reputational crises behind them; so long as a company can prove it has learned the lessons. Yet, the bigger the company the less excuse it will have for not having the processes in place to deal with a reputation issue.

There is no end of detractors who recognise the advantage of using a company’s reputation as a lever for their own gain. All businesses can benefit from taking the steps that provide reassurance that they can deal with reputational issues that arise:

* Evidence the leadership’s involvement. Allocate responsibility for reputation management to an existing committee or establish a sub-committee on this subject that reports to the board. Consider assigning accountability to a non-executive director.

* Ensure the reputations of the leadership team are beyond reproach. With the reputations of board members inextricably linked to the reputation of a business, ensure that digital due diligence is conducted on all board members.

* Create a reputation management system. Not to be confused with a crisis management system, a reputation management system exists to ensure a clear process for identifying and managing reputation risks, as well as a plan to handle the way a company is seen by external stakeholders at the point of crisis.

* Speak up before being asked. With stakeholders looking for evidence of reputation management, nothing will compare to the company’s leadership openly talking about reputation.

* Prove that you understand the consequences of reputation damage. Stakeholders want to understand how well the business understands the reputational consequences of its actions before it takes them, so consider conducting reputation impact assessments in parallel with business case development.

The incentive for taking these steps is not just a matter of reputation resilience, but of a stronger valuation in the eyes of the investment community.

Chris Scott is a partner at Schillings

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