Reputational risk - riches to rags

Ask the CEO or CFO of any major corporation and they will tell you what a lonely job it is. Lonely, and increasingly risky, as commercial pressures force companies to look to new markets to grow their business.

Risk driven by 9/11 and the threat of terrorism has certainly risen up the corporate agenda. But a more pronounced threat is fast emerging – reputational risk. Indeed, a recent survey by the ICAEW and The Risk Advisory Group ranked risk to reputation as one of greatest threats facing companies today.

There’s certainly nothing fluffy about the importance of your reputation. Get it right and it will enhance your profitability and contribute to overall long-term success. But if your reputation gets damaged, it can impact on earnings and create negative public opinion, resulting in loss of sales, a plummeting share value and a breakdown of relationships.

Take professional services firm Marsh & McLennan in the US. Its share price took an immediate 40% nosedive and there were external calls for a change in senior management following news that was directly linked to the company’s reputation.

Moody’s Investor Services and other credit ratings agencies simultaneously downgraded its debt as concerns circulated about potential loss of business resulting from its damaged reputation.

Not all companies get off quite so lightly. And yet a cavalier attitude to reputational risk prevails. Among those to have taken their eye off the ball are advisory firms, large and small. The longer and longer planning horizons meant that consultants could take their fees and disappear to wreak havoc elsewhere, long before the poor quality of their work was able to damage their reputation.

In the US, it has not been uncommon to see one major consultancy advising a client preparing a case to sue a competitor, while that competitor was assigned to help another to sue an equally prestigious member of the consulting fraternity. The result was a litigation merry-go-round. To the untrained eye, it suggested that consulting firms made a substantial share of their revenues by adding their 10 cents worth to the compensation culture from both sides of the fence.

The fall of Andersen and the growth of competition have forced the consulting profession to address its own weaknesses – in some cases for the first time. Risk to reputation is no longer an intangible that can be brushed aside with some ‘quick on your feet’ PR. It can sound the death knell of the organisation.

How a company manages its reputation must now move beyond the traditional role of public relations and it requires the integration a number of previously fragmented functions. Everything from processes driven by regulatory requirements (Sarbanes-Oxley), audits, committees and reporting requirements to soft elements including corporate culture, integrity, people, and ease of communication both internally and externally.

Creating a process to manage these seemingly disparate functions will help pinpoint any vulnerabilities and should at the very least stimulate a discussion and could pre-empt crisis management, which by definition implies a siege mentality.

The combination of these processes cannot prevent a damaging event from occurring, but it will propagate the right mindset throughout the organisation and highlight reputation management as the collective responsibility of all employees.

As companies seek to outsource various functions, the danger of being associated with the wrong business partner may wreak havoc on your reputation. Engaging in expanded due diligence and integrity checks will help to offset this risk.

Reputational risk is not only the domain of large companies. SMEs and consultants face potential damage to reputation in an increasingly competitive marketplace. If you are struggling to fulfill a contract and your company is operating in a marketplace with three or four direct competitors, your reputation is going to get pummelled.

Success is critical because, if you fail, it will take more than the current fad of business process outsourcing to save the neck of the goose that has laid such a multitude of golden eggs for so long.

Consultants must learn to deliver speedy and reliable results quickly and economically or their livelihoods will go the way of all flesh. With an intangible service such as consultancy, reputation is all that stands between six or even seven-figure incomes and the poor house. There are too many excellent alternatives to consultancy, as it has been practised.

The ‘take away’ is as simple as it is compelling. With blogging and media coverage booming, a reputation can be destroyed in a matter of days or even hours. Risk analysis, followed by proactive action, to protect our most valuable asset is essential for every one of us. It’s time to move away from the traditional ‘poor man, beggarman or thief’.

Professor Tom Lambert is chief executive of the International Centre for Consulting Excellence.