Properly assessing risk is critical to any business. Successful businesspeople understand that every decision they make must be weighed against the potential risk to the company. This risk assessment must not be limited solely to situations directly related to the business itself, however.
They must also consider reputation risk, or the risk events will have a negative impact on one’s personal reputation and, by extension, the business.
Whether fair or not, the decisions made in someone’s personal life can have a substantial impact on the company they are connected to. This risk extends beyond just the owner or executives of a company; employees caught doing unscrupulous things can cause a public relations nightmare for the business, ultimately resulting in massive losses for the company itself.
Assessing Reputation Risk
Unlike business transactions, where there are countless models and historical examples of the likely risk and reward of most given situations, reputation risk is far harder to quantify and prepare for. It is nearly impossible to predict, for example, whether or not an executive will get belligerently intoxicated and assault a police officer. The executive can bring unwelcome attention to the company, which in turn can cause investors, advertisers, and partners to shy away in the short or even long-term.
Exacerbated in the Social Media Generation
Social media platforms such as Facebook and Twitter have dramatically intensified reputation risks. In the past, it was possible for a relatively minor incident to be swept under the rug or forgotten relatively quickly. If not, chances were good that a story would stay relatively local, perhaps reported in an area newspaper once or twice before fading from memory.
Today, however, even a single story in a local newspaper (or, worse, an online blog) can be shared and re-shared thousands of times in a matter of hours.
“Viral” stories can spread across an industry and the country within only a day or two. By the same token, an ill-advised Facebook or Twitter post on a controversial topic can be shared just as quickly.
Mitigating the Danger
Unfortunately, there is only so much one can do when trying to guard against reputational risk problems. It is impossible to control every human being’s actions, and even harder to control them every second of every day. The only viable solution is offering guidelines to employees and executives to try and minimize the problem as much as possible. It is also worth calculating risk factors among employees. For example, an employee with a history of public intoxication or domestic abuse issues may not be someone you want representing your company.
At the end of the day, there is only so much one can do to reduce reputation risk. It is important, however, to have a public relations strategy on hand for if and when a troublesome situation arises—and it almost certainly will at some point.
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In 2009, consultants presciently warned that “hyper-transparency” enabled by the Internet would change the boundaries used to assess a company’s scope of control, and its degree of accountability and responsibility. “Reputation Risk,” and its ability to decimate enterprise value, is the epitome of that prediction. It would be wrong, however, to confuse an operational failure — in your examples, failures to control anti-social behavior such as belligerence or assault — and adverse economically impactful responses by stakeholders to those behaviors. It also would be wrong to confuse negative media with reputation risk.
Reputation risk is nothing more than the risk of setting false expectations or failing to meet reasonable expectations. While having a public relations strategy on hand to manage the inevitable crisis from failing to meet expectations is certainly important, there is much that a risk manager can do to reduce reputation risk and give substance to the public relations strategy. The fact of the matter is that risk managers can have a far greater impact mitigating reputation risk than communications managers can have in trying to rebuild a reputation after the fact.
I think Nir is correct that true Business Crisis Management is much more than have public relations, or communication pieces at the ready. Reputational risk results in the failure of the organization to live up to the expectations of the marketplace or society. The fallout from this can be much more than a good PR campaign can handle. One only has to look at Centerplate and the now viral video of their CEO abusing a puppy. At first the board of directors only admonished and penalized him–a failure in structural governance. Then when customers started leaving the company (operational risk), did the board finally act and terminate the CEO. Typical cascading events which highlighted risks already imbedded in their organization (structural governance risk). Actions speak louder than words, and in the case of CenterPlate no amount of PR could save them.
Social media guidelines are one thing; however there will still be those who ignore or forget them. I think in today’s connected world it’s also important to arrange training sessions so that you can ensure every employee have received the necessary in-person training. It’s just too easy to simply claim you haven’t seen a memo unless there’s a signature on a piece of paper or dozens of witnesses in a training course.