Manage your reputational risk or face the ignominy of failure

How often does one get told, ‘Your reputation precedes you”? Some individuals have a very good reputation, which means others have heard positive things about the person before actually meeting them. If the reputation precedes and is bad, there will be a lot of judgment towards the individual.

The same applies to the reputation of organisations and countries. When we talk about the reputation of a company, this refers to its standing and a widespread belief held by the industry, all external stakeholders, and beyond with regard to the particular company. In the case of a country, the reference is usually to the reputation outside it’s borders, generally abroad.

In the corporate sphere, what is reputational risk? Simply put, this is a possibility of danger that can threaten the credibility and character of a company. This can arise from actions of company leaders intentionally going errant, noncompliant actions of unruly employees, fraud and trading losses, faulty products, breach of customer data, or generally any action or inaction, which can cause a loss in stakeholder trust and confidence towards the organisation.

If the chief executive officer of a listed company that has established several brands across Kenya has put their own firm’s brand at risk and gets suspended from the organisation over unspecified allegations, this is a major reputation hazard as the entire management would be viewed with suspicion by stakeholders.

Defective goods

Product recalls due to faulty or defective goods can damage the reputation of a company leading to negative financial impacts. During the year 2020, Amazon-subsidiary Ring recalled several thousands of video doorbells after receiving reports of them catching fire.

There were also recalls in the USA of baby strollers causing entrapments. Recall of packaged Romaine lettuce in the USA and Europe by a particular brand due to E.coli contamination took place.

The list of product recalls is extensive and some of them are now viewed with caution by potential customers. On 4th October 2021, Facebook, Instagram, WhatsApp servers having a six hours outage led to an immediate impact on the share price of Facebook.

Reputational risk extends to employment criteria too. In employment, if individuals are recruited through other means than meritocracy, this is not necessarily going to help the reputation of the organisation. Meritocracy brings about a certain preparedness and a certain element of capability. It is not just a question of standards but how to conduct oneself as well as competency.

Governance and reputation are two of the most critical factors in international trade. Global funds are accessed by many nations as a means of short-term debt. These international funds are sovereign funds, pension funds, saving funds, Environmental Social and Governance funds (ESG funds).

When countries behave poorly in terms of disclosures and a general lack of integrity is evident, access to these funds becomes difficult. It is always beneficial for a country to enhance the trade position together with the negotiation position. In order to do so effectively, it is crucial to be honest and transparent, thereby building a genuine reputation.

How does one rectify the situation if the reputation of an organisation is already beginning to get tarnished? Individuals in the role of negotiation or representation must take immediate action.

It is important to be prepared for any such situation. During a crisis, time is of the essence. It is important to have plans and strategies for immediate damage control. Management must constantly observe any possible crisis element and identify when a situation is soon to become problematic.

Reputational distress

A vital component of preparation is establishing a well-trained, flexible, dynamic and adaptive crisis team assigned to any likely scenario. They must be capable to communicate effectively and expertly to the internal and external stakeholders, manage to contain and limit any damage and stimulate confidence in the organisation. Once the issue causing reputational distress has been resolved, only then is it possible to reassure customers, revive relationships, resume operations successfully and prevent reoccurrence.

CFOs and finance departments of organisations would be concerned about reputation as their focus is capital markets and funding needs of the organisation. They must constantly ask themselves, reputational risk however we measure, is it going to affect and impact our ability to fundraise or access the lines of credit? Is it going to make the cost of funding for our treasurer more expensive? Can we audit the cost of lost business opportunities due to reputational risk?

Nothing illustrates the ephemeral nature of a good reputation than the changing popularity rankings of celebrity Prince Harry and Meghan Markle. From being the principal modern global representatives of the royal family they have shifted to being questionable money-focused brands in the making in a little over two years.

Warren Buffett has put it quite simply “it takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you will do things differently.”

Ritesh Barot is a business and financial analyst, humanitarian, conservationist, occasional artist, recipient of OGW honour. [email protected]