The Biggest Loser – Reputational Risk

By December 13, 2017Uncategorized

Various events of the past few weeks have highlighted that many leaders of some of our large South African companies and institutions disregard the importance of applying ethical standards. A good reputation is the most valuable intangible asset of a company, albeit not easily quantifiable.

Only when an adverse event occurs can the value be calculated, particularly if the market capitalisation is reduced when the share price plummets. The biggest loser is usually the first recipient of negative perception. A small oversight by an employee through bad service or a seismic event like what happened at Steinhoff this past week, can be the cause of catastrophic reputational damage.

No matter the size of the entity, the negative impact affects it in the same way.

A Recipe for Disaster

Reputational risk is defined by Wikipedia as “a risk of loss resulting from damages to a firm’s reputation, in lost revenue, increased operating capital or regulatory costs; or destruction of stakeholder value, consequent to an adverse or potentially criminal event even if the company is found not guilty. Adverse events typically associated with reputation risk include ethics, safety, security, sustainability, quality and innovation.”

Reputational risk occurs when performance of an entity does not meet expectations. Some examples are:

  • Dysfunctional products – Ford;
  • Outsourcing manufacturing to third world countries – exploitation of workers.
  • Bribery and corruption;
  • Accounting irregularities – off balance sheet items, manipulation of performance.  
  • Bad service and shoddy interaction with clients and customers.

Fall from Grace

The recent debacle with the Steinhoff share price plunge has demonstrated how quickly a company can fall from grace. From being revered as the darling of the JSE and other institutions, within 3 short days Steinhoff’s share price lost 90% of its value, wiping out its market capital value and the investment values of ordinary hard working South Africans.

Steinhoff’s accounting irregularities have underlined the need for boards to be independent and not only rely on the information provided by directors. The politicians are having a field day with pointing fingers at the business sector – no doubt thrilled to have the corruption spotlight turned away from themselves, for now.

The Gupta leaks and other reports in the media have implicated a number of previously highly regarded companies and institutions for perceived untoward activities. Multichoice is a good case in point. Integrity has been eroded and ethical behaviour has been compromised for profit and other nefarious objectives.  

See no Evil

The behaviour of many leaders appears to suggest that they are unconcerned by the negative publicity. They seem to think this is just media hype and they are too big to fail.

When I mentioned the effect of the negative publicity around the KPMG saga to an employee of that firm, he was quick to respond with the retort that it was “media hype”.

Ignore the impact the media has on perceptions on the company at your peril. Once trust from the consumer, investor, media, general public and peers is eroded, more often than not it can never be recovered.

First Aid …

Leadership and management need to face the music and provide a credible and transparent communication in a short space of time. Defensive behaviour only leads to more antagonism from stakeholders.

A spokesperson should be responsible for dealing with the media and other stakeholders.  Don’t treat stakeholders with disrespect – rather inspire confidence to keep the damage to a minimum.

Crisis management becomes the norm for the day to day operational activities and strategies have to be aligned.

… and Prevention

Awareness of potential risks must be a priority for all employees including management and executives. This awareness provides decision makers with a pro-active attitude to managing these issues.   

Reputational risk is of a strategic nature and must be rated as such because it can impact on the sustainability of the company. Organisations should make use of a technological risk management tool that provides management with information to identify potential events that could cause reputational damage.

Catastrophic Failure

Ethics and good governance are the drivers for retention of good reputations. Stakeholder trust is the most important element to create sustainability and longevity of a business. When this is eroded it is very challenging to win it back.

We all have to question what is driving the kind of behaviour we are experiencing with certain leaders in South Africa.  “Short termism” (Bruce Whitfield), greed, arrogance and an attitude of ‘too big’ to fail or be caught – how can it be that this catastrophic failure of integrity is endemic amongst our country’s leaders, both in the public and private sectors?