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Why Proactive Reputational Risk Management Matters

People are reminded how influential negative news can damage organisations from time to time with dramatic company public relations crises. In a global economy where hard-to-assess intangible assets, such as brand equity plays important roles when determining the companies’ market value, they are especially vulnerable to anything that damages their reputations. Take a recent case for example, in which United Airline not only handled an overbooked flight situation terribly but also provoked a great deal of public outcry with extremely inappropriate CEO responses to the situation. In brief, the United Airline flight attendants ruthlessly removed a passenger who had already boarded the flight and was unwilling to accept the compensation of a later flight since he, a doctor, already had surgeries scheduled that required him to return on time. After refusing to get off the flight, he was severely injured after the securities dragged him off the aeroplane, and the video went viral which gave rise to the public outcry regarding how the airline tackles situation like this. People were outraged by the fact that the airline kicked the passenger out, because it could not manage to accommodate four more crew members, and the fact that the CEO “apologised” uncaringly via social media, addressing that he is sorry for “re-accommodating” the passenger. When the senior leaders, even the CEO, responded to a PR crisis that poorly, it is worth doubting that the company is fundamentally in a mess. The influences on its profitability in the short run might not be as striking as the public reactions toward this PR disaster since travellers do not switch that easily and most of the bookings were made in advance. However, from a long-term perspective, bad company reputations can have far-reaching negative impacts on the company’s market share, and thus reduce its profitability as a result.

Judging from the consequences of damaged firm reputations, we can tell that it is vital for companies to proactively manage their reputations — not simply after the crisis emerged. In other words, instead of concentrating on crisis management, the organisations should actively manage the reputational risk. A positive reputation facilitates the firm to ensure its long-term profitability in various ways: it brings customer loyalty which improves sales and enables the firm to charge higher price premium, and it enables the company to obtain lower costs of capital since the stock PE ratio for brands with a good image is usually relatively high. Furthermore, a strong reputation helps firms to attract better talent, which is crucial for the firms’ profitability and growth without a doubt. It takes a long time for a company to build up its reputation, but it can be destroyed just overnight. Some above-mentioned concepts might be common-sense for some of you, however, it is likely that you have little idea about the meaning of reputational risk management — since it tends to be ignored in risk management, according to a report develop by Deloitte and RiiЯ Ltd., due to its difficulty to explicitly define and factor it into risk management model. According to the report mentioned previously, by understanding and incorporating external risks and opportunities into the organisation’s risk Intelligence, “the goal is to end up with a program that puts the board and senior executives on the leading edge of knowing what might inhibit —or advance—the company strategy and then be prepared to act accordingly”. What is also important is the measures that companies should take so that it will continue to benefit from positive reputation and avoid a disastrous PR crisis like the United Airline just did. 

There are various dimensions that are essential to take into account. The first step to effectively manage reputational risk is to reevaluate the company’s current risk management programme and integrate the risk to reputation into it. This includes establishing a standard, utilising consistent definition of reputational risk throughout the organisation, and assess the current reputation. It can be evaluated from different aspects, such as how customers and investors perceive the company, and this results should be quantified – if possible. The evaluation process can be done by using methods such as structured media analysis, and survey studies on stakeholders. What the media say about the company is especially worth noting since most of the time they shape public opinions and therefore the expectations of the stakeholders. This leads to the next point: the quality of public relation management matters. It can be complicated especially for multinational cooperations, since you have to take into account the cultural differences and the variation of society values and beliefs. Some perceptions that are recognised by citizens in one region do not imply it will be the case somewhere else. An article written by Cameron Craig, former PR man at Apple, provides some guidelines to effectively and successfully manage relations with the media. First of all, keep it simple with the press release. “Mere mortal” should be able to read it, since the easier the press release, the broader the audience it is going to reach. Secondly, contact the reporters or influencers only when you have something important to offer, making noise in the market won’t help a company building up a long-lasting positive reputation. Thirdly, set the tone and shape the news story by only working with a small amount of media influencers that the company trusts. It is not only cost efficient but also helps an organisation to establish a better bond with the journalists and influencers.

Considering that it is fairly inexpensive to proactively manage reputational risk and that reputation can have such significant effects on an organisation, it is not too much to say that companies should all take action to protect and enhance their reputations and values.


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