Reputational risk as one of the main risks
It takes 20 years to build a reputation and
five minutes to ruin it.
While building and maintaining a solid reputation is important for all types of organizations, it is especially important for financial institutions. It could be argued that protecting a financial institution's reputation is the most significant risk management challenge that boards of directors face today.
Reputation is a misunderstood concept, too often confused with a company's advertising or PR strategy. It is something much broader: the faith that outsiders — from counterparties, to shareholders, to regulators — have in a firm's ability to conduct itself well. It's difficult to measure, because it is related to everything a company does in the public eye.
Reputation risk has long been a neglected driver of new regulation, but it has taken on a much larger role in recent months. This has been a particularly bruising year in the court of public opinion. The recent notorious matters have been institution-specific — not systemic, as they were during the financial crisis — and have not been accompanied by a market panic. That dynamic can be quite dangerous, though less obviously cataclysmic, giving casual observers a story that is easy to understand and even easier to caricature. It serves up specific errors in close, sometimes lurid detail.
Reputational damage can be exacerbated by a stricter regulatory climate. Regulators too need the public trust. Gaining that trust means acting on public concerns and right now, concerns about banker behavior are at a fever pitch.
Importance of Reputation to Stakeholders
Employees: Are more loyal to a company with good reputation. Help with recruiting
Investors and business partners: Will take risk in a company that they can thrust based upon its reputation. (More than 90% think about reputation in investment decisions: 40% care about reputation, 50% care partially).
Lawmakers and regulators: Reputation can help lessen the legal burden on a company.
Public at large: Preserve ―social license‖ to operate
Customers and suppliers: Support loyalty to company
Competition: Barrier to entry
Moreover,
reputation risk is number one risk for CRO’s (see pic.1):
Value of reputation: The USA Corporate survey:
Microsoft: 1stplace
Johnson and Johnson: 2nd
Google: 4th
Berkshire Hathaway Inc. 21st
American Express Company: 34th
Wells Fargo & Company: 36th
Apart from restructuring the risk management framework, banks need to take a broader approach to managing risk, built on the following.
Vision Expansion
All this while, banks have followed regulatory procedure or the policies of other banks, when they’ve set their own reputation risk standards. It’s time they also drew upon the best practices followed by other risk-heavy businesses, say, companies in the consumer goods or automotive sector, which have large supply chains.
Employee Belief
Employee self-belief significantly affects the banks’ risk-fighting capacity. The quality of work of employees, either on the banks’ payroll or on that of their Direct Selling Agents, call centers and outsourcing partners has a direct bearing on organizational reputation as well. So, in addition to building confidence among employees, all staff members should be sensitized to the fact that any slip-up on their part could adversely affect goodwill.
Employee Satisfaction
Discontentment in the ranks will seriously jeopardize employee contribution to reputation building. Banks have to follow policies which are sensitive to the needs of the workforce and treat employees as partners in the task of organization development.
Knowledge Banks
Although banks can learn valuable reputational risk management lessons from the past, currently, employees have minimal access to ready reference material. They need to document and store historical cases and precedents in generic form in repositories. Banks must also conduct training programs on reputation risk management to transfer knowledge.
Technology is a vital enabler of reputation risk management.
Enterprise-wide Solution
Enterprise-wide risk management solutions facilitate a holistic view of organizational risks. These programs provide early distress signals enabling timely problem resolution.
Analytics
Though a lot of hype has been created around banks’ big data, not much has been done to harness its power for risk management purposes. Banks can use analytics solutions to sift through the mounds of information for managing reputation risk.
Social Media
Putting the damage to their reputations in social media behind them, banks must now leverage the same platform to initiate customer engagement programs as part of their reputation-building measures.