Risk Insider: Nir Kossovsky

2015: Resolve to Reframe Reputation Risk

By: | January 9, 2015

Nir Kossovsky is the Chief Executive Officer of Steel City Re. He has been developing solutions for measuring, managing, monetizing, and transferring risks to intangible assets since 1997. He is also a published author, and can be reached at [email protected]

Reputation risk is not going away. For the fifth consecutive year, managing reputation risk tops surveys of C-suite imperatives such as the recently published report from Deloitte Touche Tohmatsu Limited (DTTL) / Forbes Insights.

Even Warren Buffett cited it in his Dec. 19, 2014 letter to his top executives to remind them that the “top priority — trumping everything else, including profits — is that all of us continue to zealously guard Berkshire’s reputation.”

Few today would challenge the fact that managing reputation risk is paramount for a company’s long-term success.

Even skeptics now have a clear and compelling business case: For the median company, the upside measure of success is an expected additional 4.3 percent annual return on equity. The scoring, discussed further on, is the product of building value with both a strong defense and an effective offense.

Executed properly, reputational continuity yields stakeholders who will forgive a company for an operational failure and its one-time extraordinary costs.

Playing defense is fundamental to enterprise risk management. The heart of the strategy is operational risk control because reputational consequences often follow operational failures — especially in the areas of human behavior.

At high maturity levels, traditional ERM seeks to prevent adverse events or mitigate their consequences through such strategies as enterprise-wide risk awareness, scenario modeling, and technology-generated actionable intelligence.

But adverse events will happen. As Buffett noted in his December letter, it’s “inevitable … the chances of getting through the day without any bad behavior occurring is nil.”

So continuity management is also very important — not only operational continuity, but reputational continuity.

Executed properly, reputational continuity yields stakeholders who will forgive a company for an operational failure and its one-time extraordinary costs.

That is why Buffet has been saying for more than 25 years, “We can afford to lose money — even a lot of money. But we can’t afford to lose reputation — even a shred of reputation.”

Reputational continuity is a product of good governance. It manifests in strategy, resource allocation, and controls, which are all reflections of culture, mission and leadership. “Culture, more than rule books, determines how an organization behaves,” says Buffett.

On offense, taking the strategy to the stakeholders can create value. When stakeholders can appreciate improvements in governance, controls and risk management that upgrade their long-term expectations, equity values will rise.

The reputation value metrics we use at Steel City Re reflect this appreciation. The annual equity portfolios distilled from the S&P500 (RepuSPX) on the basis of our metrics have returned an excess of 9.5 percent per year on average (4.3 percent median).

The 12-year result as of Jan. 1, 2015 is a 367.12 percent return, which compares favorably with the S&P500’s 12-year return of 79.27 percent.

The increased equity value reflects both cost savings and revenue enhancements. Better reputations lead to stakeholder behaviors that create greater enterprise value through better terms from employees and vendors for services, and better terms for capital from creditors and equity investors.

Regulators are guided by law to be more lenient. For customers, better reputations create shorter sales cycles, larger unit volumes, and customer willingness to accept premium product pricing.

Resolve this year to manage reputation, not merely its risk, for success.

Read all of Nir Kossovsky’s Risk Insider contributions.

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The R&I Editorial Team can be reached at [email protected]