Risk Insider: Nir Kossovsky

Stop the Silliness

By: | February 19, 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]

While short of issuing a full-blown rant, I am frustrated by the ongoing subversion by marketing of the word “reputation” and its risks. Executives are putting companies at risk, government officials are embarrassing themselves and small businesses are suffering.

The silliness persists because “reputation” — a core driver of value created by expectations in the modern world of behavioral economics — has been hijacked by a handful of marketers to mean as much as a Facebook “Like.”

The Reputation at Risk survey by Deloitte late last year reported “76 percent of executives interviewed believed their company’s reputation to be better than average.” But the survey also reported “only 19 percent of those executives would give their company an “A” grade for their capabilities to manage reputation risk.”

Confounding reputation risk with social concepts such as likability and cultural acceptability is “doing it” wrong.

Those numbers worry me. It’s like saying 76 percent of restaurants believe they serve above average meals when only 19 percent score themselves highly on ensuring chef competence, food safety and quality of customer service.

Reputation is an expectation of behavior. Reputation risk is when behavior falls short of expectations. Reputation risk is created by setting expectations too high or by executing below par.

Execution is what companies do – deliver solutions safely, securely, sustainably and ethically.  If the majority of the 300 executives surveyed by Deloitte are deluded about how well they deliver solutions when they admit they could manage risk better, the firms’ market values are then behavioral economic bubbles.

There’s another worrisome side to this misunderstanding: The Department of Justice’s Operation Choke Point.  Since 2009, the DOJ and bank regulators have been forcing banks and other third-party payment processors to refuse services to companies that are deemed to pose “reputation risk.” The list of dubious industries is populated by enterprises that are generally legal.

Last year, start-up condom company Lovability learned that JPMorgan Chase would not handle its credit card transactions. Lovability’s founder, Tiffany Gaines, whose business discreetly sells condoms to women, said a bank representative told her that they would not work with her because doing so posed a “reputation risk” to the company.

This bizarre initiative, only now being challenged in Congress with the Financial Institution Customer Protection Act (H.R. 766), comes from a misunderstanding of orders from the Office of Comptroller of Currency (OCC) to manage financial risk due to “reputation risk.”

This is reputation risk in the behavioral economic sense — a risk of negative future expectations — which in the financial sector, means liquidity risk. It is what underpins contagion and leads to runs on banks and Lehman moments.

“In a market system based on trust,” Alan Greenspan said during the market meltdown precipitated by Lehman, “reputation has a significant economic value.”

Confounding reputation risk with social concepts such as likability and cultural acceptability is “doing it” wrong.

If awareness is the first step to redemption, then I take comfort in the Deloitte survey’s observation that 9 out of 10 executives are explicitly focusing on reputation risk as a key business challenge. But it is time to stop the silliness.

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