The cost of losing trust

While the control of some risks – liquidity, counterparty, and operational – has improved, some corporate giants have found that it’s reputational risk which can be the most dangerous.

A crisis can define a company and its standing for many years. How long, for example, before BP can move beyond the Gulf oil spill that has dogged its reputation and cost the company $40bn? Likewise Toyota, which last year had to recall some nine million vehicles after fatal accidents were attributed to unintended acceleration: how long before a conversation about Toyota does not refer to those recalls?

Crises are expensive and time-consuming to manage in the short term. But they pose an even greater risk to long-term reputation. Crisis management has a significant role to play, of course – but taking steps to minimise the potential for crisis could be more effective. Just as operational risk  as considered impossible to measure just a decade ago, there is an emerging sub-discipline in assessing and managing reputational risk within organisations that realize the need to ensure reputation is treated in the same way as any other  valuable business asset.

‘For the automotive industry, reputation is of particular importance because of its highly competitive nature and major investment in brand-building and customer experience,’ explains Alastair Pickering, research and operations director at Alva, a consulting firm that helps companies with reputational analysis and risk assessment. Media analyst the Kelsey Group estimates global automotive advertising spend will total $40bn this year, 5.6% of total global advertising spend.

‘Reputation equates to trust in the company’s products, the integrity of its  employees and the honesty of its messages,’ says Pickering. ‘As an organisation’s trust declines, so too does the effectiveness of its marketing. Companies that damage their reputation find it incredibly difficult and expensive to regain this lost trust.’

A reputation risk can be defined as a gap between what a stakeholder expects of a company and what the company is perceived to be delivering. ‘We recommend conducting frequent stakeholder mapping exercises, talking to customers,  employees and investors to understand what they want from the organisation and While the control of some risks – liquidity, counterparty, and operational – has improved, some corporate giants have found that it’s reputational risk which can be the most dangerous also what actions or behaviour would jeopardise their relationship with the company, potentially causing them to switch manufacturers, disinvest, move jobs and so on,’ says Pickering. ‘These issues then form the basis of an organisation’s evolving reputation risk list, which can be monitored and responses planned.’

Read the full article and the In Focus supplement June 2011 issue on the RBS website.