The Cost of Reputation Risk

I came across a great presentation on Reputation Risk from Martin Davies of Causal Capital. It outlined the many dimensions of this onerous corporate threat. It offered a definition, a list of risk factors, its impact on a company’s financial condition and proposed frameworks to mitigate its effects.

In the pantheon of risk factors, reputational risk is the classic riddle wrapped in a mystery. Its obtuse nature is due in part because it can spring from a multitude of internal and external factors. This makes predicting the occurrence of a reputational risk event difficult to assess and near impossible to quantify making ROI mitigation funding decisions a perplexing task. 

Reputation risk seems to loom as a phantom menace that inhabits the dismal swamp of innumerable asymmetric risk factors. Its appearance is rare but potentially catastrophic in nature because it strikes at the heart of brand value and corporate integrity. 

The dissolution of Arthur Andersen due to its failures to detect fraudulent business and accounting practices at Waste Management, Worldcom and Enron destroyed the firms reputation for honesty and integrity. Though some argue the cause of this spectacular corporate collapse was due to the contradictions of an attestation/consultancy business model, AA’s pattern of high profile failures in its attestation business made it impossible to continue in business as a firm with unimpeachable standards for audit and accountancy excellence. 

Though corporate dissolution is the worst case scenario resulting from a catastrophic reputational risk event, larger firms with the financial wherewithal and organizational resource to underwrite corporate resilience strategies are best positioned to overcome the severe shocks of a reputation risk event. Mitigation initiatives must be more than a PR exercise in damage control. Senior management must take ownership of the event and implement a strategy that allocates resources to the problem to assure stakeholders that an optimal return on capital employed will be realized to the benefit of a sustainable enterprise.

Though reputational risk seems to arise from a kismet of asymmetrical factors, which are difficult to foresee and nearly impossible to plan for due to the limitations of linear causation and factor biases of quantitative based risk models; reputational risk is best addressed by striving for GRC (governance, risk compliance) excellence throughout the corporate enterprise.

This is particularly important for SME’s who lack an expansive balance sheet, financial reserves and organizational resources to ride out and overcome the profound impact of a reputational risk event.

Quantification of reputation risk is difficult to measure. The cost of mitigation initiatives and the expected loss realized from a reputational risk event must be funded through the GRC culture of the enterprise. The above slide caught my attention because it graphically displays the impact of a reputational risk event on the equity value of a publically traded company. Though equity exchanges are good barometers to determine monetary impact of a risk event, the managers of privately owned firms are beholden to a different set of expectations of closely held corporate stakeholders. 

Amorphous performance standards of idiosyncratic investors, the close coupling of corporate goodwill, shareholder identification, corporate identity and product branding concentrates and magnifies the intensity of reputation risk. 

SMEs mitigate reputational risk factors by developing a vigilant GRC culture that encourages the engagement of all employees in the mission of the enterprise. In so doing, all company stakeholders are deputized as vigilant risk managers; all wholly invested in the protection of corporate goodwill and the creation of long term sustainable value of an extended enterprise. 

Sum2 believe this to be the case as well. Our clients engage risk as a daily cost of doing business. We design risk management products for small business managers that empower them to lower the odds and consequences of damaging risk events while positioning themselves to be the beneficiaries of opportunities changing market conditions produce. 

Get risk aware and protect your business with the S3 an SME Seismograph, a risk detector and an early warning and opportunity discovery app on Google Play. 

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Risk: reputation, Arthur Andersen, sme, macro, catastrophic, Black Swans, facilities, business interruption, transportation, contagion risk, infrastructure risk, S3, GRC, Martin Davies, Causal Capital

Half a League, Half a League, Rode the 600

So begins Alfred Lord Tennyson's famous poem, The Charge of the Light Brigade.  The poem bespeaks the glory and folly of Pax Britannica's imperial apex; yet still offers dear lessons for those dispassionate enough to listen.

Tennyson recounts the doomed charge of a British cavalry unit at the Battle of Balaclava during the Crimean War.  British Intelligence provided the Light Brigade Command incorrect information, under estimating the strength of the defending Cossacks.  As the assault commenced the Light Brigade soldiers realized they had been misled. The probability of defeating the entrenched Cossacks was an impossibility; but the Light Brigade rode on....

Half a league, half a league,

  Half a league onward,

All in the valley of Death,

  Rode the six hundred.

'Forward, the Light Brigade!

Charge for the guns' he said:

Into the valley of Death

  Rode the six hundred.

The Crimean War was one of the great mistakes in modern history. The costly war, an accident driven by the over-sized national hubris of fledgling nation states - Britain, France, Austria- Hungary and Czarist Russia- urgently arriving on the global stage, eager to exert a national will to carve a slice from a dwindling colonial pie. 

The Crimean War provides a few lessons for today's historical actors keen to relive the historical farce once again. The United States, Russia and the EU, all seemingly intent on escalating conflict across a volatile Eurasian region surrounded by Middle and Near Eastern instability. Surely a tinderbox, a conflagration awaiting; primed to spark from the flash point of resurrected Cold War animosities.  

I cite Tennyson's poem not as an allegorical reference to the deadly game unfolding in the Ukraine but as an example of the consequences of acting on bad information.  Business intelligence is an absolute critical component of an effective risk management program.  

The stakes in the evolving Crimean crisis are huge and the consequences of the conflict will loom large over world markets for an extended period of time.  SME's in the region will bear the brunt of the economic effects of the crisis.  Political instability has placed the regional economy into a tailspin.  Clashing armies are never good for business.

European SME's need to consider the impact of a disruption of Russian oil and natural gas delivered by Ukrainian pipelines.  How would such a disruption impact the price of energy commodities and industries that are sensitive to it?

What would be the contagion effects of a broader conflict?  What would be its impact in the Greater Caucasus, Syria and Iran?   Would a conflict in the Ukraine close access to the Black Sea and how would that affect exports and the economic stability of Turkey?

How would the Russian oligarchs react to sanctions and asset seizures imposed by the west? News services are reporting significant capital flight from Russia, a plunging bourse and a ruble at historic lows.  

These are but a few questions effective risk managers need to consider.  Seeking out and assessing information and how it will impact your business model is absolutely critical during times of acute macro risk.

Don't fall victim to the blind hubris of the Light Brigade....

Forward, the Light Brigade!'

Was there a man dismay'd?

Not tho' the soldiers knew

  Some one had blunder'd:

Theirs not to make reply,

Theirs not to reason why,

Theirs but to do and die:

Into the valley of Death

  Rode the six hundred.

Regional enterprises directly affected by the conflict and the international community of SME's with supply chain, export market or contagion risk exposures linked to the growing instability in the Ukraine need to assess these emerging event and  macroeconomic risk factors.  

Get risk aware with Macroeconomic Risk and Event App (MERA) on Google Play.  Its an Mobile Office app that runs on MS Office and Android.  MERA will help you assess heightening risk factors to profit from the opportunities shifting markets present.

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Risk: economic, political, market, supply chain , capital flight, commodities, contagion risk, Ukraine, Black Sea, Eurasia, Iran

A Whiff of Risk

When you get a whiff of risk you must react to assess its danger and do something to protect yourself from its impact. Failing to do so could have catastrophic consequences. Take for example last weeks building explosions in Harlem; shaking the foundations of New York City when two apartment buildings collapsed from a gas line explosion.  

The explosion killed 8 people, wounded dozens, destroyed the homes of many families and three small businesses. It closed a major commercial thoroughfare halting business operations for over a dozen small businesses and disrupted the only subway line serving east side of Manhattan.  

Emergency response crews performed brilliantly in securing the devastated scene and within a few days some of the small businesses near the explosion were able to open. Demolition crews continue to clear the rubble of a catastrophic event that cost lives, injury, loss of property and homes, loss of revenue and the permanent closure of businesses and livelihoods.  

Clearly this is a tragedy of major proportions. What makes this event even more tragic is that it could have been avoided had people reacted to the growing warning signs that a gas line was leaking.  

For days prior to the explosion people complained about the smell of gas and it remains unclear if anyone reported it to Con Edison, building landlords or city regulatory agencies.  

That’s a typical response of people and institutions upon encountering an emerging risk factor. They simply ignore it, hoping it will go away or hoping that a responsible individual will engage the problem and muster the resources required to mitigate the risk. Unfortunately that did not occur in Harlem last week.  

Astute managers of SMEs will learn from this costly incident by engaging effective risk management practices to prevent catastrophic risk events from undermining and in some extreme cases destroying their business. 

Risk comes in many guises, colors and disguises. Risk factors often contain the seeds of opportunity that can propel a small business into the stratosphere of profitability and success. Effective managers keep their nose in the air, always sniffing and listening to the rumbles surrounding their business, assessing the risk and its potential impact on its future success.  

Sum2 believe this to be the case as well. Our clients engage risk as a daily cost of doing business. We design risk management products for small business managers that empower them to lower the odds and consequences of damaging risk events while positioning themselves to be the beneficiaries of opportunity when the aromas of opportunity arrive.   

Get risk aware and protect your business with the S3 an SME Seismograph, a risk detector and an early warning and opportunity discovery app on Google Play. 

Get Risk Aware

Risk: sme, macro, catastrophic, Black Swans, facilities, business interruption, transportation, contagion risk, infrastructure risk, New York, Harlem