Reputation risk only kills business like icebergs sink ocean-going vessels!.

I was looking for a good caption to share some thoughts on reputation risk. In The Economists’ Intelligence Unit’s (UK) language it is “the risk of risks” (white paper December 2005). Suddenly I remembered, the O&M, India (Ogilvy and Mather) Canne’s Award winning ad ‘Cancer cures smoking’ and I decided to adopt this idea and coined the caption “Live or die by your reputation!”.

Warren Buffet commented years ago on reputation as under: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you will do things differently”.

This quotable quote and my own observation “if you have no reputation, you have no business” were prominently quoted in the Corporate Communication Institute, New York in its CCI Symposium on Reputation: Managing Reputation and Risk offered in association with CCM – Council of Communication Management and hosted by Pfizer Inc on December 1, 2006 in New York (link www.corporatecomm.org/pdf/CCI_Grates_ReputationDeck_2112706.ppt).

What is reputation? Is there a precise dictionary meaning and definition for reputation? Reputation is nothing but standing, status, name, repute and character. If a company has reputation, people will trust and they will buy its products and services, invest in the company, willing to do business and communicate with the company. We need not highlight the opposite will happen in case the company is having no reputation!.

There is thus a direct link between business and reputation; financial performance and reputation; and profits and reputation. Reputation is becoming a very important corporate asset and tool to differentiate between winners and losers, as companies’ products and services have become less differentiable.

In addition, according to me, damage to the reputation of a director / partner, auditor or adviser will be transferred directly and instantaneously to the organization by their simple association. We all know what has happened in the case of Enron and Arthur Anderson. “If your reputation is good, mine is probably good too”. Thus it is very essential to ensure that we have reputation and we also deal / associate with reputed customers / companies / partners / directors / advisers / auditors.

How to build reputation? It is very difficult to provide a straight forward, simple to execute answer. Reputation can be built over a period of time with good quality products, quality services, regulatory compliance and corporate governance. Responsible business initiatives can help to quicken.

Having acquired reputation, it will be much more difficult to maintain reputation. Constantly one has to critically examine his/her performance, products/services. If there is damage to reputation, the cost of repairing it will be colossal.

Unlike other risks affecting business, reputation risk cannot be quantified easily. As of now, there is no single acceptable universal model to measure the same so as to manage. It is a higher order qualitative risk. Thus one may not be able to quantify this risk in financial terms. However, one can quantify other risks faced by a business firm and see their financial impact on the operations. In addition to affecting the financial performance of the business, the other risks affect reputation too.

Well. One may even compare the reputation risk to icebergs. Like larger portions of icebergs below, reputation risk is not visible outside. When reputation of a business is affected, the very existence of the business will be affected, like the way icebergs sink even ocean going bigger vessels.

Hence, I would like to name the reputation risk as iceberg risk.

Sometimes, some portions of the iceberg are visible from outside, floating in the ocean. One cannot afford to judge or gauge the iceberg size just from its external appearance. In a similar manner, other risks can be compared to the visible parts of the reputation risk.

Now that we are well connected with reputation risk, let us see who is responsible for reputation in a business. Every one starting from the CEO down to the last level employee of the business is responsible for its reputation. In addition, all external stakeholders also contribute to the reputation of the business.

Thus reputation is a highly valued and highly vulnerable corporate asset.