Organizations are increasingly vulnerable to public scrutiny, so it's no wonder that the subject of reputational risk is now seen as a company-wide concern -- as opposed to simply the remit of the marketing or communications department.
Our recent Chartered Global Management Accountant (CGMA) survey identified the rise in social media channels, such as Facebook and Twitter, as key contributing factors to the increased global interest in reputation. But, rather surprisingly, over 95 percent of organizations admitted to not always using feedback from these channels to anticipate and manage risk to their own reputation.
Three quarters (76 percent) of global finance chiefs now say that their company is prepared to lose short-term profit in order to protect its long-term reputation. The same number (76 percent) admit they put more emphasis on reputational risk today than in previous years. And almost half (44 percent) say they have rejected a project that made good financial sense because the reputational risk was too great.
These results show that organizations are recognizing the need to take reputational risks very seriously, and that they are including them in their wider long-term business strategy. But businesses are struggling to identify how they should go about managing reporting in this area. Over 60 percent of those surveyed had no formal processes or models in place for calculating the financial impact of not managing reputational risk.
This suggests there is a gap between rhetoric and reality -- which opens companies up to reputational damage.
In order to be fully protected, it is vital for finance directors and business leaders to move away from short-term focus and to begin collecting, reporting and monitoring reputational risk information. Feedback from social media channels is just one area. Organizations must make full use of their finance team. Given the increasing need for organisations to operate efficiently, effectively and ethically, management accounting has a crucial role to play in improving the quality of planning and decision-making.
Having their brand plastered across cyberspace for the wrong reason gives senior executives sleepless nights. This summer, we've seen several significant reputational failures exploding in the press. Twitter has been criticized for a slow response to online abuse, GlaxoSmithKline is at the center of a bribery scandal in China -- resulting in Moody's cutting its credit outlook, and SportsDirect has been hit by revelations that 90 percent of its workforce are on zero-hours contracts. These organizations have suffered reputational damage with ramifications that go far beyond a few negative headlines.
Those with true insight understand that the issues which make bad news are rooted in poor business practices. A better understanding of non-financial information in business is rising up the agenda, aligned to the push for integrated reporting, and having the skills to be able to spot both risks and opportunities is where the focus should be.
This will not only enable businesses to improve performance management, but will also support long-term sustainability; maximizing opportunities while minimizing risk.
Many crises can be avoided by implementing a more rigorous approach to reputational risk. As Benjamin Franklin said: "It takes many good deeds to build a good reputation, and only one bad one to lose it." How true this is in today's business environment.
Follow Andrew H. Harding on Twitter: www.twitter.com/@AndrewHHarding