Managing the Reputation Risk - Kuntal Sur

RECENT turmoil in global financial markets and subsequent collapse of many banks and financial institutions in western economies has brought focus back on different dimensions of risk management. Among the others, managing reputation of the bank / institution has become a prime risk management area. Reputation is the single most-valuable asset of most businesses today — albeit an intangible one. Financial institutions (FIs) around the globe are grappling to tackle reputation of their institution. Reputation risk is all encompassing as it affects shareholders, customers, investors and employees alike. Worse, the reputation risk has connection to one or almost all other risks that FIs face. Typically, reputation could be damaged by an institution’s failure to properly manage the risks it faces (such as credit, market, strategic, operational or other material risks) as well as some external factors that are beyond its control (eg rumours). Such damage may lead to serious consequences with immediate or long-term implications and in many cases result in costly litigation, or lead to a decline in its customer base, business or revenue.

Reputation, being largely based on people’s perception and expectations, is intangible in nature and thus cannot be easily analysed or quantified. While a good reputation may take many years to build up, it can be tarnished instantly.
FIs should adopt an approach to reputation risk management that fits their own risk profile, level of sophistication, which enables the risks affecting reputation to be consistently and comprehensively identified, controlled, and reported.
Reputation risk management has three main building blocks:

• Comprehensive and effective corporate governance framework, including independent reviews and audits
• Effective reputation risk management process
• Pro-active risk identification, reporting and disclosures.

FIs operating as part of a group will be susceptible to reputation events affecting their parent bank, non-bank holding company, or other members of the group. Such contagion effects on FIs’ reputation may also result from other problematic relationships, such as any close association (whether knowingly or unknowingly) with major customers, counterparties or service providers that are revealed to be engaged in unethical, unlawful or corrupt activities.
A proactive monitoring system is a prerequisite for obtaining early warning of potential risks to reputation. Such monitoring includes, (i) monitoring of media reports and (ii) monitoring of industry, market, political, legislative or social developments which may have implications for the institution.

FIs may devise early warning indicators (eg a sudden increase in customer complaints, breaches of internal controls, operational errors, fraudulent incidents, etc) and any other triggers or thresholds, which can act as alarm bells for top management actions or provide signals to invoke any contingency plans.

One of the effective ways to mange reputation risk is regular communications with stakeholders. This can take many forms, including annual reports, prospectuses, website information, AGMs, press releases, media interviews and issue specific clarifications to regulators. Timely disclosures to stakeholders, including regulators, will better their understanding of the institution’s performance and future prospects.

A good reputation hinges on a business living the values it claims to espouse and delivering consistently on the promise to its stakeholders. Active and systematic management of the risks to reputation can help to ensure that perception is aligned with reality and that stakeholder experience matches expectations.

The author is associate director with KPMG Advisory Services

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