5 Steps boards can take to mitigate risks to a company’s reputation

Photo courtesy of Scott Maxworthy on Flickr

Photo courtesy of Scott Maxworthy on Flickr

Rob Swystun, Pristine Advisers

How much is a reputation worth?

If you’re in business, a good reputation is almost invaluable.

Despite that, Echo Research managed to put a value on the reputations of all the companies in the S&P 500 and came up with the lofty sum of $3 trillion. (I calculated the sum of my own, personal reputation and it came to -$349.)

The advisory firm EisnerAmper did a survey in 2013 of corporate boards and said directors’ most pressing concern was reputational risk.

Fortunately for board members, they can play an integral role in safeguarding their company’s reputation by making sure management stays on its toes and doesn’t get complacent with reputation management, according to Roxanne Decyk, former executive vice-president of global government relations for Royal Dutch Shell and Ford Scholar at the Ford Motor Company Center for Global Citizenship. Her insights into board responsibility for reputational management were published in a blog post on the KelloggInsight website of the Kellogg School of Management at Northwestern University.

Even though the primary responsibility for the safeguarding of a company’s reputation lies with management because they know the environment, industry, company, key constituents, and history, Decyk says, the board has unique oversight of the company and can use this to aid in that safeguarding role.

Executives may start to rely too much on their tried and true systems and procedures and may risk missing emerging threats, which is why the board has to take initiative and be accountable for reputation management, the Ford Scholar says. However, she also points out that that doesn’t mean the board takes responsibility for it. That still lies with management.

Decyk identified five steps a board can take to play an active role in reputation management.

1. DIY education

In the past, it was enough for board members to educate themselves about the company by reading the materials they were given, attending meetings and visiting sites, but that’s no longer the case.

Now, directors are expected to be able to interact with a variety of stakeholders, meaning they need to be able to respond directly to constituents — including critics — about issues related to company reputation.

As an example, Decyk says the chair of the compensation committee is often expected to be able to meet with investors and explain compensation decisions that have been disclosed in the company proxy statement.

2. Choose the right governance structure for the company

Should the entire board handle risks to reputation or should there be a specific committee for it?

As with pretty much everything, it depends on the variables like the size and complexity of the company and the risks it faces.

Decyk says dedicated risk committees are most valuable for companies that are still establishing strong internal policies, systems and processes. But, ultimately, reputation management can be handled by either the full board, the aforementioned risk committee, or the audit, health and safety, corporate social responsibility or sustainability committee. It’s up to the board to figure out which option would suit the company best.

3. Create a robust intelligence system

Because it’s impossible for the board to encompass the breadth of experience needed to identify, evaluate and monitor every single situation, Decyk says, having advisors in specific areas is a must.

She suggests intelligence gathering measures that include periodic sessions for the board with independent experts like financial experts, senior government officials, heads of NGOs relevant to the company and cyber-security experts, among others.

And, she warns, it may not always be a pleasant experience, like if a mining company were to hear from a Greenpeace representative. However, these potentially unpleasant experiences are essential for getting the broadest view of the risk landscape.

4. Hire the right CEO

This is especially imperative when hiring an outsider CEO. This person cannot be a reputational risk themselves. Scrutinize their past experience and make sure their management style suits the company.

Above all else, make sure the new CEO has integrity, as it will set the right tone at the top for others to follow. The CEO should have no qualms about being transparent and sharing all news with the board, even bad news.

5. Be prepared and have a plan for when things go wrong

Decyk identifies what she calls overly-engineered, process-heavy approaches that can inadvertently act as security blankets. Board directors and management can slip into a comfort zone using these approaches because they believe by following them, they’ve identified their risks because that’s how they’ve always done it.

However, as she points out, risks can come from anywhere and even if a company has technically done nothing wrong that is deserving of a reputational hit, it can still suffer one. This can come from a misunderstanding with stakeholders, which, as we all know, can spiral out of control in this day and age quickly. Therefore, it behooves directors and management to keep an eye on both traditional and nontraditional sources of potential risks.

When these risks are identified, then comes the most important part of the process, Decyk says, which is for the board to continually be asking:

  • What does this risk mean to us?
  • What are we going to do about it?
  • What happens if things go wrong anyway?

Discussing these questions ahead of time could mean the difference between a strong and healthy reputation for the company that carries it into the future or a detrimental hit to its reputation that could lead to its demise.

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