Reputation Value at Risk

Recent surveys of the value of global brands, like the BusinessWeek/Interbrand survey published last month show that the amount of shareholder value attributable to companies’ brand reputations is enormous, often in the billions. For companies like Reuters or Burberry the value of their brand reputations can represent between 40-70% of the market cap. However, there is little data on how companies are managing the risks to their reputation - and a new survey shows that is perhaps because most companies are not managing their reputation risk.

This survey, designed and analysed by David Hensley & Garry Honey will be published in the forthcoming September edition of Strategic Risk magazine, shows that although 97% of the senior executives surveyed rated Reputation Risk an important or very great concern, the majority said they do not specifically monitor, measure or manage their reputational risk.

Given the value of intangibles, and reputation/goodwill in particular, this should be of concern to investors, including anyone with a pension fund investing in equities.

The fact that most people surveyed don’t explicitly manage reputation risk is clear. What is less clear is why. It seems to be a mixture of misunderstanding and myopia.

The misunderstanding comes from people putting this into the “too difficult” box. Although 10% of those surveyed say they already put a monetised value on their reputation, many other say the difficulty in quantifying the value at risk is one of the biggest challenges. Many of the risk managers surveyed say that better governance of reputation risk is required, including contingency planning, but overall responsibility for managing the corporate reputation is often unclear. One department manages brand communications, another corporate social responsibility, and another investor relations – all separately assessing and managing risks to the reputation.

The myopia comes from the senior executives. None of the Chief Executives or Chairmen in the survey thought that they had a governance issue. They all described reputation as an operational risk, and thought that a focus on good operational delivery was essentially all that is required – seemingly without thought to preparing for unexpected or external factors such as those that have recently affected the reputations of Cadbury and BP.

I am sure that it is not so simple, but what is clear, is that shareholder value is at risk.