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"Most ERM frameworks don't factor in reputation"

Published on Thu, 01/08/2019 - 16:22
Kasper Nielsen, chief strategy officer at Reputation Institute
Kasper Nielsen, chief strategy officer at Reputation Institute

Interview: Kasper Nielsen of Reputation Institute explains why most organisations still don't understand how to manage their reputation, and discusses his plans to make reputation insurance possible.

More CEOs lost their jobs in 2018 than ever before, according to Kasper Nielsen, chief strategy officer at Reputation Institute. "And it was usually because of reputation issues," he explains. "The number one CEO killer is reputation."

20 years ago, when Reputation Institute, a global leader in reputation intelligence, was formed, it had to make the case for why reputation matters, says Mr Nielsen. Not so any more: any successful business understands that a company's reputation is its licence to operate. It underpins everything.

"If you can't measure it, you can't manage it."

But effectively managing reputation remains a challenge for most organisations. At the heart of Reputation Institute's ethos is the belief that quantifying reputation is vital for managing it. "Our mission when we established RI was to quantify this asset. If you can't measure it, you can't manage it," says Mr Nielsen.

"In the financial side of a business, they have numbers for everything. That's how they manage it. There's a rhythm to it. The most successful companies are those that create a rhythm to how they measure and manage their reputation."

The story does not end there, however. Understanding and measuring your reputational exposure is just the first step: "Once you have that information, you need to know how to use it. This is the stage companies struggle with most."

Part of the challenge, he explains, is that reputational management is not integrated in to other parts of the business. "Many companies are drowning in the data but it doesn't make sense to them because it's not linked to the business. The best companies have reputation integrated into their business strategy."

Factoring in the reputation multiplier

Mr Nielsen is on a mission to help companies integrate reputation management into their enterprise risk management frameworks. "The problem with some ERM frameworks," he says, "is that they are two dimensional, focusing only on cost and likelihood. As a result they don't take into account the reputational risk multiplier."

He explains: "The financial cost of product recalls, for example, is one thing, but the reputational element is different. The reputational impact is not captured unless reputation is integrated into the risk registry."

He uses the example of the Costa Concordia running aground in 2012: "The possibility of a crash will have been identified as a risk, but I'm pretty sure the ultimate financial cost to the company - i.e. loss of sales from damaged reputation - was not factored in. That's the reputation multiplier."

According to Mr Nielsen, Reputation Institute's RepTrak - its technology-enabled analytics platform designed to provide industry, competitor, and company intelligence - can assist companies put the reputation multiplier into the ERM process. "It adds the third dimension and will move the dots on your risk analysis. Some of the areas you would not prioritise before, you will after this analysis."

This is not about adding another process, he stresses. "There is not one dot called reputation. It's not something to be managed separately, that's why it must be integrated into the ERM."

Reputation insurance: is it possible?

Alongside managing reputation, creating a reputation insurance product has become somewhat of a holy grail for the risk and insurance professions. There is appetite for such a product, but the complexities of this risk, combined with a lack of data and an incomplete understanding at a corporate level has so far precluded this market from taking off. Insurers are particularly cautious given the potential magnitude of a reputation insurance claim.

As Mr Nielsen says: "It's a very complex question. For example, the financial impact of a reputational event can be huge. The average share price impact of a reputation event is 8%. But no insurer is going to insure Apple for an 8% fall in share price."

But he firmly believes the challenges are surmountable and is working with organisations and insurers to define what they want to insure and, importantly, to improve their understanding of reputation exposures.

Member feedback

Most businesses, he believes, do not yet have sufficient understanding of their reputational exposures to give the insurance market the reassurances they need to start creating meaningful products. "They are not yet managing reputation or collecting insurable data. Some companies are integrating reputation into their business strategy, and they are ready to talk to insurers, but these are only a fraction of businesses."

Having reliable and consistent reputation data with clearly defined triggers will be vital for insurance to take off. Mr Nielsen believes Reputation Institute's RepTrak could "fill the gap" and they are exploring plans to make it available for insurance purposes.

In the meantime, Reputation Institute wants to trigger an open conversation with businesses and the insurance market about reputation, its place in the ERM process, and ambitions for creating insurance products. "I want to kick off co-creation with Airmic members. I'd love to have feedback from them on both the ERM and insurance front. We are reputation experts, not risk or insurance experts. Together, I think we can really overcome the challenges."

Click here to visit Reputation Institution's website.

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