What’s the risk? Survey shows increased focus on reputation

A substantial majority of businesses are focusing more on reputational risk today than in the past.

But many companies do not vigorously monitor social media and lack processes to calculate the financial impact of not managing reputational risk, a new CGMA survey shows.

Seventy-six per cent of CGMA designation holders who took part in the global survey said businesses in their industry are putting more focus on reputational risk than in the past. Market demands for transparency, reputational failures at other businesses or leading companies, and the rise of social media were the top reasons cited for the increased global focus on reputational risk.

CGMA holders and their companies appear to be keenly aware of the effects a damaged reputation can have on their companies:

• More than one-fifth (22%) said their organisation had experienced a reputational failure.
• More than two-fifths (44%) said they or their organisations had rejected a project that made financial sense because the reputational risks were too great.
• Nearly two-thirds (65%) said the financial implications of reputational risk are considered always or often in their organisation.

Enterprise reputation and risk expert Jim Traut, CPA, CGMA, said companies with strong brands that have direct relationships with consumers have been leaders in protecting their reputations. But Traut, the former vice president of enterprise reputation and risk management and ethics and compliance at global food company H.J. Heinz Co., said companies without direct customer contact and even small businesses and sole proprietors need to focus on reputational risk.

“Think about the great restaurant that you keep going back to, year after year,” Traut said. “Why do you go back? Because they’re managing their reputation. Every day, every meal, they’re managing their reputation.”

Brand reputation is built through all of an enterprise’s relationships, Traut said. Survey respondents ranked relationships with customers as most important, followed by relationships with employees, regulators and investors.

Finance personnel can help protect the brand by driving understanding of the value of these relationships.

“The accountant, who is traditionally thinking about cash and P&Ls and balance sheets, would be well-served to recognise that those relationships … will be absolutely critical in the valuation of those businesses [for decades to come],” Traut said.

The survey results show that financial impacts of reputational risk are being weighed to some extent, but there is room for improvement. Although excessive short-term focus by investors is a common concern in finance today, 76% of respondents said their companies are prepared to lose profit in the short term to protect the organisation’s reputation and drive more long-term success.

Social media disconnect

But 62% of respondents said their organisation does not have a formal process or model for calculating the financial impact of not managing reputational risk. And despite the many examples of companies hurt by damaging YouTube videos and Facebook posts, just 20% of respondents said their organisations heavily use social media feedback to help anticipate and monitor reputational risk.

More than half (52%) use social media feedback to some degree to anticipate and manage reputational risk, and 28% never use social media feedback that way.

Whether a sole proprietor or large corporation, businesses should monitor when their brand is being mentioned on social media sites, Traut said. He said companies should have a mechanism for reviewing and reacting to social media feedback.

“I don’t think companies are doing enough of that,” Traut said.

UK/US differences

Respondents from the UK and US made up the largest portion of the more than 1,300 survey responses. UK respondents were more likely than those in the US to say they are focusing more on reputational risk today than in the past. Almost four in ten (39%) UK CGMAs said they are putting significantly more focus on reputational risk today, compared with 21% of US CGMAs.

By more than two to one (34% to 16%), UK respondents were more likely to say their organisation had experienced a reputational failure.

Responses from CGMA designation holders from across the globe are included in the survey.

Related CGMA Magazine content:

“Anti-viral Remedies for Reputational Damage”: These days, bad news spreads faster than ever. Management accountants can help companies prepare to inoculate their hard-earned reputations against damage on social media and repair the harm when it occurs. Read the experts’ prescription.

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.