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Definition of Risk Management and Damage to Reputation

Sean Salleh 23 Sep 2013 Risk and uncertainty

Risk to reputation is recognized as a concept. In commercial terms, the reputation of an enterprise influences the loyalty of its customers, the prices they are prepared to pay, and the quality of the employees it can attract. Quantifying it in a definition of risk management is another matter. While after-the-fact statistics exist that might give a hint of how such estimations might be made, damage to reputation can vary considerably both in amount and duration. The question often becomes ‘how do we contain or repair the damage now that it’s started’, rather than ‘how do we assess the possible risk of damage occurring’.  Are there metrics for reputational risk that would allow it to be modeled and assessed before any incident arose?

Organizations often omit references to reputational risk because of the difficulty they have in assessing it Image source: annualreports.ing.com

Insurers’ Points of View

Insurance companies spend much of their time refining their definition of risk management. Using their terminology, reputational risk may be considered a business continuity risk, and also strategic (rather than operational), behavioral (driven by the way people or organizations behave), intangible and consequential (indirect). Categorizing reputational risk as consequential means that some consider that reputational risk cannot be measured. In other cases however, dollar figures can be attached to reputational damage, if not risk. An example is the immediate $24 million decrease in value of the stock of car hire firm Helphire as a result of an email with negative publicity.

Do We Owe You an Apology?

The recent case of cancer charity ‘Susan G. Komen for the Cure’ (also known simply as Komen) provides a further perspective on the definition of risk management. Criticized for its funding decisions, Komen hired a public relations consultancy to essentially find out if it owed its donors an apology. If the charity fails to apologize when an apology is expected, it risks losing donor funding. If it apologizes when no apology is required, the effect may range from positive (big enough to apologize if required) to negative (out of touch or even paranoid). While outcomes could be modeled according to the decision on apologizing and the level of apology issued, it’s still after the fact. If Komen had had prior knowledge of the degree of outcry, would it have changed the funding decision itself?

From Crisis Management Back to Risk Management

Limiting damage to reputation after it has started can be viewed as crisis management, rather than any definition of risk management. Is it possible to quantify the factors that affect reputational risk and get ahead of the game by modeling effects before they happen? One reputational risk model suggests that three factors shape the degree to which such risk exists: the gap between reputation and true character; change of external expectations that can affect this gap; and the quality of internal coordination that can also affect this gap. From this point of view, we now have measurable items that can be used in a quantitative model to determine risk to reputation.

If you’d like to know how Analytica, the modeling software from Lumina, can help you manage risks of all sorts, then try a thirty day free evaluation of Analytica to see what it can do for you.

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Sean Salleh

Sean Salleh is a data scientist with experience in guiding marketing strategy from building marketing mix models, forecasting models, scenario planning models, and algorithms. He is passionate about consumer technologies and resource management. He has master's degrees in Operations Research from University of California Irvine and Mathematics from Northeastern University.

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