Steer Clear of Black Box Formulas

Today’s post discusses the difficulties with measuring reputational risk. It’s part of the continuing series of excerpts from the position paper “Beyond the Bottom Line: 20 Ways to Reduce Reputational Risk.” Download the entire paper to take a look at the 20 reputational risk scenarios designed to help you cope with various situations.

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Scientists, technology experts, and other data-driven individuals are not going to like this, so I might as well just say it: Quantifying reputational risk is next to impossible.

It is akin to then-Supreme Court Justice Potter Stewart commenting on pornography: “I know it when I see it.”

Some academics have atteScalesmpted to divine formulas to measure the impact of an organization’s communications efforts. Many larger public relations agencies have cooked up proprietary schemes in hopes of convincing clients they can accurately measure what they do for them.

One financial expert with whom I discussed this paper told me in no uncertain terms that he can compute reputational damage by noting the market valuation lost after a crisis. While I can by no means claim fiscal expertise, I believe that market valuation—and the manic depressive mood swings of stock markets—are poor yardsticks of the economy and of individual companies, to say nothing of its failure to serve as a valid reputation barometer.

Do you remember the phrase “voodoo economics” from a long ago presidential campaign? That’s my view of such measurement attempts. Futility reigns. The solution? Trust your executives who are wise and experienced in such matters.

This is not to say we are left to toss darts at a dartboard, to merely guess at the effect of reputational risk. Fortunately, there are other means of assessment.

Consider this recommendation from Robert G. Eccles, Scott C. Newquist, and Roland Schatz from their article “Reputation and Its Risks” in the Harvard Business Review:

“Various techniques exist for evaluating a company’s reputation. They include media analysis, surveys of stakeholders (customers, employees, investors, NGOs) and industry executives, focus groups, and public opinion polls. Although all are useful, a detailed and structured analysis of what the media are saying is especially important because the media shape the perceptions and expectations of all stakeholders.”

Another alternative method of measurement comes our way courtesy of the U.S. military’s “after action review.” Such reviews generally concentrate on these questions:

  1. What was expected to take place?
  2. What really happened?
  3. Why was a difference observed (or not)?
  4. What can we do to achieve a better outcome in the future?

The “Organizational Dynamics: A Focus for Effective Risk Management” paper chimes in with such best practices as making simulation drills a part of the planning process. It also preaches the wisdom of activating your company’s risk committee, or forming one if none currently exists (author’s note: You would be wise to give your chief communications officer a seat at that table). Your communicators should also create discussions surrounding reputational risks that may appear on the horizon (as I’ve said many a time—to many a sideways glance—if your current communications staff is incapable of this, get rid of them and bring on board more capable minds).

What other steps can you take to manage reputational risk effectively? The Federal Reserve Bank of Philadelphia offers some key elements for banks to consider:

  • “Reinforcing a risk management culture by creating awareness at all staff levels
  • Instilling ethics throughout the organization by enforcing a code of conduct for the board, management, and staff…
  • Establishing a crisis management team in the event there is a significant action that may trigger a negative impact on the organization”

If it’s good enough for bankers, it ought to be good enough for the rest of the economy, too. You would be wise to weave the Philadelphia Fed’s recommendations into your company’s reputational risk planning.

The point is not to cave in to an obsession with measuring everything solely in dollar terms. As the above methods point out, reputational risk is a very real phenomenon, one that shrewd organizations and communications executives recognize and respect.

How do you — indeed, do you — try to define “reputational risk” as it affects your organization?

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