Every two years, British insurance brokerage Aon surveys the U.K.’s top 2000 public and private sector organizations about their risk management strategies. In 1995 and 1997, fire was considered the greatest risk, while risk to corporate reputation didn’t even make the top 10. In 1999, business interruption was considered the greatest risk, and reputation risk made its debut on the list at number four. This year, in an indication of how seriously senior executives are beginning to take corporate reputation management, reputation risk was the number one concern of executives.
Aon believes the growing concern about reputation risk arises out of the rapid changes taking place in the global business environment, ranging from mergers and consolidation to the growing impact of the Internet. (The second greatest concern of executives surveyed this year was that their companies were failing to change fast enough to stay ahead of or keep up with their competition.)
These factors and others have led a significant number of executives to recognize the very real value of “soft” assets such as reputation, the company says.
“Either directly or indirectly, the majority of every organization’s value is made up of reputation,” says Deborah Durkin, managing director of client service in Aon’s corporate division. “Brands alone can be valued in millions or even billions of pounds. Most other intangible assets—skills, knowledge, know-how, strategic alliances, relationships—are interdependent with an organization's reputation.”
Yet despite growing concern among U.K. companies about the threats to their reputations, the survey also found that only 21 percent have quantified their brand value or reputation in financial terms. According to Aon, “Companies are failing to determine the value of intangibles at risk, even though they comprise a greater percentage of most companies’ net worth today.” Indeed, the company estimates that physical assets now represent less than 25 percent of the net worth of most companies—down from 75 percent a decade ago.
According to Jo Macdonald, director of Aon’s business risk consulting practice in London, the finding that managers are concerned about reputation risk is entirely consistent with the outcomes of strategic risk assessment exercises that Aon has conducted for clients. Aon’s Reputation Risk Managament process is designed to minimize the risk of reputational crisis and to minimize the potential damage if a crisis should occur.
According to Aon, “The insurance industry, and most of the risk management specialists that feed off it, have long promoted the idea that reputation risk is triggered by catastrophic events that happen despite the organization’s best efforts,” such as product contamination or product contamination. But in reality, the group says, the majority of reputation risk arises not because of uncontrollable external forces but rather because of organizational behavior and management failure.
It cites examples such as the well-publicized case of Royal Bank of Scotland, which entered into a strategic alliance with American televangelist—and fringe presidential candidate—Pat Robertson and then lost both private and commercial customers after Robertson charged on air that Scotland was too tolerant of homosexuals.
“There are two apparent common denominators in all of these, and in the many more instances of reputation damage that are in the public domain,” Aon says. “The first is a lack of awareness of the potential importance of the organization's reputation; the second is that no person, or group of people, ‘owned’ the organization's reputation risk and were thus empowered to protect it. Just having a public relations function does not qualify as PR people have little influence over the causes of reputation damage and yet are expected to perform the impossible if it all goes wrong.”