Reputational Risk: Don’t Pull a Tiger Woods

In the past year, it has become blaringly obvious how important a company’s reputation is to their bottom line. With situations like the BP oil spill, Toyota’s incident with faulty brakes and the whole Tiger Woods scandal, we have seen why companies need plans in place to protect their reputations in the wake of a crisis. One incident (albeit large incidents in the previous examples) can alter a company’s entire image in a negative way. The same damaging incidents can also happen within financial services firms.

The term “reputational risk” has been thrown around a lot in the past couple years as something financial firms should include as part of their risk management plan. Jonathan Howitt of The Man Group recently stressed that reputational risk is “every person in the institution doing their job professionally, diligently and making sure it is as error free as possible.” He also goes on to say that reputational risk is very closely tied to operational risk. He feels that prevention tactics and having processes in place is a necessity for all firms. And with such a close eye on operational risk at the moment, this must be a hot issue, right? But in actuality, I don’t think many firms in the industry have actual concrete plans in place to manage their reputational risk. From what I have been reading lately, I think many firms within the industry are aware and continually working on their business continuity plans in case of a disaster or need to work off-site. Though, at the end of the day, you just don’t hear as much concern about reputational risk. I could be wrong, but according to a survey conducted by Airmic, an association for insurance and risk managers, 80% of those who took part in the poll claimed that reputational risk is their top concern, but only 43% said they have plans in place to deal with it.

You would think in a time when firms are just digging themselves out of the financial crisis and can see how important trust is to their clients, that reputational risk would be on the top of their to do lists! Maybe this is something everyone should keep an eye out for in 2011. Let’s just hope it doesn’t take another crisis for everyone to see the importance a company’s reputation has on their whole business model.

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