Protecting Shareholder Value and Corporate Reputation

An organizations’ brand and reputation form part of the most valuable assets that need to be preserved for the business to continue enjoying its success. Building a much coveted brand name and a positive reputation within your industry or niche is not an easy task that is completed overnight. It takes years of hard work involving customer relationship management and offering a product ladder that meets your customer’s needs and wants. However, losing the fruits of all that hard work can happen overnight. As Warren Buffet puts it……” It takes a lifetime to build a reputation and only 15 minutes to destroy it.”

Many organizations have fallen victim of crises because they were caught unaware resulting in loss of shareholder value and a bad tarnish to their business image. Some have been forced completely out of business. Lessons can be learnt from the recent events in the Gulf of Mexico where an oil drill rig operated by British Petroleum (BP) Company exploded on April 20, 2010 killing 11 people, injuring 17 others and causing a massive oil spill which has become the largest accidental marine oil spill in the history of the petroleum industry.

There has been different estimates by various analysts of the final total costs to BP all of them amounting to billions of dollars. Between April 20, the date of the explosion and July 15, the date the spill was contained, investors saw their shareholding tumble by over 50%.

Another case in point is that of Tiger Woods who saw his personal branding deteriorate in value after being exposed for extramarital affairs.

Several organisations that had sponsored and endorsed him for years immediately severed ties with him. This whole affair has had a negative impact on his performance on the golf course as evidenced by his recent poor results. Whether Tiger Woods will be able to make a fully fledged come back or not, nobody really knows. Only time will tell.

Indeed, it is difficult to accurately predict when the next crisis will strike and its severity. However, this does not mean managers should take a nap and wait for one to come knocking at their doors to wake them up. Crisis Management is all about being proactive and not reactive.

So how can organizations identify their key risks, minimize the likelihood of them happening but also be best prepared to react effectively when things do go wrong?

In a white paper by Strategic Thought Group, Protecting Shareholder Value and Corporate Reputation with Effective Risk Management, the authors explain what risk management involves and the steps that organizations should follow. The authors argue that:

# Risk management is not a box-ticking process. It is about identifying and capturing the risks on a system that allows visibility from anywhere in the world, and evaluating those risks using both quantitative and qualitative measures. Evaluating the risks is key to establishing whether the probability of loss is high or low and also what is at stake.

# The organization should have clear sight of the risks which could severely damage or even stop the business operating. Managers should be asking questions like……“What is the worst that could happen……..”Are we prepared for the worst?” thereby allowing assumptions to be challenged all the time as the conditions change during the course of the business.

# A risk and opportunity awareness culture should be created. This is achieved by having risk champions within the organization who are responsible for communicating all the risk matters to employees. By doing so, it allows risks and opportunities to be recorded, assessed and dealt with accordingly.

# The risk appetite of the organisation should be clearly defined at board level and cascaded down to employees. The business and the shareholders also need to agree on the acceptable level of risks. As the global financial crisis has shown, there was no agreed acceptable levels of risk between the banks and their shareholders. As a result, banks took huge bets on investments using shareholders’ funds resulting in excessive losses on sub-prime mortgage investments.

# Decisions on risk management should be evidence-based backed by sound information hence the need to have an enterprise-wide single system where information can be stored at the same time allowing greater transparency and easier decision making.

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3 Comments

  • By Gary Cokins, September 8, 2010 @ 11:13 pm

    Peter,

    First, thank you for referencing my blogs. I don’t think I am all that smart, but I am a careful observer of what I get to see in my job.

    Next, I believe that you are on target seeing the tight integration between risk and performance management. They appear to both be complex topics, but software tools can integrate their impact on each.

    Feel free to communicate with me.

    Gary

    Gary Cokins, SAS

  • By Peter Chisambara, September 9, 2010 @ 8:04 am

    Gary, I’m so glad to see you drop by and leave your first comment here. I agree that we are now on target to see both worlds of risk management and performance work together to achieve organizational goals. This recent recent global financial crisis has taught various organizations that you cannot focus on one and ignore the other. The two are both sides of the same coin.Whereas in the past managers focused mostly on the development of KPIs and Critical Success Factors (CSFs) ignoring the most important risk factors, we now see quite a number of them question the viability of their business strategies. They are now starting to ask questions like, “What are the highest threats to our strategies?” Like you said, the two are complex fields, but technological advancement is making it easier to integrate the two.

    Gary has authored a book: Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics. A very valuable resource for those who want to get great insights on how to integrate performance management and risk management. The book is a great read.

  • By Caroline Eveleigh, September 9, 2010 @ 12:57 pm

    Hi Peter – love your blog. Interesting thoughts on the value of brands – coicidentally I was thinking and blogging about this only today!

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