Stakeholders and Reputational Risk

Your reputation and your organisation’s reputation are valuable assets that need nurturing. The willingness of others to trust you, their desire to work with you and virtually every other aspect of the relationship between you and your stakeholders is influenced by their perception of your reputation (see more on The value of trust).  But reputations are fragile: they can take a lifetime to build and seconds to lose.  Some of the factors influencing them are:

1. Reputation cannot be controlled: it exists in the minds of others so it can only be influenced, not managed directly.
2. Reputation is earned: trust is based on consistent behaviour and performance.
3. Reputation is not consistent: it depends on each stakeholder’s view. One organisation can have many different reputations, varying with each stakeholder.
4. Reputation will vary: each stakeholder brings a different expectation of behaviour or performance and so will have a distinct perception of reputation.
5. Reputation is relational: you have a reputation with someone for something. The key question is therefore: ‘with whom, for what?’
6. Reputation is comparative: it is valued in comparison to what a particular stakeholder experiences or believes in relation to peers, performance and prejudice.
7. Reputation is valuable: but the true value of reputation can only be appreciated once it is lost or damaged.

Estimating the ‘true value’ of your reputation is difficult and as a consequence decisions on how much to invest in enhancing and protecting your reputation becomes a value judgment rather than a calculation. Your reputation is created and threatened by both your actions and their consequences (intended or not).  Some actions and their effects on your reputation are predictable, others are less so and their consequences, good or bad are even less certain. This is true regardless of your intention; unexpected outcomes can easily cause unintended benefit or damage to your reputation.

Building a reputation requires hard work and consistency; the challenge is protecting your hard earned reputation against risks that can cause damage; and you never know for sure what will cause reputational damage until it is too late – many reputational risks are emergent.

Managing Reputational Risk in Organisations

Because an organisation’s reputation is not easy to value or protect, managing reputational risk is difficult! This is particularly true for larger organisations where thousands of different interactions between staff and stakeholders are occurring daily.

The first step in managing an organisation’s reputational risk is to understand the scope of possible damage, as well as potential sources and the degree of possible disruption. The consequence of a loss of reputation is always the withdrawing of stakeholder support:

• In the private sector this is usually investor flight and share value decline; these can spiral out of control if confidence cannot be restored.
• In the public sector this is typically withdrawal of government support to reflect declining confidence.
• In the professional sector client confidence is vital for business sustainability; a loss of reputation means a loss of clients.

Each sector can point to scenarios where the impact of reputation damage can vary from mild to catastrophic; and whilst the consequences can be measured after the effect they are not always predictable in advance.  To overcome this problem, managing reputation risk for an organisation requires three steps:

• Predict: All risk is future uncertainty, and an appropriate risk forecasting system to identify reputation risk is required – creative thinking is needed here! The outcomes from a reputational risk workshop will be specific to the organisation and the information must feed directly into the governance process if reputation risk is to be taken seriously (see more on The Functions of Governance).
• Prepare: Reputation risk is a collective responsibility, not just the governing body’s. All management and operational staff must recognise the organisation’s reputation is important and take responsibility for protecting it in their interaction with stakeholders. The protection of reputation should also be a key element in the organisation’s disaster recovery plans.
• Protect: A regular vulnerability review will reveal where reputation risk is greatest, and guide actions to prevent possible damage. Each vulnerability must be assessed objectively and actions taken to minimise exposure. Significant risks will need a ‘protection plan’ developed and then implemented and monitored.

Dealing with a Reputational Risk Event

When a risk event occurs, some standard elements needs to be part of the response for individuals and organisations alike. For reputation enhancing risk events, make sure you acknowledge the ‘good luck’ in an appropriately and take advantage of the opportunity in a suitably authentic way. Over-hyping an event will be seen as unauthentic and have a negative effect on reputation; but good news and good outcomes should be celebrated. Reputation threatening risk events need a more proactive approach

• Step 1: Deal with the event itself. You will not protect your reputation by trying to hide the bad news or ignoring the issue.  Proactively work to solve the problem in a way that genuinely minimise harm for as many stakeholders as possible minimises the damage that has to be managed.
• Step 2: Communicate. And keep communicating – organisations need to have a sufficiently senior person available quickly as the contact point and keep the ‘news’ coming. Rumours and creative reporting will always be worse then the fact and will grow to fill the void. All communication needs to be open, honest and as complete as possible at the time.  Where you ‘don’t know’ tell people what you are doing to find out. (see Integrity is the key to delivering bad news successfully).
• Keep your promises and commitments. If this becomes impossible because of changing circumstances tell people as soon as you know, don’t wait for them to find out.
• Follow up afterwards. Actions that show you really care after the event can go a long way towards repairing the damage to your reputation.

Summary

Reputation is ephemeral and a good reputation is difficult to create and maintain. Warren Buffet in his 2015 memo to his top management team in Berkshire Hathaway emphasised that their top priority must be to ‘zealously guard Berkshire’s reputation’. He also reminded his leadership team that ‘we can afford to lose money–even a lot of money. But we can’t afford to lose reputation–even a shred of reputation’ (discussed in Ethics, Culture, Rules and Governance). In the long run I would suggest this is true for every organisation and individual – your reputation is always in the minds of other people!

The Value of Trust

Trust is a key element in the effective management of project teams and contracts. Trust speeds everything up and lowers costs but you have to continuously demonstrate you are completely trustworthy or people will quickly lose confidence in you. As the level of trust goes down, the speed of doing business goes down and costs go up. When levels of trust are low, or distrust exists, relationships and communications are ineffective and everything has to be proved or validated.

Balancing the cost of validation, checking and supporting legal documentation, the requirements of no trust, against the speed and cost effectiveness of trusting the information and actions of others is an interesting dilemma. How much is enough to pay for the lack of trust? Where are the pragmatic limits??

Temporary organisations such as project teams (particularly virtual teams), where people are brought together to complete a given task that requires a high degree of collaboration, within tight timescales and with a high cost of failure don’t have time to allow trust to develop naturally. They have to work out their differences on the fly and blindly trust one another to do their jobs. This is ‘swift trust’ and can be a powerful force but it is fragile and easily broken.

In other places a reputation for integrity and trustworthiness can be established and may pay dividends.

We are working on a White Paper looking at the role of trust within projects. Any thoughts of comments will be welcome. Previous White papers can be downloaded from http://www.mosaicprojects.com.au/WhitePapers.html