Reputational Risk

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• Reputational Risk
• How to Manage for Value Creation
• Arif Zaman
• VI Financial Risk Congress
• Cartagena de Indias, Colombia
• 22 November 2007

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Agenda

• credentials and background
• reputational risk what, why and how
• Colombias reputation

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• Building Blocks
• 1. Why reputation
• management is not enough
• 2. Reputation
• 3. Risk
• 4. Reputational risk and
• customers
• 5. and employees
• 6. and shareholders
• 7. (inter)national relationships and
  responsibilities
• Based on international research
• with companies, investors and
• policy-makers at Henley
• Management College 2001-3.
• Published in 2004 (price 120), an
• FT bestseller and being translated

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experience
research
consultancy
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Thinking and Acting Across Boundaries
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Starting points

• Reputation more than PR
• Risk more than financial
• Reputational risk more than CSR, crisis
  management
• Role of the CEO and the board
• Simple language accessible to people across the
  organisation

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Reputational Risk links with corporate
governance
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What drives what stakeholders expect of corporate
brands?
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The soul of the stakeholder
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What Is Reputation?

• Reputation is a perception of character
• Corporate reputation is how key stakeholders
  perceive that your company or its employees
  behaves

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In todays world, where ideas are increasingly
displacing the physical in the production of
economic value, competition for reputation
becomes a significant driving force, propelling
our economy forward. Manufactured goods often
can be evaluated before the completion of a
transaction. Service providers, on the other
hand, usually can offer only their
reputations. Alan Greenspan, former Chair,
Federal Reserve
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Why Is Reputation Important?

• A strong, positive reputation
• Brings about supportive stakeholder
• behaviour

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How Can You Manage Reputation?

• You dont own or control perceptions of
• others.

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Important Questions

• Reputation for what?
• Reputation with whom?
• Reputation for what purpose?

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Examples of the Drivers of Key Risks
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Building Blocks
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ISO / BSI risk trends review (2006)

• Risk is related to uncertainty
• Risk matters and, if it occurs, will have
  consequences
• Risk management is a process
• People perform risk management
• NB
• 2008 ISO 26000 (CSR)
• 2009 ISO 31000 (risk management)

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Reputational Risk

• The comparison that key stakeholders
• make between how a company or its
• employees are expected to behave and
• how they actually behave.
•  
• Key point reputational risk can therefore
• be positive or negative.

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Reputational Risk and Customers

• Why customer satisfaction alone is not a
  reputation guarantee common misconceptions
• SAB Miller and Bavaria acquisition

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Customer Relationship Mismanagement

• inadequate testing
• poor back office integration
• front-end applications fail to communicate
• lack of departmental integration 70 of
  consumers receive duplicate emailings, generated
  from the same source regularly
• lack of channel integration
• lack of real value for the customer
• sloppy data handling
• failure to see CRM as ongoing
• failure to educate your staff
• long customer response times

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Reputational Risk and Employees
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internal and external reputation
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Shareholders and reputational risk

• investor relationships
• corporate governance, banking and reputational
  risk
• Colombia case studies

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what investors really want (sell-side analysts)

Source All-Europe Research Team Survey (2002)
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At its core corporate governance is about
creating value from the quality of decision-making

• 1. value creation and maintenance
• 2. accountability decisions for whom?
• 3. consensus something that is agreed by more
  than one person
• 4. action corporate governance is about deciding
  as well as debating and moving forward as well as
  reflecting on the past and present
• 5. quality acknowledges increasing importance of
  softer factors

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corporate governance for banking organisations
(Basel Committee on Banking Supervision, February
2006)

• From a banking industry perspective, corporate
  governance
• involves the manner in which the business and
  affairs of
• banks are governed by their boards of directors
  and senior
• management, which affects how they
• Set corporate objectives
• Operate the banks business on a day-to-day
  basis
• Meet the obligation of accountability to their
  shareholders
• and take into account the interests of other
  recognised stakeholders
• Align corporate activities and behaviour with
  the expectation that banks will operate in a safe
  and sound manner, and in compliance with
  applicable laws and regulations
• Protect the interests of depositors

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four important forms of oversight

• 1. oversight by the board of directors or
  supervisory board
• 2. oversight by individuals not involved in the
  day-to-day running of the various business areas
• 3. direct line supervision of different business
  areas
• 4. independent risk management, compliance and
  audit functions. In addition, it is important
  that key personnel are fit and proper for their
  jobs

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Sound corporate governance principles

• Principle 1
• Board members should be qualified for their
  positions,
• have a clear understanding of their role in
  corporate
• governance and be able to exercise sound judgment
• about the affairs of the bank
• Risk management committee - providing oversight
  of
• senior managements activities in managing
  credit,
• market, liquidity, operational, compliance,
  reputational
• and other risks of the bank.

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• Principle 2 The board of directors should
  approve and oversee the banks strategic
  objectives and corporate values that are
  communicated throughout the banking organization
• The banks corporate values should recognise the
  critical importance of timely and frank
  discussion of problems. In this regard, employees
  should be encouraged and able to communicate,
  with adequate corporate protection from reprisal,
  legitimate concerns about illegal, unethical or
  questionable practices. Because such practices
  can have a detrimental impact on a banks
  reputation, it may prove highly beneficial for
  banks to establish a policy setting forth
  adequate procedures, consistent with national
  law, for employees to communicate material and
  bona fide concerns directly or indirectly (e.g.
  through an independent audit or compliance
  process or through an ombudsman) and
  confidentially to the board independent of the
  internal chain of command.

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• Principle 3 The board of directors should set
  and enforce clear lines of responsibility and
  accountability throughout the organisation
• Principle 4 The board should ensure that there
  is appropriate oversight by senior management
  consistent with board policy
• Principle 5 The board and senior management
  should effectively utilise the work conducted by
  the internal audit function, external auditors,
  and internal control functions
• Principle 6 The board should ensure that
  compensation policies and practices are
  consistent with the banks corporate culture,
  long-term objectives and strategy, and control
  environment
• Principle 7 The bank should be governed in a
  transparent manner

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• Principle 8 The board and senior management
  should understand the banks operational
  structure, including where the bank operates in
  jurisdictions, or through structures, that impede
  transparency (i.e. know-your-structure)
• Corporate governance challenges arise where
  banks operate through structures that lack or
  impair transparency. .Operating in such
  jurisdictions or through such structures may,
  however, pose financial, legal, and reputational
  risks to the banking organization
• Banks may also be exposed to risk indirectly
  when they perform certain services or establish
  opaque structures on behalf of customers.in some
  cases customers may use products and activities
  provided by banks to engage in illegal or
  inappropriate activities. This can, in turn, pose
  significant legal and reputational risks to banks
  that provide such services.

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• Banks should only approve complex financial
  structures, instruments or products if the
  material financial, legal and reputational risks
  arising from their use or sale can be properly
  assessed and managed.
• The board and senior management can enhance
  their effectiveness by requiring that internal
  control reviews include not only core banking
  businesses, but also activities conducted in
  jurisdictions, or through structures (either on
  the banks own behalf or on behalf of customers)
  that lack transparency. These reviews should
  include, for instance, regular inspection visits
  by internal auditors and assessment of legal and
  reputational risks arising from those activities
  or structures.
• The board, or senior management consistent with
  guidance from the board, should ensure the bank
  has appropriate policies and procedures to-
• Regularly evaluate the need to operate in
  jurisdictions or through complex structures that
  reduce transparency
• Identify, measure and manage all material risks,
  including legal and reputational risks, arising
  from such activities
• Establish appropriate processes for the approval
  of transactions and new products, especially
  related to such activities (e.g. applicable
  limits, measures to mitigate legal or
  reputational risks)

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Colombia case studies

• Cementos Argos
• Interconexión Eléctrica S.A. E.S.P. (ISA)

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Reputational Risk and Communities

• Corporate Social Responsibility Business
  behaviour that generates the commitment and trust
  of key stakeholders
• President Uribe to the British and Columbian
  Chamber of Commerce, November 2007
• In Colombia, investment, whether private,
  national or international, has all the room it
  needs for growth if it acts with social
  responsibility with transparency in
  state-investor relations, with a commitment to
  the community beyond merely demanded by law.

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corporate social responsibility

• The Board is committed to and promotes corporate
  social responsibility on paper and in practice.
• Local laws and tax rules are followed.
• Stakeholders opinions are taken into account
• There are high labour standards and measures to
  protect the environment coupled with capacity
  building
• economic, social and environmental performance
  and impact, is monitored and reported to the
  public
• There is a high standard of employee training and
  steps aimed at raising awareness of the companys
  responsibility

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What Makes a Good Corporate Citizen?

• How a board runs it affairs Corporate
  Governance
• How a business relates to society - Corporate
  Social Responsibility

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The business stake in conflict reduction

• Anglo-American (Nov. 2007) We have an important
  obligation to play our part in our zone of
  influence to promote human rights, to ensure
  proper control of our security impacts and to
  reduce povertyBritish-based companies can make a
  contribution to peace-building which is
  entirely in line with the objective of corporate
  responsibility.
• Coca Cola and BP case studies
• Redprodepaz Network of Regional Peace and
  Development Programs and the EUs Peace
  Laboratories Initiative

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Reputational Risk methodology the approach
Through market research, being able to measure
the impact of reputational risk is the major
concern. The Reputational Risk Strategy
approach Stage I - Reputational profile and
quantification Stage II - Qualitative
analysis Stage III - Stakeholder validation Stage
IV - Periodic review www.reputationalrisk.co.uk
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Colombias reputation thoughts and
opportunities

• addressing the perception-reality gap and
  information asymmetries
• the 3 Cs
• coffee, cocaine and conflict Colombia 2008?
• curry, cricket and conflict South Asia 2008?
• vs. commerce, creativity and connectivity
• Reputational risk a potential key to
  positioning and performance in the medium term to
  drive increased and better quality FDI and
  portfolio investment
• Role of the banking sector given Operational Risk
  Directive on reputational risk vs. other emerging
  market approaches
• Reputation Institute and Reputational Risk
  Strategy
• British and Columbian Chamber of Commerce
  opportunities including Business and Social
  Awards
• Inward investment from key Commonwealth markets
  eg. South Africa, India and Malaysia

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Key messages and takeaways

• To manage reputational risk, you need to have a
  deeper understanding of reputation and risk
• Reputational risk is about managing key
  stakeholder expectations, linking it at its core
  processes to corporate governance and applying a
  consistent approach across customers, employees,
  investors and communities
• Colombias (business) reputation can be enhanced
  by a better understanding of reputational risk
  especially given increasing investor interest and
  the proactive approach of Asobancaria