Corporate Social Responsibility and Reputation Risk Analysis Mario Testa PhD student in Marketing University of Salerno, Faculty of Economics, Business Research and ...
Text Previews (text result may be not accurate) Corporate Social Responsibility and Reputation Risk
Analysis
Mario Testa
PhD student in Marketing
University of Salerno, Faculty of Economics, Busine
ss Research and Studies Department
Via Ponte Don Melillo, 84084 Fisciano, Salerno, Ita
ly
mtesta@unisa.it
1. CSR: Key issues and Total Responsibility Management approach
The trend for better corporate governance and accountability has f
ocused attention on the
responsibilities an organization has not only towards all its st
akeholder groups but also to the
environment and society in which it operates.
In the last two decades the business community has concentrated on
more and more transparency.
This new trend for greater organisational accountability is the
result of a growing demand for
improved information on how organizations conduct their business in the curre
nt complex socio-
economic context. Companies are amongst the most powerful social
and economic institutions of
modern society and, recently, their role has taken on more widespread
functions, surpassing the
traditional ones to include those belonging to the social and ethical profile.
The theme of Corporate Social Responsibility (CSR), and its inte
rnal and external communication,
has been the centre of debates since the Sixties, above all in the
United States. Only recently, due
to increased pressure from stakeholders, has it taken place on a wider scale.
The concept of Corporate Social Responsibility, requested by an increa
sing number of international
institutions – including the World Economic Forum and the World Business Counc
il for
Sustainable Development – is gradually becoming widespread in compani
es, adopting ethical
influences in strategy decisions. The main aspects connected to a
company’s ethical responsibility
within the European Union, have been highlighted in 2001 by the European Commiss
ion’s Green
Paper “Promoting a European Framework for Corporate Social Responsi
bility”. Following this
publication CSR can be defined as a concept whereby “companies int
egrate social and
environmental concerns in their daily business operations and their int
eraction with their
stakeholders on a voluntary basis”. It is important to underline that being sociall
y responsible means
not only complying with relevant legislation, but also going beyond compl
iance and investing more
than required into human capital, environment and relations with stakeholders
At present, the approach to an enhanced sustainability is based upon the
integration of a series of
objectives which not only include those connected to economic performance
, but also those which
are ethically-socially and environmentally linked. Obviously, each or
ganization is involved in CSR
in its own way, depending not only on its core competences, resources a
nd stakeholders’ interests,
but also on the culture and traditions of the area where the enterpr
ise is located (Palazzi M.,
Starcher G., 2001).
This approach, known as
Triple Bottom Line
and represented by Sustainability Reports and/or by
Social Reports, is part of “wider values” determined by social
and economic values for all
stakeholders, through the progressive expansion of social responsibility
contents from the inside of
an organization to the external environment (Testa M., 2004). An outline of
this kind has led to a
wide array of standards, guide lines and codes of conduct promoted b
y both the companies
themselves as well as important international organisms. The centr
al aim is to establish suitable
tools for the diffusion of social-ethical management principles.
Therefore, the set of interdependent managerial tools and practices
can be referred, in their whole,
to a
modus
operandi
that can be identified as
Total Responsibility Management
(TRM) (Gatti M.,
Testa M., 2003). It can be seen as a systemic approach to the manag
ement of a company’s
Practically, CSR builds on compliance with the leg
islative framework, which differs between countries
, but focuses on
the additional contributions from enterprises to me
et societal expectations.
relationships with its key stakeholders and its treatment of the na
tural and social environment. TRM
is built on widely-agreed upon foundation of values and three main eleme
nts can be identified
(Waddock S., Bodwell C., 2002):
vision setting and leadership system;
integration of responsibility into strategies and practices;
assessment, improvement and learning systems.
This approach is based on an integrated system used to address rel
iability; in fact, monitoring,
improving and measuring performance helps companies maximize c
ompetitive success just as the
Total Quality Management
(TQM) approach has done for quality in the past. Building TRM
approaches requires a foundation of generally agreed values, such as t
hose outlined by the
International Labour Organization conventions on labour and human rights or the
principles of the
United Nation’s Global Compact which provide a broad guidance on ecologic
al and social issues
too.
However, as they also recognize a basic individuality of compan
y vision, strategies and
commitments, governance implementing TRM develops company specific
approaches to
responsible management that provide a framework to guide managers, wit
hout placing unnecessary
constraints on their activities.
A clear vision on corporate responsibility from top management and well-artic
ulated guiding core
values that support the vision (Waddock S., Bodwell C., 2002) are necessary.
An example of a
comprehensive model for business ethics programmes is provided by th
e “Ten point program for
implementing values driven management” by Driscoll and Hoffman (Dr
iscoll D.M., Hoffman
W.M., 2000). The two authors identify the following key elements for the
successful development
of any corporate values initiative: Self assessment; Commitme
nt from the top; Code of ethics;
Communication; Training; Resources; Organizational ownership; Consiste
nt standards and
enforcement; Audits and evaluation; Revision and reform.
Responsibility depends on the perspective of the particular stakeholder
whose interests are under
consideration. Consequently, responsibility management involves a process
of meetings and
dialogues with relevant stakeholders in order to establish a set of
decision processes or results. As
responsibility is defined by its impacts and how these are perc
eived by different stakeholders,
companies need to know how well they are doing with respect to those different stakehold
ers.
Determination of responsibility requires a measurement and assessment s
ystem that provides a basis
of understanding and information for internal stakeholders, like employees
, and external
stakeholders that hold a company accountable for its actions and their
outcomes. This level of
accountability implies the need for the integration of responsibili
ty into strategies and the operating
practices used to carrying out those strategies. It also implies a corres
ponding need for improvement
and learning systems, built on feedback from holistic measurement
systems, so when problems
occur steps can be taken to improve the situation (Waddock S., Bodwell C., 2001).
As these are the main issues of CSR vision, the TRM can be seen
as a very important approach in
establishing management based on CSR values.
2. Reputation drivers: opportunities and threats
Generally
companies consider implementing responsibility systems too expensive
and besides they
can even lead to a number of disadvantages compared to their competit
ors. In fact, the cognitive
assumption is that higher levels of responsibility will add to unrecove
rable costs, because the costs
related to an irresponsible corporate behaviour are often hidden or unrecog
nised, while the apparent
benefits of cutting corners sometimes seem obvious.
It is easy to understand that the respect for the general inte
rest profiles, of safeguarding the
environment and of fairness in business – reached through the implementa
tion of TRM – entail
costs for the company from which its benefits are only visible in
the long run as well as being
difficult to measure. The TRM does not directly have an impact
on the company’s financial
performance, but can mitigate the risk of reputation losses and aff
ect intangible assets (Fonbrun
C.J., 1996).
Managers generate
reputation gains
that improve a company’s opportunities to attract resources,
enhance its performance and build competitive advantage (Fonbrun C.J., Vindova R., 1999).
Reputation determines how stakeholders are likely to behave towards an
organization. It can
influence investors’ decision to hold its shares, consumers’ and supplier
s’ willingness to buy from
or sell to it, the extent and nature of media and pressure group attenti
on, potential recruits’
eagerness to join it and existing employees’ motivation to stay
The interaction between company and stakeholders can increase or reduc
e its reputation capital and
therefore affect the risk of threats and the opportunity platform (fig. 1).
Figure 1:
Reputation Risk Management Virtuous Cycle
Adapted from Fombrun, Gardberg, Barnett, 2000
Risks to reputation can arise from many sources, but seven main drive
rs of reputation are (Rayner
J., 2001):
Financial performance
The financial results indicate whether the company strategy
is competitive and investors are
confident that their investments will continue to reap returns.
Corporate governance and quality of management
;
Corporate Governance can be defined as a series of rules, mechanisms
and processes generated by
the interaction between the different entities on various instituti
onal levels, in order to guarantee the
interests of those who operate around and within the company in an equal
and satisfactory way,
with respect to both the organisation’s survival conditions as well as
the widespread values
generally shared by the original collective (Gatti M, Dell
a Piana B., Testa M., 2005). Displaying
good corporate governance is a major contributor to reputation and to marke
t valuation. Obviously
an effective corporate governance and a correct interpretation of the
relations between its
components derive, mainly, from the quality of the leadership.
Dr Kim Howells (Minister for Corporate Social Resp
onsibility) has said: “…the best companies, large o
r small,
recognise that the corporate reputation is now a vi
tal element in business success. Companies are expo
sed to greater
public scrutiny, and the information revolution mea
ns that the consumers are able to take a much wider
range of choices
into account when making purchasing decisions”. Quo
ted in the foreword to the Institute of Chartered A
ccountants of
England and Wales (ICAEW) publication “Human Capita
l and Corporate Reputation: Setting the Boardroom A
genda”,
June 2000.
Reputation
Capital
Risk
Reduction
Oppor
tunity
Platform
Corporate
Performance
Total
Responsibility
Management
Social, ethical and environmental performances
;
Nowadays, the many different types of stakeholder are much m
ore sensitive to social and
environmental problems than in the past. Organisations therefore have
to try to follow socially
orientated aims, ranging from the protection of the environment as
well the worker’s rights, in order
to make the economical rule fit the social one.
Employees and culture
;
Stakeholders’ interest in an organization’s human capital is leading
them to demand information on
the kind of people employed in the organization, their diversity, their ski
lls, their training
programmes, their motivation and attitude to their employer, their re
muneration, staff retention
levels and recruiting processes and,
in primis
, the characteristics of the organizational culture.
Marketing, innovation and customer relations
;
Responsibility management involves a process of meetings and dialog
ues with relevant
stakeholders in order to reach agreements on a set of decisions on proce
sses and results. By new
processes and innovative goods the companies can obtain their competitive
advantage and by
customer satisfaction and good faith in all agreements they have the opportunity to m
aintain it.
Regulatory compliance and litigation
;
Not complying with relevant laws and regulations is one of the ma
in risks for both small and large
companies: the violation of the laws or internal corporate regulati
ons can imply serious losses of
profit as well as bad consequences for company image.
Communication and crisis management
;
Some organizations are now introducing early warning systems to i
dentify and manage events
which may lead to crises, so corrective policies, and pertinent com
munication actions, can be taken
before company reputation is damaged.
All these factors contribute to create reputation capital. This is the fluct
uation of company value and
can be calculated as the market value of the company in exces
s of its liquidation value and its
intellectual capital (Fombrun, C.J., Gardberg N.A., Barnett M.L., 2000).
Reputation is not only an indicator of past performance, but a future prom
ise and having a good
reputation means to have many opportunities and benefits, including (Rayner J., 2001):
Attracting investors and securing capital at lower cost;
Attracting customers and creating consumer loyalty;
Commanding a premium for products and services;
Recruiting and retaining high quality employees;
Creating barriers to entry for potential competitors;
Providing an edge in competitive markets.
Instead, the costs deriving from not having a TRM do not represent t
he actual monetary outgoings,
but can be identified costs from the loss of profits and this theref
ore justifies the non adoption of
responsible choices by any organizations (fig 2).
Figure 2:
Managing the downside of Reputation Risk and Threats of Costing
Adapted from Fombrun, Gardberg, Barnett, 2000
It is now generally believed that the social-environmental aspe
cts of the organisation’s activity
represent factors that are relative to its survival and ability
to compete. The actual choice of
adopting a TRM will only be possible when the risks from an irres
ponsible management do not
become unbearable for the organisation.
3. Managing Reputation Risk
Managing reputation risk means to consider the current and prospective
impacts on earnings
deriving from negative public opinion. Obviously, risks cannot be completely
eliminated from
company activities, but managers have to try to manage the economi
c and social threats in order to
reduce the negative consequences deriving from it.
Reputation Risk Management process is formed by two different but contextual approa
ches:
- Improving the corporate image by univocal and disclosed behaviors (i.e.
strategic options
which take the relevant stakeholders and their aims into considera
tion, sustainability
policies, corporate giving, cause related marketing, etc) and through communicati
on;
- Controlling and auditing several company project activities.
Regarding the first point, corporate image refers to how a corpora
te is perceived. It is generally an
accepted image of what a company "stands for". The creation of a
corporate image is an exercise in
perception management. It is created by institutional and marketin
g communication, but primarily
by what the companies do.
The experience of numerous companies has clearly demonstrated tha
t being inattentive towards
company expectations, or moreover betraying corporate image
, aiming at exclusively
communicating the environmentalist, altruistic and philanthropical “faça
de”, generates amplified
negative consequences, which hit the organization with growing force.
“(…) per
corporate image
deve intendersi come l’organizzazione viene percep
ita, in un dato momento, dai pubblici
esterni” Siano A.,
Comunicazione d’impresa
, Giuffrè, Milano, 2001, 130; besides see.Margulies
W.P, “Make the most
of your corporate image”, in Harvard Business Revie
w, 55, 1977.
Reputation
Risk
Media
Investors
Employees
Partners
Customers
Regulators
Community
Activists
Threat of
Boycott
Threat of
Illegitimacy
Threat of
Disinvestment
Threat of
Rogue
Behavior
Threat of Bad
Exposure
Threat of
Defection
Threat of
Lagal Action
Threat of
Volatility
The second point is highlighted by the development of
risk culture
. In fact, the management should
individualize all company projects and activities that can conditi
on the reputation of the company
and manage the possible risks.
Synthetically, the Reputation Risk Management is recognized as a
n integral part of good
management practice, based on an interactive process consisting i
n the following steps, which,
undertaken in sequence, continually improve decision making. The main steps are (fig
3):
- Risk identification
- Risk assessment
- Risk treatment
- Monitoring and reporting
- Risk Management review
Figure 3
Steps and tools in Risk Management
Risk Identification
For each project the manager has to follow a wide array of s
teps, starting from a systematic
analysis of the technologies, production methods, details of the contr
act, social and environmental
effects, etc. This study must group together all the units involve
d. This can be achieved through
discussions, interactive workshops, interviews, questionnaires, brainstorming ses
sions, etc.
The risk can be identified by a description of the problem and the
units involved in the possible
effects, creating a Risk Breakdown Structure (RBS), which under
lines all the linkages between the
risks.
Two different methods can be adopted to build an RBS :
- Top Down – identification of an “ aggregated” risk (mask risk) whic
h can be declined into
more elementary risks, but due to its “togetherness” nature it
cannot be exclusively
perceived by the Risk Manager.
- Bottom Up - the risks are denounced to the Risk Manager, by the dif
ferent functions which
participate in programs/projects, in relation to the concrete
possibility that an event at risk
can manifest itself.
Risk Identification
Monitoring and reporting
Risk Assessment
Risk treatment
Steps
Tools
Priority list of the
risk
Main Risk Factor
Plans to mitigate
the risk
Balanced Scorecard
and reports
Risk management review
Adjustament actions
Useful techniques for identifying reputation risk and describing caus
es, events and consequences,
include:
- Upper system analysis (Golinelli G.M., 2005): once conflicts are
identified between
expectations and delivery capability, the board must decide how to res
olve those conflicts -
by ensuring that it meets stakeholders expectations, or that it
modifies its promises, or by a
combination of the two.
- SWOT analysis: the threats can reveal risks to reputation a
nd opportunities can reveal
potential levers to enhance reputation.
Risk Assessment
The goal of this phase is to set the risks in order of importance.
Reputation risk can be regarded as
an impact or consequence of other risks or it can itself be a s
ource of risk. Therefore some
organizations manage reputation by scoring the reputation impact of oth
er risks or consider the
reputation as a category of risk in itself.
Usually qualitative tools are used and each risk can be measured by helpful technique
s:
- PEST analysis, that is an evaluation of the political, economic, s
ocial and technological
influences;
- Review future regulatory changes;
- Sustainability Balanced Scorecard, that helps to monitor all mai
n risks by integrating them
into Key Performance Measures (KPMs) (Metallo G., Cuomo M.T., Testa
M., 2004);
- Risk matrix (Likelihood/Consequences).
An estimation of the risk can be achieved by Risk Factor, which der
ives from the following
relation: Likelihood that it will happen x Consequences for the company.
Risk treatment
Risk treatment according to the ISO is the "treatment process
of selection and implementation of
measures to modify risk [ISO Guide 73]"
. Before implementing risk treatments a company has to
analyze the possibility and capacity to manage the risk, the costs
to eliminate or reduce it and the
probable benefits that can derive from it. Considering this, the compan
y can then decide if the risk
can be:
- Eliminated or avoided;
- Reduced;
- Transferred to the future or to other units;
- Accepted.
After choosing how to face the risk it necessary to identify the options which could
be used to treat
the risks, select the best option in terms of its feasibility a
nd cost effectiveness, preparing a risk
treatment plan and implementing the risk treatment plan.
Monitoring and reporting
Reputation risk monitoring and reporting provide management and the boar
d with assurance that
established controls are functioning properly.
Management should regularly monitor the corporate reputation and the r
isks from its activity –
whether centralized or decentralized at business lines, support functi
ons, affiliates, or business
partners – to ensure the vitality of the system and achieving the
desired results predicted Effective
monitoring and reporting help to inform the management and to identif
y in advance the future
successful processes.
Risk Management Review
This is one of the most important phases, as it analyses the posi
tive or negative results obtained, in
order to take the correct and appropriate actions.
These phases will be set and overseen by the Risk Manager, whose ta
sk is to guarantee that the
system works well, that the risk team is effective, the trea
tments are appropriate and fast, the
It is only by the active participation of an inter
national organization, as ISO, that a common risk
management
language for those who are interested in the manage
ment of the risk as an integral component of effec
tive corporate
governance will be reached.
evaluation report is transmitted. Besides he checks the effecti
veness and the costs of corrective
actions, suggests strategies to the board and assigns a Risk Owner in case of a high
risk factor.
4. Conclusion
In recent times there has been a paradigm shift in many e
conomies, particularly in the way
corporate governance, business ethics, risk management and compliance
are approached.
It is a shift that continues to be driven by demanding performance e
xpectations, increasing
stakeholder demands and growing public scrutiny after some spectac
ular failures around the globe.
Potentially, this is a highly positive development. An investment to
reduce the risk places a
premium on solid performing businesses that are well-managed, confer
ring a competitive advantage
on businesses that create and maintain a culture of “integrity-driven performanc
e”.
Currently, a good strategy is not effective if the corporate has a
bad image. Today, reputation is one
of the most important corporate assets and it is also one of the most difficult to prote
ct.
The measurement of the reputation level, which is at the base of
the pertinent social consent, has to
permeate
ex ante
ideation and evaluation of the strategic options.
Adopting strategic decisions is the combined effect of managerial
processes and socio-cultural
influences that are placed inside and outside the entrepreneurial orga
nization, between numerous
systems that have diverging interests.
With regards this, it is interesting to highlight that even in an
analytical-formal approach, based on
addressed and guided instruments, often the fundamental decisions and stra
tegic options appear
modeled by experience, cognitive processes, and the ability to re
cognize and interpret timely
marks of change from the outside as well as from those inclined towards recognizing t
he risk.
So, only the enlightened managers that take care of reputation risk w
ill obtain a positive corporate
image, transforming the threats in opportunities and the costs in
probable gains .But before
identifying a risk system, it is necessary that a culture
in all the entrepreneurs oriented to the
Corporate Reputation exists, as well having managers communicatin
g their own philanthropic
activities.
The behaviors based on the adoption of own business cultural values and a cl
ear vision of the
purposes of the enterprise, engrave a strong coherence to the actions unde
rtaken in the course of
time orienting the direction of future conduct. From this point of view r
eputation represents a
promise of reliability.
This new awareness should contribute to improve not only the control proce
sses but the ideation
and implementation phases, in order to consciously plan and achieve busines
s goals, improve
performance, satisfy stakeholders, increase effective exploita
tion of new opportunities and good
corporate governance.
Bibliography
Driscoll D.M., Hoffman W.M.,
Ethics Matters
, Center for Business Rthics, Bentley College,
Waltham, Massachusetts, 2000.
Fombrun, C.J., Gardberg N.A.,Barnett M.L., “Opportunity Platforms and S
afety Nets: Corporate
Citizenship and Reputational Risk”,
Business and Society Review
, 105:1, 2000, 85-106.
Fonbrun C.J., Reputation: realizing Value from the Corporate Image, Har
vard Business School
Press, Boston, 1996.
Fonbrun C.J., Vindova R., “Fanning the Flames: Corporate reputation as Social
Construction of
Performance”, in Porac J., Ventresca M.,
The Social Construction of Industries and Markets
,
Oxford University Press, New York, 1999.
Gatti M, B. Della Piana B., Testa M.,
The ineffectiveness of the corporate governance system. An
empirical example: The Parmalat Case
, the
\b\t\n \f \r\r
\t !"# $%%"&
Gatti M., Testa M.,
A new approach in Company Stategy: Total Responsibility Management
, 8
th
World Congress for Total Quality Management, Dubai, 2003.
Golinelli G..M.,
L’approccio sistemico al governo dell’impresa
, Cedam, Padova, II ed., 2005.
Margulies W.P., “Make the most of your corporate image”,
Harvard Business Review
Metallo G., Cuomo M.T., Testa M.,
Social Responsibility in energetic companies. A possible
approach: the ethical costs analysis
, 19th World Energy Council Congress, Sydney, Australia,
Palazzi M., Starcher G.,
Corporate Social Responsibility and Business Success
http://www.ebbf.org
, (Dec 2001).
Rayner J., Risky
business. Toward best practice in Managing Reputation Risk
, Institute of Business
Ethics, London, 2001.
Siano A.,
Comunicazione d’impresa
, Giuffrè, Milano, 2001, 130.
Testa M., “La sorveglianza”, edited by Pellicano M.,
Il governo strategico dell’impresa
,
Giappichelli, Torino, 2004.
Waddock S., Bodwell C., “From TQM to TRM. Total Responsibility Approache
s”,
The Journal of
Corporate Citizenship
, autumn 2002.
Waddock S., Bodwell C.,
Total Responsibility Management (TRM): An Emerging Business
Imperative
, ILO Working Paper; Geneva, July, 2001
.
Corporate Social Responsibility and Reputation Risk
Analysis
Mario Testa
PhD student in Marketing
University of Salerno, Faculty of Economics, Busine
ss Research and Studies Department
Via Ponte Don Melillo, 84084 Fisciano, Salerno, Ita
ly
mtesta@unisa.it
1. CSR: Key issues and Total Responsibility Management approach
The trend for better corporate governance and accountability has f
ocused attention on the
responsibilities an organization has not only towards all its st
akeholder groups but also to the
environment and society in which it operates.
In the last two decades the business community has concentrated on
more and more transparency.
This new trend for greater organisational accountability is the
result of a growing demand for
improved information on how organizations conduct their business in the curre
nt complex socio-
economic context. Companies are amongst the most powerful social
and economic institutions of
modern society and, recently, their role has taken on more widespread
functions, surpassing the
traditional ones to include those belonging to the social and ethical profile.
The theme of Corporate Social Responsibility (CSR), and its inte
rnal and external communication,
has been the centre of debates since the Sixties, above all in the
United States. Only recently, due
to increased pressure from stakeholders, has it taken place on a wider scale.
The concept of Corporate Social Responsibility, requested by an increa
sing number of international
institutions – including the World Economic Forum and the World Business Counc
il for
Sustainable Development – is gradually becoming widespread in compani
es, adopting ethical
influences in strategy decisions. The main aspects connected to a
company’s ethical responsibility
within the European Union, have been highlighted in 2001 by the European Commiss
ion’s Green
Paper “Promoting a European Framework for Corporate Social Responsi
bility”. Following this
publication CSR can be defined as a concept whereby “companies int
egrate social and
environmental concerns in their daily business operations and their int
eraction with their
stakeholders on a voluntary basis”. It is important to underline that being sociall
y responsible means
not only complying with relevant legislation, but also going beyond compl
iance and investing more
than required into human capital, environment and relations with stakeholders
At present, the approach to an enhanced sustainability is based upon the
integration of a series of
objectives which not only include those connected to economic performance
, but also those which
are ethically-socially and environmentally linked. Obviously, each or
ganization is involved in CSR
in its own way, depending not only on its core competences, resources a
nd stakeholders’ interests,
but also on the culture and traditions of the area where the enterpr
ise is located (Palazzi M.,
Starcher G., 2001).
This approach, known as
Triple Bottom Line
and represented by Sustainability Reports and/or by
Social Reports, is part of “wider values” determined by social
and economic values for all
stakeholders, through the progressive expansion of social responsibility
contents from the inside of
an organization to the external environment (Testa M., 2004). An outline of
this kind has led to a
wide array of standards, guide lines and codes of conduct promoted b
y both the companies
themselves as well as important international organisms. The centr
al aim is to establish suitable
tools for the diffusion of social-ethical management principles.
Therefore, the set of interdependent managerial tools and practices
can be referred, in their whole,
to a
modus
operandi
that can be identified as
Total Responsibility Management
(TRM) (Gatti M.,
Testa M., 2003). It can be seen as a systemic approach to the manag
ement of a company’s
Practically, CSR builds on compliance with the leg
islative framework, which differs between countries
, but focuses on
the additional contributions from enterprises to me
et societal expectations.
relationships with its key stakeholders and its treatment of the na
tural and social environment. TRM
is built on widely-agreed upon foundation of values and three main eleme
nts can be identified
(Waddock S., Bodwell C., 2002):
vision setting and leadership system;
integration of responsibility into strategies and practices;
assessment, improvement and learning systems.
This approach is based on an integrated system used to address rel
iability; in fact, monitoring,
improving and measuring performance helps companies maximize c
ompetitive success just as the
Total Quality Management
(TQM) approach has done for quality in the past. Building TRM
approaches requires a foundation of generally agreed values, such as t
hose outlined by the
International Labour Organization conventions on labour and human rights or the
principles of the
United Nation’s Global Compact which provide a broad guidance on ecologic
al and social issues
too.
However, as they also recognize a basic individuality of compan
y vision, strategies and
commitments, governance implementing TRM develops company specific
approaches to
responsible management that provide a framework to guide managers, wit
hout placing unnecessary
constraints on their activities.
A clear vision on corporate responsibility from top management and well-artic
ulated guiding core
values that support the vision (Waddock S., Bodwell C., 2002) are necessary.
An example of a
comprehensive model for business ethics programmes is provided by th
e “Ten point program for
implementing values driven management” by Driscoll and Hoffman (Dr
iscoll D.M., Hoffman
W.M., 2000). The two authors identify the following key elements for the
successful development
of any corporate values initiative: Self assessment; Commitme
nt from the top; Code of ethics;
Communication; Training; Resources; Organizational ownership; Consiste
nt standards and
enforcement; Audits and evaluation; Revision and reform.
Responsibility depends on the perspective of the particular stakeholder
whose interests are under
consideration. Consequently, responsibility management involves a process
of meetings and
dialogues with relevant stakeholders in order to establish a set of
decision processes or results. As
responsibility is defined by its impacts and how these are perc
eived by different stakeholders,
companies need to know how well they are doing with respect to those different stakehold
ers.
Determination of responsibility requires a measurement and assessment s
ystem that provides a basis
of understanding and information for internal stakeholders, like employees
, and external
stakeholders that hold a company accountable for its actions and their
outcomes. This level of
accountability implies the need for the integration of responsibili
ty into strategies and the operating
practices used to carrying out those strategies. It also implies a corres
ponding need for improvement
and learning systems, built on feedback from holistic measurement
systems, so when problems
occur steps can be taken to improve the situation (Waddock S., Bodwell C., 2001).
As these are the main issues of CSR vision, the TRM can be seen
as a very important approach in
establishing management based on CSR values.
2. Reputation drivers: opportunities and threats
Generally
companies consider implementing responsibility systems too expensive
and besides they
can even lead to a number of disadvantages compared to their competit
ors. In fact, the cognitive
assumption is that higher levels of responsibility will add to unrecove
rable costs, because the costs
related to an irresponsible corporate behaviour are often hidden or unrecog
nised, while the apparent
benefits of cutting corners sometimes seem obvious.
It is easy to understand that the respect for the general inte
rest profiles, of safeguarding the
environment and of fairness in business – reached through the implementa
tion of TRM – entail
costs for the company from which its benefits are only visible in
the long run as well as being
difficult to measure. The TRM does not directly have an impact
on the company’s financial
performance, but can mitigate the risk of reputation losses and aff
ect intangible assets (Fonbrun
C.J., 1996).
Managers generate
reputation gains
that improve a company’s opportunities to attract resources,
enhance its performance and build competitive advantage (Fonbrun C.J., Vindova R., 1999).
Reputation determines how stakeholders are likely to behave towards an
organization. It can
influence investors’ decision to hold its shares, consumers’ and supplier
s’ willingness to buy from
or sell to it, the extent and nature of media and pressure group attenti
on, potential recruits’
eagerness to join it and existing employees’ motivation to stay
The interaction between company and stakeholders can increase or reduc
e its reputation capital and
therefore affect the risk of threats and the opportunity platform (fig. 1).
Figure 1:
Reputation Risk Management Virtuous Cycle
Adapted from Fombrun, Gardberg, Barnett, 2000
Risks to reputation can arise from many sources, but seven main drive
rs of reputation are (Rayner
J., 2001):
Financial performance
The financial results indicate whether the company strategy
is competitive and investors are
confident that their investments will continue to reap returns.
Corporate governance and quality of management
;
Corporate Governance can be defined as a series of rules, mechanisms
and processes generated by
the interaction between the different entities on various instituti
onal levels, in order to guarantee the
interests of those who operate around and within the company in an equal
and satisfactory way,
with respect to both the organisation’s survival conditions as well as
the widespread values
generally shared by the original collective (Gatti M, Dell
a Piana B., Testa M., 2005). Displaying
good corporate governance is a major contributor to reputation and to marke
t valuation. Obviously
an effective corporate governance and a correct interpretation of the
relations between its
components derive, mainly, from the quality of the leadership.
Dr Kim Howells (Minister for Corporate Social Resp
onsibility) has said: “…the best companies, large o
r small,
recognise that the corporate reputation is now a vi
tal element in business success. Companies are expo
sed to greater
public scrutiny, and the information revolution mea
ns that the consumers are able to take a much wider
range of choices
into account when making purchasing decisions”. Quo
ted in the foreword to the Institute of Chartered A
ccountants of
England and Wales (ICAEW) publication “Human Capita
l and Corporate Reputation: Setting the Boardroom A
genda”,
June 2000.
Reputation
Capital
Risk
Reduction
Oppor
tunity
Platform
Corporate
Performance
Total
Responsibility
Management
Social, ethical and environmental performances
;
Nowadays, the many different types of stakeholder are much m
ore sensitive to social and
environmental problems than in the past. Organisations therefore have
to try to follow socially
orientated aims, ranging from the protection of the environment as
well the worker’s rights, in order
to make the economical rule fit the social one.
Employees and culture
;
Stakeholders’ interest in an organization’s human capital is leading
them to demand information on
the kind of people employed in the organization, their diversity, their ski
lls, their training
programmes, their motivation and attitude to their employer, their re
muneration, staff retention
levels and recruiting processes and,
in primis
, the characteristics of the organizational culture.
Marketing, innovation and customer relations
;
Responsibility management involves a process of meetings and dialog
ues with relevant
stakeholders in order to reach agreements on a set of decisions on proce
sses and results. By new
processes and innovative goods the companies can obtain their competitive
advantage and by
customer satisfaction and good faith in all agreements they have the opportunity to m
aintain it.
Regulatory compliance and litigation
;
Not complying with relevant laws and regulations is one of the ma
in risks for both small and large
companies: the violation of the laws or internal corporate regulati
ons can imply serious losses of
profit as well as bad consequences for company image.
Communication and crisis management
;
Some organizations are now introducing early warning systems to i
dentify and manage events
which may lead to crises, so corrective policies, and pertinent com
munication actions, can be taken
before company reputation is damaged.
All these factors contribute to create reputation capital. This is the fluct
uation of company value and
can be calculated as the market value of the company in exces
s of its liquidation value and its
intellectual capital (Fombrun, C.J., Gardberg N.A., Barnett M.L., 2000).
Reputation is not only an indicator of past performance, but a future prom
ise and having a good
reputation means to have many opportunities and benefits, including (Rayner J., 2001):
Attracting investors and securing capital at lower cost;
Attracting customers and creating consumer loyalty;
Commanding a premium for products and services;
Recruiting and retaining high quality employees;
Creating barriers to entry for potential competitors;
Providing an edge in competitive markets.
Instead, the costs deriving from not having a TRM do not represent t
he actual monetary outgoings,
but can be identified costs from the loss of profits and this theref
ore justifies the non adoption of
responsible choices by any organizations (fig 2).
Figure 2:
Managing the downside of Reputation Risk and Threats of Costing
Adapted from Fombrun, Gardberg, Barnett, 2000
It is now generally believed that the social-environmental aspe
cts of the organisation’s activity
represent factors that are relative to its survival and ability
to compete. The actual choice of
adopting a TRM will only be possible when the risks from an irres
ponsible management do not
become unbearable for the organisation.
3. Managing Reputation Risk
Managing reputation risk means to consider the current and prospective
impacts on earnings
deriving from negative public opinion. Obviously, risks cannot be completely
eliminated from
company activities, but managers have to try to manage the economi
c and social threats in order to
reduce the negative consequences deriving from it.
Reputation Risk Management process is formed by two different but contextual approa
ches:
- Improving the corporate image by univocal and disclosed behaviors (i.e.
strategic options
which take the relevant stakeholders and their aims into considera
tion, sustainability
policies, corporate giving, cause related marketing, etc) and through communicati
on;
- Controlling and auditing several company project activities.
Regarding the first point, corporate image refers to how a corpora
te is perceived. It is generally an
accepted image of what a company "stands for". The creation of a
corporate image is an exercise in
perception management. It is created by institutional and marketin
g communication, but primarily
by what the companies do.
The experience of numerous companies has clearly demonstrated tha
t being inattentive towards
company expectations, or moreover betraying corporate image
, aiming at exclusively
communicating the environmentalist, altruistic and philanthropical “faça
de”, generates amplified
negative consequences, which hit the organization with growing force.
“(…) per
corporate image
deve intendersi come l’organizzazione viene percep
ita, in un dato momento, dai pubblici
esterni” Siano A.,
Comunicazione d’impresa
, Giuffrè, Milano, 2001, 130; besides see.Margulies
W.P, “Make the most
of your corporate image”, in Harvard Business Revie
w, 55, 1977.
Reputation
Risk
Media
Investors
Employees
Partners
Customers
Regulators
Community
Activists
Threat of
Boycott
Threat of
Illegitimacy
Threat of
Disinvestment
Threat of
Rogue
Behavior
Threat of Bad
Exposure
Threat of
Defection
Threat of
Lagal Action
Threat of
Volatility
The second point is highlighted by the development of
risk culture
. In fact, the management should
individualize all company projects and activities that can conditi
on the reputation of the company
and manage the possible risks.
Synthetically, the Reputation Risk Management is recognized as a
n integral part of good
management practice, based on an interactive process consisting i
n the following steps, which,
undertaken in sequence, continually improve decision making. The main steps are (fig
3):
- Risk identification
- Risk assessment
- Risk treatment
- Monitoring and reporting
- Risk Management review
Figure 3
Steps and tools in Risk Management
Risk Identification
For each project the manager has to follow a wide array of s
teps, starting from a systematic
analysis of the technologies, production methods, details of the contr
act, social and environmental
effects, etc. This study must group together all the units involve
d. This can be achieved through
discussions, interactive workshops, interviews, questionnaires, brainstorming ses
sions, etc.
The risk can be identified by a description of the problem and the
units involved in the possible
effects, creating a Risk Breakdown Structure (RBS), which under
lines all the linkages between the
risks.
Two different methods can be adopted to build an RBS :
- Top Down – identification of an “ aggregated” risk (mask risk) whic
h can be declined into
more elementary risks, but due to its “togetherness” nature it
cannot be exclusively
perceived by the Risk Manager.
- Bottom Up - the risks are denounced to the Risk Manager, by the dif
ferent functions which
participate in programs/projects, in relation to the concrete
possibility that an event at risk
can manifest itself.
Risk Identification
Monitoring and reporting
Risk Assessment
Risk treatment
Steps
Tools
Priority list of the
risk
Main Risk Factor
Plans to mitigate
the risk
Balanced Scorecard
and reports
Risk management review
Adjustament actions
Useful techniques for identifying reputation risk and describing caus
es, events and consequences,
include:
- Upper system analysis (Golinelli G.M., 2005): once conflicts are
identified between
expectations and delivery capability, the board must decide how to res
olve those conflicts -
by ensuring that it meets stakeholders expectations, or that it
modifies its promises, or by a
combination of the two.
- SWOT analysis: the threats can reveal risks to reputation a
nd opportunities can reveal
potential levers to enhance reputation.
Risk Assessment
The goal of this phase is to set the risks in order of importance.
Reputation risk can be regarded as
an impact or consequence of other risks or it can itself be a s
ource of risk. Therefore some
organizations manage reputation by scoring the reputation impact of oth
er risks or consider the
reputation as a category of risk in itself.
Usually qualitative tools are used and each risk can be measured by helpful technique
s:
- PEST analysis, that is an evaluation of the political, economic, s
ocial and technological
influences;
- Review future regulatory changes;
- Sustainability Balanced Scorecard, that helps to monitor all mai
n risks by integrating them
into Key Performance Measures (KPMs) (Metallo G., Cuomo M.T., Testa
M., 2004);
- Risk matrix (Likelihood/Consequences).
An estimation of the risk can be achieved by Risk Factor, which der
ives from the following
relation: Likelihood that it will happen x Consequences for the company.
Risk treatment
Risk treatment according to the ISO is the "treatment process
of selection and implementation of
measures to modify risk [ISO Guide 73]"
. Before implementing risk treatments a company has to
analyze the possibility and capacity to manage the risk, the costs
to eliminate or reduce it and the
probable benefits that can derive from it. Considering this, the compan
y can then decide if the risk
can be:
- Eliminated or avoided;
- Reduced;
- Transferred to the future or to other units;
- Accepted.
After choosing how to face the risk it necessary to identify the options which could
be used to treat
the risks, select the best option in terms of its feasibility a
nd cost effectiveness, preparing a risk
treatment plan and implementing the risk treatment plan.
Monitoring and reporting
Reputation risk monitoring and reporting provide management and the boar
d with assurance that
established controls are functioning properly.
Management should regularly monitor the corporate reputation and the r
isks from its activity –
whether centralized or decentralized at business lines, support functi
ons, affiliates, or business
partners – to ensure the vitality of the system and achieving the
desired results predicted Effective
monitoring and reporting help to inform the management and to identif
y in advance the future
successful processes.
Risk Management Review
This is one of the most important phases, as it analyses the posi
tive or negative results obtained, in
order to take the correct and appropriate actions.
These phases will be set and overseen by the Risk Manager, whose ta
sk is to guarantee that the
system works well, that the risk team is effective, the trea
tments are appropriate and fast, the
It is only by the active participation of an inter
national organization, as ISO, that a common risk
management
language for those who are interested in the manage
ment of the risk as an integral component of effec
tive corporate
governance will be reached.
evaluation report is transmitted. Besides he checks the effecti
veness and the costs of corrective
actions, suggests strategies to the board and assigns a Risk Owner in case of a high
risk factor.
4. Conclusion
In recent times there has been a paradigm shift in many e
conomies, particularly in the way
corporate governance, business ethics, risk management and compliance
are approached.
It is a shift that continues to be driven by demanding performance e
xpectations, increasing
stakeholder demands and growing public scrutiny after some spectac
ular failures around the globe.
Potentially, this is a highly positive development. An investment to
reduce the risk places a
premium on solid performing businesses that are well-managed, confer
ring a competitive advantage
on businesses that create and maintain a culture of “integrity-driven performanc
e”.
Currently, a good strategy is not effective if the corporate has a
bad image. Today, reputation is one
of the most important corporate assets and it is also one of the most difficult to prote
ct.
The measurement of the reputation level, which is at the base of
the pertinent social consent, has to
permeate
ex ante
ideation and evaluation of the strategic options.
Adopting strategic decisions is the combined effect of managerial
processes and socio-cultural
influences that are placed inside and outside the entrepreneurial orga
nization, between numerous
systems that have diverging interests.
With regards this, it is interesting to highlight that even in an
analytical-formal approach, based on
addressed and guided instruments, often the fundamental decisions and stra
tegic options appear
modeled by experience, cognitive processes, and the ability to re
cognize and interpret timely
marks of change from the outside as well as from those inclined towards recognizing t
he risk.
So, only the enlightened managers that take care of reputation risk w
ill obtain a positive corporate
image, transforming the threats in opportunities and the costs in
probable gains .But before
identifying a risk system, it is necessary that a culture
in all the entrepreneurs oriented to the
Corporate Reputation exists, as well having managers communicatin
g their own philanthropic
activities.
The behaviors based on the adoption of own business cultural values and a cl
ear vision of the
purposes of the enterprise, engrave a strong coherence to the actions unde
rtaken in the course of
time orienting the direction of future conduct. From this point of view r
eputation represents a
promise of reliability.
This new awareness should contribute to improve not only the control proce
sses but the ideation
and implementation phases, in order to consciously plan and achieve busines
s goals, improve
performance, satisfy stakeholders, increase effective exploita
tion of new opportunities and good
corporate governance.
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