Underestimate reputational risk at your own cost

KPMG South Africa is making the news for all the wrong reasons… The question supposedly being asked by the risk fraternity and the industry at large is how an assurance provider of the stature of KPMG got it so wrong

Companies need to ask what events have unfolded in their business environment that could have plunged their reputation. Inevitably, the cost of unmanaged reputational risk exposes organisations of all sizes and complexities, and one may wonder whether we are losing the plot on what constitutes risk appetite.

Organisations are constantly taking risks in order to pursue their objectives. This puts them in the spotlight among their stakeholders. Knowingly or unknowingly, the appetite for risk tends to increase. The subject of risk appetite is highly debated, and the task at hand is for organisations to re-assess the risks that are tolerable while remaining truthful to their stakeholder’s mandate.

We need to shift our focus on risk appetite as a cornerstone for reputational risk. The International Organisation for Standardisation (ISO) Guide 73:2009 Risk Management – Vocabulary defines risk appetite as “the organisation’s approach to assess and eventually pursue, retain, take, or turn away from risk”.

Every event that occurs teaches us a lesson. There has never been a better time for risk practitioners to review their entity’s exposure, but the intention is not for organisations to be overly watchful; otherwise they will fall short of their targets.

There are, therefore, many lessons to learn from the KPMG scenario. Among them is the necessity for every person in the organisation to be vigilant and aware of the underlying risks that might pose reputational damage. This may be supported by leadership commitment through promotion of a risk-based thinking when making decisions.

However, top management needs to be clear and communicate the organisation’s risk appetite. It should not be left to the company’s personnel to make their own judgements.

Light at the end of the tunnel

An organisation facing the dilemma of salvaging its reputation, or looking to the future in order avoid an unpleasant brand reputation, should not lose hope. I recently read the Harvard Business Review article entitled Reputation and its risks, by Robert Eccles, Scott Newquist and Roland Schatz.

The authors propose a framework for managing reputational risk (see overleaf).

Personally, I am always reminded by an article I wrote in 2011 entitled: In pursuit of profits do not forget your risk appetite (National Safety, May/June Vol. 71, 3). I quoted Richard Barfield from PricewaterhouseCoopers, who noted: “To embed risk appetite effectively in the business requires management to establish limits for each risk type and cascade them to lower levels in the organisation.”

As Henry Ford once said: “You can’t build a reputation on what you are going to do.”  

Hope Mugagga Kiwekete is a managing consultant at the Centre for Enterprise Sustainability. Prior to his current role, he was a principal consultant: risk management at Transnet Freight Rail, and a management systems specialist and senior EHS auditor at the South African Bureau of Standards (SABS).