| Reputational
Risk
 By
Thomas P. Johnson, Jr.
With disclosure, the quality of
the story being told ultimately rests on the quality of
the actions being taken.
Reputational risk has taken on a whole
new dimension in the wake of corporate scandals and a
regulatory crackdown, but do executives fully understand
how to respond? Although a commitment to openness and
accuracy of information would seem to address most perception
issues, a deeper level of preparation will be needed if
companies are to convincingly manage and explain special
circumstances.
The disclosure challenge is immense,
given the extensive array of financing and risk management
techniques used by modern financial institutions. Sophisticated
off-balance-sheet ventures involving derivatives and special
purpose entities are prolific in the financial system,
for example, but have become controversial in the wake
of high-profile corporate scandals involving Enron Corp.,
Tyco International and WorldCom Inc.
Rightly or wrongly, the investor and
regulator backlash has engulfed several major financial
institutions, which have lost trading value and, at least
temporarily, even some degree of corporate independence.
That raises the stakes for everyone else. As Wachovia
Corp. chief financial officer Robert Kelly puts it, "Reputational
risk issues are almost more important now than financial
issues in terms of valuing your stock."
The call to action is clear, yet one
danger is that people will view this as short-term public
relations problem likely to go away over a period of time,
whereupon they can resume business as usual. Another is
that they will underestimate the preparation that is needed
to manage and explain contingencies in the new environment.
The prudent approach is to view disclosure
as a long-term issue that will require a sustained commitment
to reputational risk management. The dimensions of this
commitment include adherence to principles as well as
rules, so that people throughout the organization are
conscious of the potential public consequences of their
private acts.
Good intentions will ultimately fall
short unless they are backed up by robust plans and procedures.
That is why executives will have to work harder to envision
all the possible outcomes of their corporate ventures
and rehearse management and communication responses. Speaking
at BAI's Retail Delivery conference in Atlanta last November,
former New York mayor Rudy Giuliani recounted how years
of disaster planning and response drills paid off in helping
the city manage the after-effects of the September 11
tragedy.
The combination of stricter disclosure
requirements and heightened investor and regulator sensitivity
to what's being reported does pose a substantial additional
burden on financial institutions. Yet, the best managers
will seize on the situation as an opportunity to elevate
their preparedness. After all, the quality of the story
being told ultimately rests on the quality of the actions
being taken.
Mr. Johnson
is publisher of Banking Strategies
and president and chief executive officer of BAI.
Copyright © 2003 by Banking
Strategies, published by BAI.
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