Risk management and prevention requires a strategic effort in order to survive and thrive. Social media allows for an excellent opportunity to participate in environmental scanning and similar preventative measures which can help improve an organization's customer retention. The Reputation Institute helps us to understand the importance of managing reputation risk.

Executives know the importance of their companies’ reputations. Firms with strong positive reputations attract better people. They are perceived as providing more value, which often allows them to charge a premium. Their customers are more loyal and buy broader ranges of products and services. Because the market believes that such companies will deliver sustained earnings and future growth, they have higher market value and lower costs of capital. In an economy where 70% to 80% of market value comes from hard-to-assess intangible assets such as brand equity, intellectual capital, and goodwill, organizations are especially vulnerable to anything that damages their reputations. Damage to reputation is an enterprise-wide event that can lead to lowered stakeholder support, decline in financial performance, and a loss of goodwill with local communities as well as its ‘license to operate’ in key markets.

Most companies, however, do an inadequate job of managing their reputations in general and the risks to their reputations in particular. They tend to focus their energies on handling the threats to their reputations that have already surfaced. This is not risk management; it is crisis management – a reactive approach whose purpose is to limit the damage. Reputation risk management is about anticipating threats that may damage the company’s reputation capital.

A recent survey on global risk management, conducted by AON indicated that of the top 10 corporate risks managers see today, ‘damage to reputation’ has the highest threat to value. Although ‘damage to reputation’ tops the list of risks identified by senior managers, fewer than 50% of them claim to have a strategic plan in place for managing reputation risk. Most CEOs admit that their companies lack coordination with respect to who owns reputation risk, and responsibilities are fragmented among a wide range of business managers.

It is crucial that companies implement a Reputation Risk Management Process to objectively and systematically assess potential gaps between stakeholder perceptions and company behaviors. Vital to the success of the process is that a senior executive below the CEO is responsible and that a cross-functional team manages the reputation risks...

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