Reputation is an accumulation of perceptions and opinions about an organization that reside in the consciousness of its stakeholders. Reputation has becoming increasingly important to any company as the world becomes more complex. Tangible factors of business are becoming less significant and rapidly replaced by the intangible factors. Reputation is considered as the most valuable intangible asset. Though reputation is considered as an intangible asset which will not be presented in any balance sheet, it will represent the market value.
Warren Buffet said: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” The hard-owned reputation is much more vulnerable in 21st century, as the globalization and development of technologically interconnection make news more easily transmitted and more transparent. Once reputation is compromised, it may be costly to rebuild reputation and the period may be extremely long. What’s worse, reputation capital may never be recovered.
According to Jenny Rayner (2009), the seven drivers of reputation:
- Financial performance and long-term investment value: A company that demonstrates a consistent financial performance is deemed a reputable company and, therefore, a safe investment.
- Corporate governance and leadership: The effective corporate governance of the business helps to safeguard the company’s reputation.
- Delivering customer promise: Companies have to maintain customer expectation, so as to maintain a good reputation.
- Workplace talent and culture: Employees must be satisfied with their working environment so as to exalt the company name.
- Corporate social responsibility: Companies can benefit from a good reputation if they demonstrate a commitment to corporate social responsibility.
- Communications and crisis management: A company must have a contingency plan in place, in order to deal with any crisis, so as to maintain company reputation.
A reputation risk occurs when the negative information or business events are transmitted publicly, which makes damage to the company’s reputation capital and has a negative impact on the value of the company. Its “compounded” nature which will distinguishes reputation risk from other types of risks makes reputation more critical. Reputation risk is sometimes called as “risk of risks”. Usually reputation risk is treated as negative threats or having downside impact, however it also may bring positive impact. Hence, reputation risk is defined as any action, event or situation that could adversely or beneficially impact on organization’s reputation.
Effective identification of risk and effective response plan are regarded as two fundamental disciplines to manage reputation risk. Effective identification of risk can expose those risks or threats to reputation, which will help the risk managers to reduce them into an acceptable level. Effective response will work when negative events occurs, which will diminish the damage to reputation. Reputation Risk Management can not be regards as crisis management planning. It is not a specialist function to be active when emergency occurs. Holistically operating Reputation Risk Management will have effective impact on the organization’s actions, behavior and standards. The protection against the most potentially damaging reputational events must be proactive, not just reactive.
A new Enterprise Sustainability Risk Management Framework (ERMIF) is designed to help top management in organizations to establish a holistic and systematic sustainability risk management process that generates the risk indicators, risk sources, objectives and reporting system. Enterprise Risk Management is defined as a process, affected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives. Some recent studies indicates that Enterprise Risk Management Implementation has becoming more and more critical and requisite- almost 80% of companies have ERM process and function. The three main benefits of ERM process and activity is better control of uncertainty, loss avoidance and better conformity of achieving organization’s objectives.
Jeffrey T.Resnick (2006) points out that “ERMIF framework can help companies identify the event/issue categories which must be considered in the building of any robust risk-management system, including reputation.” According to him, the eight phases of the reputation audit process are:
- Identify Reputational Risk Elements & Stakeholders
- Prioritize Elements & Stakeholders
- Inventory Available Reputation Information & Identify Information Gaps
- Design Audit Instruments & Methodology
- Conduct Audit
- Consolidate Findings and Report to Management
- Develop Draft Solutions Document & Implement
- Create & Implement Reputation Monitoring Programs
The eight phases are integrated seamlessly into the Enterprise Risk Management Integrated Framework. Once reputation events are identified in the initial reputation audit, it still needs to be reevaluated. Generally, the duration of previous audit is two years and the audit should be reviewed after two years. How often the audit be revaluated depends on how dynamic environment the industry operate in. An industry which operates in a more highly dynamic environment should review its reputation audit mote frequently.
Case Study: Reputation Risk Management by Air France on Airline Crash
On 01 June 2009, Air France Airbus A330-200 crashed into the sea while on transatlantic flight from Rio de Janeiro-Galeao International Airport, RJ(GIG) to Paris-Charles de Gaulle Airport(CDG). All 216 passengers and 12 crew members were killed after a chain of events triggered by ice crystals blocking the plane’s pitot tubes, which provide airspeed readings to the pilots. The airplane was in contact with the Brazilian ATLANTICO control center on the INTOL- SALPU- ORARO- TASIL route at FL350. At around 2 h 02, the Captain left the cockpit. At around 2 h 08, the crew made a course change of 12 degrees to the left, probably to avoid returns detected by the weather radar. At 2 h 10 min 05, likely following the obstruction of the Pitot probes by ice crystals, the speed indications were incorrect and some automatic systems disconnected. The airplane’s flight path was not controlled by the two copilots. They were rejoined 1 minute 30 later by the Captain, while the airplane was in a stall situation that lasted until the impact with the sea at 2 h 14 min 28. The search crews operated by Brazil, France, the United States and Spain started to search the victims after the crash. Twenty days later, and after 51 bodies had been recovered, the search operation for more victims” bodies was called off by the reasons that the location where flight 447 went down was in 13,000 feet of water and mountain terrain underwater.
The final official report was released on 05 July 2012. According to the final report, the accident resulted from the following succession of events:
- Temporary inconsistency between the airspeed measurements, likely following the obstruction of the Pitot probes by ice crystals that, in particular, caused the autopilot disconnection and the reconfiguration to alternate law;
- Inappropriate control inputs that destabilized the flight path;
- The lack of any link by the crew between the loss of indicated speeds called out and the appropriate procedure;
- The late identification by the PNF of the deviation from the flight path and the insufficient correction applied by the PF;
- The crew not identifying the approach to stall, their lack of immediate response and the exit from the flight envelope;
The crew’s failure to diagnose the stall situation and consequently a lack of inputs that would have made it possible to recover from it. The company made an advance payment of approximately 17,500 Euros to each victim’s family and did not dispute the figures initially put forward by lawyers and insurers.
The share price recovery of Air France is hampered by the financial crisis from November2009 to June 2010. In spite of the financial crisis, Air France made an impressive recovery from the disaster. Air France shares recover strongly and over 20 percent of value is generated for shareholders before February 2010.
Attributes of Air France’s response which drove the share price recovery can be concluded as:
- Air France takes a rapid and credible action: Air France immediately activated its crisis communication plan to manage priorities: looking after the victims’ families and issuing initial information after Air France’s technical operation center had realized that AF447 crashed into the Atlantic on June 1, 2009. Air France immediately activated a dark website http://alphasite.airfrance.com/en/s01/ dedicated to providing information to the victims’ families and the media. Six press releases were issued by the company between 13:21 and 20:30 local time, updating the information of the plane, confirming the information of the passengers who were on board flight AF 447, establishing a special toll-free number for the victims’ families or friends to call from France, Brazil and other countries, expressing deepest sympathy to the relatives and friends of the victims and offering medical and psychological assistance to the families and friends of the victims. Air France also stated that all the information in its possession on the disappearance of flight AF447 had been sent to French Accident Investigations Bureau for civil aviation (BEA) and the Aircraft manufacturer Airbus. Air France also showed its resolute commitment to safe improvement and to compensation. The company made an advance payment of approximately 17,500 Euros to each victim’s family and did not dispute the figures initially put forward by lawyers and insurers. Air France provided an update about the replacement of the Pitot sensors on its fleet of A330s and A340s on July 31, 2009, which was recommended by Airbus.
- Air France performs sensitive, accurate and transparent communication: Air France has adapted an open and direct communication strategy. Its immediate six press releases not only updated frequently, but also provided accurate information of plane, passengers and crew. The frequent updating press illustrates Air France’s transparency in dealing with this crisis. The company kept in doing everything possible to investigate the causes of the crash before the investigating agency issues its report. When Air France’s CEO met with members from the AJPAE (French Professional Aviation and Space Journalists Association), he announced that the investigation would be “long and difficult” given the location of the accident. Assumptions about the possible causes of the crash were pure speculation before report issued by investigating agency. Air France also adapted two-way communication by establishing a special toll-free number for the victims’ families or friends, meanwhile by offering psychological and medical support.
- Air France showed Empathy and compassion in dealing with the crisis: Air France was immediate in their expression of compassion over the tragedy, and focused their resource on recovering and identifying the victims and assisting their families and friends. A medical and psychological assistance unit has been set at Paris-Charles De Gaulle 2 and Rio de Janeiro airport for the families and friends of the victims. Meanwhile Air France has kept in showing and communicating compassion, sympathy and concern to the families’ losses. The frequently updating press releases continued emphasizing the company’s “anxiety,” “distress” and “deepest sympathy” to the mourning families. An interreligious ceremony for the relatives and friends of the victims was held on June 3, at 4 p.m. at Notre-Dame Cathedral in Paris. At the same time, two memos were issued by Air France to ask journalists to respect the privacy of the families staying at the hotels of CDG Airport and inform them that they could not attend the religious ceremony out of respect the families’ grief.
- Strong personal leadership of the Chief Executive: Air France’s CEO Pierre-Henri Guorgeon, who had joined the Air France Group only five months before the AF447 crash, showed his strong personal leadership in dealing with this extremely difficult exercise. He gave the company’s first public statement in a press conference held at 1p.m at Rossy. His speech highlighted his company’s deepest sympathy and pain to the relatives and friends of the victims and resolute commitment to investigate the cause of the crash. On June 11, 2009, Air France CEO met with members from the AJPAE (French Professional Aviation and Space Journalists Association) to discuss the current situation and outlook for air transport. His successful respond to the media not only reiterated that assumptions made by some media were pure speculation but also expressed the company’s deepest sympathy and commitment to investigate the cause of the crash. Air France’s CEO met with the families of the victims in Brazil and attended a mass held at the Church of the Immaculate Conception in memory of the crash victims. His impressive respond to the media and action to the victims’ families showed Air France’s commitment to do everything they could to investigate the cause of the crash, to help the victims’ families and to improve safety. This gave investors confidence in Air France’s ability to deal effectively with the aftermath.