Key Issues: Risk Management
Reputation risk and the
internationalising
firm
By Scott Hargreaves,
Director of Policy and
Public Affairs, SDA Strategic
Risk considerations
Public affairs concepts
Strategy and activities
W
hile in the public mind the issue of
globalisation spotlights the effect of
foreign firms taking over Australian
companies, less attention is paid to the changes
that Australian-based firms are making as they
become global players. Whether or not BHP
Billiton’s CEO is based in London or Melbourne
matters less to its investors and local
stakeholders than the changes to the company’s
operations that are flowing in the wake of its
globalisation.
Company Secretaries often have a role in
ensuring the direct financial risks associated
with international expansion are examined, but
increasingly they must also consider associated
strategic risks, particularly the risk to corporate
reputation.
Australian companies have for some time
now factored reputational risk into their
strategic planning processes, recognising that
the risks to shareholder value are just as real as
those arising directly from the balance sheet.
Outraged stakeholders, product liability
issues, non-compliance with HR policies,
associations with unsavoury governments: all
can set the bears running. For firms taking their
place on the global stage, it is vital they
understand the changed risk profile this creates
and also the pressures it creates on their
relationships with existing stakeholders.
Reputational risk
A recent study of the Fortune 500 companies
suggests that risks associated with physical
assets are far outweighed by ‘strategic’ risk to
the companies’ non-physical equity (Marsh,
2002). This non-physical equity is variously
described as brand equity, or increasingly as the
value of its corporate reputation, an expression
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of the quality of its relationships with key
stakeholders.
Reputational risk is a recently developed yet
critically important concept emerging from the
management literature. Charles Fombrun
defines reputational risk as ‘the range of
possible gains and losses in reputational capital
for a given firm’ (Fombrun, 1996). This bidirectional perspective of risk and its impact
upon reputation signals an important shift in
stakeholder communication.
Risk has been traditionally framed in terms
of potential for loss. Fombrun’s theory of
reputational risk accounts for both the positive
and negative effects of stakeholder perception
on reputation. As he puts it, a company’s
reputation is both its safety net in times of
trouble and an opportunity platform for further
growth.
US experience
At many of Australia’s listed companies,
Company Secretaries take formal responsibility
for oversight of corporate public affairs, the
group of activities and personnel responsible for
managing the corporation’s interface with
external stakeholders. In framing a direction for
the group, Australian companies can benefit
from the lessons of the US experience.
As the US began to face the challenge of
taking a global perspective in the 1980s,
attention turned to the role of corporate public
affairs in managing a much more complex
environment of social and political issues.
Although it was a widespread assumption
that greater investment in corporate public
affairs activities would be necessary, it took
practitioners and researchers some time to come
to grips with the specific actions and strategies
that would come into play. One researcher,
Martin Meznar, went directly to the Fortune 500
firms to find out how they were in fact
responding.
Issues management
Meznar’s working hypothesis was
that firms in the US that were
internationalising would increase
their investment in public affairs
activities. To undertake his study he
built on the public affairs concepts of
‘buffering’ and ‘bridging’, used to
describe the generic strategies
organisations could deploy when
dealing with social and political
issues.
As the terms imply, firms that are
buffering utilise boundary-spanning
agents to protect themselves from
the impact of external issues,
whereas when bridging they engage
with the relevant issues and
stakeholders.
The objective of issue
management activities is ‘securing
organisational legitimacy from
external stakeholders’. Meznar
obtained responses on management
of ‘social’ and ‘political’ issues from a
cross-section of Fortune 500 firms,
and correlated the results with
publicly available data on corporate
financial performance.
Complexity
The study confirmed the number
of countries in which a firm operates
does indeed lead to an increase in all
types of public affairs activities.
Similarly, political bridging activity
increases as the percentage of foreign
employees increases, as firms
‘devoted greater effort to being a
compliant corporate citizen’.
The conclusion in respect of social
issues was quite different. Relating
the observed activities back to
financial performance, the ultimate
conclusion was:
The preliminary evidence is that
public affairs contribution to MNC
(multinational corporations) economic
performance comes from easing
adaptation to the local political
environment (political bridging) while
protecting the firm from being
overwhelmed by changing local social
expectations (social buffering). (Meznar
and Nigh, p. 361)
Meznar also drew attention to the
requirement for a challenging
balancing act by corporations as they
seek to maintain a reputation for
corporate social responsiveness while
also ensuring their approach to
stakeholders is consistent globally.
Problematic indices
Australia is now following the
example of the Fortune Reputation
Index and firms are being rated on
the results of surveys of peak
organisations and other relevant
bodies.
The longer experience of the US
with such measures has focused
attention on severe methodological
objections, particularly in screening
out the ‘halo’ effect of the public’s
perceptions of corporate social
performance (Fryxell and Wang,
1994).
For the firm trying to analyse and
reduce its risk profile, such indices
are problematic, and a stakeholdercentred reputation management
scheme is the superior means to
successfully integrating corporate
public affairs activity with overall
strategy.
Strategic management
Operational managers who rigidly
apply their ‘Five Forces’ model or
their value-chain analysis, without
reference to the stakeholder
environment, will find even the best
laid plans thwarted by
unacknowledged external forces
driven by governments, regulators,
NGOs and the global media.
Strategic stakeholder management
recognises that while primacy in
planning must be given to the
competitive environment, a similar
level of analytical rigour must be
applied to the stakeholder
environment.
Unfortunately, many applications
of stakeholder mapping rarely move
beyond a rudimentary ‘hub and
spoke’ framework, and are long on
generalisations and short on
conclusions. An effective stakeholder
analysis exercise will draw on a range
of approaches appropriate to the
particular firm, its industry, and its
geographic focus. This in turn will
enable a strategic approach to the
management of reputational risk,
enabling protection and
enhancement of shareholder value.
Contact Scott Hargreaves, BA, MBA, at
[email protected]
Sources
Brandenburger and Nalebuff (1980)
in Competitive Strategy.
Fombrun (1996) Reputation: Realizing
Value from the Corporate Image.
Fryxell and Wang (1994) The Fortune
Corporate Reputation Index: Reputation
for What?
Marsh Ltd, quoted by Stuart Bassett,
director, in a CSA seminar, 17 May
2002.
Meznar and Nigh (1994)
Multinational Operations and
Stakeholder Management.
Strategic stakeholder management recognises
that while primacy in planning must be
given to the competitive environment, a similar
level of analytical rigour must be applied to
the stakeholder environment.
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