Events leading to reputation damage can strike at any time from any direction. Kenneth Ramaley, managing director of Ramaley Group L.L.C., discusses how to identify scorecard metrics that will allow for preventive approaches to reputation risk management.

Reputation damage often seems to be driven by unpredictable events. Fifty years ago, a meteorologist would have suggested that the likelihood of a “superstorm” taking a particular path is also driven by unpredictable events.

As more data has become available, scientists have identified variables that contribute to the risk of such a storm and quantify the likelihood of alternative paths. This has allowed them to greatly improve accuracy in forecasting these previously opaque events. Similarly, with the right metrics in their reputation scorecards, corporate leaders and risk managers can identify when a reputation storm is brewing and sound the alarm proactively.

A good reputation scorecard must provide an actionable snapshot of reputation risk drivers across the firm. The goal of these metrics should be primarily preventive — identify key risks to reputation before the reputation damage is incurred. Unfortunately, many of the most available metrics are lagging indicators at best. We will first discuss why “standard” metrics are inadequate and will then provide a roadmap to enable you to identify scorecard metrics that will allow for preventive approaches to reputation risk management.

Since reputation derives from the perception of key stakeholders, a common approach to reputation measurement incorporates periodic stakeholder surveys to ascertain their perception of your firm's reputation. These surveys take two forms: the “overall reputation” survey and the “dimensions of reputation” survey.

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The “overall reputation” survey is the simplest and least useful. This survey asks a simple question like “What do you think about Company A?” or “Rank these companies by your overall impression of them.” While it can be useful to know such overall impression data, it provides little real value to the firm in determining how to improve, given the aggregated nature of the results.

To understand the gaps in this approach, consider Arthur Anderson L.L.P.'s “reputation score” immediately prior to the Enron Corp. scandal. Could they have anticipated the impending reputation disaster that would bring down their firm by observing the trending of this kind of score?

A “dimensions of reputation” survey will ask customers to provide their opinion of your firm according to different dimensions — for example, satisfaction with price, satisfaction with service, likelihood to purchase, likelihood to refer. The theory is that by carefully tracking these dimensions, the firm will notice small declines and be able to respond rapidly if perceptions begin to decline along any of the key dimensions.

While this is a great improvement over aggregation, it is still a lagging indicator of reputation risk. By the time these measures reveal that perceptions of your firm are declining, the reputation damage has already been incurred. While there is some potential to limit the damage by early detection of declining attributes, this is hardly a preventive scorecard metric. Furthermore, negative reputation momentum associated with rapid communications (social media) and other methods might mean that even the most frequently updated survey will not move fast enough to provide actionable data to control reputation risks.

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A firm's reputation is driven by stakeholder perceptions of the firm's capabilities. When these perceptions align with the firm's reality, the reputation is well-deserved. However, if a firm has a “hidden reality” that is not perceived by its stakeholders, this gap will increase reputation risk.

The Arthur Anderson/Enron situation provides a useful case for identifying scorecard metrics that will make a difference. Arthur Anderson's reputation (as auditor) was based on a perception of objectivity and fair practices. This perception was not supported by the realities of their engagement with Enron. Ultimately, Arthur Anderson's reputation was destroyed when their actions came to light. Once an unperceived reality becomes perceived (for example, by a whistle-blower), the risk becomes realized as a potentially catastrophic loss of reputation.

So what kind of metrics could have enabled Arthur Anderson's stakeholders to identify and proactively manage this gap between perception and reality? Quite simply, metrics that demonstrate the effective functioning of a transparent company must be used to demonstrate consistency between perceived reality and actual reality. For example, how often do your front-line associates escalate concerns? Escalations alone do not indicate transparency, but substantive escalations based on “ear to the ground” indicators provide just such an insight.

Another good transparency metric can be derived from periodic random sampling of internal emails. What percentage of emails discusses customers in a manner that is consistent with the firm's public image? Are there any emails that would cause a reputation incident if they were made public?

These are but two examples of approaches to measuring transparency. Each business should analyze its internal communications channels to determine the best measures of transparency through those channels.

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While transparency metrics are necessary for assessing an organization's reputation risks, they are not sufficient. Other risks to reputation derive from the stability of customer expectations and the stability of firm execution. How consistent are stakeholder expectations over time? How likely is a decline in firm performance against those expectations? Methods must be established within a firm's business environment to track stability.

While they are a blunt tool for measuring overall reputation, customer surveys are a precise instrument for measuring environmental stability. With expectation-focused questions rather than impression-focused questions, the firm can begin to identify shifting expectations and establish a measure of the stability of those expectations.

The Six Sigma approach to statistical process management also can be a worthwhile tool to help businesses understand the stability of their own execution relative to customer expectations. Quantitative measurement of performance variation is a key to assessment of internal stability, just as much as qualitative assessment of customer expectations is a key to assessment of environmental stability.

Establishing appropriate transparency and stability metrics is a significant endeavor. Successful deployment requires identifying the right metrics, establishing appropriate management routines to review and to act upon the measurements, and training associates to understand the implications of reputation risk management (particularly transparency).

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A comprehensive baseline assessment of the firm's reputation risk is a good foundation, allowing firms to recognize changes to their reputation risk environment (transparency and stability) as they arise. Fortunately, we have begun to see the emergence of consulting firms specializing in this unique intersection of skill sets to deliver turnkey solutions and help firms adopt effective reputation management scorecards.

With the acceleration of reputation risk driven by social media, the 24-hour news cycle and other factors, a window of opportunity has opened for corporate leaders to differentiate themselves through effective, proactive reputation risk management. As these societal changes become more ingrained, only those firms that have adopted a proactive stance towards their reputation risk will survive. As in so many management disciplines, we are beginning to see the rise of quantitative techniques that will render reputation risk management by “gut feel” as obsolete as the “weather rock.”

Kenneth Ramaley, managing director of Ramaley Group L.L.C. in Fort Mill, S.C., has 15 years experience in risk management and advanced analytics and has worked extensively on preventive reputation risk management. He can be reached at ken@ramaleygroup.com.