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Questions and Answers
What percentage of market value often comes from intangible assets like brand equity and goodwill?
Most companies effectively manage their reputational risks before they become crises.
False
What approach do companies typically take when addressing threats to their reputation?
Crisis management
Companies with strong positive reputations are more likely to attract better ______.
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Match the following concepts with their descriptions:
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Which of the following factors does NOT determine the extent of a company's exposure to reputational risk?
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Reputational risk is explicitly included in the Basel II framework for regulating capital requirements.
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What role does media coverage play in a company's reputation?
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The gap between a company's reputation and its actual character is referred to as the __________.
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Match the following companies with the issues that affected their reputations:
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What does the quote by Abraham Lincoln imply about character and reputation?
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Stakeholder expectations have remained unchanged over the past few decades.
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Name one major auto manufacturer that improved vehicle quality by 2001.
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The competitive advantage for companies can be severely affected by __________ circumstances from interest groups and media.
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Match the company with its initiated societal responsibility initiative:
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Which of the following practices was once considered acceptable but is now viewed as unethical?
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Merck faced lawsuits due to their painkiller Vioxx causing heart attacks.
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What can happen when a company's actions do not align with its public expectations?
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What was American Airlines negotiating at the same time it approved retention bonuses for senior managers in 2003?
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The CEO is solely responsible for managing reputational risk in a company.
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What are the five steps for effectively managing reputational risk?
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The company must remain above the awareness threshold, which is a minimum number of stories mentioning or featuring the company in the leading _______.
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Match the following aspects of reputation management with their descriptions:
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What percentage of media stories should be positive for a company to maintain a positive reputation?
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Why is strategic media intelligence preferred over old clipping services?
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Study Notes
Managing Reputational Risk
- Reputational risk is important for attracting good talent, charging a premium for services, and increasing customer loyalty.
- 70% to 80% of market value comes from intangible assets like brand equity, intellectual capital, and goodwill.
- Companies typically focus on crisis management and not actively managing reputational risks.
Determinants of Reputational Risk
- Reputation-Reality Gap: When a company's reputation is more positive than its actual character, it poses a substantial risk. This gap can be revealed by financial performance metrics, ethical conduct, and environmental practices.
- Changing Beliefs and Expectations: Stakeholders' beliefs and expectations can change over time, widening the reputation-reality gap. Examples include changes in ethical standards, environmental concerns, and corporate social responsibility.
- Weak Internal Coordination: Poor coordination between different business units and functions can lead to conflicting expectations and damage a company's reputation.
Managing Reputational Risk: Five Steps
- Assess Reputation: Companies must measure their reputation across multiple areas, such as product quality, financial performance, and employee relations. This can be achieved through media analysis, surveys, focus groups, and public opinion polls.
- Evaluate Real Character: Examine the company's actual performance and behavior to identify discrepancies with its perceived reputation.
- Close Reputation-Reality Gaps: Address any inconsistencies between reputation and reality by improving performance, reducing expectations, or enhancing communication efforts.
- Monitor Changing Beliefs and Expectations: Continuously track shifting stakeholder sentiment and expectations to ensure alignment with the company's practices.
- Assign Responsibility: Appoint a senior executive below the CEO to oversee the coordination of all reputational risk management activities.
Media Coverage
- Media heavily influences stakeholder perceptions and expectations.
- Companies need to stay above the awareness threshold to maintain their visibility and reputation.
- Aim for at least 20% positive media coverage and no more than 10% negative coverage.
Media Coverage and Reputation
- Media coverage above awareness threshold is crucial for any company, regardless of size.
- Even positive stories in low-coverage scenarios are ineffective, and negative news can reinforce negative reputation.
- Companies must strive for a 35% "share of voice" in the media to minimize negative stories.
- Share of voice needs to reach 50% during crisis situations to counter negative narratives.
Evaluating Company Reality
- Managers often overestimate their company's capabilities.
- A lack of negative news doesn't guarantee a good reputation: absence of coverage often means no reputation.
- Performance targets need to be benchmarked against competitors.
- Data reliability and consistency issues can plague benchmarking processes.
Tools for Managing Reputation Risk
- Extensible Business Reporting Language (XBRL) helps improve data analysis and transparency in financial reporting.
- Visualization software utilizes color and diagrams to highlight financial trends and potential risks.
Closing Reputation-Reality Gaps
- Companies must address gaps between perceived reputation and actual reality.
- Effective investor relations and communications programs can bridge the gap.
- Unjustifiably positive reputations require either improvement in capabilities or a lowering of stakeholder expectations.
Monitoring Changing Beliefs and Expectations
- Regular surveys of stakeholders can identify shifts in priorities and potential gaps between reputation and reality.
- Periodic surveys of experts can identify relevant trends.
- Engage with influential NGOs to understand potential risks and gain a clearer understanding of emerging issues.
Reputational Risk Management
- One executive should be responsible for assessing reputation, evaluating reality, and managing related risks.
- This individual should report regularly to top management and the board.
- Implementing a comprehensive risk management process is feasible and cost-effective.
Importance of Focus
- Reputational risk management requires a dedicated focus and clear responsibility.
- By recognizing reputational risk as a distinct category, companies can allocate resources and coordinate efforts.
- Ignoring negative aspects and unrealistic optimism can lead to unforeseen damage.
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Description
This quiz explores the critical aspects of managing reputational risk in businesses. Understand how factors like the reputation-reality gap and stakeholder expectations impact a company's market value and ethical conduct. Assess your knowledge of strategies to bridge the reputation-reality gap and enhance internal coordination.
