Computer Science

Supporting Strategic Success through

Enterprise-Wide Reputation Risk Management

Nadine Gatzert, Joan Schmit

Working Paper

Department of Insurance Economics and Risk Management

Friedrich-Alexander University Erlangen-Nürnberg (FAU)

Version: October 2015

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SUPPORTING STRATEGIC SUCCESS THROUGH ENTERPRISE-WIDE

REPUTATION RISK MANAGEMENT Nadine Gatzert, Joan Schmit*

This version: October 30, 2015

ABSTRACT Concern over an organization’s reputation is at a heightened level and has become a top strategic business risk. Reputation creation, enhancement, and protection are critical to an organization’s success, yet highly challenging given the wide ranging and somewhat opaque nature of the concept as well as the variety of potential events causing harm. These qualities call for a strong enterprise risk management (ERM) approach to reputation that is holistic and integrative, yet existing knowledge of how to do so is limited. The aim of this paper is to evaluate and synthesize existing reputation literature in developing an enterprise-wide reputation risk management framework incorporating necessary steps, processes, and considerations. We address risk strategy, risk assessment, risk governance, and risk culture as key elements of ERM and conclude with suggestions for future research.

1. INTRODUCTION Reputation broadly is considered at the core of organizational value, with one study estimating that reputation’s asset value represents 22% of the S&P 500’s total market capitalization (Decyk, 2015). The enormous effects of reputation-damaging events on firm value can also be seen when considering the experiences of BP (2010 oil spill) and TEPCO (2011 Fukushima Daiichi nuclear power plant accident).1 Scott and Walsham (2005) further suggest that changing social norms combined with advanced communication technologies make reputation more fragile than ever, a notion supported by surveys of executives who list reputation as a top strategic business risk (Deloitte 2014). Academics have noted the relevance of reputation to corporate value. Numerous empirical studies suggest that investment in positive reputation creation (and maintenance through risk management) yields strong returns. In general, a good reputation, including investment in reputation building, serves as a signal regarding the quality of products and services offered. This is especially relevant against a background of information asymmetry (Shapiro, 1983; Klein and Leffler, 1981). Firms with a high reputation are further assumed to have potentially

* Nadine Gatzert is at the Friedrich-Alexander University Erlangen-Nürnberg (FAU), Chair of Insurance

Economics and Risk Management, Lange Gasse 20, 90403 Nuremberg, Germany, Tel.: +49 911 5302 884, nadine.gatzert@fau.de, Joan Schmit is at the University of Wisconsin-Madison, American Family Insurance Distinguished Chair in Risk Management and Insurance, jschmit@bus.wisc.edu.

1 BP is said to have lost 50% of its market value while TEPCO lost 80% (Aon, 2012)

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significant competitive advantages as compared to competitors with low reputation (Fombrun and Shanley, 1997), which is why it is also considered as a strategic intangible asset (Hall, 1992). In particular, strong empirical evidence indicates that a positive corporate reputation positively affects stakeholder behavior. Especially important is the effect on customer behavior. Among the findings are that positive reputations imply a higher “willingness to pay” by customers (Graham and Bansal, 2007), positively impact spending and share of wallet (Walsh et al., 2012), and generate purchase intention (Yoon et al., 1993). They also positively affect customer loyalty (Walsh et al., 2009; Walsh et al., 2012), word of mouth (Walsh et al., 2009), as well as trust and identification (Keh and Xie, 2007). Similarly, suppliers are affected by a buyer’s positive reputation, often offering better contractual terms because of the impression of lower credit risk (Van den Bogaerd and Aerts, 2015). When investors perceive an organization positively, they often allow easier access to capital (Shane and Cable, 2002; Dollinger et al., 1997) and lower financing costs along with more flexibility with respect to the type of financing instrument (Wang et al., 2012). Firms with a better reputation also generally have an advantage in hiring employees, generating more job applicants as well as a higher quality of applicants (e.g. Turban and Cable, 2003). In line with the positive effects of better reputations on stakeholder behavior, several studies demonstrate empirical evidence for a significant positive relationship between the level of reputation (over time) and firm performance using various measures of reputation and financial performance (e.g., McGuire et al., 1990; Deephouse, 2000; Roberts and Dowling, 2002; Raithel and Schwaiger, 2014). Roberts and Dowling (2002) and Raithel and Schwaiger (2014) further observe that non-financial components of reputation may even contribute more to financial performance than do financial components. Given the wide array of influences on reputation, the fact that many researchers from a wide range of fields have studied reputation is not surprising. Much of that research is focused on the definition and measurement of reputation, however, and much less on risks associated with reputation and their management (Gatzert et al., 2015). A few exceptions exist, including an entire issue of the Geneva Papers devoted to insurer reputation risk exclusively, including Eccles and Vollbracht (2006) with focus on the relevance of strategic management communication based on empirically observed long-term media reputation, and Gaultier- Gaillard and Louisot (2006) with respect to definitions and drivers of reputation (risk). Others are similarly focused in perspective, such as considering the reputational effects of accounting restatements along with the effect of reputation repair programs (Chakravarthy et al., 2014), reputation as part of social responsibility (Hogan and Lodhia, 2011), and the relationship

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between reputation management and crisis management (Coombs, 2007; Kim et al., 2011). Some focus on the strategic use of resources to create and protect reputation (Eccles et al., 2007; Louisot, 2004), while still others focus on governance aspects including the role of the Board of Directors (Tonello, 2007) or how organizations can improve the value of their ERM taking into account corporate reputation (Rogers et al., 2010). The closest work to our paper is Regan (2008) who offers a broad reputation risk management approach. In this paper, we contribute to the literature by presenting a framework for enterprise-wide reputation risk management that applies across industries, thereby addressing risk strategy, risk assessment, risk governance, and risk culture as key elements of enterprise risk management (ERM). In contrast to previous work, we offer a broader perspective on the underlying causes and consequences of reputation damage based on empirical evidence and insight from the academic literature and provide additional detail in identification of reputation determinants, antecedents, and drivers. While much of this information exists in various places in the literature, it has not been organized into a cohesive framework nor employed in developing an ERM strategy. The framework is intended to support overall organizational strategic objectives through identification of successful methods to protect and support an organization’s reputation. To achieve this outcome, we begin with a discussion of ERM generally, and then follow with specific consideration of each element, focusing on reputation risk. Detail includes extensive consideration to important questions such as how to define and measure reputation and reputation damage, as well as reputation’s determinants, antecedents, and drivers. We follow with a presentation of an enterprise-wide reputation risk management including risk strategy, identification, assessment, and response, as well as risk governance and risk culture based on an evaluation and synthetization of existing reputation literature. We conclude with consideration of the most relevant areas for future research in this field. 2. REPUTATION DEFINITION AND FUNDAMENTAL ERM FRAMEWORK 2.1 Reputation definition, measurement, and antecedents 2.1.1. Reputation definition The definition of corporate reputation typically incorporates the concept of a multidimensional social construct involving the aggregate perceptions of a firm’s stakeholders on financial and non-financial aspects of a firm (Fombrun, 1996). Fombrun and van Riel (1997, p. 10), for instance, define reputation as “a collective representation of a firm’s past actions and results that describes the firm’s ability to deliver valued outcomes to multiple

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stakeholders.” Reputation can differ across stakeholder groups (Walker, 2010), where key stakeholders often include customers, suppliers, (potential) employees, and investors. Conducting a meta-study of research published between 2000 and 2003, Barnett et al. (2006) define reputation as “observers’ collective judgments of a corporation based on assessments of the financial, social, and environmental impacts attributed to the corporation over time” (p. 34). Reviewing literature published in heavily-cited management journals from 1999 through 2008, Lange et al. (2011) conclude with a three-pronged conceptualization as: being known; being known for something; and generalized favorability. They note that most authors start with the notion first proposed by Fombrun (1996) that reputation “exists in the minds of beholders.” Definitions of “reputation risk” incorporate implied definitions of reputation as well. For example, Solvency II and Basel III define reputation risk as the “loss in confidence in the integrity of the institution” (Solvency II definition, see CEA, 2007). Scott and Walsham (2005, p. 311) suggest a broader definition of reputation risk as “the potential that actions or events negatively associate an organization with consequences that affect aspects of what humans value” in order to take into account social, political, and ethical aspects of relevance for “a wide range of stakeholders” and thus beyond shareholder value. In particular, reputation risk often results from other underlying risks such as operational risk events.2 The focus of each tends to be on reputation generating from the perspective of various stakeholders. 2.1.2 Reputation measurement Given the multiple definitions of reputation, it is not surprising that its measurement is equally varied. In general, the most appropriate measure depends on how reputation is being viewed. Measurement is affected as well by who is perceiving the reputation such as an investor, employee, customer, regulator, or other (Lange et al., 2011). Several commonly- used reputation measures are listed in Clardy (2012), including surveys or questionnaires (in case of reputation as general knowledge or beliefs), external rankings (in case of reputation as evaluative judgment),3 interviews (reputation as brand knowledge and beliefs, or as personality), as well as Tobin’s q, Goodwill, or Brand Equity (reputation as a financial (intangible) asset). Deephouse (2000) and Rindova et al. (2007) measure media reputation

2 This is also one reason why the reputation risk policy by Allianz insures risks (crisis events) that are covered

by other insurance policies, which also ensures that the risk is well defined (Gatzert et al., 2015). 3 External rankings typically exhibit further limitations due to an overweighting of financial aspects, amongst

other aspects (Fombrun and Shanley, 1990), and due to its public availability, the construction may influence the ranking, which is why representative surveys are more recommendable (Lange et al., 2011).

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based on a content analysis of print media statements about the firm, including the extent of coverage, favorability of coverage, and content of coverage. Ultimately, the proper measurement technique will depend on the organization’s purpose and the situational context, including relevant stakeholders. Table 1: Selected determinants, antecedents, and drivers of reputation from the literature

2.1.3 Reputation drivers and antecedents In addition to understanding what reputation is, and some sense of methods to measure reputation, successful management of it also requires identification of drivers and/or antecedents through which reputation is developed (Rindova et al., 2005, 2010) and which can contribute to reputation building and reputation repair (Rhee and Valdez, 2009). These drivers and/or antecedents, if adversely affected (or positively affected), will in turn harm (or enhance) the organization’s underlying reputation. In risk management terms, these may be

Determinants, antecedents, risk drivers Reference / described in (e.g.) Determinants (Fombrun et al., 2000)

Financial performance Fombrun et al. (2000), Roberts and Dowling

(2002), Rhee and Valdez (2009, p. 151) Emotional appeal Fombrun et al. (2000) Products and services Fombrun et al. (2000) Vision and leadership Fombrun et al. (2000) Workplace environment Fombrun et al. (2000) Social responsibility Fombrun et al. (2000) Antecedents

High status affiliations (borrowing reputation from affiliates; distinguish from competitors); especially relevant for new firms

Rhee and Valdez (2005), Rindova et al. (2005, 2010), Lange et al. (2011, pp. 180f)

Media (as an information medium, network approach, reputation endorser)

Scott and Walsham (2005, p. 309), Rhee and Valdez (2009, p. 151, 153),

Rankings / certifications from institutional intermediaries (as an information medium, network approach)

Rhee and Valdez (2009, p. 153), Rindova et al. (2005)

Firm characteristics (institutional ownership, advertising intensity and diversification, specialization, organizational age, longevity and past performance, (complexity of) firm’s market action profile, corporate culture and identity)

Rhee and Valdez (2009, p. 151, 152f), Lange et al. (2011, p. 177), Basdeo et al. (2006), Fombrun (1997, p. 8)

Reputation spillover (“reputation commons” problem; spillover within and across sectors)

King et al. (2002), Cummins et al. (2011)

Congruence between reputation claims and context Scott and Walsham (2005, p. 312) Risk drivers Internal risk drivers (corporate governance, human rights, human resources, community involvement, environment, business behavior)

Scandizzo (2011)

External risk drivers (project, counterparty, country, sector risks)

Scandizzo (2011)

Changes in technology and social norms Scott and Walsham (2005), Eccles et al. (2007)

Reputation-reality gap Eccles et al. (2007)

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considered “hazards,” which are conditions that make losses more likely and/or of larger value. Table 1 shows a list of selected determinants, antecedents, and risk drivers of corporate reputation from the literature. Ultimately, these concepts of reputation definition, measurement, determinants, antecedents, and drivers are key components to a successful ERM process. 2.2 Key elements of ERM At its best, ERM manages risk across the entire organization in an integrated and holistic manner, considering interdependencies across risk situations. ERM is a critical support of the firm’s business strategy and is intended as a means to manage opportunities and risks in a coordinated process for purposes of increasing firm (and stakeholder) value.4 When comparing various ERM frameworks and standards,5 one can derive that organizational ERM encompasses four key elements. They are: risk strategy, risk assessment, risk governance, and risk culture. These are discussed in detail below, with a focus on integrating reputation risk management as depicted in Figure 1. In this context, we note that a Canadian survey by Rogers et al. (2010, p. ii) shows that firms on average need “more than five-and-a- half years of ERM experience before exploring ways to integrate the management of corporate reputation into the ERM process.” Figure 1: Embedding reputation risk into an ERM framework

4 Grace et al. (2015) demonstrate that ERM adds to an organization’s cost and revenue efficiency; see Gatzert

and Martin (2015) for a survey of the empirical literature that shows that ERM generally has a (significant) positive impact on firm value.

5 See, e.g., KPMG (2001), FERMA (2002), COSO (2004), ISO (2009).

Risk Strategy -define

goals/objectives -set risk appetite

Risk Assessment -identification -measurement -evaluate and prioritize risk

treatment

Risk Governance -risk ownership -internal control -communication

Risk Culture -establish risk

culture -set culture across entire organization

-ensure risk awareness

Reputation risk as key element of strategy

Reputation risk as risk of risks – Identify key causes – Measure effect on organizational

goals and outcomes such as revenues and profits

– Identify and evaluate risk treatment options

– Monitor results and update Governance establishes processes and structures around (reputation) risk – Identification of key stakeholders – Establish risk ownership – Develop strong communication

both internally and externally

Reputation risk culture – Requires embedding reputation

risk into the holistic ERM framework to foster cohesive culture of risk awareness

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Reputation risk is considered a “risk of risks,” meaning that it generates from other sources of variability. A successful ERM process, therefore, manages reputation risk effectively, and a successful process to manage reputation risk will be an effective ERM effort. In addition, managing corporate reputation can generate substantial value for firms by positively influencing various stakeholder groups as described in the introduction, which is exactly in line with the goals of ERM. Conversely, a not well managed reputation can induce costs for firms, including from redundant or inconsistent risk identification and risk management processes (see also Tonello, 2007; Regan, 2008). Tonello (2007, pp. 23f) further raises the question whether reputation risk should be treated separately from other business risks or not. He cites a survey, where 55 percent of the participants responded that it should be considered as a “failure to manage other risks effectively” and should thus not be managed separately. We note as well that the few insurance policies providing protection against reputation events tend to require the occurrence of an underlying loss (Gatzert et al., 2015). 3. INTEGRATING REPUTATION RISK MANAGEMENT IN A HOLISTIC ERM FRAMEWORK 3.1 Risk strategy The purpose of any unit or activity within an organization is to support the organization’s overall strategic objectives, where ERM is a critical element. In defining the activities and procedures for ERM, therefore, coordination and alignment with the organization’s objectives is imperative (Rogers et al., 2010). One important step is to identify the set of key stakeholders that are vital for achieving the company’s long-term strategic goals and objectives (see, e.g., Tonello, 2007; COSO, 2004). In this regard, Lange et al. (2011, p. 165) point out that the identification of an organization’s key stakeholders is generally highly complex (see also Mitchell et al., 1997). To define the organization’s risk appetite in regard to reputation requires defining how to measure reputation and reputation risk, e.g. by examining the impact of a changing stakeholder behavior on a chosen financial performance measure (see Regan, 2008). Based on their characteristics, objectives, and experiences, organizations may choose to accept quite different levels and types of risk; therefore, evaluation of risk management options must be made based on the defined risk appetite. All of these elements associated with risk strategy requires the involvement of the Board of Directors as well as a strong communication plan to ensure support of the defined strategy

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throughout the organization (see also Regan, 2008, and Tonello, 2007), which is also of high relevance when implementing risk culture. 3.2 Risk assessment Risk assessment encompasses risk identification, measurement, evaluation/response, and monitoring. The intention is to have a full sense of the organization’s exposures to risk, the opportunities and challenges posed by those risks, and sufficient detail regarding risk dimensions and dependencies in order to evaluate possible risk response solutions. 3.2.1 Risk identification A risk source not identified is one managed well only by accident. A rigorous, extensive, and thoughtful identification process, therefore, is crucial to an organization’s success. Specifically, the organization ought to identify exposures, perils, and hazards. An exposure is what can be lost, the peril is the cause of loss, and hazards are conditions that make loss more likely and/or larger. Gatzert et al. (2015) describe these elements within a reputation risk situation with focus on reputation-damaging events. In this case, the “crisis event” is the peril causing loss, while reputation is the exposure, and the financial effect of a damaged reputation is the measurement of loss. Successful reputation risk management requires identification of potential crisis events taking into account that reputation risk is a risk of risks, their financial implications, and the factors that affect their occurrence and effect, especially in regard to the impact of events on the behavior of the firm’s key stakeholders as identified in the risk strategy definition step (see previous subsection). As a risk of risks, reputation risk identification is a multi-step process: First is to assess reputation-relevant underlying business risks and understand how these underlying risks may affect reputation, i.e. the perceptions of stakeholders. In this regard, it is also vital to understand the possible ways in which such reputation-damaging events affect stakeholder outcomes and ultimately stakeholder behavior, thus causing a financial loss for the firm, e.g. due to lost revenues or higher costs of capital. The intention ultimately is to ensure that these underlying risks are managed effectively. As Regan (2008) indicates, a thorough risk identification process also requires a team at all levels of the company with sufficient knowledge about the company and the environmental conditions. In particular, Regan (2008, p. 191) suggests interviews with internal and external experts, brainstorming sessions, or event inventories to identify reputation relevant underlying risks. These activities need to consider not only risks present within the organization (market and

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credit risks, underwriting / insurance risks, and operational risks), but also risks that may arise from outside the firm due to reputational spillover effects within and across the industry, see Cummins et al. (2011) for an empirical analysis in the financial services industry, or due to misconduct by business / trading partners (see Regan, 2008). An overview of selected empirical evidence in the event study literature regarding reputational crisis events that can significantly affect financial performance as well as trigger events (perils) often used in reputation insurance policies is provided in Table 2, and we refer to Gatzert (2015) for a more comprehensive review of this literature. Of the existing empirical studies, we note that quite a few have focused on the influence of operational risk events on financial reputational losses in the sense of market value losses. Some of this research has been done in the financial services sector, given the regulatory requirements to identify, report, and assess a variety of risk sources, including reputational risk sources. In general, a positive association between the occurrence of operational risk events and financial reputation loss is found. Most consistently found is the positive association with fraud-related events. Outside of the financial services sector, studies have shown a negative market impact of a variety of events/behaviors, which also include fraudulent and criminal activities, unethical behavior, legal disputes as well as product failures (see Table 2). In addition, regarding the impact of reputation-damaging events on corporate reputation, the empirical literature should be taken into account as well when assessing risks for the respective firm. See also Section 1 for a short overview of empirical evidence regarding the consequences regarding stakeholder behavior and financial performance for firms with strong (or weak) corporate reputation, and Gatzert (2015) for a review of the respective empirical literature on stakeholder behavior. If we stop at the list above, however, we miss the opportunity to identify new sources of risk. That is, successful risk management requires anticipation of events that have not yet happened and that is active rather than reactive. Scott and Walsham (2005) in particular highlight the combined effects of continuously changing social norms with technological advances in communication capabilities as requiring anticipation of what could happen based on new conditions.

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Table 2: Selected underlying causes with potential impact on corporate reputation and financial performance: Insight from the event study literature

To identify the specific reasons for losses in reputation and/or financial reputational losses, an analysis of the effect of reputation-damaging events on various adverse behavioral changes of different stakeholder groups is vital.6 For instance, customers may switch to a competitor implying a reduction in revenues, suppliers or business partners require higher contracting costs due to an increasing monitoring effort, employees may leave the company or are less

6 In this context, firms should also distinguish between financial and non-financial components of reputation,

which can have a different impact on financial performance (see Roberts and Dowling, 2002) due to different effects on different stakeholder groups.

Underlying risk / crisis event with impact on… Empirical evidence / reference in…

…financial performance (non-financial industry)

Fraudulent earnings restatements Palmrose et al. (2004) Allegations of illegal activities Murphy et al. (2009), Alexander (1999) Criminal fraud charges Karpoff and Lott (1993) Corporate illegalities Davidson and Worrell (1988), Reichert et al. (1996) Military (defense) procurement fraud Karpoff et al. (1999) Environmental violations Karpoff et al. (2005) Financial misrepresentation Karpoff et al. (2008) Public disclosure of allegations of price-fixing Skantz et al. (1990) Legal disputes Bhagat et al. (1998) Unethical business behavior Long and Rao (1995) Technical and product failures Rubin et al. (1988), Borenstein and Zimmerman (1988),

Mitchell and Maloney (1989) … financial performance (financial industry) Operational risks (especially fraud); effect depends on type of firm, firm characteristics, sequence of triggering events, timing of market reaction

Perry and de Fontnouvelle (2005), Cummins et al. (2006), Gillet et al. (2010), Biell and Muller (2013), Sturm (2013), Fiordelisi et al. (2013, 2014)

Operational risk implying inter- and intra-sector spillover effects (banks, insurers)

Cummins et al. (2011)

… corporate reputation Layoffs Flanagan and O’Shaughnessy (2005) Downsizing (conflicting signals to stakeholders: potentially positive for shareholders, negative for (potential) employees or customers)

Love and Kraatz (2009)

Corporate Crime Williams and Barrett (2000) Exemplary trigger events (perils) used in reputation insurance policies (e.g. Munich Re)

Gatzert et al. (2014)

Product recall Discrimination or harassment of clients or employees

Breach of data privacy Loss of key persons Misconduct of key persons Breach of UN Global Compact Principles No. 3, 4, 5, 6 (labor) and 10 (anti-corruption)

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motivated, investors increase their costs of capital due to a reassessment of the firm’s business risks, or regulators impose an investigation along with sanctions or require a reorganization, thus implying additional costs as well (see Cummins et al., 2006). 3.2.2 Risk measurement In line with the risk identification process, the measurement or assessment of reputation risks starts with an evaluation of the underlying risk sources. Most often, reputational losses result from operational or strategic loss events (see previous subsection), which often are difficult to quantify due to a lack of historical data. In these cases, qualitative approaches such as risk workshops and the derivation of risk maps may be used based on likelihood and severity assessments (see also Regan, 2008, p. 192). In general, however, a holistic approach is needed when quantitatively and/or qualitatively assessing the underlying risks (financial, underwriting, hazard, operational risks) by taking into account potential reputational damages, e.g. done by the risk owners, given that the underlying risk event occurs. Typically the triggering event is reported in the media; otherwise, stakeholders are unlikely to be aware of the event and therefore will not alter their perceptions. One element of risk quantification, as a result, is to assess the likelihood of negative publicity from various potential events. Tonello (2007, pp. 32-33) states specifically that the probability that an event breaks the news in the first place is increased if “management does not meet public expectations in terms of ethical standards (risk of fraud), the board’s oversight is ineffective (governance risk), or the company does not avail itself of a thorough compliance program (compliance risk).” Furthermore, once negative publicity does occur, the actual effect of that publicity on corporate reputation and thus the perception of stakeholders may depend on various factors. For example, Love and Kraatz (2009) find that prior reputation serves as a moderating factor in that firms with a stronger reputation suffer less reputation damage after a downsizing. Other empirical work show that firm size and organizational age strongly affect the impact of a reputation event (Flanagan and O’Shaughnessy, 2005). Eccles et al. (2007) further describe the reputation-reality gap, changing beliefs and expectations, as well as weak internal coordination as factors impacting the level of reputation risks. Financial losses in case of a reputation-damaging event typically have been measured in the event study literature as the difference between the resulting market value loss (requiring consideration of listed companies) and the original loss. Other financial measures include a loss of revenue, operating margins, or market share, all of which allow consideration of instances beyond just that of stock listed corporations.

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An interesting item to note regarding this approach to measurement of reputation losses is that it does not measure directly the effect on stakeholder perceptions, which is how most commentators refer to the notion of reputation. More research is needed to understand the relationship between perceptions and behaviors across various stakeholders and then further to understand the relationship between those perceptions and organizational outcomes (see also Gatzert, 2015). For instance, while a particular event might not have an immediate effect on profit, it might form the basis for future changes in perceptions that could have devastating effects on the organization’s long-term results. A damaged reputation, however, does not necessarily result in actual financial loss. After the trigger event happens, response and communication are vital (Chakravarthy et al., 2014), including a firm’s social media capabilities (Lee et al., 2015). Furthermore, insufficient risk prevention measures, e.g. insufficient internal controls, operational risk management, crisis communication strategy, can amplify the likelihood and/or severity of reputational losses. Moderating factors may further impact the extent of the financial loss after a crisis event. For instance, Rhee and Haunschild (2006) find that organizations with stronger prior reputations experience greater financial reputation losses upon the reporting of relevant events (product recall). They actually receive more media attention when those events occur as well, likely contributing to the larger negative effect of the event itself. On the other hand and as described above in case of reputational effects, market analysts and consumers may resist changes in reputation ordering because the ordering is collectively regarded as appropriate. Highly reputed firms, therefore, may be more resilient to the revelation of product defects (see also Pfarrer et al., 2010). Reputational effects are also moderated by substitutability and generalism or specialism, as Rhee and Haunschild (2006) show that “having few substitutes with an equivalent level of reputation, or a focused product identity stemming from specialism, buffers the negative market reactions to product recalls.” Furthermore, antecedents and risk drivers such as changing norms and technological progress can impact reputation. If there is a financial effect, however, it can lead to a downward spiral. The loss of resources will dampen the organization’s ability to undertake its strategic initiatives; furthermore, lower resources are themselves taken as a sign of poor quality, thereby affecting reputation negatively (Fombrun and Shanley, 1990 Roberts and Dowling, 2002).

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