Top 10 op risks: reputational damage

Reputational damage: top 10 operational risks for 2013

Up in smoke: BP’s reputation suffered after the Deepwater Horizon oil spill – but did BP deserve all the blame it received?

A good reputation has never been easier to lose – though this may not be a problem for much of the financial sector, as it doesn’t have one. Once again in 2012, the annual Trust Barometer survey conducted by US PR firm Edelman found banks and financial services the least trusted sector of business – less trusted even than they were in 2011.

From a psychological point of view, this represents a real problem: once ‘primed’ with a negative impression of a company, people are far more likely to believe further negative news, while positive news faces an uphill struggle to be accepted.

Social media’s ubiquity means that reputational damage can spread far faster than ever before; it also opens the door for the easy creation and spread of malicious rumours. Social media monitoring is now becoming essential, with banks and other financial service providers devoting full-time teams to maintaining the company’s reputation on Twitter, Facebook and elsewhere.

And, in particular in consumer banking, expectations of service levels are also high – if customers are used to being able to conduct transactions online or via a mobile device at will, there is very little margin before a service interruption becomes reputational damage. Longer interruptions, of course, can be catastrophic, as Royal Bank of Scotland found to its cost when a failed software upgrade in 2012 interrupted payment services for many of its customers for up to two weeks.

Growing use of outsourced service providers also exposes companies to reputational risk (see “Emerging market operational risk”) – as technology and manufacturing companies such as Apple have already found to their cost, the public will hold a company morally responsible for misdeeds or poor working practices at a contractor or supplier abroad (often instead of the contractor itself – public blame for the 2010 Gulf of Mexico oil spill fell entirely on BP, rather than on the contractor that was actually operating the Deepwater Horizon rig, Transocean). And growing regulatory pressure, through legislation like the US Foreign Account Tax Compliance Act (Fatca) and the UK Bribery Act, to hold companies legally responsible for their contractors will only increase the risk that they will suffer reputational as well as regulatory loss from something that happens at a contractor to which they may be only indirectly linked.

“There is a big focus on vendor management – the pressure is being put on vendors through banks. It’s a hot topic, a lot of our clients talk about it, and not all institutions are aware enough yet – especially some second-tier banks, which really need to work on it,” says Bob Contri, partner in charge of the financial services practice at Deloitte in New York.

Top 10 operational risks 2013: Back to introduction

IT sabotage
 

Reputational damage

NEXT: Incentives and compensation

Fraud and customer data abuse

Epidemic disease

Political intervention

Sanctions and AML compliance

Emerging market operating risks

Business continuity and disaster recovery

Failure to enforce internal controls