. 43
( 131 .)


in resignations/recruitment costs, loss of productivity and concerted trade
union pressure;
Financial viewpoints: investor™s, lender™s and insurer™s confidence;
Government and the regulatory regime: reflects changes to a company™s
operating environment beyond its control (e.g. leading to imposed restric-
tions, loss of licence, likelihood of government intervention, etc.);
Government reaction to public pressure: reflects the extent to which per-
ceived unethical business practices are becoming untenable, i.e. over-
charging and monopolistic tendencies;
Government: local government pressures and permits, including planning
regimes and processes which can aid or inhibit operations;
International governments and regulatory regimes: for example, the
European Union, United Nations and international labour organisations;
Journalist and media interest: reflects the extent to which intrusive and main-
tained media coverage could adversely influence stakeholders™ perception;
Chapter 9 “ Shareholder value and reputational risk 211

Key competitors: the extent to which major competitors affect the ˜compe-
titive environment™ like resource and product prices, their reporting and
stakeholder engagement activities; and
Local communities: local communities can prove of critical importance
and can pose risks of their own from activism and objections to planning
applications and business operations. They are also the source of employ-
ees and local reputation is of importance.

The media and NGOs will only be able to create public awareness if the
issues that they are promoting are likely to lead to a high level of anger and
outrage among the general public. ˜Bad news sells newspapers™ and the
press want to highlight the culprits. Industry lives with these issues and
often comes to accept them as par for the course. The public perspective
can be very different and the owner should stand back and try to see the
issue through the public™s eyes. How angry could they get if the company
was to fail to manage the issue?

A SERM stakeholder reputation audit
An overview of the framework for a SERM reputation risk assessment is set out
The company™s executive board should have a set of high-level or prime
objectives which need to be achieved over time. Failure or success in achieving
these aims/objectives will have a major negative or positive impact on the repu-
tation and, ultimately, the value of the company. These objectives will be regu-
larly considered and challenged by the non-executive directors (NEDs) as there
can be a tendency for companies to become blinkered and to overmanage their
˜pet™ issues and not recognise the true reputational opportunities and chal-
lenges that lie ahead.
A reputational risk assessment should:
Identify, quantify and evaluate the risk of the company of failing to achieve
its stated aims/objectives; and
Then actively reduce that risk.
Assessing the risks which are inherent within the business has six stages:
The public profile of the stated objectives and aims;
The level of public awareness and concern in the event of a failure to achieve
any of the stated aims;
The longevity of public awareness and concern of the failure;
The focus of blame on the company in isolation from the rest of the sector;
Stakeholder reactions in the event of a failure; and
The inherent risk of failure of these aims.
Part B “ Overview of the Economic Aspects of Business Risks

There should then be an assessment of the residual risk, which is considered after:
Operational controls and methods of mitigating risk are considered; and
Stakeholders™ expectations are assessed, engaged with and measured.
The residual (net) reputational risk can then be calculated by dividing the
inherent reputational risk by the risk reduction scores for each issue:

Residual (net) reputational risk inherent (gross) reputational risk/the risk
reduction score

The owners of a company should then be in a position to map their risks and
consider where additional resources can increase their risk reduction effort and
will, therefore, have the most impact on reducing the level of reputational risk.
Such an assessment is essential in successfully managing the reputation
and, ultimately, the value of a company. It enables the formulation of a risk miti-
gation strategy that will:
Identify, focus and prioritise on the critical issues and stakeholders;
Obtain the ˜best possible risk mitigation results for the resources employed™
to manage the risk;
Monitor and review progress;
Assist in the decision-making process by providing valuable insight into
˜reward versus risk™ strategy determination;
Complete the risk registers;
Measure internal perception of concerns against external stakeholder sentiment;
Integrate, rationalise and lever conflicting stakeholder expectations;
˜Granulise™ and weight the aims, stakeholders and mitigation categories;
Work effectively throughout the sourcing value chain;
Encourage industry solutions to industry problems;
Work as a pre-emptive planning tool; and
Communicate the results to the wider stakeholder audience, for example
through wider and more effective reporting.
The list should then be expanded to show the key individual stakeholders under
each category outlined above. Agreeing exactly who their key stakeholders are
can be a challenge to most boards. The key stakeholders™ trust and high regard
for an organisation is paramount for sustainable growth and ability to manage
risks instead of ˜fire fighting™.

It is not just fear from the perspective of the individual but also fear for
their family members. If you did not trust someone™s driving you certainly
would not want them taking your children to school. A breakdown of trust
creates fear as in potentially managing one issue badly the public will start
to ask the question ˜who is going to suffer next?™
Chapter 9 “ Shareholder value and reputational risk 213

The link between a company and its key stakeholders is an issue which the
company has the ability to manage or influence, and thereby improve the pos-
ition for the stakeholder. For each of its stakeholders the company should con-
sider the pertinent issues, which could enhance or destroy their relationship.
The issues may vary from stakeholder to stakeholder as their expectations are
not necessarily the same.

Stakeholder reporting
For extra-financial reporting there is an increasing number of guidelines and
reporting frameworks for organisations to become immersed in; the main ones
in the UK are the Turnbull Code, the Corporate Governance Combined Code
(the Code) and the forthcoming EU Accounts Modernisation Directive that the
Operating and Financial Review (OFR) sought to implement. There is a trend
towards the internationalisation of Accountancy Standards with the introduc-
tion of the IFSB et al. Within the SRI field there have been great strides forward
in parts of the EU with new legislation in France, for example, and reporting
requirements are being strengthened in Asia, with a combination of voluntary
approach and countries like Australia imposing legislation. Moreover bodies
like the Association of Chartered and Certified Accountants (ACCA) have sup-
ported the value of narrative reporting for organisations worldwide.
Under the Turnbull Code and the proposed OFR a company should have
these issues clearly identified and entered onto its risk register. They are
dynamic and in further analysing the issues new issues will often emerge
which, if managed well in advance, could significantly enhance the company™s
reputation. With regards to specific risk issues there are social, environmental
and ethical (SEE) risk reporting recommendations from the Association of
British Insurers™ (ABI) guidelines (available at http://www.ivis.co.uk/pages/
framegu.html), although they are intended for listed companies. The Global
Reporting Initiatives (GRIs) template for reporting non-financial performance
(see www.globalreporting.com) can be used in parts in order to provide a struc-
ture to communicate with stakeholders.
Management of these issues sets the company apart from its competitors
and helps answer the question ˜What makes you different?™ If the service the
company provides is similar to the competitions, the only differential is price.
The ultimate goal is to be ahead of the field and align the company™s policies
and operations with its stakeholders™ growing expectations.

The EU Accounts Modernisation Directive (AMD)
The legislative background is that it derives from the Accounts
Modernisation Directives, the 4th and 7th directives on the annual and con-
solidated accounts of companies (Directives 78/660/EEC and 83/349/EEC
respectively) and the directive on the annual and consolidated accounts of
banks and other financial institutions and insurance undertakings.
Part B “ Overview of the Economic Aspects of Business Risks

The Accounts Modernisation Directive became effective for financial
years beginning on or after 1 April 2005. It requires a mandatory enhanced
directors™ report (EDR); large quoted and unquoted companies must pro-
duce an EDR with a ˜fair review™ of the business of the company. This
review should report relevant environment and employee matters using
key performance indicators (KPIs) ˜to the extent necessary for an under-
standing of the development, performance or position of the business of
the company™.
The enforcement structure for the AMD is similar to that for the now
abandoned OFR, namely it is the ultimate responsibility of company dir-
ectors to sign off the EDR, which will be enforced by the FRRP (Financial
Reporting Review Panel). Company auditors are required to state whether
the information given in the EDR is consistent with a company™s accounts.
The objectives of the extended business review in the directors™ report
are that:
(1) The directors™ report for a financial year must contain:
A fair review of the business of the company; and
A description of the principal risks and uncertainties facing the
(2) The review required is a balanced and comprehensive analysis of:
The development and performance of the business of the company
during the financial year; and
The position of the company at the end of the year, consistent with
the size and complexity of the business.
(3) The review must, to the extent necessary for an understanding of the
development, performance or position of the business of the company,
Analysis using financial key performance indicators; and
Where appropriate, analysis using other key performance indica-
tors, including information relating to environmental matters and
employee matters.

Stakeholder reporting channels
The following reporting channels are seen of primary importance in reporting
sustainability performance to stakeholders:
Academic and research organisations:
Collaborative research papers; and
Grants and sponsorship.
Business partners and supply chain:
Tender document; and
Supplier meeting.
Chapter 9 “ Shareholder value and reputational risk 215

Customers and industry partners:
Corporate responsibility or sustainability report;
Purchasing; and
Direct action groups and NGOs:
Corporate responsibility or sustainability report; and
Face-to-face meetings.
Corporate responsibility or sustainability report;
Internal magazine; and
Financial investors:
Annual report;
Press release;
Questionnaire; and
Road shows.
Governmental organisations (local, national and international):
Corporate responsibility or sustainability report; and
Regulated disclosure.
Journalists and media organisations:
Corporate responsibility or sustainability report; and
Press releases.
Key competitors:
Sector journals and sector quality standards; and
Industry trade bodies.
Local communities:
Site newsletter;
Local press article; and
Cause-related marketing channels.

Stakeholder risk analysis
An organisation needs to consider the currency of an issue by asking the fol-
lowing questions:
How current is the issue and is it of growing relevance or concern to the
Is it an old issue which is lying dormant and could suddenly take off?
Is it a new emerging issue?
What are the dynamics of the issue and the stakeholders involved?
Stakeholder assessments and engagement will enable a company to see in a new
light the relationship between itself, its stakeholders and the issues. It will give
a company its overall view as to which stakeholders to target for engagement
Part B “ Overview of the Economic Aspects of Business Risks

and to enter into dialogue with, in order to see how their common interests can
best be aligned.

Benchmarking the issues


. 43
( 131 .)