Impact of reputational risks on organisational performance.
Reputation is as old as human existence. Organisations create reputation for themselves through their actions. The bizarre part of reputation is that it could be built subconsciously. This encourages increase in awareness of organisational reputation and attendance to stakeholders’ demands. As well-resourced reputations is capable of reflecting the delivery of demonstrable performance criteria reinforced by effective communication with and between stakeholders. This is the motivation of the research topic.
Corporate reputation manipulates the products and services consumers’ purchase, the investments investors make, the job offers prospective and current employees pursue and the regulation regulators make as well as the attraction of groups in a society towards or away from an organisation.
Organisations are striving to achieve positive perception from the various sects in the society to ensure their purposes, on which performances is assessed. Strong reputation can provide reasonable assurance that objectives are achievable as it creates stability and remove doubt.
The objective of research is to assess the impact corporate reputation (using quantitative and qualitative research methods) deduced from public ratings, to provide a basis on which achievement of organisational performance could be enhanced.
It was found out that individuals in a society belongs to at least one group of stakeholders and organisations inability to provide for their interests is likely to results in repulsive actions. Since these are depriver to organisational performance achievement, it could be asserted that corporate reputation ameliorates performance
KEYWORDS: Corporate Reputation, Reputation Management, Organisational performance.
LIST OF ABBREVIATIONS: Reputation Management (RM), Corporate Social Responsibility CSR
CHAPTER ONE: INTRODUCTION
1.1 An Overview
In the field of risk management, various researches have been conducted dealing with measurement and management risks. The same applies to reputational risk, as part of the enterprise risk management of an organisation. A number of researches has confirmed that efficient of all sort of risks ensure reduced losses. However, reputation, highlighted as risks of risks (Economic Intelligence unit, 2005) has limited research in integration of reputation risk into the Enterprise risk management.
As discussed earlier that reputational risk being difficult to measure and quantified should be focused on more with high level of awareness, this is not the case.
The research takes approach through the input it adopted in its questionnaire of seeking the perception of the public on reputation. The lack of this approach by governmental institutions, profit and non-profit oriented organisation in jointly seeking the overall perception of all its stakeholders which prompt this research aiming for the objectives:
To assess the effects of reputation risks on perspectives of organisational stakeholders who could influence performance of entities
It aim to provide an understanding of the structure and requirements of implementing effective reputation management in consistent with recent knowledge in this area.
These objectives are attempted through the following questions:
Is there a relationship between corporate reputation and performance?
What are the effects of corporate reputation on organizational performance?
Can these findings be generalized?
1.2 Problem Definition
Corporate Reputation of an organisation is ever - existing but not always thought of until an organisation realises it may influence its objectives, which it uses to gauge its performance or could be used to attain competitive advantage. The question that arises is that what constitute reputation and how to manage them to avert their negative impact on an organisation? As stakeholders of an organisation are numerous, it is therefore essential to acknowledge managing corporate reputation from all fronts of its stakeholders. The researcher considers the existence of different groups of stakeholders of an organisation based on sample selected along with their decisions in situations which go along their perspective on organisation reputation.
Essentially, I argue on the side of effective management of stakeholders is capable of influencing the direction an organisation takes, adopting its reputation as a means for such proposition.
1.3 Research Objective
The objective of this research is to assess the effects of reputation risks on perspectives of organisational stakeholders which could influence performance of entities. It also aims to provide an understanding of the structure and requirements of implementing effective reputation management in consistent with recent knowledge in this area.
1.4 Theoretical Framework
Measuring the impact of reputation should be done through the major elements of RM, Although these elements are difficult to measure directly from the sample of the research, these elements are variables which prompts their components or causal characters which were identified as major independent variables; with relation to the dependent variable to be measured.
It should be noted this kind of analysis does not identify the weakness points. Therefore, to locate the major weaknesses that lie within the main elements, the components of those elements; minor independent variables; should be measured in order to locate the exact weakness components.
1.4.1 Dependant Variable
1.4.2 Major Independent Variables
1.4.3 Minor Independent Variables
Investment and Share price
Regulation infringement penalty
Each of the research variables will be measured by a set of statements covering all dimensions of a variable. These statements are demonstrated in the form of a questionnaire, in order to have standardized data allowing easy comparisons, which would also give more control over the research process. Such a strategy in collecting the data will keep the researcher independent. The research included the general public captured through various media which support easy access to suitable individuals needed for the research and who are likely to qualify for one or more of the independent variables.
The statement will be weighted individually depending on the importance of each using a five – point Likert scale where:
1 refers to very likely/ very unlikely
5 refers to very unlikely / very likely
In support of the position of questions in the questionnaire, this could either be positive or negative.
1.5 Research Questions
The research will attempt to find answers to the following questions:
Is there a relationship between corporate reputation and performance?
What are the effects of corporate reputation on organizational performance?
Can these findings be generalized?
Statement of Hypothesis
Null hypothesis: The level of reputation risks is not directly related to organisational performance.
Alternate hypothesis: The level of reputation risks is directly related to organisational performance.
1.6 Research Methodology
1.6.1 Data Needed
The data for this study will be collected from different sources. A questionnaire is designed for this purpose. The researcher will use specified questions for clarifying any questions that might be misunderstood by respondents, within some questions, to avoid misleading answers, and to provide additional data sources.
1.6.2 Sample Selection
The sample is open to the general public to ensure reasonable response needed for all sections on the questionnaire. The researcher will send out questionnaire to unlimited response from which results will be scrutinised.
1.6.3 Sample Size
The researcher limited the sample size to 600 which he deemed reasonable and for proper data analysis within the short time of the dissertation, for four weeks.
1.6.4 Data Analysis
All data will be analysed through ‘Microsoft Excel’ and simplified as per the needs and specific requirements of this research. The final data is transferred from ‘Microsoft Excel’ after being run through statistical tests to measure the strength of correlation between the independent and dependent variables by applying the chi test square and then the other statistical analysis. These are the minor independent variables, with their major elements. We shall then measure the overall effectiveness of each minor element to detect the weakness points, later measure the overall effectiveness for the major elements, and finally measure the overall effectiveness to the sample in order to represent the population and reach the objective of the research taken.
1.7 Assumptions and Limitations
Organisations are aware that negative actions or occurrence towards any stakeholders will have negative impact on their performance. The respondents of questionnaire belong to at least one of the stakeholders organisations have. Respondents understand terms used in the questionnaire as they attain at least degree level of education.
There are numerous limitation faced during the research:
The Questionnaires may not be addressed with full attention and in good faith. As a result, the questionnaire was set so that many different questions would address same result, thus not directly focusing on one element or component.
Longer time limit for the duration of the research would have recouped more results, thus better representative sample, reliable data and analysis could have been done.
The researcher was faced with restricted resources to assess avenues which could have provided better insight.
Other data collection means inaccessible to the researcher will have added value to the quality of result.
1.8 Research Structure
Chapter one: Introduction: A brief introduction to the background of Corporate Reputation Management. It highlights the research objectives and questions and explains the structure of the research.
Chapter two: Literature Review: A discussion and analysis of available research on RM. The literature review sets the research work in the wider context of corporate reputation.
Chapter three: Research Methodologies: This chapter discusses different methodologies adopted in this research and the research strategy chosen. It describes the questionnaire made to measure the impact of reputation on organisations including statistical analysis used including the method of testing and validity of instrument used.
Chapter Four: Data Collection and Results: Data collected from the questionnaires, are being analysed in this chapter.
Chapter Five: Data Analysis: Findings from research are summarised. Attention is again directed at the research objectives, questions and hypothesis.
Chapter six: Conclusions and Recommendations: The dissertation ends with a summary and presenting of the final results and a discussion as well as recommendations. It discusses the limitations faced during the research and the contributions and recommendation for future researchers.
This chapter set the tone of the other chapters. Its framework focus on the acknowledgment that to achieve research objectives and provide answer to the research questions, an all-inclusive study based theoretical and empirical testing are needed. The details of approach adopted used in this research are later discussed in coming chapters with this chapter pointing to where to find areas of the research reader may be interested.
CHAPTER 2 LITERATURE REVIEW
This chapter is an overview of the concept of reputation management and available research on Corporate Reputation. This will give us an overview of Corporate Reputation, its elements and constituents, its importance to businesses and discussion on its measurements and management.
“Reputation is the opinion generally held of a person or thing” (Collins, 2009). This shows reputation is as old as man. One of the few old inferences of reputation could be traced back to 1961, where (Susan V. Scott, 2005) it was quoted that how an organisation and its products is regarded could influence the personnel it recruits, investors, legislations, adequate customers and relationships in the community it operates. Reputation is a reflection of how well or how badly different groups of interested people – stakeholders – view a commercial name (Larkin, 2003).
Reputation is a socially shared impression, a consensus about how a firm will behave in any given situation. It is based on a set of collectively held beliefs about a company’s ability and willingness to satisfy the interests of various stakeholders (Helm, 2007).
Reputational risk is any risk to an organisation's reputation that is likely to destroy shareholder value. Reputational risk is one of the risks Basel 2 definition of operational risks excludes (Reputationsl risk, 2011)
Reputational risks range from physical failure (manufacturing fault or accident) to security failure, product/service shortfall, competitor targeting, bad behaviour, unfair employment practices, damage to health, safety or the environment, inconsistency in policies/practices, poor governance/ethics, regulatory intervention, threat of litigation, adverse stakeholder perception and so on. In fact, reputation has always mattered, but the assault on corporate reputation has intensified as a result of some compelling trends that are placing new pressures on companies (Larkin, 2003).
In brief, “Reputations reflect behaviour an organisation exhibits day in and day out through a hundred small things. The way it manages reputation is by always thinking and trying to do the right thing every day”. Reputation risk can be considered in terms of corporate reputation (Larkin, 2003).
2.2 DEVELOPMENT OF REPUTATION
Until the turn of this century, after which the gathered momentum regarding reputation culminated into series of books, conferences and institutional ratings and legislations – a view which could be supported by the recent texts (Matteo Tonello, 2007) on the topic(mostly less than twenty years), recent establishment of reputation institute in 1999 which followed the quarterly Corporate Review Journal in answer to “demands by practitioners for answers to questions about how reputations affect competitive positioning, about how to examine and value corporate reputations” (Fombrun, 1999), corporate reputation is modestly regarded in risk management.
2.2.1 GRADUAL EVENTS SUPPORTING FOUNDATION OF REPUTATION
The abrasion of traditional authority
The respect in the judgement of experts has plummeted to a very low level. People don’t longer hold on to comments of doctor, accountant, lawyer or priest. Industrialized societies are experiencing low levels of confidence in spite of recent stable economic and political conditions. Surveys suggested that trust in government is at an all time low, characterized by a pervasive decline in deference to authority. Economic growth over the last few decades was supported by the good modern welfare state, have resulted to economic security. Authority has shifted away from religion and the state and has moved to individuals, with growing preoccupation with the quality of lifestyles, opinions, values own autonomy (Larkin, 2003).
Nowadays, conventional authority is rejected, and people prefer to believe in their own sense of identity and individuality where as everyone has view and opinion believed to hold the same weight, regardless of the credibility of its source which is capable of prompting claims of discrimination or exclusion, when reinforced through the media and consumer action (Larkin, 2003).
Decline in trust
There is great concern about the human impact on the environment, as the growth of material consumption and population generate greater pollution and resource degradation. The economic and political structures of global and national development are, in some people’s minds, starting to develop doubt and encourage inequality (Larkin, 2003).
A decline in the reputation of science
Lack of trust has generated motions that : The perceived purpose of science is crucial to public response, people now question all levels of authority, including scientific authority, people place more trust in science which is seen to be ‘independent and there is a culture of institutional secrecy which invites suspicion (Larkin,2003).
Government policies have been increasingly oriented towards identifying and protecting victims, or potential victims, in the form of new ‘rights’. Recently, the right to compensation and the recognition of a formal complaint was given an emotional dimension by a growing concern about the needs of victims. It has become the norm to form a victim’s group, not only for compensation purposes, but to carry the mantle of demands for better safety and associated regulation (Larkin, 2003).
Organisations who do not appreciate the social and political status accorded to victims exposed themselves to reputation risks.
Corporate social responsibility agenda
The relationship between business and society has benefits, but also attracting new risks which will determine prosperity or extinction. Some of these impact on the environment, and on society in general and have created new challenges with implication for financial and reputation performance (Larkin, 2003).
Corporate social responsibility is based on the belief that trade brings obligations and that companies should be accountable for their use of resources. It covers a number of issues:
Employment – workforce diversity and appropriate workplace conditions and practices.
Environment – limiting environmental impact from any stage throughout product and process lifecycles.
Human rights – Respect for human rights anywhere a company operates.
Communities –Involvement in community activities of a company location.
Commercial relationships – dealing fairly with customers, partners and suppliers;
Numerous influential accreditation schemes relating to some or all of the above issues have emerged in relation to CSR performance and reporting. Achieving a balance between commercial success, environmental quality and social justice means that the stakes are becoming much higher for companies in their dealings with the outside world. Society expects more from business. Transparency and accountability have become the watchwords of modern business, and external perception of the way in which companies are seen to be behaving now has material consequences for corporate reputation(Larkin,2003).
Governance and liability
The pursuit for better institutional and business accountability, in response to a perceived decline in trust, has affected human existence. This is in the form of detailed and costly controls via extensive legislation and regulation. These new pressures for transparency and accountability are increasingly becoming enshrined in corporate governance guidelines and disclosure legislation (Larkin, 2003).
2.3 WHAT IS CORPORATE REPUTATION?
There is certainly no single or dominant definition or theory of corporate reputation. Part of the problem is that the academic research in this area of knowledge is still in its infancy, also reputation overlaps various disciplines of knowledge, each with a distinct perspective and research approach (Larkin, 2003). The lack of systematic attention to corporate reputations can be traced to the diversity of relevant academic and practitioner literatures that explore different facets of the construct (Fombrun, 1999).
Corporate reputation is defined as a collective representation of a firm's past actions and results that describes the firm's ability to deliver valued outcomes to multiple stakeholders (Fombrun, 1999). Corporate reputation is a set of attributes ascribed to a firm, inferred from the firm’s past actions (Keith Weigelt, 1988).
2.4 CREATION OF REPUTATION
Reputations are viewed as having some basis in organisations’ actions, (providing a quality good/service, for example) as well as being constructed by others via their perceptions of those activities (Schweizer and Wijnberg, 1999, p. 251).
It is created through various media of information on a country, industry and corporation. This could be through word of mouth, personal contact of experience, direct mail, advertising, product design, price attractiveness, advertising, news, weblogs etc (Manchester Business School, 2002).
Information could be directly passed through interactions with an organization or mediated reports about an organisation to stakeholders. Majority of the information stakeholders receive about organisations is derived from the news media – reason media coverage is an important feature of reputation management (The Reputation Paradigm, 2001).
Reputation behaviour is strategically important in incomplete settings, for example where all players in an industry are not equally informed about parameters that define pay-off