Respected governance and internal audit expert Norman Marks posted a fascinating article on reputation risk. He quotes a line from a recent survey that summarizes the main point: reputation risk is driven by other business risks. In many ways, he seems to be speaking directly to conflict minerals. A few of his salient points are below. Actually, the whole article is so on-point we almost need to quote it in its entirety.
It should be noted that the likelihood of a significant impact on reputation arising from, say, a safety issue is not necessarily the same as the likelihood of other impacts such as fines, lost time, and so on.
In addition, the impact on reputation may be positive while the impact on, say cash flow, is negative!
For example, the decision to divorce the organization from a supplier who is found to have broken the law may adversely impact costs and disrupt delivery of product to the market – while enhancing the reputation of the organization…
… when there is violence in some part of the world, people look to the US, EU, and others for a reaction. It’s not only the action that can affect reputation, but the failure to act…
Actions by third parties that are part of the extended enterprise (suppliers, channel parties, agents, and even customers) can affect reputation. This needs to be identified, assessed, and monitored closely as well…
Of course, reputation risk is the basis of the Dodd-Frank Section 1502 conflict minerals disclosure so perhaps there is little surprise that Norman’s comments are so relevant. Yet in the heat of effort companies are expending for SEC compliance, some may lose sight of this risk.
Reputation risk is a subject we explore specifically and deeply, from many points of view and sources. We also explicitly drill down into impacts on supplier relationships – both positive and negative*.
Norman refers to the concept of “risk sensing” as a means of identifying and monitoring reputation risk. We agree – as a matter of fact, given that our experience includes traditional risk management (insurable and non-insurable), this comes naturally to us.
One client has a particular exposure to reputation risk. We knew this before the engagement because of our pre-engagement research and “risk sensing”. In reality, this was easy to identify because the company is very well known and recently the subject of significant negative publicity about their core operations. Because we were aware of this existing situation, significant time was expended discussing potential reputation impacts of conflict minerals matters. Facilitated discussions took place between many business, communications, PR and procurement leaders (among others), leading the client to a thoroughly-considered conclusion and plan of action.
Norman’s article should be carefully reviewed and considered. Afterwards, it may be worthwhile to revisit your own assessment of conflict minerals reputation risk.
* For instance, eliminating suppliers that are not conflict free can result in a consolidation of purchasing power (a positive), but also reduce supply chain resiliency in the event of a disruption, such as what occurred with capacitor manufacturing in 2011 (a negative).