“70% of businesses experience threats to corporate reputation,” highlights BDO study

Monday, 2 November 2020 01:00 -     - {{hitsCtrl.values.hits}}

Businesses are becoming increasingly vulnerable to reputational risk, with 70% of them having experienced an event that has posed a threat to their reputation. That’s according to the fifth annual Global Risk Landscape Report produced by specialist accountancy and business advisory firm BDO LLP

BDO Partner and Global Chair of Risk Advisory Services Nigel Burbidge
BDO Sri Lanka Deputy Managing Partner and Head of Risk and Forensics Ashane Jayasekara

BDO’s extensive survey of no less than 500 C-Suite executives across the EMEA, Europe, the Middle East, Africa, Asia Pacific and the Americas shows that companies are alert to the dangers, with 25% suggesting shareholder price is a primary consequence of reputational damage, with a quarter also believing customers will take their custom elsewhere in the wake of a damaging incident. 

Family-run businesses and manufacturers feel the highest reputational risk. Despite the threat, it’s clear that too many companies remain reactive in their approach, with less than half (45%) of those surveyed believing their crisis strategy is proactive and over a third (35%, in fact) considering themselves to be reactive when it comes to reputation-centric issues. Trying to demonstrate corporate integrity while acting without values is an issue that can touch even reputable companies. 

BDO’s survey reveals the scale of so-called ‘integrity washing’, with businesses worrying more about the perception of integrity than the practice. A significant 87% of executives believe their organisation is culpable on this particular point, while almost half (49%) agreed with the statement:  “So long as we are perceived to have integrity, we do not actively prioritise putting it into practice.”

The chemicals entrepreneur Jon Huntsman had a clear view about integrity. For him it was the cornerstone of commerce. “There are no moral shortcuts in the game of business or life,” he wrote. “There are, basically, three kinds of people, the unsuccessful, the temporarily successful, and those who become and remain successful. The difference is character.” 

The biggest risks to reputation? Respondents identified a wide variety of flash points. Major risks in the next one to two years include a failure to have robust succession planning (39%); the rate of globalisation (35%); and risk posed by a poor corporate culture (47%). Risks from people are front and centre: 50% of respondents worry about a new generation requiring different working styles and 38% point to a lack of diversity in their organisations. It is imperative boards think about potential challenges before they arise.” The survey shows companies are alive to the dangers, with 25% saying shareholder price is a primary consequence of reputational damage. Other impacts include damage to company culture and low staff morale, a drop in productivity, financial losses and low employee retention. This highlights the need for boards to pay close attention to integrity.

The public remains vigilant about the behaviour of companies. Our survey shows one in three respondents believes their customers are less confident that the brand will do what is right, compared to five years ago. On the plus side, 35% think their customers have more confidence over the same period. Are companies accurately tracking how customers see them? The board may be overlooking current threats. Chief risk officers report a significantly higher rate of threats than chief executives and managing directors; it implies one in four reputational events are missed by company leaders. 

A key issue is who leads on integrity? Our respondents are in no doubt: 62% agree their brand is either synonymous or closely tied to that of the chief executive. This tight connection is a double-edged sword: 85% of respondents say leaders becoming more visible introduces a reputational risk. A misbehaving chief executive can destroy a brand. The role of chief executives in building integrity is analysed in detail on page 14. We wanted to track the most important threat vectors and the survey supplies the results. 

In 2017 the top three risks were technological changes, regulatory risk and macroeconomic developments. The priorities of 2020 are very different: the top three are economic slowdown, computer hacking and business interruption, showing that the world we are living in is changing faster than before, bringing new opportunities and challenges for businesses. Technology poses multiple risks. The threat of a privacy breach is well appreciated, with 31% citing it as the top IT threat in the next one to two years. 

Almost one in ten points to third-party connectivity as a danger. This is one to watch, as IT ecosystems grow evermore complex and interdependent. Banks, for example, are opening up their customer data to third parties via application programming interfaces, or APIs, a trend known as open banking. The model is replicated in other industries. Expanding the perimeter of security opens the door to misuse of data and unwanted intrusions. 

Third-party risk to reputation is likely to be a growth area, particularly with increased home working driven by the coronavirus lockdowns and criminals trying to exploit that situation. 

The future of tech risk? One in four respondents points to artificial intelligence (AI) as a major threat over the next one to two years. Companies are concerned that AI engines are less than transparent on how they produce results. Worse, multiple AIs working together may affect each other’s performance, a property called emergent behaviour. “AI is starting to deliver incredible results in industries from retail and aerospace, to logistics and credit,” says Markus Brinkmann, BDO partner, head of forensic, risk and compliance in Germany. 

“The survey shows widespread concern around AI deployment, especially on how the algorithms operate. In the future I expect to see a focus on how AIs are monitored.” Environmental concerns are now front and centre. An overwhelming 85% of respondents say their industry has been endangered by the industry focus on environmental governance. Companies have moved fast to cope. Almost half have reviewed their supply chain as a result of environmental concerns and 47% have been affected by changes to investments. Four in ten have implemented changes to their business purpose for environmental reasons, profound evidence of how important green issues are to modern commerce. 

What action can companies take to improve their resilience? Our survey offers a number of suggestions. Appointing a risk officer to the board is an option. In Europe, only 22% of respondents say risk officers hold a C-suite position, compared to 46% in Asia-Pacific. A third of respondents say their organisation was considering elevating the risk officer to the C-suite. Changing strategy from reactive to proactive is advisable. 

The proposition that preparing for a crisis is better than reacting after is supported by 58%, compared to just 18% who believe the response is what matters. But only 45% of companies believe their strategy is proactive, with 35% reactive. Only one in five ranks their organisation as “extremely proactive”. 

The risk of fraud can damage, and even destroy, corporate reputations,” says Pierre Taillefer, national risk advisory services leader at BDO Canada. “By objectively assessing their governance structure and corporate culture, and by implementing measures that prevent fraud from occurring, or at a minimum mitigate the impact of fraudulent activity, organisations will be able to better maintain trust and credibility with stakeholders. 

“Elements that can be assessed as a means to measure integrity include an organisation’s commitment to and promotion of its core values and an organisation’s tone at the senior level, in addition to an organisation’s corporate culture, internal control environment, and overall employee engagement.” Complacency is a serious problem when promoting integrity. Self-assessment may be affected by over-confidence. Organisations clearly need an objective methodology to assess risks.

BDO in Sri Lanka Deputy Managing Partner and Head of Risk and Forensics Ashane Jayasekara says, “BDO surveys help our clients prepare for an uncertain future. It is clear that many companies are still reactive in their approach. Some of the reputational risks highlighted pose an existential threat. A proactive approach means taking action before disaster strikes. In the long run there is nothing more important than the integrity of your brand.”

BDO LLP Global Chair of Risk Advisory Services Nigel Burbidge commented: “Clearly integrity is vital, with 99% of respondents agreed on that point. Being trusted confers extraordinary advantages on a given business and secures customer loyalty. Customers flock to brands they believe in, and that sense of integrity allows the company to outperform its rivals.”

Burbidge added: “However, we have found deep disagreement on who’s responsible for transparency. One-in-three companies admits to being reactive on reputation. That’s not the best strategy. A worrying 87% say their company may be guilty of ‘integrity washing’. Clearly, then, there is much work to be done here. Integrity should be woven into the fabric of every company. Everyone must share the same ethos.”