Today, consumers expect more. Heightened public scrutiny of companies has seen a far higher value be placed on high-quality corporate reputations and public trust. Accordingly, as reputations become increasingly valuable, so the threat of reputational damage and a loss of trust has increasingly come into the spotlight – deservedly so, for damaged public trust has proven an existential issue for several large global companies. In this context, we examine the value of enhanced due diligence tools like adverse media checks to ensure that businesses are empowered to take a proactive approach to mitigate risks by knowing exactly whom they are doing business with.
What is Reputational Risk and Why Is It So Crucial?
To understand reputational risks, one first needs to understand reputation.
Broadly, a company’s reputation is the collective thoughts and feelings of stakeholders that have been created over time as the result of that company’s decisions and behaviours. As a major driver of growth and sustained, long-term value, it is one of a company’s greatest assets.1
Accordingly, the concept of reputational risk can be understood as events that undermine public trust in a company’s products or brand.
The value of reputation cannot be understated: a company’s reputation is estimated to account for a quarter of its market value.2 Accordingly, damage to reputation can be devastating and the importance of assessing and mitigating reputational risks has grown exponentially over the last decade.
Today, companies understand that reputational risks pose some of the greatest threats to a company’s success and profitability. According to a publication by Deloitte, 73% of surveyed board members identified reputational risk as the area where they felt their company was most vulnerable. Furthermore, as noted by PwC…
“The executives we surveyed consistently ranked reputational harm at or near the top of negative impacts from various forms of economic crime, with public perception (reputation/brand strength, business relations and share price) taking the hardest hit – a level of impact that has increased since 2016.” – PwC.3
This concern from C-Suite executives is warranted. In today’s economy, a significant majority of a company’s value comes from hard-to-assess intangible assets such as brand equity, intellectual capital and goodwill – more than ever, companies are vulnerable to anything that damages their reputations.4
The Value of Knowing Whom You Do Business With
In the context of identity verification and due diligence, knowing exactly whom you do business with is crucial for the management of reputational risks.
Whom a company surrounds itself with is central to its reputation. A network of trusted, reputable and well-liked clients and business partners will likely boost a company’s reputation. Conversely, association with even one business partner or client with a sufficiently negative reputation can damage or even destroy a company’s reputation.
“It takes many good deeds to build a good reputation, and only one bad one to lose it.” - Benjamin Franklin.
Businesses cannot afford to overlook the significant risks posed by clients and business partners – being dragged into a public scandal because of your business’s association with a problematic client or business partner can instantly undo years of hard work and cost millions to recover from.
Public trust and reputation are fragile. In a survey by Deloitte, 85% of respondents were very or fairly likely to sever an existing relationship with an organization if it did something that negatively impacted trust.5 Consumers also relate to the value of trust, even in a corporate setting, in a human way, describing the loss of trust in terms such as betrayal, disappointment and anger.6 Damage to reputation and the public’s trust in a company can pose an existential threat to a company.
To study the financial impact of damage to trust, Deloitte looked at three different companies that had been embroiled in scandals, all of whom had a market cap of over $10 billion. The scale and scope of all three scandals were trust related. Over the course of their respective scandals, the three companies lost between 20-56% of their market cap over a period of between three months and two years. The combined total value of this loss was approximately $70 billion. The value they lost in relation to their peers was even more severe, with the three companies falling behind their respective industry indexes by 26-74%.7
In this changing global context that is seeing a heightened demand for trust, businesses cannot afford to overlook the risk posed by doing business with clients who pose a reputational threat to the business. Knowing whom you do business with is more important than ever.
Tools for Risk Assessment – The Value of Adverse Media Checks and Enhanced Due Diligence (EDD)
Tools for enhanced due diligence – adverse media checks, politically exposed person checks and sanction checks – are so valuable because they empower companies to make informed decisions that enable a proactive approach to risk mitigation.
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Now more than ever, proactive approaches to risk management are vital because reactive approaches are nearly impossible to get right; once they have broken, scandals are nearly always out of a company’s hands.
“The existence of social media platforms that facilitate the extremely rapid spread of information (both real and fake) means that the publicity from an incident may often prove uncontrollable, even with the swiftest responses. Preventing these incidents from ever happening in the first place is increasingly becoming the only way forward.” – PwC.9
By using enhanced due diligence tools to know exactly who your client or business partner is, a business can ensure that it does not make any decision that exposes it to an undue level of risk. For example, an adverse media check on a client is a small step that can instantly help to vet a client’s surface-level reputation and reveal any prior public scandals by screening the internet for news stories of that client.
Naturally, demands for risk assessment will vary; wealthy, influential and politically exposed clients will warrant a far higher level of due diligence than a singular user. Certain clients, such as High-Net-Worth-Individuals (HNWIs) will warrant more intensive due diligence checks that include Politically Exposed Person (PEP) checks and sanction checks.
Today, public scandals are more likely than ever to spiral out of the company’s control. Damage to reputation can cost a company millions and destroy years of progress. Given the stakes, a proactive approach to reputational risk mitigation is crucial. Using digital tools that empower your business to make informed decisions is more important than ever.
Adverse Media Checks and Enhanced Due Diligence Solutions for South Africa
As South Africa’s leading provider of due diligence and remote onboarding solutions, ThisIsMe is proud to be at the forefront of a trust-based and privacy-compliant digital world. To experience how our full suite of advanced solutions for identity verification, information validation and risk assessment can empower your business, book a demonstration by contacting our team here.
- Deloitte Risk Advisory. 2016. Reputation Matters: Developing Reputational Resilience Ahead of Your Crisis.
- Deloitte Risk Advisory. 2016. Reputation Matters: Developing Reputational Resilience Ahead of Your Crisis.
- Global Economic Crime and Fraud Survey. 2018.PwC.
- Harvard Business Review. 2007. Reputation and Its Risks.
- Deloitte. Chemistry of Trust, Part 1. 2020.
- Deloitte. Chemistry of Trust, Part 2. 2020.
- Deloitte. Chemistry of Trust, Part 1. 2020.
- Harvard Business Review. 2007. Reputation and Its Risks.
- PwC. Global Economic Crime and Fraud Survey. 2018.
