REPUTATIONAL RISK

Reputational Risk

Reputational Risk

Introduction

Financial firms, and in particular banks, play an active function in the financial and social development of countries. This is because they have the capacity to select investment and consumption projects, manage risks, conclude who has access to the capital, and which activities are to be financed. They also carry social responsibility in the struggle against scarcity and social inequalities, and in the battle for sustainable development.(Atkins, 2008) The financial industry is starting to be aware of this responsibility, and of the financial repercussions that may arise from evading it. Moreover, this responsibility has been seen as a way of stopping possible crises, and has been used to take preventative measures against the risks drawing from from a bad reputation.

 

Discussion

Businesses have adopted CSR to support their fiduciary relation with shareholders, as Peter Utting argued in 2003. If a firm projects itself as being socially responsible, and avoids embarrassing exposures of malpractice, it can make deeper and strengthen its reputational capital and preempt risk. That is, it can assist avoid short-term reputational risk related to exposure of a firm's malpractice, which often carries financial sanctions, as Ralph Hamann and colleagues documented in 2003. For instance, after the 1999 World Trade Organization protests, those firms listed on the Fortune 500 that were seen as socially irresponsible suffered a 2.7% loss, as Deborah Spar and colleagues documented in 2003. CSR can assist accommodate consumer preferences for socially responsible products.

Civil society organizations have increased the power they dedicate to exactly petitioning and exposing the malpractice of corporations, which has assisted to change consumer preferences and citizen's attitudes toward human rights, the natural environment, and exploitative relationships, as Utting observed. Just as municipal society activists can change the broader public insight of what business should be managing, they also shape managerial preferences through evolving new concepts of social responsibility, taught in business education and propagated by industry organizations and municipal society. While rational actor models assume management's decisions are premised on primarily narrowly characterised cost-benefit analysis, several case studies suggest this is not always the case, as Spar and colleagues contend.(Atkins, 2008)

Some firms have spent considerable amounts of cash on simply creating the impression of responsibility, rather than committing to practices that are authentically responsible, as documented by Sharon Beder in 1997. BP's 1998 installation of solar power cells at 200 of its propelling stations is an example of this. BP invested 0.1% of its portfolio on solar panels while simultaneously expanding its fossil fuel extraction and exploration program. Fitzpatrick, 2007)

 

CSR and reputational risk management

The period “reputational risk” as a widely-used category is, in practice, relatively latest and an important source is the Basel 2 operational risk debate. The Basel 2 banking regulations omitted reputational risk from the formal delineation of operational risk, but in managing so assisted to institutionalize the category and its increasingly famous articulation in formal risk maps inside organizations of all kinds. Practitioner texts and papers have only lately appealed specifically to the notion of reputational risk, as a ...