Organizational character leads to market reputation that can make or break customer loyalty, with resulting impact on the firm’s long-term value creation goal. While it is true that risks such as property, casualty, and workers compensation can be mitigated via insurance, reputation risk does not enjoy that luxury.
Just as the character of a person is predicated on that person’s choices, so is an organization’s character founded on the choices it makes.
The six pillars of character are:
Reputational risk leads to negative publicity, loss of revenue, litigation, loss of clients and partners, exit of key employees, share price decline, difficulty in recruiting talent, and ultimately erosion in shareholder value, as noted in various risk management studies. Therefore organizations need to be very careful in building and protecting their reputation to remain viable.
Dr. Kasthuri Henry will present the session, Reputation Risk Mitigation Through Corporate Accounting Stewardship, at Accountex USA 2017.
We have all witnessed the recent customer-related incidents within the airline industry. While distasteful, they have not been as harmful to organizations as risk introduced by lapses in financial stewardship and accountability. We function in a global economy where capital flows across national borders and the viability of any business hinges on its ability to command that capital. Investors take into consideration reliable and transparent financial reporting as part of good corporate governance.
Sir Adrian Cadbury defined Corporate Governance as the balancing of the interests of individuals, organizations, and society. When this equilibrium is shifted, whereby one of the three elements takes undue advantage of the other two, untenable risk follows.
Take for example the case of Enron and Arthur Andersen. When an external auditor falsified the financial reporting certification in return for higher profits it put the credibility of all certified financial reporting to the SEC under question. The risk to the US capital market was larger than a mere collapse of Enron, and the regulators had to intervene. Just as a rogue cop can put an entire police department case history into jeopardy, so can missteps by any one person in the financial accounting arena! Those of us in the profession need to always remember that we represent our organization at all times and our stewardship is paramount.
We are a society that does not care much for business regulations. Do we ever stop to think that regulations come into play when our ethical lapses result in harmful socio-economic impacts? If there had been no Enron-Arthur Anderson crisis there would be no Sarbanes-Oxley Act. If there had been no sub-prime crisis that paralyzed the global financial industry there would be no Dodd-Frank Act.
What if we take a responsible stewardship position and self-govern to eliminate the chance of an ethical lapse? What if we put our self-interest, in the true sense of the word, front and center? Would we not, in the long-run, be better off and not have to deal with any new regulations? Why is it that we complain and take to task remedial actions that resulted from our own lapses of judgment?
Growing up in my household of two boys and two girls, my father had a house rule: Boys will be boys and do things they are not supposed to do, but the girls had to find a way to reduce the rambunctious ramifications in the interest of the family. This meant that if the boys did anything destructive, the punishment for them was for performing the act, while the punishment for the girls was for allowing it to happen. I learned very quickly that it was in my self-interest to stop the boys from even thinking of behaving badly. Without going into trade secrets to protect the innocent, I can affirm that the boys quickly learned where their boundaries were.
This experience taught me a very valuable lesson, in spite of the pain that preceded it. It taught me that we each have an obligation to be responsible stewards of the unit we belong to. That unit might be family, organization, local community, country, and global civil society all at the same time. It also taught me that doing nothing and allowing bad things to happen is also a choice — and that this choice becomes part of each of our characters, resulting in the reputation we embody.