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Companies are leaving profits on the table to protect reputation

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A global survey has found that CFO’s and other financial leaders are putting corporate reputation above financial profits.  However, according to Australia’s leading expert on reputational risk they may be passing up opportunities for creation of shareholder value.

The joint survey by the Chartered Institute of Management Accountants (CIMA) and the American Institute of Certified Public Accountants (AICPA) of over 1,300 Charted Global Management Accountants (CGMAs), across 61 different countries has revealed that 76% of respondents said they now see more focus on reputational risk in their industries. Reputational risk expert David Van, founder of The De Wintern Group, believes the survey results are simultaneously welcome and concerning. Further, he believes that poor knowledge about reputational risk might lead to companies passing up value creation opportunities.

According to CIMA, 65% of CGMAs said their organisations often or always consider the financial implications of reputational risk when making decisions. And almost half (44 per cent) said their organisations have rejected projects that made financial sense because the reputational risks were too great.

“A company’s reputation is its greatest source of competitive advantage so it must be protected from risk,” said Van.  “Without clear understanding of the reputational risks involved companies may be passing up opportunities to create greater value.”

“However if companies have formal systems for managing reputational risk then they are able to make well informed decisions that could lead to greater value for shareholders while mitigating the risk of reputational damage,” said Van. “Yet from our experience few companies manage reputational risk in a formal sense in the same way they manage operational or financial risk”.

Australian listed companies are required by the ASX Good Governance principles to identify and manage material risk and Principle 7 lists reputational risk as one of those material business risks.  Yet despite the growth of sophisticated risk management systems, most companies do not have formal systems to manage reputational risk. “This survey is one of many that demonstrate that the significance and awareness of reputational risk is growing.  This is encouraging as in the past it was often dismissed by risk managers as being simply a consequential risk.” said Van. “Yet few companies have the requisite knowledge and tools to help them manage reputational risk, evidenced by the fact that it continues to be rated as such a high concern.”

“By being better informed companies should be able to balance reputational and opportunity risk,” said Van.