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News Intelligence for Reputational Risk Management

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News Intelligence for Reputational Risk Management whitepaper - 02 News Intelligence for Reputational Risk Management AYLIEN.com 1 AYLIEN is the AI-powered News Intelligence Platform that aggregates, understands, and delivers the world’s news so you can make better informed risk decisions. 2 Introduction Types of Reputational Risk Protecting your reputation is nothing new; availability, and timeliness of data can help the wise have warned us about the perils of manage it. Cognitive technologies such as Product/Services: Ethical/Integrity: damaged reputations for many centuries, natural language processing (NLP) and Product Safety or Fraud from Aristotle to Benjamin Franklin. More machine learning (ML) are being utilized to Services Issue Bribery recently, advancements in technologies help identify, measure, and monitor for industries and communications have reputational risks, so that action can be Health Corruption made reputations more complex than ever taken to mitigate them before unrepairable Environmental before to protect, and the spotlight on it reputational damage is done. This Controversy has never been in more focus. As a result, technology is now available as a News organizations have had to develop new Intelligence Platform. strategies for reputational risk, which has Financial: Security: become a crucial component in a broader Reporting Issue Physical risk strategy. Accounting issue Cyber Credit Rating Leading the way are financial institutions, and they are wise to do so, as the impact of reputational damage can be catastrophic. Risks can spark from a wide range of provenances, and can escalate with tremendous speed too, meaning that organizations need to be prepared to act fast. Furthermore, the reputation of financial institutions collectively suffered 87% >25% 47% huge damage as a result of the great financial crisis in 2008, heightening scrutiny OF EXECUTIVES, RATE OF A COMPANY’S MARKET OF COMPANIES SAY THEY on the sector since. REPUTATIONAL RISK AS MORE VALUE IS DIRECTLY ARE NOT PREPARED FOR IMPORTANT THAN OTHER ATTRIBUTABLE TO ITS REPUTATIONAL RISKS THAT Reputational risk management has therefore STRATEGIC RISKS REPUTATION ARE OUTSIDE OF THEIR become a priority for organizations, often DIRECT CONTROL topping lists of strategic risks and C-level issues. In fact 87% of executives surveyed by Deloitte rate reputational risk as more important than other strategic risks. Like with most of today’s risk challenges, new technology that enhances the quality, 3 What is Reputational Risk? Notable Examples of Reputational Risk The OED defines reputation as “the beliefs financial crimes, and failing to meet or opinions that are generally held about contractual requirements to name just a someone or something”. It can be positive, few. Any of these can significantly damage Facebook privacy scandal in neutral, or negative, and is subject to an organization’s reputation. 2018 led to $120bn stock value fluctuate based on both direct and indirect influences and actions. Reputational risk likewise has the ability drop (largest in history) to trigger a range of follow-on risk From a business perspective, ultimately consequences, which goes a long way to Credit Suisse spying scandal led it’s how your customers, clients, and other explaining why it is such an important issue for C-level executives and boards. Some to CEO resignation | 2019 stakeholders (such as investors) perceive your organization in terms of competence, of the knock-on effects are: regulatory transparency, and guardianship. Your change, increased competition, talent Uber’s long list of scandals in organization suffers if its reputation retention, cash flow/liquidity, and share 2018 led to CEO removal, falls below what is expected from it by price volatility. multiple resignations and stakeholders, whereas a strong positive reputation can lead to growth. Revenue loss and stock value are the key lawsuits, and customer backlash impacts, causing huge losses for financial For the most part reputation is determined institutions, destroying market value, 40% of US millennials said they’d by the actions and decisions of internal and requiring substantial investment in recovery costs. In 2015 a number boycott United Airlines after stakeholders, and damage is done through management malpractice or an ineffective of organizations lost over one third of the 2017 passenger removal response to a crisis. However there are their share value as a result of damaged controversy many external factors that can influence reputation (Deloitte). reputational risk as well. The unique thing about reputational risk is that it is a by-product of other risks. These risks can be roughly put into four main categories: ethics and integrity; product and services; security; and financial. Some examples of these risks are non- compliance with regulations, poor financial performance, lack of innovation, senior management scandals, product recalls, security breaches, environmental issues, 4 Westpac stock price vs reputational risk Westpac, Australia’s second largest bank, was fined $700m in Q4 2019, having been 240 30 Money-laundering scandal accused of breaking money-laundering laws 23 million times, including a failure to CEO Resigns 29 200 properly vet payments from 12 customers linked to child exploitation. The huge 28 spike in negative news surrounding the 160 scandal in November ‘19 coincided with a steep decline in stock price, showing the ATM Outages 27 monetary impact of a reputational crisis. 120 Earlier lesser reputational risk crises, such 26 Stock Price Volume of Stories Volume No Interest Rate Cuts as the ATM outage in July ‘19, and the 80 refusal to pass on interest rate cuts from 25 the Central Bank to customers in October ‘19 led to dips in stock prices as well, 40 24 although nothing as severe as the cliff edge November ‘19. 0 23 Jul Aug Sep Oct Nov Dec 5 The Challenges of Reputational Risk Management Clearly reputational risk is a multifaceted cultures, and demographics can also area of interest, which brings with it many Understanding Risks Outside of lead to reputational risk. The challenge challenges that have to be addressed. If is navigating tactfully through these they’re not, organizations could potentially Your Direct Control uncertain waters by collecting enough face reputational ruin. The good news is information from every point of view to most reputational risks can be managed One of the most daunting things about help you prioritize and make clearer, more successfully, and their impact limited, if reputational risk is the fact that there are educated decisions. these challenges are dealt with. many risks outside of an organization’s direct control that can cause significant reputational damage. As many as 47% The Need to Implement a of companies say they are not prepared Framework to cope with this scenario, according to Deloitte. This relates to supply chains, Since the financial crash in 2008, financial or third party software for example. institutions have been proactive in Other organizations from the same addressing the challenges of financial sector may also affect your reputation risks, and recently that trend has been too, contaminating your business due to replicated in non-financial risks. One damaging the integrity of the market as a 47% important step in this process has been whole. Close monitoring of external risks implementing a management framework. A is critical, and an outside-in approach is OF COMPANIES SAY THEY ARE cause and effect model provides a suitable essential as part of your reputational risk NOT PREPARED TO COPE WITH framework. THIS SCENARIO, ACCORDING framework, helping organizations define, TO DELOITTE. measure, and monitor reputational risks. In a nutshell it consists of identifying Understanding the Stakeholder how an incident can occur, followed by the stakeholder perception and behavior Landscape change, and then the impact this has on reputation and value. This is important, The people that perceive your reputation as you cannot manage what you cannot are far from homogenous; it’s much more control, you cannot control what you complex than that. For example, what may cannot measure, and you cannot measure be perfectly acceptable to an investor may what you cannot define. be considered highly unacceptable by a customer. Differences between countries, 6 What are AI, ML, and NLP? The Need to Find Out in Real Time signals of potential risk events while Artificial Intelligence: at the same time reducing compliance The simulation of human intelligence The speed with which people can access costs through automation’. And McKinsey processes by machines, especially news and other sources (such as social estimates that digital risk initiatives can reduce operating costs for risk activities computers. media) means that reputational risks can spread more rapidly than ever before. If by 20 to 30 percent. One area it can be the risk is serious enough, it’s probable used successfully in a reputational risk Machine Learning: that it will lead very quickly to a crisis. management strategy is tracking global Computational learning using Reacting slowly is not an option. Being one news with a News Intelligence Platform. algorithms that detect patterns in step ahead as a result of interminable and data and use them to make predic- meticulous news monitoring is essential to tions or decisions. help prepare for such a risk and avoid a full blown crisis. 60% Natural Language Processing : The Solution is Technology FINANCIAL INSTITUTIONS PLAN TO The computer analysis, INVEST IN DATA AND TECHNOLOGY
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