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 TO HELP THEM FOCUS MORE ON representation, and transformation The above challenges can all be managed REPUTATIONAL RISKS (DELOITTE). of human (natural) languages. with enhanced quality, availability, and timeliness of risk data. Over 60% of financial institutions plan to invest in data and technology to help them focus more on reputational risks (Deloitte). The emergence of NLP and ML, and their integration into day-to-day activities, is going some way to enhancing reputational risk management strategies. Another recent Deloitte report advises that these technologies ‘should be leveraged to automatically scan a wider set of data sources to provide early warning

7 Implementing News Intelligence Into Your Framework

Once a story gets picked up by a trusted Automate the Process a result. And it has never been easier media source, it amplifies the perceived to detect events and topics as they are severity of it in the public sphere, and has happening, thanks to real-time clustering Replacing manual processes with an the potential to spread rapidly amongst of similar articles. The size of a cluster, automated system is a huge benefit to the masses, particularly if the sentiment is which reflects the number of articles it financial institutions. Instead of hundreds negative (which it often is). Monitoring the contains, helps to identify, assess, and of analysts sourcing and processing news closely for risk signals and sentiment monitor the past, present, and potential global news every day, a News Intelligence should therefore be an essential part of impact of particular events to your Platform automatically ingests hundreds every financial institution’s reputational of thousands of news articles from across reputation. risk management framework. the world as soon as they are published. Using NLP, it extracts key information from There is a problem, the scale of global news Free Up Valuable Resources every article in real time, transforming in the 21st century is overwhelming, and unstructured data into structured, stored, the manual processes of traditional media The benefits don’t end with the quality and actionable data. The result is the ability monitoring are now inefficient, inaccurate, and scale of news data. The automation to flexibly, quickly, and accurately search and ineffective. As a result, risk signals of the process frees up valuable resources for specific categories of news, as well as relating to reputation are either missed saving financial institutions time, money, entities such as people, places, products, entirely, or discovered too late. and effort. Risk analysts can identify companies, and even concepts. risks faster and more accurately from a The solution is implementing an innovative centralized solution for a more collaborative technology, such as a News Intelligence Make Better Informed Decisions and less siloed environment. And using a Platform, that will significantly improve the News Intelligence Platform to deduplicate process, providing NLP and ML capabilities The outcome of this is the power to make similar articles speeds up the analysis to aggregate and understand global news in better informed decisions. The holistic process, as do auto-extracted summaries real time, so that reputational risk signals nature of a News Intelligence Platform for individual and multiple articles. do not go unnoticed. means that global news in multiple languages, machine translated into English, provides full coverage so stories and events are never missed. Signals that were previously overlooked due to language barriers, or were simply never sourced in the first place, can be utilized as

8 News Intelligence in Reputational Risk Management

It is clear that there are huge opportunities reactions, that as a result can transform for financial institutions to benefit from risks into opportunities. For example implementing an innovative AI-powered a proactive and effective response to technology such as a News Intelligence a perceived risk at an early stage will Platform into their reputational risk benefit your organization’s reputation by management framework, particularly in demonstrating competence, transparency, these three core use cases: and guardianship. Furthermore, building

ongoing reputational resilience can help Identify Emerging Risk repair any damage that takes place when a Events Earlier crisis eventually emerges.

Reputational resilience begins with the Monitoring the Response to early identification of potential risks. a Crisis News intelligence helps organizations identify those risks earlier, by aggregating After a reputational crisis has faded A PROACTIVE AND EFFECTIVE “ a comprehensive amount of NLP-enriched from the initial media spotlight, there is RESPONSE TO A RISK AT AN EARLY news articles, events and topics of interest no magic reset for your organizations’ STAGE WILL BENEFIT YOUR from across the globe, and making them reputation to return to normal. The impact ORGANIZATION’S REPUTATION BY easily discoverable and understandable. can unfold months or years after the crisis DEMONSTRATING COMPETENCE, Previous blind spots become clear. Once a breaks. It’s therefore crucial to monitor TRANSPARENCY, AND GUARDIANSHIP risk is identified early, organizations are the reputation rebuilding process. How is “ able to mobilize a response immediately, media sentiment towards your organization as the risk is beginning to appear, which is changing over time? Are you starting to essential for minimizing the initial damage. rebuild your reputation? Or are attitudes still negative? News will help you monitor Turning Risks Into Opportunities how far you’ve come, and how much more you have to do. Reputational risk is not just about mitigating damage, it’s also about discovering opportunities to improve your reputation and grow your business. News intelligence can help you understand media trends and anticipate stakeholder

9 News Intelligence Framework

Implementing a news intelligence framework enables financial institutions to be prepared for risks and opportunities that arise, by playing a critical role in a broader risk framework. The accompanying flywheel shows the five stages, from initially developing a taxonomy of risks to monitor in the news, through monitoring and investigating proactively, to assessing the risk impact and reporting for future mitigation. It’s an iterative process that has been used by AYLIEN customers to uncover 30% more risk events every week.

10 Conclusion

As an asset, an organization’s reputation is about as important and valuable as it gets. That’s why every step needs to be taken to ensure that it is protected to the best of an organization’s ability. Implementing a reputational risk management framework, and improving the quality, availability, and timeliness of risk data will go a long way to modernizing an organization’s approach, enabling them to stay ahead of the myriad reputational risks by acting fast and effectively. A News Intelligence Platform should form part of the first-line of defence, helping organizations to identify and monitor emerging risks from around the globe, both before the crisis explodes, and after it subsides, to help turn reputational risks into reputational opportunities.

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