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Know the Risks that affect your Capital

Did you know that there are 11 key risks that affect your company's ability to acquire, protect and retain capital?

It's about License to Operate

An evolving consumer, a shifting marketplace, a world in transition and new tools and channels in Social Media, provides a complex reputation landscape that a Company now operates in to protect its capital. To survive and be sustainable a Company must not only operate, they must also innovate. This requires a legal and regulatory license to operate (risk management) and a social license to grow and innovate (opportunity). Both of these licenses to operate are dependent on your stakeholder's level of trust, good feelings, admiration and esteem for your Company (RepTrak, 2004).

These business risks are broken down into 2 types of business risk :

  • strategic risks and
  • operational risks.

Both have an impact on your company's ability to retain and recover stakeholder trust in the event of a crisis.

There are 3 fundamental strategic risks for your Company:

  1. lack of coherent business strategy 
  2. a sudden change of strategy, or
  3. a strategy implementation failure.

Each of these risks can have a significant impact on shareholders and investor trust if not effectively managed.

There are 8 common operational risks that all have an impact on the trust of dominant groups of stakeholders.

  1. Financial performance - Shareholders and Investors
  2. Product and service quality - Customers, Shareholders and Investors
  3. Trademark and brand erosion - Customers, Employees and Shareholders
  4. Production failure or insufficient capacity - Customers, Shareholders and Investors
  5. Human resources - Employees
  6. Scalability - Suppliers, Partners and Customers
  7. Health and Safety - Employees, Customers and Local Communities
  8. Governance and Ethics - Government, Shareholders and NGO's.

 Why do these risks matter?

Fundamentally, we see 6 outcomes of issues in these areas:

  1. Lower valuation
  2. Lower liquidity
  3. Higher cost of capital
  4. Ability to raise new capital may be constrained, impacting growth
  5. Ability to win approval or advocacy for your corporate activities may be constrained
  6. Your reputation risk exposure may negatively impact the level of trust, admiration, esteem or good feeling in your relationships with key stakeholders.

The Investor Perspective

Today Pension Funds and their Asset managers are under pressure from their Customers to care about environmental, social and governance issues as well as the economic fundamentals. Investors are the recognized parties in risk mitigation and reputation risk management.

For an investor, fiduciary responsibility is a given. That’s their role as an Investor. Investors must demonstrate an adequate assessment of risk return relationship and identify opportunities. Investors deploy risk issues screening using an array of business intelligence data providers focused on listening to what stakeholders say about the company ("outside in") as well as examining what a company says about itself ("inside out"). Using fundamental and ESG analysis tools, they integrate both qualitative and quantitative intelligence in order to make informed decisions to price and protect their assets.

What is the likelihood of trust recovery if you have a crisis that stems from one of these risks? Will it be severely damaged, where full recovery is both questionable and costly and the risk demands the attention of the Board of Directors and priority action? OR is trust recoverable with little effort or cost and can be contained locally without the need to inform senior management?

Today the Principle of Responsible Investment (PRI)'s 1,395 signatories now have a total of $64 trillion in assets under management (McKinsey, Feb 2015) Investor. This is up from $4 trillion only 10 years ago on the PRI's launch. This shows both the demand from consumers and their stewards and the resulting practices of today's asset managers.

#bigidea

  1. Consider how your business practices are impacting your licenses to operate - both legal and regulatory and the opportunity to grow and innovate.
  2. Does likelihood of trust recovery and the factoring of outrage change the risk ranking?  
  3. Understand the risks that impact your capital.

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I appreciate that you are reading my post. On LinkedIN and our blog, I write about board related issues - corporate strategy, human capital, reputation risk, technology, corporate governance and risk management trends.

If you learned something from reading this post or thought it was a sound #back to basics" refresher, please click the thumbs up icon on my LinkedIn and let me know. If you would like to read my regular posts then please click 'Follow' (at the top of the page). If we have met, do send me a LinkedIN invite. And, of course, feel free to also connect via Twitter.

If you are interested in using the RepTrak model to benchmark your reputation, or if you are interested in developing your reputation risk management, digital, communications or responsible investment strategies, do connect with us at RL Expert Group.

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