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Reputation risk management

By any measure, payment processor company Wirecard’s demise has been dramatic. Within a month of KPMG refusing to verify the company’s accounts, CEO Markus Braun had resigned and it had filed for insolvency with debts of over GBP 3 billion.

Given that the writing had been on the wall for over five years, plenty of tricky questions are now being asked of Wirecard’s management and its business partners. Its long-term auditor EY and Germany’s banking regulator are in the firing line. There is widespread talk of another Enron.

Professional services in the spotlight

Other advisors are also attracting red ink, including Wirecard’s crisis law firm and PR agency. Legal and communications firms generally manage to keep their names out of the media spotlight during major controversies involving their clients.

In part, this can be ascribed to an unwritten convention between the mainstream media and the hands that feed it that says that every organisation has the right to be heard, however unsavoury it’s reputation, and that their advisors are only doing what is expected of them.

With one man’s meat being another man’s poison, it remains to be seen whether Wirecard’s dramatic collapse hinders or benefits its crisis advisors.

However, with corporate governance, responsibility, and transparency in the spotlight as never before, it is incumbent on consulting companies of all stripes to ask difficult questions of clients before they are engaged, not afterwards.

As Arthur Andersen discovered with Enron, not asking difficult questions upfront can prove a perilous defence.

A 1MDB hoarding in Kuala Lumpur

Last week I had the fortune to be invited to speak on the topic of reputational risk management to MBA students and assorted internal auditors, risk managers, HR and communications executives at the Othman Yeop Abdullah Graduate School of Business at the Universiti Utara Malaysia in Kuala Lumpur.

Reputation risk may not be as high up the agenda of boards of directors and management teams in Malaysia as in some other countries, but it has gained importance in recent years due largely to two major crises:

  • the 1MDB scandal that led directly to the overturning of the Malaysian government, the arrest and forthcoming trial of former prime minister Najib Razak, fraud investigations in 10+ countries, and criminal charges laid against Goldman Sachs and two of its former employees
  • and the various woes befalling Malaysia Airlines (here’s my take on the mystery of MH370 from an online/social media perspective; if you haven’t already, I strongly recommend you read this in The Atlantic for what may well be the last word on the tragedy).

Whilst unresolved, both crises helped erode confidence and trust in institutions in Malaysia and raised (and continue to raise) legitimate questions about how Malaysia Inc – which is still largely dominated by a few family-controlled businesses – operates.

Accordingly, companies (especially government-owned or linked ones) and parts of government and civil society are actively considering the extent to which they are exposed to reputational risks, and thinking harder about how these should be minimised and managed.

The whys and hows of effective reputation risk management

Predicting and managing reputational risks poses a wealth of tricky questions and challenges – amongst them:

  • How should reputation risk be defined?
  • What are the primary drivers of corporate reputation?
  • What forms do these risks take?
  • Who is responsible for an organisation’s overall reputation?
  • Who should own corporate reputation on a day-to-day basis?
  • What role(s) should communications and marketing play in reputation risk management?
  • How best measure, track and report reputational threats?
  • Why can leaders be reluctant to get to the root of reputational issues?

I tackled these and other challenges in my presentation, setting out solutions based on my professional experience, research and observation.

Here are my slides:

Fortunately, trust in Malaysia appears to have been restored to some degree over the last eighteen months.

However it is clear that organisations based in Malaysia – and elsewhere – continue to grapple with the strategic, governance and operational challenges reputation risk management inevitably raises.

I will explore some of the questions raised in my talk in more depth over the coming weeks and months on this blog.

Meantime, I hope you find the slides useful.

The past few days have seen the Metropolitan Police in London, the FBI and US Immigration and Customs Enforcement (ICE) hauled over the coals for appearing to use inaccurate and non-consensual facial recognition technologies.

In the face of hostile media reports, public concerns about AI in general and complaints about their programmes specifically, as well as ongoing litigation, all three organisations have doubled down on the appropriateness and legality of their actions.

Their reaction is hardly surprising. The artificial intelligence (AI) that underpins these technologies is largely unregulated. And the general public is only starting to become aware of its benefits and risks, is largely skeptical of its promises, and is concerned about some of its potential impacts.

The looming tower of AI

The benefits of AI are many. It can help tackle climate change, strengthen cybersecurity, improve customer service and stop people making abusive comments on Instagram, amongst all manner of other applications.

However, as Stanley Kubrick highlighted in his 1968 film 2001: A Space Odyssey in the form of HAL 9000, AI poses substantial risks.

These risks include:

  • unfair or discriminatory algorithms
  • unreliable or malfunctioning outcomes
  • misuse of personal or confidential data
  • greater exposure to cyberattacks
  • loss of jobs
  • legal risks and liabilities
  • direct and indirect reputational risks, including malicious deepfakes.

It is likely that these risks will become greater and more reputational in nature as the adoption of AI technologies becomes more mainstream, awareness diversifies and grows, and public opinion consolidates.

Source: PEGA, 20

In addition, the risk management industry is looking at AI from a risk perspective, and the PR/communications industry from a communications perspective.

AI reputation management research study

However, little exists on the reputational threats posed by AI, or how these should be managed should an incident or crisis occur – an important topic given the volume of AI controversies and the general focus on corporate behaviour and governance.

Accordingly, I am pulling together examples of AI controversies driven by or relating to artificial intelligence for an initial report and possible quantitative study and white paper on the topic.

To kick-start the process, I am crowdsourcing information on the nature and impact of recent controversies through an AI and algorithimic controversy database.

The database is open, and your contribution is welcome. Given the sensitivity of these types of events, please note all contributions should be fair, accurate and supportable.

Let me know if you have any questions.

Thank you.

Volkswagen’s diesel emissions test saga is one of the most complex, sustained and costly crises in recent years.

This timeline seeks to put the scandal into broader context by highlighting important legal, regulatory, industry and other inputs, outputs and outcomes from its inception to the current day. It is updated on an ongoing basis.

Let me know if there’s anything important I may have missed.

2020

2019

2018

2017

2016

2015

2014

2008

2004

  • US Environmental Protection Agency (EPA) significantly tightens diesel emissions standards.

Most companies expressly avoid mentioning past scandals in their advertising. Not so VW, which makes its 2015 diesel emissions crisis the starting point for its latest ad ‘Hello Light’.

The ad is clearly intended to signal VW’s shift to electric driving, while drawing on the company’s glory days of the 1960s and 1970s. It is eye-catching, and feels honest and refeshingly unnostalgic.

It is also brave. For one, there are clear risks in framing the firm’s shift to electric through the prism of its diesel emissions fiasco. Purists might also complain there is no apology – just as there was no apology in VW’s November 2015 goodwill marketing campaign.

Hello Light is no one-off, but is part of VW’s larger ‘Drive Something Bigger Than Yourself’ brand campaign that aims to press home it’s commitment to electric while drawing on its rich history.

Yet VW’s diesel emissions woes are far from over. With legal cases in 50 countries, 2019 may prove to be the company’s ‘most difficult year ever’ according to Hiltrud Werner VW Group board member and head of compliance.

Each court case will bring a rash of unwelcome publicity as old documents are raked over and new evidence comes to light. Much will hinge on the company’s rogue employee defence, which is looking increasingly brittle.

While risky, VW’s electric driving campaign is also strategically critical. Diesel sales have been dropping sharply.

Major cities are banning diesel cars in their centres. And several top auto manufacturers have promised to end production of the internal combustion engine. VW says its last generation of combustion engines will be launched in 2026.

In addition, the electric market is a challenging proposition thanks to new entrants such as Tesla and the relatively high cost of electric technologies, even if these costs are now starting to fall as volume increases.

Set against this background, VW’s electric driving campaign is worth the strategic and reputational risks.

Arguably, it should have been run sooner.

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