Brand and reputation are indispensable to the bottom line, argues David Abrahams of Marsh Risk Consulting.

During 1999, there were a number of regulatory and legal developments that focused attention on the need for management of risks for brand and corporate reputation.

  • The Turnbull Committee's guidelines require boards of directors to report to shareholders on risks to future cash flow and earnings. With 75% of the market capitalisation of FT-SE 100 companies now attributable to intangibles such as brands, this will require commentary on the demand for a company's products or services.
  • The adoption of the new UK accounting standard FRS 10 has established that brands acquired by a company can be recognised as distinct intangible assets on the balance sheets. This amounts to a formal acknowledgement of the contribution of brands, in general, to the creation and maintenance of shareholder value.
  • New rules requiring pension schemes to declare their policy on socially responsible investment underpin the need for the board to respond to the wider concerns of stakeholder communities, domestically or globally.
  • The Public Interest Disclosure Act came into effect in 1999 to protect employees who reveal malpractice on the part of their employers, and September saw the first test case seeking protection under its powers. Companies must review the adequacy of their internal complaints procedures and mechanisms for employee feedback.

    In recent years we have seen highly regarded branded businesses experience unanticipated crises of confidence under the full gaze of the world's consumer and financial press. This was a reminder of the importance of tactical readiness, and the crucial impact of the tone set by the chief executive. Equally important are the firm's culture and management processes. These must allow indicators of fundamental change in demand or customer perception to be perceived and evaluated within an organisation.

    In addition, the Airmic survey continued to rank loss of reputation and risk to brand and trademarks as issues of the greatest importance.

    In the future, it is clear that regulators, such as the FSA, will continue to influence the ways in which managements design and promote their product or service offerings.

    Value reporting to investors, including discussion of the state and momentum of the company's brand assets, will continue to develop as an area of management focus. Chief executives and finance directors, who previously may have had little involvement with the technical aspects of brand and reputation management, will become increasingly accustomed to the interpretation and application of market research and other non-financial indicators of brand performance. The strategic management of brands may move higher up the corporate agenda.

    The spread of ecommerce will alter brand risk profiles in a number of ways. A company's online presence will increasingly project a comprehensive branded business system, which will be experienced by customers as a navigable proxy for the entire company and its divisions. This will oblige brand owners to overcome any inconsistencies or incompleteness in their value proposition, previously tolerated, but now evident and potentially undermining the whole. The visibility of competing offerings will accelerate tactical response from all players; customer reaction will be more immediately perceived inside and outside the company.

    Figuratively and operationally, businesses will be turned inside out. Careful organisational design, combined with adequate financial provision for the uncertainties and increased volatility of an e-commerce environment, will be important components of good governance.

    The move by some brand owners to concentrate their resources into power brands, reducing the number of brands in a market, may alter the firm's net risk profile, increasing vulnerability.

    The more effective risk financing solutions in these new and complex areas are likely to emerge from alternative risk transfer markets, rather than through conventional insurance.

    Board members may also need to become accustomed to working with formal measures of brand health and corporate reputation. The identification and treatment of brand risk must explicitly acknowledge both catastrophe and erosion of customer preference as equal threats to performance and to the value of the brand.

    Where appropriate, boards of directors will do well to understand which components of the brand's image create its equity. Where the role of brand is increasing, organisational design and culture must evolve to reflect this realisation.

    The scale and precise nature of brand risk are inevitably different for different companies. However, it is greatest where there is significant change in market conditions, or if a company is making substantial investments in new branded ventures. Companies operating with a single brand in a regulated or supervised industry may find themselves especially vulnerable to complex escalations of market or brand reversal, and to consequent impacts on shareholder value.

    David Abrahams is practice leader brand risk at Marsh Risk Consulting. This article is taken from the Marsh report Key Risk Issues 2000