How do we assess less tangible elements of a deal?

The COVID-19 pandemic has infiltrated the business world with a sense of volatility, most certainly accelerating company collaboration and greater need for alignment, however, in some instances, the uncertainty has cultivated litigious environments making it more important than ever for organisations to improve their commercial and contracting practices. Relationships can become more intense as a result of additional pressures and concerns and old habits must be adapted for organisations to successfully develop, adapt and transform.

Traditional practices tend to focus primarily on measurements of tangible factors such as costs, whilst such practices are imperative as statutory accounting requirements, organisations should also consider measuring the potential risks of intangible assets. Although it may sometimes appear difficult to directly link intangible assets to the profitability of a company, many elements of intangible assets can be undoubtedly commercially beneficial and are often dominant determinants of shareholder value. A Harvard Business Review found that in today’s economy 70% to 80% of market value comes from hard to assess intangible assets and so organisations are particularly vulnerable to anything that damages their reputation.  The following article highlights the growing importance of carrying out risk-based assessments of reputational risk, good will and customer relationships and how organisations can carry out such assessments when assessing deals, settling claims and making key business decisions.

Reputational Risk

Damage to an organisation’s reputation has the power to tarnish a company’s name and lead to potential financial and social capital losses, or even cause the collapse of a company, thus exemplifying the significance of intangible risks. When assessing deals or settling claims, professionals should keep in mind that business failings may be magnified by the media and across social media as both now possess the influence to play a huge role in setting the agenda surrounding a company’s disputes.

Despite the threat of reputational damage, organisations often do not do an efficient job at protecting their reputation and often only face such problems once they have already arisen and sometimes when it is too late. This is not risk management but, instead, crisis management.

A reputation is to be protected to avoid negative impacts such as bad media press, but professionals should also make organisations aware that maintaining a good reputation can add to an organisation’s profitability. Weber Shandwick Research found that a global executive on average reported their organisations’ reputation accounts for 63% of a company’s market value.

Reputation risks may prevail where an organisation’s performance falls short of the expectations held by its stakeholders (for example customers, shareholders, investors, politicians, employees, the media or the general public) and concerns ripple down through the media to the public and employees.

Levels of risk resulting from a tarnished reputation have been categorised by Denni Arli from the University of Minnesota, into two: Direct and Indirect. Reputation risks stemming from the direct performance of an organisation materialise where the organisation in question is in control of the conduct carried out that has caused the negative impact.  On the other hand, reputational risks can arise from the indirect conduct of an organisation’s third parties, distributors and supply chains, despite the organisation in question being unaccountable and having no direct link to any damaging actions.

However, there are various actions organisations can carry out to mitigate both categories of reputational risks.

1. Identify and prioritise highest value stakeholders who drive the most value across the organisation. Both value and risk can be measured through losses in revenue, increased operating, capital or regulatory costs or even destruction of shareholder value which could lead to consequential decreased outside investments. If you can identify a potential risk, then you can actively formulate a mitigation plan.
2. Audit your position against your highest valued stakeholders’ expectations and identify vulnerabilities and gaps. Once vulnerabilities and gaps are identified, set a strategic plan to strengthen your organisations position and avoid falling short due to such vulnerabilities.
3.  Break down traditional ineffective processes and adapt to the modern times. Response times to issues is paramount to limiting negative impacts. The digitisation of the business world has increased significantly over the past decade, but the pandemic has increased the need for virtual communication even further. An IACCM study showed that face-to-face communication was preferred by 96%. However, this form of communication is fast becoming the exception to alternatives like email and video conferencing and organisations must break down old traditions and create effective communication processes to ensure relationships remain effective.
4. Draw out an ideal solution for all of the above by drawing up plans and communicate plans internally.

Good Will

The Institute of Business Ethics claims as the business world adapts to modern times, a company’s values and ethics grow in importance and determine more of a company’s worth. The challenge for organisations is not to merely define corporate values and standards, but to ensure they are practiced consistently, day-to-day. Companies that have open dialogue about values, beliefs and behaviours are more adept at managing reputational risk. Be overt in describing how the intended culture will impact decision making across the organisation. Such actions may narrow the pervasive nature of possible reputational damage.

Collaboration works best with open and clear dialogue. Clearly outline what you want to achieve, make the process as simple as possible and align all objectives to one common goal. Create a strong culture story and communication methodology.