Uncertainty and media attention still hover around the scandal that inflicted a €5 billion loss to the assets of Société Générale. Numerous comments have been made on the process that allowed a single individual, not even fully authorized, to circumvent the system of internal controls of a bank. Independently from the organizational malfunctioning that allowed this to happen, substantial reputational damage has been made.
Controlling for market dynamics, SocGen went down by 12% the next day, a good proxy of its reputation loss. Reputational risk, understood as the economic consequences of changes in judgment over the level of trust of customers vis-à-vis credit institutions, has become an aspect where intermediaries have understandably being concerned about lately.
The notion of reputation embodies a kind of judgment that is not only economic. In general, one can say that reputational risk is the probability that an event affects the level of economic trust of a given actor. To measure such damage, qualitative and quantitative methodologies exist. The former create a barometer of reputation on the basis of perceived quality of products and service, innovation, quality of management, leadership, and sustainability. The main US indicator, RepTrack, highlights how consumer products companies enjoy the best reputation (74.39), while banks and other financial intermediaries have the worst image (62.67), not counting specific scandals and wrongdoings. Similar results were also reported by Fortune in its ranking of the Most Admired Companies.
What banks should be doing to remedy to the current image problem affecting the financial industry? First of all, acknowledging that reputation is their most fundamental asset, and as such it requires investment for its growth and maintenance. The management of reputational risk should be geared toward removing potential crisis factors with actions aimed at decreasing the probability of adverse events for corporate reputation. These include the mapping of controls, the introduction of a committee overseeing the quality and respect of stakeholders' interests, responding proactively to customer complaints, the continuous monitoring of reputation, and so forth.
Since the possibility of nasty events escaping preventive controls is always there, crisis management actions should also be planned for, including public disclosure, interventions on corporate governance, brand diversification, and the like.
The process of achieving full awareness of these problems in the financial system is going to be still long and painful. But there are positive developments in many quarters toward a redefinition of the corporate mission in the above terms. "Our reputation is everything" is declared in one of these attempts. But top management and supervision must act to get the right range of behaviors from the people placed in the positions that can affect what defines the long-term value of a financial company.
by Giampaolo Gabbi,
Member, Finance and Insurance Division of SDA Bocconi School of Management