How do you price reputational risk?

Reputational Risk occurs when either the company's affected interest group(s) face an experience or event that alters their view/impression of the company; or the company delivers a product or service to an affected group in a manner that is inconsistent with the belief held by the affected group. So, in my view, taking this approach,for a company to measure the impact on reputation risk, it needs to quantify the effect of the above mentioned events - either in rectification and/or loss of future business and revenues. Basically, the question is how different is the firm's business / revenues from the original business plans after the occurrence of the event affecting reputation risk.

I agree Sriram, the remediation cost is one that can be easily measured long after the loss of reputation event, along with the diminished sales/profits.

More immediate indication may be taken from other businesses which have suffered similarly and average out the decline in their share prices.

Putting a number on it beforehand is difficult but an obvious indicator is  - what effort was required to achieve the original reputation?

Generally it is a lot and I'd be looking at something around three years marketing budget and whatever additional costs the event incurs directly (such as the cost of hiring a new CEO and/or Chairman).

Hi,

Reputation risk quantification should start from the operational segments posing threat of reputational loss. Touchpoints with every business stakeholder - customer, employee, shareholder, regulators and market at large. The cost of processes within Bank to ensure quality interactions or deliverables to these stakeholders could be one factor. Recovery costs in case of punitive efforts to recover reputation is another. As an extension, research efforts in Bank to escalate bank positioning is another contributor. Another possible way would be to list out the core values of the Bank. Then to quantify the cost of effort and time put into establish,maintain and improvise those values in the Bank.

Regards

Rajeev

But you can get into a chicken and egg thing with reputational risk.

If banks start quantifying reputational risk, and allocating capital against those risks, isn't the bank admitting that they are already engaging in activities that might effect their reputations with clients, shareholders, counterparties etc...