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Reputational Risk

By Simon King

Republish: EasyPublish™
Published: 24Jun2009
Word count: 594
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In October 2008, Megan Murphy (Law Courts Correspondent at the Financial Times newspaper) reported that Abbey National was fighting a rearguard action against a record £2.8 million race discrimination award made to a former employee. The news report concerned the high-profile Chagger v Abbey National plc & Hopkins [2006] legal case, where the Employment Tribunal's finding of unlawful race discrimination led (after Abbey National's refusal to comply with the Employment Tribunal's order to re-instate Mr Chagger to remedy its wrongdoing) to the record £2.8 million compensation award.

According to Nigel Porter of 11KBW set of chambers, the case has progressed to the Court of Appeal, is due to be heard next month (July 2009), and the hearing is limited to the matter of compensation only. The wrong done of race discrimination by Abbey National and Nigel Hopkins seems to have been finalised by the Employment Appeal Tribunal, which upheld the original Employment Tribunal's finding that Abbey National and Mr Hopkins had discriminated against Mr Chagger on the grounds of race.

Spanish owned UK high street bank Abbey National (which is re-branding as Santander from 2010, and is part of the Banco Santander Group) employed Balbinder Chagger, who is of Indian origin, as a Trading Risk Controller. He earned about £100,000 per annum and reported into Nigel Hopkins. Abbey National dismissed Mr Chagger in 2006, apparently for reasons of redundancy.

Megan Murphy had also reported that legal experts had expressed astonishment at Abbey National's decision to fight the case at all given, amongst other things, the reputational risk involved. This would suggest that reputation is generally recognised by many organisations to be an important asset (or liability) that contributes to their market value. For example, many financial institutions regard reputation as a major source of competitive advantage.

Advancements in the world have made companies more vulnerable to reputational damage; improved global media and communication channels, increased scrutiny from regulators and reduced customer loyalty expose organisations to greater levels of reputational risks.

Thinking on reputational risk is divided into two schools. One school believes reputational risk is a primary risk, alongside other primary risks (e.g., market risk, credit risk, legal risk, and so on). This view predominates in sectors where primary risks are difficult to measure and quantify; organisations in such sectors are likely to view reputational risk as a primary risk in its own right. In contrast, there is the other school that believes reputational risk is a secondary risk (i.e., a consequence of other primary risks). This view predominates in sectors where the key primary risks are measurable and quantifiable; organisations in such sectors are likely to view reputational damage as a consequence of the failure to manage the various primary risks properly.

The biggest source of reputational risk is probably the failure to comply with regulatory or legal obligations. Failure to satisfy customers with the appropriate levels of service and quality is likely to be another major source of reputational risk.

Ultimately, reputation is about how an organisation is perceived by its various stakeholders, such as customers, suppliers, employees, competitors, investors, regulators, the media, the public, and so on. Many organisations regularly monitor the perceptions of their customers, but not of their other stakeholders. As a result these companies may be slow to address issues that may damage their corporate image.

Good communications with stakeholders becomes highly important once a reputational crisis breaks out. Companies that respond quickly and effectively to reputational crisis, in an open manner, will improve their chances of emerging with their reputations intact. Those that don't are likely to suffer heavy and, possibly, irreparable reputational damage.

Abbey National plc & Hopkins v Chagger [2008] and Appeal Stages and Court Structure in Employment Disputes

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