Risk Management On A Company Reputation Management
Under the word risk in the Oxford English dictionary, is defined as: Exposure to the possibility of loss, injury, or other adverse or unwelcome circumstances; a chance or situation involving such a possibility.
In fact, there is no necessity to say that risk has all the time been, it is and will be a constant in our lives. Although the concept of risk, and management of it have changed during the centuries until it took the nowadays definition during the Cold War. Under the word 'risk' in the Oxford English dictionary, is defined as: Exposure to the possibility of loss, injury, or other adverse or unwelcome circumstances; a chance or situation involving such a possibility.
In fact, there is no necessity to say that risk has always been, it is and will be a constant in our lives. Although the concept of risk, and management of it have changed during the centuries until it took the nowadays definition during the Cold War.
Risk is an action that we take in order to gain something more. Unfortunately, this action sometimes doesn't bring good effects, but also bad once. When we think about risk, we imagine doing some adventures sports like climbing the hill or bungee jumping. The risk, however, is present in everyday ruin, especially in our work environment. We face the risk in each company when we start with a new task or a new project. Risk is a think that if it wants to grow, then we cannot avoid it. Taking risk has two sides like Russian roulette. We can get killed (meaning lose everything), or we can jump to another higher level.
Is the Risk Management relevant in 21th century?
Nowadays before we make any decision we need to look 5 steps forward to know if this path is really good for our company or us. Personally I like to compare Risk Management duties to chess game. In both cases before u make your move (take a decision in the company) you need to think of your opponent strategy and his move. You need to figure out which move is the best for you in achieving the final goal, which is victory. The same is with RM; you check all the possibilities; you try to forecast the future and make the best decision based on this plans.
Thinking about risk management we take into consideration the probability of the event to happen, the vulnerability, meaning how much the element can afford and the value, meaning the damages of the element after a certain event.
R = P x VUL x VAL
Risk Management is especially relevant since 2008 when the crisis emerged. Since that time each company in the world is struggling with taking any decisions, and that's when Risk Management steps. Today every new business and every single decision is concocted with risk. Owners of companies have to use Risk Management in order not to make any wrong and non-thought decision.
In conclusion, when we talk about Risk management in the 21st century we can definitely see how the application of it can reduce costs, prevent disasters, help us decide for a more appropriate exposure to the market (if in the matter of business) and the client and definitely been aware of our overall possibilities despite an opponent.
The importance of Risk Management on a company reputation
For a business, reputation is how shareholders and customers see the company; reputation describes what type of image that conveys the company to market. Not knowing manage this reputation; can cause devastating damage to the company, as negative publicity, loss of income, decline in customer base or departure of key employees. This is known as reputational risk.
On the other hand, companies with a solid reputation are likely to have higher profits and more stability, it make easier to recruit and retain the best employees and more likely to resist the challenges of crisis.
The way an organization faces a crisis determines often if your reputation improves or worsens after the event. So have a good plan, develop processes to deal with crises and think about the threats in advance before they become a disturbing reality, is essential for the company to act effectively, knowing establish priorities in terms of probability and severity potential.
And who is responsible for managing an organization's reputation?
Many CEOs believe that managing the reputation of an organization is a sole responsibility of them. What is not true? No single person or positions that have the ultimate responsibility for managing reputation and assess the risks that daily surround organizations.
Besides the CEO, responsible for managing the reputation of the organizations include, the board of the company, the people closest to customers and key stakeholders of the organization and communication departments. It is they who will influence the image that the market will have the organization.
With the world increasingly globalized, manage the reputation of a company becomes something increasingly complex. New technologies such as the Internet, blogs and text messages have complicated the situation for companies trying to manage their reputational risk. Information today is transmitted to the world with fast speed, making companies increasingly transparent in the eyes of customers, stakeholders and shareholders. The big problem is that many organizations are not prepared to react with the same speed, for reasons such as bureaucracy and regulations inherent in large organizations, causing a devastating outcome to their reputation.
Among these negative results may be mentioned four possible effects of an attack on the reputation of a company fall in stock prices (if the company is publicly traded), decline in market share, difficulty in recruiting and retaining talent and dissatisfaction in communications in which the company operates. Reversing this is not always an easy task, and takes a long time for the company's reputation back to the confidence level desired.
For managers, managing reputational risks of a business is a complex task and there are no formulas ready that could be used in every different case. It is up to them to analyze each situation and make a decision consistent with the moment.
Case Study of BP
BP (British Petroleum) takes its beginnings in early 1900's. Dr. William D'Arcy with his team under George Reynolds obtained permission from Shah of Iran to search for oil in 1901. Dr. William D'Arcy became almost out of his financial resources, investing on oil expedition after 7 years of useless tries, but when the last hope was almost died, he obtained the telegram dated on 26 April of 1908 in which was said, that team headed by George Reynolds had drilled up to 1800 feet and had explored the oil reserves. Dr. William D'Arcy suddenly understood how lucky he was...
Later, the Anglo-Persian Oil Company (APOC) was founded in 1914. It becomes the subsidiary of Burham Oil Company. The aim of a new company was oil exploiting, but company faced the new big problem: on the one hand, it had plenty of oil, on the other - there were no customer to supply this oil. Automobile industry had just started to develop at that time. Single persons could offer cars with oil engines. The demand for oil was quite low. Moreover, Standard Oil of India was strong experienced competitor at that time.
Winston Churchill wise politician and big patriot of his country managed to ensure his colleges in Parliament in making Anglo-Persian Oil Company as a British property, which would become a benefit as for company as for Britain.
The new times have come. More and more cars started appearing on streets of Europe and United States cities, and less and less horse wagons in 1920-30's. Number of gasoline pumps rapidly increased from 69 to 6000 in Great Britain during the 5 years of the second decade of 20 century. "BP" letters started becoming well known for everybody.
APOC changed its name to Anglo-Iranian Oil Company (AIOC) in 1935.
World War II brought bad news for BP. During the war; oil development just stuck, military, especially aviation used BP oil. The oil transportation from Iran became very dangerous business. BP lost 44 tankers; 657 sailors were killed; 260 became prisoners. The company was keeping in secret oil production place during the whole war, which was enormous courage and heroism.
After the World War Second, Iranian national movement appeared in Iran, which was directed against Anglo-Iranian oil cooperation. Besides, Mohammed Mossadeq - a nationalist, became a prime minister of Iran. He persuaded everybody in Iranian parliament to nationalize Iranian oil. He did it by using unanimous voting.
Britain sued to the Iranian Government at International Court of Justice to prove Iran actions were illegal due to AIOC, but British complaints were refused. Later all British people left Iran. After this, Iranian oil was boycotted by many of countries around the world. It was the hardest time for Iran. Iranian economy was almost crashed during 18 month of boycotting. The Prime Minister of Iran resigned, and Britain returned 40 % of AIOC shares. In 1954, AIOC changed its name to British Petroleum.
In 1960-70's, BP looked for new natural oil reserves places. BP started exploring North American continent, especially North Sea. Without any believes, in the last moment after 10 years of useless drilling, they found as called "Forties field " with huge reserves of oil. BP produced approximately 400 000 barrels of oil per day in the new place.
BP lost Middle-East competitiveness, because of a conflict situation between BP and Libya, which had been just misunderstanding between Libyan government, its oil tax policy and Great Britain at the beginning, and becoming a big conflict after British military left Iran, allowing clutching between
Iran and Libya. Such British actions were accepted negatively by such countries as Libya, Iraq, Iran, Saudi Arabia, Qatar, Abu Dhabi. Some of these countries decided to nationalize oil production immediately, some in 10 years time.
BP being as any British governmental company or property was involved in the process of privatization in 70's and 80's of the last century. The process of privatization was quite long. In 1987, the last governmental shares of BP were sold. Started as a private company, BP's new main goal is just oil detection, qualifying, transportation and selling.
BP built the biggest oil pipeline (1200 km long) in North America.
In the 1990's, BP merged with ARCO, Amoco, Aral and Castrol's motor oils. Company obtained new name "BP Amoco plc".
With starting 2000's, BP identified and promoted itself as " Green Company ". Company starting to struggle against carbon pollution in the atmosphere and did everything possible for reducing it.
Also, BP launched new emission trading scheme and worked a lot on producing solar energy.
Company in fifth time changed its name to BP plc in 2001. It also acquired the new slogan, which sounded like, "Beyond Petroleum".
Type: Public limited company
Trade as LSE: BP, NYSE: BP
Industry: Oil and gas
Founded: 1909 (as Anglo-Persian Oil Company) APOC
1935 (as Anglo-Iranian Oil Company) AIOC
1954 (as British Petroleum) BP
1998 (as BP Amoco plc)
2001 (as BP plc)
Headquarters: London, United Kingdom
Area served: Worldwide
Key people: Mr. Carl-Henric Svanberg, (Chairman), Mr. Robert W. Dudley, Chief Executive Officer
Products: Petroleum, natural gas, motor fuels, aviation fuels.
Service: Service stations
Financial information (2012):
Cost of goods sold (US$ Millions): 318,043
Current Liabilities (US$ Millions): 84,318
Total assets (US$ Millions): 97,584
Long Term Debt (US$ Millions): 35,162
Return on Equity: 27,47
Market Capitalization (US$ Millions): 811,030
Total Company Assets (US$ Millions): 293,068
Revenue growth (%): 26,37
Net Income (US$ Millions): 26,097
Earnings Per Share (US$): 1.34
Total Equity (US$ Millions): 111,465
Profit Margin (%): 6.83
Debt to Equity Ratio (%): 0.32
Inventory Turnover (US$ Millions): 26661
Number of employees: 83,400
Risk Management Process
Risk management process is an interconnected process, and each part gives decision makers tools to analyze and manage risk and have a better understanding of risks and its impacts.
Risk management can apply in all sectors of the company; it can be used for strategic or operational purposes.
In risk management process, we separate risks into general categories within the group because it facilitates the understanding, the associated perils and hazards.
The Chart below illustrates in greater details how all the parts are interconnect in the risk management process.
Source: The Royal children hospital Melbourne.
Identify the risks
The first of all in risk management process is to identify potential risks involving your business activities. To be able to identify a risk is necessary to know all range of risk and its features to create a database of risks that are relevant for your company. There are 10 main risk categories and which category is composing for several risks.
Financial position: Currency, interest rate, investment, hedging Credit: Credit vetting, customer, credit security, III part Liquidity: Cash flow, funding
Financial Operations: Trading and dealing, processing, systems, event
Strategy and Operational
Strategy and Product: Strategy, development, launch and, competitive Operational 1 and 2: Production, logistics, procurement, sales Infrastructure: Organizational, personnel, systems/reporting, planning, site related, dealer net Security: Fraud and theft, accidental, terrorism, sabotage, natural disaster
Compliance and Regulatory: Political, fiscal, regulatory, economic, environmental, litigation/legal.
In the case BP for instance, it is possible to relate the oil and gas industry activities to many different types of risk, below are presented five risks that relates BP market segment.
Environmental Risk- Risk of endangering public heath and/or employee health and conflict with health regulation, risk of contamination of water, soil and air.
The Production Risk- Planning and scheduling risks, Technological risks, risks of process control, quality assurance risks (including related risk of higher cost of technical warranty), maintenance risks, safety risks
The procurement risk- component quality risk, material quality risk, risk of supplier profile and reliability, risk of inadequate timing, risks of an unexpected cost increases, supplier loyalty risks, and supplier credit risks.
Energy Polices changes- Change and increase environmental regulations, increase in regulation, in the company operation.
Security- Fraud, theft, accidental, terrorism, sabotage and natural disaster Analyzing and evaluating the risks
Once you have the risk identified and aware of which risk the company is related; you are now able to analyze and evaluate the risks. The most common way to analyze the risk is by
â€¢Likelihood of it occurring
â€¢Consequences of it occurring.
Tables in the show present it in greater details
Likelihood scale example
Consequences scale example
Source: Queensland Government
Once you know the risk, its consequences and likelihood, you can create a table for rating the risks. In this evaluation, you need to classify the risk, its severity and decide ways to manage it.
Formula for calculate risk rating: Likelihood X Consequence of the risk= Risk rate
Risk rating table example
Source: Queensland Government
Whenever the risk is identity, analyzed and evaluated, it is possible to rank them by priority and decide how to treat the unacceptable ones.
Risk treatment is done through options. The option will depend on the severity; some risks will be treated immediately others can be managed and treated, not with the same urgency. Before decide., which risk should be treated the following information must be gather:
â€¢Way of treatment
â€¢People responsible for treatment â€¢
Article name: Risk Management On A Company Reputation Management essay, research paper, dissertation