We have long known that it is possible to identify, in advance, organisations that have systemic weaknesses that make them more likely to fail in this way. Preliminary findings from our latest research provide indications of a new analytical approach.
Regular readers will recall that recent rules from the UK Financial Reporting Council require companies it regulates to report clearly on important reputational, behavioural and organisational risks. [Note: since this was written, the FRC has published new Guidance on Board Effectiveness which recommends greater focus on these areas at board level. We have written about it here. Our recommendations to the FRC on this are here.] We have analysed the Annual Reports of about half of the FTSE 100 constituents to discover how they were getting on.
We used a simple scale to score their reporting performance on five axes
The scoring system awarded from 0 to 5 points on this scale.
The five (inevitably overlapping) axes we chose were:
- Behavioural risk
- Organisational risk
- Cultural risk
- Reputational risk
- Learning from errors and experience
By way of example our cohort included seven financial services companies. Plotting their results on a chart reveals the picture below.
This picture is revealing even without more information. You can separate financial services (FS) companies that talk about learning from mistakes from those that do not; evidence of the Financial Conduct Authority and Prudential Reguation Authority campaigns to improve culture is ubiquitous; and two seeming weaklings emerge: FS6 and FS7 with averaged composite scores of 1.6 and 1.1.
To give a little perspective, FS2 was the top scoring company across our entire survey with a composite score of 3.6 that leaves plenty of room for improvement. The bottom company managed to score a zero on all five dimensions.
Annual Reports may portray a company as better or worse than it actually is. A poor score may reflect poor risk management or inadequate reporting by the board. Contrariwise a higher score may represent better risk management or exaggeration by the board. At present we suspect the former more than the latter.
This analysis provides a new and solid starting point for identifying UK companies that are particularly vulnerable to unpleasant surprises. Huge volumes of differentiating information exist in the public domain. Our experience is that, with a suitable analytical framework and methodology, this yields revealing and predictive insights into the extent of a company's vulnerability to crises and the nature of its fault lines. The framework can equally be used to compare and rank companies, identifying both which companies are more and less accident-prone and which are more, or less, likely to survive a reputational crisis.
Our methodology is obviously relevant to leaders of companies both in reducing the risk of being held responsible for the unexpected sudden collapse of their company and to ensure that outsiders gain a fair perspective on risk management in these areas. With access to inside information the analysis can be made far more granular, robust and revealing, supporting improvements in both risk management risk reporting. We are talking to a number of companies about this.
Our research insights and methodology are also relevant to:
- Investors who wish to avoid unpleasant surprises;
- D&O insurers ranking board risks;
- General liability insurers ranking operational risks;
- Banks assessing credit risks.
We plan to report further on our findings in the coming months.
In the meantime you can learn more about reputational, behavioural and organisational risks in "Rethinking Reputational Risk: How to Manage the Risks that can Ruin Your Business, Your Reputation and You" written by the late Professor Derek Atkins and me. Publishers Kogan Page offer a 20% discount using code BBLRRR20 to our readers.