Clifford Chance

Reputational risk is the number one concern for UK boards

Fears over brand damage are impacting attitudes to tax and executive pay

UK boards are among the most reputation-aware in the world, according to a new research report written by The Economist Intelligence Unit (EIU) and published by international law firm Clifford Chance. It finds that 74% of UK board members see reputational damage as the most worrying consequence of an incident or scandal, ranking it as more serious than the potential direct financial costs, loss of business contracts and even impact on share price - this compares with a global average of 57%. Furthermore, 56% of UK respondents now cite reputation risk among the top three risk categories they are currently focused on, topped only by financial risks such as funding issues and breach of financial covenants.

The report documents the attitudes to risk of 320 board members of companies worldwide each with over half a billion dollars in annual revenue[1]. Findings reveal a boost to risk management in the UK with 82% of local board members seeing an increase in financial investment over the past two years and 74% citing an increase in the time invested. At the same time, an over-emphasis on risk management may be inhibiting business growth, with a third of UK respondents expressing this concern. 

UK businesses are taking a broader approach to risk management too, encompassing more contentious issues such as tax and pay. Whilst the tax debate has highlighted moral concerns about corporate tax practices, most (62%) UK board members surveyed said that minimising tax was not a business necessity, compared with a global average of 46%. Moreover, 27% are significantly concerned about an incident or scandal arising relating to tax, compared with a global average of 21%, and only 10% in the US. This suggests UK board members are among the world’s most concerned when it comes to reputation risk surrounding tax.

Remuneration is also under scrutiny, with 32% of UK respondents saying that the possibility of brand damage has led to changes to executive pay, while 24% say the same for non-executive pay.

Guy Norman, Global Head of Clifford Chance's Corporate practice: “UK corporations have a minefield of issues to navigate as they try to protect their business against incidents that could severely damage their reputation.  With tax and executive pay coming under greater scrutiny amongst press, public and politicians alike, UK boards are smart to take a stance on these issues; while not illegal, they may be considered by many as immoral, causing the kind of reputational damage that can be hard to bounce back from.”

Jeremy Sandelson, Global Head of Litigation and Dispute Resolution:  “Forward-thinking organisations realise that prevention is better than cure and are taking a broad-ranging view of risk that seeks to spot and deal with potential issues before they become a reality, while still allowing space on the agenda for longer term business development and expansion.  It's a significant leadership issue and requires board-level focus to ensure that risk awareness is spread throughout the organisation – it has to start at the top for it to be embedded into every tier of the business.”

Other areas of focus due to reputational concerns include:

• Regulation: 85% of UK respondents see legal/regulatory risk – itself often a source of reputational damage – as increasing in importance over the next two years. This compares to a global average of 64%
• Shareholder activism: 21% of UK respondents placed shareholder activism among their top three concerns. This is almost twice the global average, which is 12%, indicating a greater awareness of investor sentiment in the UK
• Unethical behaviour: 74% of UK boards say that the reputational risk arising from unethical behaviour at their organisation has become much more important to the board. This view is shared even more strongly across the world with 82% agreeing

Luke Tolaini, Clifford Chance partner commented: “As UK boards become more heavily influenced by reputational concerns, so we are being asked to get involved much earlier in the process – collaborating with clients at the planning stage of risk management, rather than stepping in after a crisis hits.”

To read about the global findings revealed in View From The Top: A board-level perspective on current business risks, please visit
http://www.cliffordchance.com/content/cliffordchance/thought_leadership/global_risk_report.html

[1] 34 respondents to the global survey were from the UK.