Risk Management and Ethical Systems Design

Recently the Wall Street Journal featured a conversation with Henry Ristuccia, a partner at Deloitte and global leader for Governance, Risk and Compliance Services, speaking on the subject of reputational risk management. The key takeaway: reputation is considered the highest impact risk area to business strategy.

The challenge is that many organizations still take a rear-view mirror approach to risk, especially reputational risk. For example, in the case of an adverse event to their reputation, they may get legal, corporate communications and PR involved, and then they may do a post mortem to help avoid a similar event. That essentially is crisis management, not reputational risk management. While crisis management is important, it may not be enough when dealing with reputational risk issues as it typically entails taking backward-looking, reactive measures after an event has occurred.

Ethical systems design is imperative from a risk management point of view. Companies with a strongly aligned ethical culture (and a reputation for such a culture) will be viewed more favorably in all their strategic endeavors, and they will be less likely to commit transgressions that damage their good name. Ristuccia talks about how reputation is shaped outside the organization, but in truth it begins closer to home, with the perspectives of executives, managers and employees within the company. Corporate behavior becomes part of the reputational infrastructure and permeates every aspect of a business, both internal and external. If a company wants to have a solid reputation, it should start with solid ethics.