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Managing risk and reputation to create enterprise value.

Sample Text - Chapter 1

Chapter 1: Markets Will Reward You

On or about 13 April, 2009, in a small Domino's Pizza franchise in North Carolina, two employees posted a prank video of unsanitary food-preparation practices. Within a few days, the power and reach of social media triggered more than a million views on YouTube and a “viral” spread of the subject on Twitter. Google trends reported a 50% increase in searches for "Domino’s Pizza."

A malicious product tampering event had placed at risk a valuable intangible asset—the Domino’s reputation for food security. Stakeholder perceptions of product quality were sharply undermined. YouGov, an online research firm, confirmed that the perception of Domino’s brand quality flipped from positive to negative in approximately 48 hours. A national study conducted by HCD Research using its Media Curves Web site found that 65% of respondents who would have previously visited or ordered Domino's Pizza were less likely to do so after viewing the offensive video.

Despite a public relations effort to restore Domino’s reputation spearheaded by Tim McIntyre, vice president of communications for the Ann Arbor, Mich., pizza chain, Domino’s reputation continues to slide months later. There is little evidence of reputation resilience (Figure 2), and as a result, the company is underperforming the median of its Restaurant peer group by 26%.

Figure 2: Twelve-month reputation and economic return profile for Domino’s Pizza (NYSE-DPZ). The Steel City Re Corporate Reputation Index shows a precipitous decline for Domino’s Pizza following the mid-April 2009 food security event. By the end of September 2009, Domino’s ranked in the 22nd percentile among its 47 peers in the Restaurants sector compared to a ranking at 55th before the event. Its return on equity for the period was 26% below the median of its peer group. Data source: Steel City Re.

While it takes millions of dollars to build a reputation that customers trust and investors reward, a 30-second lead story on the evening news or a 10-line blog on the web, can compromise everything a company has done to develop and protect its reputation. Greg Babe, CEO of Bayer USA, headlined a 2009 luncheon, “Why Reputation is Your Most Important Asset.”

Resilience — the ability to mitigate, and recover quickly from, disruption—is a material strategic advantage. In fact, the a company’s ability to beat headline risk and rebound from disaster—reputation resilience—is key to a company’s market valuation. Today, reputation resilience is much more than a marketing or public relations initiative. Rather, it is arguably the most pressing corporate managerial challenge.

Reputations result from perceptions that stakeholders have about a company’s intangible assets. Developing and implementing strategies to increase, protect and recover the value of intangible assets, such as patents, trademarks, trade secrets and know-how; and business processes for innovation, quality, security, safety, ethics and integrity, ethical sourcing and environmental sustainability, are essential to long- term corporate success. Markets recognize, and reward, such actions.

As IBM’s Daniel Prieto, notes, “In our complex and interdependent global economy, companies should go beyond protecting physical assets because cascading effects can create extreme consequences. Small actors and individual events are stretching companies’ boundaries of responsibility, which is increasing the risks they face in the course of doing business.” Mr. Prieto is the company’s Vice President and Senior Fellow for Homeland Security and Intelligence, IBM Global Leadership Initiative.