Reputational Risks & DT

Reputational Risks and Digital Transformation.?

The hyper-connected corporate environment exposes corporations to image risks at scale and speed never experienced. The millions of consumers engaged in social networks can reflect individual perceptions and unwork in a few hours, reputations consolidated over years.?

A few months ago a contaminated raw material caused the death of at least 100 dogs causing the snack manufacturer to stop production, the retail removed from the shelves all the company's brands and, on social networks, millions of consumers now associate these brands with the death of animals. The company remains closed. The large-scale formation of opinion produces the phenomenon of brand exile.

While a company's IMAGE risk is associated with how it is perceived in the short term, REPUTATION stems from the set of interactions with its stakeholders and society over the years. A company's reputation can account for more than 25% of its market value, reaching more than $16 trillion of market capitalization on the largest stock exchanges. While valuable, reputation is a fragile asset, vulnerable to instant destruction, and recovery is slow and costly - when not, impractical. It is the role of the Board of Directors diligent, to monitor the mapping, mitigation, the state of organizational readiness, and the possible contingency of adverse events.

Reputational risks affect confidence in the company and its brands. Trust of customers, employees, suppliers, regulators, the community, and investors. Ethical issues may involve all types of corruption, working conditions, or use of d and third-party data. Operational issues affect product quality, customer relationships, and even occupational accident risks. There are also risks associated with controversial issues, such as executive statements or corporate practices dissonated with the policies announced. For example, in 2014 Volkswagen became embroiled in a scandal when it was revealed that it hid high gas emission rates from its vehicles, leading to the CEO's departure in September 2015.

With the phenomenon of Digital Transformation (TD), new events foster reputational risks as business processes and models are redesigned and adopt Artificial Intelligence (AI) solutions, such as machine learning or natural language processing (NLP), blockchain, augmented reality or RPA (robotic process automation).?AI use can be like dealing with a black box without any visibility into how recommendations are structured, potentially leading to inappropriate or inappropriate decisions.

For example, Goldman Sachs, responsible for apple's credit card, was involved in an investigation into the possible bias of its AI algorithm that allegedly discriminated against women at the time of granting the credit limit. This event glues on Apple the POSITIONING REPUTATIONAL risk, typical of companies with difficulty dealing with topics such as diversity, representativeness, gender equity, inclusion or sustainability. ?In a similar case, Optum, an American health management company, was investigated for allegedly using an AI algorithm that recommends doctors and nurses pay more attention to white patients than black sitters. In addition to the consequent discriminatory practice, this event exposes a bias of origin associated with the low quality of the service provided - process risk.?

The authorities are trying to react. Regulatory aspects that concern data processing should be observed in light of the dynamism of its updates. Regulations such as the European Union's General Data Protection Regulation, the California Consumer Privacy Act (AB 375), and the General Personal Data Protection Act (LGPD, Brazil) target the safety of all stakeholders. We typically associate such risks with the leakage of customer data. But what if your employees' data were exposed? How much would it cost to provide them with a solution?

Also, as presented in my article "The board of directors and Platform-based business models " (August/2022 edition), a company that opts for business models on digital platforms, such as marketplaces or match or delivery applications, should ensure users' access simply and quickly, usually via the Internet and through the sharing of personal data. In this context, there are legal and regulatory implications, which may expose the company to reputational and financial risks.

Social events also expose companies to reputational risks by damaging the relationship between the customer and the brand. ?So-called chatbots, robots that automate conversations via websites and applications, use AI application type (NLP) solutions to scale the number of customers served in a short time. But Microsoft launched an AI-based chatbot in 2016 that tweeted racist and misogynistic comments. And in 2018 it was Amazon, with its chatbot accused of discriminating against women. Business spending grew by 63% between 2021 and 2022 and is expected to continue at this rate until 2025 – meaning that many companies, and their brands, will navigate chatbots for the first time, exposed to negative social events and consequent reputational risks.

The moment does not require new tools for the management of reputational risks - just a trained and responsible look at the impact resulting from the changes in the business context produced by the adoption of digital transformation strategies. Additionally, cultural issues should be observed to promote ethical and compliance values. It is necessary for a corporate environment based on trust and empathy, in which people do not have the fear of denouncing situations of reputational risks that love the values of the company and the strength of the brand.