Table of Contents

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Nov 18, 2013 (3 years and 8 months ago)

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1


Table of Contents





Chapter 1 Introduction &Problem Formulation

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................................
.
4

Chapter 2 Research Methodology

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...............................

11

2.1. PARADIGM

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................................
..

12

2.2. METHODOLOGICAL APPROACH

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..........................

13

2.3. CRITICISM AND CHOICE OF METHODOLOGICAL APPROACH

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....

14

2.4. METHODOLOGICAL APPROACH USED IN THE THESIS

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.................

15

2.5 OPERATIVE PARADIGM AND RESEARCH DESIGN

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...........................

18

Chapter 3 Theoretical Part

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..................

22

3.1 REPUTATION AND REPUTATION MANAGEMENT

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...........................

22

3.1.1 REPUTATION AND ITS COMPOSITION

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.........

22

3.1.2 BUILDING CORPORATE REPUTATION

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..........

25

3.1.3 MAINTAINING CORPORATE REPUTATION

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................................
................................
.

28

3.1.4 STAKEHOLDER THEORY

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................................
...

33

3.2.

RISK AND REPUTATION RISK

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................................

3
7

3.2.1 RISK CONCEPT

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.....................

37

3.2.2 REPUTATION RISK AND ITS MATTER

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................................
...........

38

3.3. RISK MANAGEMENT

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................................
................

41

3.3.1 RISK MANAGEMENT DEFINITION

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..................

41

3.3.2 RISK MANAGEMENT PURPOSE

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................................
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.......................

43


2


3.3.3 RISK MANAGEMENTAND RISK LIFECYCLE
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................................
..

43

3.3.4 RISK MANAGEMENT PROCESS

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.......................

45

3.3.5 RISK MANAGEMENT TECHNIQUES

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...............

50

3.4 PROACTIVE REPUTATION
RISK MANAGEMENT

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..............................

51

3.4.1 PROACTIVE AND REACTIVE REPUTATION RISK MANAGEMENT

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.........................

52

3.4.2 PROACTIVE REPUTATION RISK MANAGEMENT AND REPUTATION RISK LIFECYCLE

...................

53

3.4.3 PROACTIVE REPUTATION RISK MANAGEMENT MODEL

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................................
........

55

3.4.4 FURTHER THINKING ON PROACTIV
E REPUTATION RISK MANAGEMENT

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........

65

3.5 CONCLUSION OF THE THEORETICAL PART

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................................
.......

67

Chapter 4 Practical Part: Reputation risk management at the Vestas A/S

.........

67

4.1INTRODUCTION

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..........................

68

4.2 VESTAS A/S
---
COMPANY PROFILE

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........................

68

4.3 RISK MANAGEMENT IN VESTAS A/S

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....................

70

4.3.1HISTORY OF VESTAS RISK

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................................
................................
................................
.

70

4.
3.2 RISK MANAGEMENT PRINCIPLES AND DRIVING FORCE WITHIN VESTAS

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........

71

4.3.3 VESTAS RISK MANAGEMENT AND BCM FRAMEWORK

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...........

73

3.3.4 STRENGTH AND WEAKNESS ANALYSIS OF SUCH SYSTEM

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................................
....

79

4.4 REPUTATION RISK MANAGEMENT IN VESTAS

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................................
.

80

4.4.1 REPUTATION RISK MANAGEMENT IN RISK
MANAGEMENT DEPARTMENT

................................
.....

81

4.4.2 REPUTATION RISK MANAGEMENT IN COMMUNICATION DEPARTMENT

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........

82

4.4.3 CONCLUSION ON REPUTATION RISK MANAGEMENT IN VESTAS

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.......................

84

4.5 TESTING PROACTIVE REPUTATION RISK MANAGEMENT MODEL IN VESTAS

.......

84


3


4.5.1 TESTING PROACTIVE REPUATION RISK MANAGEMEN
T MODEL IN RISK MANAGEMENT
ACTIVITIES.

................................
................................
................................
................................
................................
....

85

4.5.2 TESTIFYING PROACTIVE REPUTATION RISK MANAGEMENT MODEL IN COMMUNICATION
ACTIVITIES

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................................
................................
................................
................................
.....

86

4.5.3 CONCLUSION ON MODEL CERTIFICATION

................................
................................
................................
.

87

4.6 FURTHER THINKNG: PROACTIVE REPUTATION RISK MANAGEMENT IN VESTAS

89

4.6.1 PROBLEMS IN RE
PUTATION RISK MANAGEMENT IN VESTAS

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..............................

89

4.6.2 HOW TO PROACTIVELY MANAGE REPUATION RISK IN VESTAS

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..........................

90

Chapter 5

Conclusion and Reflection

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................................
.........................

93

References

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........................

97

Appendices

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...................

100











4


Chapter 1 Introduction &Problem Formulation



TNCs and The changing world

It is a changing world with massive challenges. Globalization and economic

integration have
been the key words repeatedly heard from media, economic forums and literatures. Intensified
trade relation, opening market for foreign direct investment both in production sector and
financial sector plus the industrial structure reform
have pushed each nation to be a member
of global family and strengthened their correlation in various spheres no matter in economy or
politics. Technology innovation which derives from the new requirement due to such
integration has in return speeded up su
ch integration and reform. It also changes our economy,
our politics, our ideology and our way of life, which brings up more opportunities and
challenges for business. Behind all the reforms and changes we meet around us, we cannot
avoid seeing a group of
figures in the shadow which direct the trend of such changes in our
earth. They are international/transnational companies, a group of business organizations even
to some extent shaking the status of national government. 45 out of the world top 100
economie
s are corporations, representing annual revenues of $29 trillion.
1

The annual
revenues of Royal Dutch/Shell are greater than the GDP of Morocco; those of Wal
-
Mart
greater than the GDP of Poland and those of General Motors greater than the GDP of Denmark.
B
y using FDI, financial flow, etc, TNCs integrate world economy in a strictly correlated
manner. TNCs and global growth are of interdependence.


TNCs and Risks

Although TNCs are of vital role in the global economy and has their power in influencing
nation
s, governments and society, they are actually very vulnerable to the external
uncertainties, which in some sense originate from the TNCs and their activities. In



1

World Bank and Fortune magazine, 2002


5


manufacture industry, the uncertainties in market requirement and industrial development
trend

would bring down market share and lose competitive position. Export and import
enterprise fear about the uncertainty in currency exchange rate and standard of product
quality. Companies conducting FDI are cautious about the changes in regulation and polit
ical
turmoil. Enterprises in Banking industry could frequently be trapped by the defraud actions as
well as investment failure due to unsuccessful management and unexpected changes in the
financial market. As the correlation in business amongst different c
ompanies as well as
integration of global economy are increasingly intensified, the repercussion of uncertainty in
one company or industry would soon be transmitted to massive groups of linked companies
or industries with magnified effect. A case ahead is
the global economic recession in 2008 due
to the crisis of subprime credit in American real estate industry. Normally these uncertainties
are named as risk, although this definition is not strictly accurate. According to the report of
risk management edite
d by the economist intelligence unit, there are 13 kinds of risks
threatening corporate global business operation ranging from regulation risk to terrorism risk,
each one of which would lead to hash end for companies. Up to now there is no exact statistics

on how large the annual loss is due to risk exposures in various kinds. However, if we only
observe the general loss in US subprime mortgage crisis deriving from the credit risk, we
might not be hard to imagine how large this amount it could be. (It is es
timated that the total
loss can reach $170bilion, which takes up 1.3% of the annual GDP 2006 in the USA.
2

The major
stock index in Europe has declined on average 3%.
3
)


Reputation risk and TNCs

The threats from risks are indeed dreadful for any company. H
owever, amongst those risks,
reputation risk could be the largest threat facing the TNC. It is undeniable that reputation with
its symbols like brand is becoming one of the largest assets obsessed by the TNC. Some 53% of
the value of the Fortune 500 corpor
ations is accounted for through intangible asset


an
estimated $24.27 trillion. Research conducted by Interbrand with Citybank in 1998, found that



2

http://news.xinhuanet.com/fortune/2008
-
02/22/content_7645527.htm

3

Conclude from Financial Times and ot
her Magazines


6


the total value of the FTSE 100 companies was £842billion, with goodwill accounting for 71%
of total market
capitalization
4
. However such asset’s value is volatile and easy to be
depreciated, depending on the perception from internal and external stakeholders, which is a
risk for TNCs. Especially when new technology and new social powers such as media, internet
and Nongovernmental organizations are increasingly reshaped our lives, any default action
referring to reputation can easily be disclosed with magnified effects transmitted in an
uncontrollable manner. The cost for reputation risk is massive with profound
repercussion. It
is not only a problem of fines from authority or compensation fees used for victims and
worsened current performance in a while, but a loss of long term trust within your fatal
stakeholders like investors, partners and customers, a loss of

expected future performance, a
drainage of core competence like talent employees and what is more a chance to lower down
other perceived risks such as credit risk, financing risks, etc. A survey recently conducted by
Economist Intelligence Unit

shows that

most of TNCs companies rank reputation risk as the
No.1 risk and regard reputation loss as predominant loss within organizations.






4

Strategic reputation management, Judy Larkin, 2003


7



Table1.
1

Reputation survey by Economist Intelligence Unit, 2005
5



Reputation Risk Management and further thought

Although reputation risk is a No.1 threat and companies do indeed attempt to manage it, the
current situation on reputation risk management is far to be satisfying both in practice and
theoretical research. In theoretical research, reputation risk manageme
nt is on its infant stage
of research. Currently there is no consensus about how to define it in that one academic group
believe it is a risk category in its own right, the other stresses it is a consequence of poorly
managing other risks.
6

It is also lack

of research on how to assess, control such risk by using
what methods. Different authors interpret reputation risk management from different
perspective such as knowledge management, public relations, etc without consensus ideas.
What is more, the researc
h on such issue is lagging behind the practical requirement of
corporations. In practice, most companies deal with reputation risk issues from crisis
management and Public relation perspective, which the author of this thesis defines as reactive
actions/st
rategy. Holding such strategy means giving up the chance to proactive discover the
source of risks, manage and respond them from their origin through process, but passively



5

Working paper: Reputation
--

Risk of risk. The economist intelligence unit, 2005


6

Reputation and its risk: the necessity of managing reputation risk, Dr Robert G. Eccles 2006


8


waiting for risk exposing. Most of TNCs employ talent PR staff with strong crisis m
anagement
capability. However it is from those TNCs that scandals are frequently exposed such as the
case of Enron, etc. In addition, companies have seldom enough tools and techniques or well
defined process for managing reputation risk. Considering this,
the author of this paper cannot
help thinking:
Could we manage reputation risk in a proactive way? If so, how could this
proactive strategy manage reputation risk?


These two questions would be a red line through this paper and be the questions the author
wish to deal with.


However, dealing with reputation risk in general terms would only lead to theoretical debate
without any assistance to solve concrete problems.
Furthermore, answering the questions
above could be a failure if we could not link them with practical cases. Thus this paper will
take a company case for study, which is Vestas

A/S

case. Thus the two questions will be
streamlined to be: “
C
ould this proact
ive strategy link to Vestas Case


呯 wha琠e硴xn琠can
瑨楳⁳瑲t瑥杹⁢e
app汩ed

to Vestas case?”



Since there is no solid theoretical framework or practical model in solving these two problems,
the author of this paper will take an explosive step and method
s. According to the author’s
understanding, solving this problem requires two steps: Theoretical construction and practical
application. During theoretical construction process, theories in reputation management and
risk management will be reviewed so that

intervention spanning those two areas can be
possible perceived. This intervention might be a key to the solution. Apart from that

other
relevant materials derived from various sources would be scanned so that inspirable thoughts
can be concluded and be i
ntegrated. In this part, the following sub questions are worthwhile to
be considered:


1.

What is reputation? What is it composed of?

2.

How reputation is built up? / What is the process for building up reputation?

3.

How reputation can be maintained after success
ful construction?


9


4.

What is risk? What is reputation risk?

5.

How to manage risk? What is risk management process, methods and strategy?

6.

What are the sources of reputation risks

7.

What is life cycle of such risk? How is it formed and evolving?


8.

Can reputation risks be managed in a proactive way? If so, how can they be managed?

9.

Can we conclude a model for proactive reputation risk management? If so, what is it?

10.

What is the further thinking for proactive strategy?


The theoretical construction g
ives us an inspiration and a rough mind
-
frame. In the practical
part, such mind frame would be adapted or probably reshaped in the light of concrete case.
In
this part, detail analysis on case company’s risk management and reputation risk management
would

be made. Based on this,
Models formed in the previous part would be
applied or
testified so as to answer the questions formulated above. Several sub
-
questions should be
answered as well:


1.

What is the risk management system in Vestas?

2.

What is the reputation risk management system in Vestas?

3.

Can the proactive reputation risk management model be applicable or testified in the Vestas
case
?

4.

If it is not able to be testified, what are the reasons behind? If it can be testified, to what ext
ent can
the model be applied
or

testified in the Vestas case?

5.

Problems in reputation risk management in Vestas?

6.

Id
eas about
W
hat
V
estas should do to proactively manage its reputation risk from author’s
perspective?


Theoretical and practical parts construct the general structure of this paper. Sub
-
questions
under each part can be viewed as subsections in each part. The detailed paper structure would
be following:



Introduction:

In this part, relevant background about
reputation risk and TNC is
introduced so as to lead to the necessity of research on the problems issued in the problem

10


formulation in this part plus the thought on how such research could be conducted.



Methodology
: In this part, methodology concerning pro
ject research would be
presented. Research approaches will be given as well so that by criticism on each approach
,

suitable approaches to this paper can be chosen and research design can be implemented
throughout the paper.



Theoretical Part
: In this part,

theoretical framework leading the whole paper is
attempted to constructed by systematically integrating the parts answering the listed questions
pinpointed in the introduction part



Practical Part:

In this part, analysis on Vestas risk management system is

made with
focus on reputation risk management, based on which model formed in the theoretical part is
testified and further thinking on proactive reputation risk management in the case company is
made.



Conclusion Part:
In this part, conclusion of the w
hole paper with refection of limitation

and further issues

is made.



















11


Chapter 2 Research Methodology



Before commencing a project, a methodology has to be worked out on how the structure of the
project should be
built up. As a result, it should be necessary to make some considerations on
how the analysis in the project should be understood, discussed and of course what the target
of the project is. It is important that the project, in its working process, should h
ave a clear and
conscious guiding principle of methodological approach. Methodology may be viewed from
different perspectives acco
rding to different philosophers.

In this project the author
emphasizes that the research is working under the framework of Arb
nor and Bjerke’s
perception of methodology. Arbnor and Bjerke’s perception of methodology is shown in the
figure below.


Theory of Scienes
Methodology
Fundamental
Presumptions
Paradigm
- Conception of
reality
- Conception of
Scienes
- Scientific
ideals
- Ethics/
Aesthetics
Methodological
Approach
Operative
paradigme
- Methodical
procedures
- Methodics
Study Area

Figure
2.
1
-

Methodology
7


As can be seen, research starts from researcher’s ultimate assumptions which c
onstruct the
paradigm and determine the choice of methodological approach. Operation paradigm applies



7

Methodology for creating business knowledge, Arbnor & Bjerke, Sage Publications, UK, 1997


12


the methodological approach to the study area by constructing exact means to conduct
research. Theory of science spans the assumption and methodological a
pproach, while
methodology relates to methodological approach, operative paradigm and relevant study area.


2.1. PARADIGM

The concrete
definition of paradigm

in general terms is given as: “
A set of assumptions, concepts,
values, and practices that consti
tutes a way of viewing reality for the community that shares them,
especially in an intellectual discipline.”
8
Arbnor and Bjerke developed such definition by
involving content and constitution of it consisting of “
a
conception of reality
, a
conception of
science
, scientific ideal and ethical/aesthetical Aspects”.
9

Different view point of these paradigms,
either subjective or objective
,

would lead to different methodological methods and influence
the operative paradigm which is the practical research metho
d and procedure in a target
research area. Related to the paradigm, there are three methodological approaches guiding
business research: analytical approach, system approach and actors approach.


In the following part, the author would introduce these methodological approaches in terms of
its conception of reality, perception of knowledge, human nature and ambition of knowledge
creation under the paradigm each approach chooses. By criticizing them,

the author would
come up the research methodological approach adopted in this thesis and furthermore the
concrete research methods and procedure in the reputation risk management research which is
within the framework of operative paradigm depicted by met
hodical procedure and
methodics.





8

www.dictionary.com

9

Methodology for creating business knowledge, Arbnor & Bjerke, Sage Publications, UK, 1997


13


2.2. METHODOLOGICAL APPROACH

According to Arbnor and Bjerke, there are three methodological approaches for business
research, namely analytical approach, system approach and actor’s approach, based on
researcher’s differ
ent view point on paradigm.

The analytical approach

is commonly used in scientific study as well as business research. The
reality according to the analytical assumption is objective and independent of its
observers
10
with structure of stability. The realit
y is the sum of independent parts, which are
also objective and with casual relations among each other. The human is assumed to be stimuli
receivers.
The knowledge

from analytical approac
h is regarded as objective and

universal,
independent of human observ
ation as well. The knowledge can be obtained by reproducing
the reality via mathematic model, statistics, etc, through induction, deduction and verification,
which is cyclical process. The ambition of knowledge creation in analytical approach is to
attempt

to reproduce the exact picture of reality with validity, reliability, objectivity, and
representatives as their research criteria.

The system approach
shares certain extent of similar view point of analytical approach, but has
rooted differences. System approach regards reality as a system composed of subsystems
which are

objective or objective assessable. The relations between subsystems or system
compo
nents are more complex compared to that of analytical approach simplified into causal
relations. Because of this, the whole is not the sum of different parts but the synergy from the
relation of subsystems.
The knowledge

according system approach is depend
ent on system,
which means knowledge is not universal but sometimes unique to certain system. The human
behaviour is also shaped by the system. The knowledge creation follows the producer
-
product
connections through methodical procedure and methodics with
the ambition not only to
illustrate the reality, but reach better explanations and understandings of how various types of
systems behave under different internal and external circumstance
11
, doing of which requires
the system analysis and construction.




10

Methodology for creating business knowledge, Arbnor

& Bjerke, Sage Publications, UK, 1997

11

Methodology for creating business knowledge, Arbnor & Bjerke, Sage Publications, UK, 1997


14



Th
e actors approach

holds the opinion that reality is subjective and depends on the interaction
of the human or actors. The whole is in individual’s mind and it is by intercommunication and
interaction between different actors, clearer vision of reality coul
d be reached. The human
being is playing important role of knowledge creation in actor’
s approach as knowledge is
subjective and unique dependent on each actor. The ambition for knowledge creation is to
understand the subjective reality within actors.


2.
3. CRITICISM AND CHOICE OF METHODOLOGICAL APPROACH

Analytical approach

is often criticized to be over objective and over simplicity which means it
simplifies the relation among elements within reality into casual relations, the consequence of
which is simp
lified perception of the reality and adoption of the research methods such as
mathematical models, statistic data, etc. If we apply analytical approach in how to proactive
manage reputation risk, the first question is to assume that the reputation is purel
y objective
and independent of human perception and subjective judgment, which is obviously contra
ry

to the reality of reputation which is defined as perception and value judgment of stakeholders
over the company. Due to the rooted disagreement of reality
paradigm, analytical approach
would not be implemented into the research of this project.


As
for

the
Actor approach
, it has been criticized to be
too

subjective and also to be over
emphasized on individual perception on reality. The knowledge from actors approach could
be over subjective

as well

without possible link to objective reality, though by dialogue and
communication objective is believed to be

reached. Given proactive reputation risk
management case, some assumptions from actors approach seem to be linked to the research
object such as reputation, value judgment, etc. However reputation risk is not purely
subjective as it refers to the economic

loss to the company, which is concrete and objective.
This means that the reality of reputation risk is objective accessible. In addition, the solution to

15


reputation risk problem should not be
solely

dependent on experience or subjective discussion,
but h
ave to link to how to mitigate economic effects or loss. Furthermore, actors approach does
emphasize the infinite discussion and
impossibility of reaching
real truth, which means
that
in
our project the problem of how to manage reputation risk should alway
s be
left

un
solved as
more dialogue and discussion are required.


Compared with other approaches,
system approach

is more acceptable in business studies.
The main criticism on it is the abstract characteristic of system viewing and understanding
relation
s, which from author’s perspective is more referring to application rather than
argument on key paradigms of approach. The author believes system approach is aligning
with his systematical view on reality and perception of science and able to integrate the
ories of
two systems namely reputation management system and risk management system to update
his picture of reputation risk management. In the following part, the author would state how
he organizes research based on system approach.


2.4. METHODOLOGICAL

APPROACH USED
IN THE THESIS


As stated above, the author here would use system approach as guiding method for research.
The author agrees with
the conception of reality

within system approach that reality is
objective or objective accessible and systemati
cally organised. In this thesis, the author does his
research on reputation risk management, which from his perspective is a system. Such system
is under the super system of corporate management
system
and composed of many
components namely reputation risk

identification, reputation risk analysis, reputation risk
control/mitigation, monitor and report. All these components are organised as sub system
in
that within

each of them other components regarded as sub
-
sub
-
system can be viewed. Take
the subsystem of

reputation risk identification for example, it involves stakeholder
identification, profiling and stakeholder scanning, each of which has its own system structure.




16
















Figure 2.2 systems in this paper
12


The components under the reputation risk management system are closely related by relation
in a cyclical form, which in return creates synergy of either appreciated or depreciated
corporate reputation value, or economic ads or loss which represents the obj
ective accessibility
of reputation risk management. The reputation risk management system is not closed but an
open system which means it should be studied under system context and influenced by
several factors in the context while in the meantime the syst
em has no power to change these
external factors. In this thesis, reputation risk management system would be put in a corporate
case, Vestas case and studied under the Vestas corporate context. Such system could probably
be affected by factors from its env
ironment such as corporate resource, corporate governance,
IT and knowledge management system, etc.
All these factors would possibly influence the
components of system and come up a new system related to the context.
For example, if the
company assigns th
e task of managing reputation risk to other department rather than risk



12

Made by author



Corporate Management Syatem


(Super System)








Reputation risk management system


(Sub System)

Reputation risk
identification

Stakeholder
profiling

Stakeholder
identifying

Stakeholde
r scanning

Reputation
risk
analysis

Reputation
risk
control

Reputation
risk Monitor
and report


17


management department, the system form of reputation risk management might be different
.


As for the knowledge perception and knowledge creation, the author follows the ideology of
conception of science

under the system approach. In system approach, knowledge relies on
system and allows the active role of knowledge creators to understand the system or explain
the system. The former knowledge creator is deemed as hermeneuticists and l
ater one the
explanaticists. The author does not take the willing to be explanaticist like analytical
knowledge creator or purely hermeneuticist
who
would interpret the reality without
delimitation, but to create knowledge within system by following the pa
th of hermeneuticists.
As writing this thesis is a process of knowledge creation, the author attempts to organise it in a
system form, which takes the route of
system analysis and system construction
. The system
analysis here is to analyse two interlinked
systems that is reputation management system and
risk management by depicting the concepts, theories and describing them in a logic structure.
As previous reactive reputation risk management system is proved to be of dysfunction in the
business reality, th
e author here attempts to construct a new proactive reputation risk
management system represented as proactive reputation risk management model based on the
result from system analysis, via integrating some analogous elements. For example in
reputation ris
k identification section, stakeholder identification is linked to risk identification;
in reputation risk analysis section, risk prioritisation is linked to stakeholder prioritization, etc.
Realizing the possible conflicts between system and its environmen
t,
the author would testify
this model when it is applied in Vestas case and give his understanding on the conflicts, which
help to create further knowledge.

To put it into more clear

vision, the whole process of
knowledge creation

in this thesis would fol
low a hermeneutical learning process, which means
a theoretical framework on proactive reputation risk management is built first and afterwards
testified
in the Vestas case so that a
reflection on model’s adaptability would be generated.

In
other words, th
e author would take three stage study
process. In the first stage, a formulated
problem with supplemented sub
-
questions would be
given

to clarify what the research is for.
Then the author would analyze reputation and the reputation management system from
v
iewpoints of its components, building process, relevant theory, etc. The system of risk

18


management would be analyzed too. When finishing the system analysis, the author will
attempt to construct a new system by linking risk management system to reputation
management system in order to reach a new system model namely proact
ive reputation risk
management model
. These system analyzing and constructing stages construct the theoretical
part of this paper. Finally, the new system model would be implemented into the Vestas case
to explore its
adaptability

for reputation risk management in practice, the outcome of wh
ich
would lead to the further reflection on the problems we desire to solve











Figure 2.3
Three stage study for knowledge generation
13


2.5
OPERATIVE PARADIGM AND RESEARCH DESIGN

Three methodological approaches provide a framework or guideline for proceeding to the
project. However, it is by operation paradigm that solid research design and procedure would
be implemented. An operative paradig
m relates a methodological approach to the area of
study. Operative paradigm consists of two important parts: methodical procedure and
methodics
14
. Methodical procedure refers how the knowledge creator selects, adopts and
modifies theories, techniques, tool
s, etc during the research, while methodics concerns how



13

Made by author

14

Methodology for creating business knowledge, Arbnor & Bjerke, Sage Publications, UK, 19
97









THEORY




PRACTICE







SYSTEM ANALYSIS:

Reputation risk & Risk

management

SYSTEM
CONSTRUCTION
:

Proactive reputation risk model

PROBLEM:

How to manage Reputation
risk in proactive manner?

IMPLEMENTATION:

Vestas A/S reputation risk
management


19


research is actually conducted. The methodics and

methodical procedure construct

the whole
picture of research design illustrating the logics and process of research.

The methodical procedure in thi
s thesis

is to adopt and modify proper theories and techniques
for methodics. The theories adopted are mainly within the sphere of reputation management
and risk management including concepts (such as concept of reputation, concept of risk,
reputation risk
, proactive reputation risk management, etc) and theories (such as stakeholder
theory, risk lifecycle theory, risk management process, etc). Such theories are mainly
concluded from different literatures. As such theories are within different assumptions an
d
concepts held by different authors and some of them are even contradicted with each other,
the author
thereby

redefines many concepts and assumptions in terms of the research
intention of this paper and organises them into one theoretical system serving
for constructing
system model.
In
the practical part, the author takes the technique of case study. The materials
for case analysis compose of primary data from face to face interview, but also secondary
information from varied sources such as Vestas webpa
ge, Vestas annual reports, Vastas
corporate slices, Industrial report, etc. The author ranks the information obtained in terms of
criteria like credibility, accuracy and relevance. For example the corporate internal slices (if
any at all) would be ranked t
o the highest as it has the best accuracy, relevance and credibility
to the research target though they are normally hard to be available. Following that, data from
face to face interview, corporate annual report could be positioned to the lower rank and
i
ndustrial report would be at lowest rank due to its low relevant information to this paper.

The

methodics in this paper

follows the system logics of analogizing theories, constructing
models, case studies, model
certification

and conclusion. The author starts his interested
problem area by viewing the dysfunction of current system in managing corporate reputation
risk. Inspired by the system thinking, the author holds the ambition to construct a new system
to compensate the g
ap due to the dysfunction of old system and requirement of reality. The
author takes the step to make paper review and make system analysis over different system
theories to understand their concepts, components and structure. After that the author selects

two major theories system, namely reputation management system and risk management

20


system as elements source for methodical procedure. By further analyzing the two systems,
the author explains the correlations of the two system elements and builds up mode
l of new
system (namely proactive strategy system) as an alternative product for replacing the old one
(reactive strategy system). To
understand

the fit between new system and its environment, the
author takes the case study and put the system in Vestas en
vironment.
By analyzing the fitness
and possible contradicts, the author would realize the applicability of such system under the
case corporate context and conclude the reflection over its limitation and further issues.
Tools
like Interview, paper review
on secondary materials about Vestas risk management system
would be put to use. The project design below illustrates the details of methodics throughout
the project.


21


Chapter One
Problem Formulation
Chapter Two
Research Methodology
Chapter Three
Theoretical Framework
Reputation and Reputation
Management
Risk and Reputation Risk
Risk Management
Proactive Reputation Risk Management
Models For proactive Reputation Risk Management
Chapter Four
Reputation risk management
in Vestas A
/
S
Risk management in Vestas A
/
S
Reputation risk management in Vestas
Reputation risk management in Risk
management department
Reputation risk management in
communication department
Testing proactive reputation risk management model
Chapter Five
Conclusion Part
Conclusion on the whole thesis
Limitation and reflection
Data
:
primary data
Secondary data
Technique
:
Interview
,
Desk
research
,
Paper Review
Concept
:
Reputation
,
risk
,
reputation risk
,
risk
management
,
etc
Theories
:
Reputation theories
,
Stakeholder approach
,
Risk life cycle
,
Risk
management strategy
,
Risk management
process
,
Risk modeling
,
Knowledge Management
,
etc
Testing model in risk management activities
in Vestas
Testing model in communication activities in
Vestas
Proactive reputation risk management in Vestas
Conclusion on model certification

Figure 2.4 project design
15




15

Made by author


22


Chapter 3 Theoretical P
art



3.1 REPUTATION AND REPUTATION MANAGEMENT

We have mentioned a lot
in the previous part about
reputation risks in which is the research
sphere
of
this paper. However, before we make discussion
on

such
risk, we might have to be
aware
of
what reputation is; how reputation can be settled in practice and maintained in the
operations. In this section, we would make a discussion about them by reflecting to the
literature and our general logics and understanding over such issues.

3.1.1
REPUTAT
ION AND ITS COMPOSITION

What reputation really is can be one of the easiest and most sophisticated questions in our
mind. The definition in our daily life could be visible but segmental. Reputation can be a
vision that others hold about the object they ar
e concerning; Reputation can be a sort of feeling
or emotion when we use a product, enjoying service or even staying with and talking about
somebody or something;
S
ometimes
i
t also can be a judgment or a
n

impression about someone
and something. Different p
eople can define reputation in different ways. If we link reputation
to the company, we would from our first intuition come up many terminologies such as
corporate image, corporate brand, etc. In most literatures, such terminologies like corporate
image ar
e indeed interchangeably used with the term
-
reputation. However, this way of
definition can be blurring and illogical in that these two concepts might not strictly match each
other.

(Or else why we do not conclude them into one concept) Finally we are stil
l left to
explain the concrete definition and the relations amongst those terms.

Actually many authors have tried to give distinctive definition to reputation in the corporate
context. Judy Larkin(2003) defines reputation as a reflection of how well or ho
w badly
different groups of interested people view a commercial name. It implies a value judgment

23


about the attributes to the company and is established over time, which is based on trust and
belief.
16

Grahame Dowling (1994) argues that reputation is the ev
aluation (respect, esteem,
estimation) in which an organization’s image is held by people.
17

Croft Susan (2003) makes a
deeper consideration about the essence of reputation. In his opinion, reputation is the sum of
the values that stakeholders attribute to
a corporation, based on their perception and
interpretation of the image the company communicates and its behavior over time
18
. His
definition gives us an inspiration that value interchange between companies and stakeholders,
which is a group of entities an
d peoples having interest attachment to the company’s behavior,
is a core of reputation and its building. The author of this paper prefers to adopt Grahame’s
thought over reputation definition and give his
own
definition on reputation

in the following:


Reputation is the value judgment hold by various stakeholders attributed to the corporation, which is
generalized from stakeholders’ knowledge, obtained information and value exchange with corporation
over time. The Reputation is end up with value commitme
nt, which leads to trust and belief in a
sustainable manner.


From this we might feel a little bit clear about reputation essence which is value judgment.
Reputation could not be a uniformed concept unless special stakeholder group is defined.
Value judgm
ent can be different from one group of stakeholder
to

another which in return
results in different reputation. Thus when mentioning reputation, we have to consider
stakeholder. When discussing reputation risk, risk in stakeholder value judgment should also

be considered.

Reputation is not a concept that could be mixed with other concepts such as corporate identity,
corporate image and brand. Actually, those concepts compose of the reputation concept and
are interrelated in a mechanical way.
When

discuss
ing

the
composition of reputation
, we have
to define its components, namely corporate identity, image and brand.




16

Strategic Reputation Risk Manageme
nt, Judy Larkin 2003, Palgrave M
acmillan
Press


17

Corporate Reputations
-
strategies for developing the corporate brand, Grahame R.

Dowling1994, Kogan Page Limited


18

Managing Corporate Reputation: Th
e New Currency, Croft Susan 2003, Thorogood London


24


Corporate identity

is the vision the company attempt to preach to the stakeholders about itself.
It takes normally in physical forms such as logos
, advertisement, color schemes, uniforms, etc,
but not limits to them. Corporate identity also includes the unphysical forms such as service,
corporate culture, experience of corporate product, etc. Corporate identity is transferred
through advertisement,
internet and even appearance of daily operation, etc, which is
information transmission at single direction.


Corporate image

is the vision, the belief, the knowledge or attributes in the stakeholders about
the company at one time point. In other word,
corporate image is what stakeholders think
of

company at any moment. Corporate image has two dimensions: one is cognitive dimension
and the other is emotional dimension. Cognitive dimension refers to the vision, the knowledge
and the general perception on
corporation. For example, when we mention TNC, we could
come up the impression of skyscrapers in business district. When we mention Vestas, We
would firstly get the image of wind turbines. The emotional dimension is more about feelings
and belief the stake
holders hold about company. For example, when we mention
Mercedes
Benz, we might get the feelings of high quality, stability, safety and honor. Such feelings and
belief
are
relatively subjective to stakeholders’ own experience and current information about

company, its integrity and its behaviors
19

based on their own value judgment.


Corporate Brand

derives from corporate image and identity. Corporate brand is also
composed of cognitive and emotional elements and is concerned from stakeholders’
perspective.

However the stakeholders we mention here is limited to customers. Corporate
Brand from cognitive perspective is any tangible symbols identifying company itself as well as
distinguishing it from others, such as logo, trademark, etc while from emotional per
spective is
the intangible attribute such as trust, belief, satisfaction symbolized into name, logos,
trademarks to the current or potential in the market. Corporate brand is
formed from

consistently consolidated identity, image construction over time base
d on value exchange and



19

Managing Corporate Reputation: The

new currency, Croft Susan 2003, Thorogood London


25


distribution carried by products and service to customers. Corporate brand is commitment
given to the customers who hold trust for such commitment.
Corporate reputation

is the
brand in all stakeholder group rather than only customer
s. Corporate brand helps to develop
reputation over time as customers are the largest or dominant stakeholder group in almost any
company and would be empowered to influence other stakeholder group directly or indirectly.
Corporate reputation comprises cor
porate identity, corporate image and also corporate brand.
Corporate reputation shares the same component and essence of corporate brand but only
extend its focus group from limited stakeholders, namely customers to lager categories. In
addition, it is als
o important to mention that corporate brand is not the same as product brand
although they are closely related.
Figure 3.1 illustrates

the relation of reputation, brand, image
and identity.

Now that we are clear about the components of reputation, then i
t is natural that further
discussions about how reputation is build and how it can be maintained should be made,
which leads to our next subsections of this part

3.1.2 BUILDING CORPORATE REPUTATION

Building reputation is not a difficult task; however buil
ding a good reputation is not easy. It is
in this process of building reputation, risk might occur. However, before we step into such
sphere, we have to know how reputation is built from theoretical perspective, which would be
presented in this part.

As h
as been stated in the last section, corporate reputation has its components, respectively
corporate identity, corporate image and brand. It is the mechanism existing amongst them that
comes up the formulation of reputation. The following graph illustrates
the general picture
about how reputation is formed.


26


Corporate Reputation
Corporate Brand
Corporat
e Identity
Corporat
e Image

Figure
3.1

Corporate Reputation composition and building


When corporation is founded and operating, a certain identity would be transmitted to the
stakeholders through
information channel like advertisement, media, cooperation and
business partnership, etc. For most of the TNCs, they would lay sufficient energy on certain
vision and identity projection that are in favor of the corporate requirement. Logos and other
symbo
ls of company like annual report, packages, etc, must be unique, attractive and
correlated to the company business and mission in a persistent way. The information channel
must be clear and effective so that the information sustaining corporate identity ca
n reach the
target stakeholders in intact manner. What has to be noticed is that some other channels like
daily operation, cooperation with business partners, employees and managers can all be
channels for such identity consolidation. Besides projecting id
entity also refers to the wider
issues of how employees and internal market interpret this identity compared with the
projected, external identity, which alongside positioning helps create the desired image.
20


Stakeholder is the receiver of such informatio
n and the image creator of corporation. After
receiving the transmitted information, stakeholders would first portrait a vision of company
and later a cognitive image as more information comes and more knowledge is acquired.



20

Managing Corporate Reputation: The

new currency, Croft Susan 2003, Thorogood London


27


Stakeholders at this point woul
d turn their role from passive information receiver to active
obtainer. What they would do is to experience corporate core business or other behaviors and
make intuitive and initial value judgment to decide its psychological attribute (eg, Is this
company
doing something good? Can

we accept this company?) After
wards they would
compare corporate activities with other peers or even competitors and finally reach their own
conclusion and judgment on company status in their mind (Is this company more acceptable
to
us? From our psychology, which company is closer to us?). This two
-
stage process is called
image positioning with the first stage defined as image acceptance positioning and the second
stage termed as image status positioning. Such positioning is import
ant for company as after
such positioning emotional image is formed which might be stable and allergic and image
construction process is over. Positioning is the only way to turn corporate identity into
corporate image. Image positioning might lead to imag
e gap between the preached image the
company wishes to be formed (corporate identity) and the actual image in stakeholders’ mind.
Image gap also refers the issues of distance between stakeholders’ understanding and
expectation from corporate promise, and t
he actual fulfillment of such commitment done by
the company. Image gap is a major reputation risk existing in most of industries and trapping
lots of companies. There is something more the author wishes to concern over the emotion
dimension of the image.
From brand management and marketing perspective, such emotion
attachment constructs the core advantage of our company distinguishing ourselves from our
peers and competitors.
Especially the image status determines

the priority of trust and belief in
stakeh
olders’ mind against our competitors. This explains why many companies surviving
from crisis issues could not go too far in business success because your image status is
replaced and you are less close to the stakeholders, mainly customers any more.


Fur
thermore, we must be aware that image should be referred from stakeholders’ perspectives,
which means the possibility of different images coming up from various stakeholders that
corporate business and behavior concern. Therefore when mentioning image, we
have to
ascertain from which stakeholder group it is defined, the principle of which can be also
applicable in reputation issues stated later in this chapter.


28



As have been identified before, image is a time
-
point concept while reputation is an accrued
co
ncept based on value interchanging and judgment between stakeholders and company itself.
After consistent image building and reflection in stakeholders’ mind over time via image
positing, the emotional aspect of image has been repeatedly consolidated which

in
consequence generates trust attachment from stakeholders to the company. Such trust
outcome originates from the long term value judgment from stakeholders over the company.
When the value commitment followed by the company has in a relatively long time

continuously matched that of the judgment held by the stakeholders not only in presentation
but in real conduct, a sense of trust is emerging and thus sound reputation is preached and
formed. From this angle, reputation is trust and belief recognized and
stocked by stakeholders
about company over time, which is often regarded as reputation capital and

might sometimes
help to absorb

the shock from business loss to the company. This can therefore explain why
the reputation is so important to the company and
even market economy whose foundation is
trust and credit. However, as has been mentioned in image consolidation, stakeholders are not
in a unanimous group but should be divided into distinctive sections. Even some of the
stakeholder groups are contradictiv
e in group interest. Thus the value judgment from different
stakeholder group can be distinctive and reputation which is defined from stakeholders’
aspect could be different as well. Hence managing reputation must take stakeholder
management into considera
tion and corporation willing to construct and maintain good
reputation should lay special emphasis on stakeholder issues. In reputation risk management,
one of important theories is stakeholder approach
.

In the latter part, stakeholder approach
would be pr
esented in details later on.


3.1.3 MAINTAINING CORPORATE REPUTATION

After successfully building up a good reputation, then it is the process for reputation
maintenance.
For reputation maintenance, there are no common theories adopted but actually
arg
uable amongst academic fields. Most of theories are approach focus which presses the

29


methods for reputation maintenance and management. One approach follows Public relation
perspective.

Public relation in most of circumstance emphasizes continuous image building
and identification through tactics like advertisement, campaign, sponsorship and charity to
maintain good reputation.
In public relation, the accountability, transparency and
res
ponsibility are frequently articulated, but they often
only
stay on the paper.
Rec
ent
corporate scandals and crisis

cases

prove the failure of isolated public relation in reputation
maintenance, which actually worsens the trust on corporate behavior. Now t
hat Public relation
is out of function in crisis, then crisis management could be an attempt to maintain reputation.

Thus crisis management methods come to the platform. Crisis management deals with crisis
defined as “the critical moment and turning point

of difficulty and danger”.
21

It

is the

process
of preparing for and responding to an unpredictable negative event to prevent it from
escalating into an even bigger problem, or worse, exploding into a full
-
blown, widespread,
life
-
threatening disaster.


Cris
is management involves the execution of well
-
coordinated
actions to control the damage and preserve or restore public confidence in the system under
crisis.
22

Crisis management is the last fence of reputation protection for company. Its
effectiveness depend
s on the severity of issues, flexibility of company in issue dealing and
capability of crisis staff. Crisis management is a compensatory action after damage has been
done. In addition crisis management planning and conducting itself is costly. Having reali
zed
the shortfall of the approaches mentioned above, other authors state their understanding over
reputation maintenance in their
literatures. Croft Susan(2003) add
resses that maintaining good
reputation requires integrating communication matrix with marke
ting matrix the outcome of
which is the term Integrated marketing communication. In Judy Larkin’s book, corporate
social responsibility has been leveraged on a high level for sustainable reputation maintenance.
In Forstmoster and Herger’s paper, triple bot
tom line supervision, namely streamlining
corporate governance by reaching the synergy of business success, social responsibility and
environmental protection has been mentioned and regarded as philosophy for successful
reputation maintenance. All these id
eas held by different academic groups and authors



21

Oxford advanced learner’s dict
ionary of current English, fourth edition. 2004

22

http://www.siliconfareast.com/crisis
-
management.htm


30


contribute to the thought on reputation maintenance piece
-
mealy.

In the author’s opinion of this paper, reputation maintenance despite of its different
presentation could not be more than successfully m
aintaining clear, unique corporate identity;
keeping image vision to stakeholders be positive and respond to the changes of value
expectation as well as promoting or stabilizing the image status in stakeholders mind;
ascertaining consistently value exchang
e with stakeholders so as to reinforce trust between
stakeholders and the company. On company side, what they can fully control is the identity
sides while image can be harsh to control over stakeholders. In maintaining corporate identity,
the author stre
sses several points worthwhile to be noticed. One is the uniqueness of identity,
which means the logo, corporate/product name, trademark can distinguish our identity from
other peers, demonstrate our value orientation directly and be welcomed by the target

stakeholders. It also refers to the legal issues such as trademark, logo registration and
propriety right so that our hospitable identity can be kept and protected. The other is the
consistency of our identity. One consistency requirement is the unanimous

vision provision in
geographic scales, which means the company should prevent the inconsistence of vision
provision in different territories. For example the discriminative service or products provision
in less developed countries where less strict litiga
tion or depowered NGOs is. Another
consistency is in vision provision in time scale. It is sometimes the case that companies change
their long
-
used logos and other identity symbols where the vision of companies changes too,
which leads to the confusion of
vision in the consumers’ mind. In addition there is also one
consistency requirement on vision preaching sources. For example, in advertisement, a house
keeping company show themselves up by exhibiting clean machines and neat dressed staff in
uniform while

in real service untidy machine and staffs without uniform would ruin the vision
formed in the advertisement. Managing image does not depart from its component
management. As image is composed of image vision, image cognition and image emotion
comprising i
mage acceptance and status, image maintenance should be the task of integrating
the maintenance of whole components. Image maintenance from cognitive perspective can be
controlled or monitored via corporate identification methods such as advertisement, log
o,

31


media propaganda, etc. However, maintaining from emotional stage can be uneasy as
supervision over stakeholders’ subjective emotion could be uncontrollable. The author at this
paper suggests the following arguments for consideration:


1.

The largest expect
ation from stakeholders to the company is not charity, sponsorship, or
other so called social responsibilities, but whether this company can do good business in its
selected industry, which explains the most valuable corporate commitment to the
stakeholder
s and society. For customers, the value for company to exist is to provide
valuable product, service and consistently doing this. By doing this, company can keep its
financial achievements so that other stakeholders such as investors, governmental
organiza
tion can be satisfied. Therefore, the fundamental strategy for image maintenance is
doing good business.


2.

Doing good business is the integration of comprehensive corporate operation and
behaviors including production, process management, financing, marke
ting, R&D,
innovation, etc. Therefore, maintaining sound image is not responsibility of certain sectors
but duty of whole departments. CEO and management boards should be the coordinators
of image maintenance and also one of the most significant image amba
ssadors for the
company.


3.

Doing good business also states two meanings: one is to do something correct and to do
something better. To do something correct does mean to compliance to the common value
of the stakeholders such as regulation, production sta
ndard, codes of conduct, etc and also
provide expected value to the stakeholders through business operations. To do something
better requires company to exceed itself against competitors in its core business and
achievements so as to raise competitive imag
e status within stakeholders’ mind.


4.

Maintaining image is also referring to fulfilling the expectation of stakeholders. We have to
ascertain the expectation is within our capability and effectively reached by our business

32


operation, service, product provi
sion, etc. Discrepancy or gap between stakeholders’
expectation and reality should be eliminated, no matter expectation is higher or lower than
reality.


5.

Effective communication is also important for maintaining sounding image. Effective
communication does not only mean one
-
way message transmission via efficient channel or
selection of stakeholder group, but an attitude to listen to the voice of internal an
d external
stakeholders and quick actions to make improvement. Message transmission is not only at
the duty of one or two departments but integration and aligning of all corporate sectors to
articulate in one voice. Communication also has to take cultural
and language elements
into concern so as to prevent any misunderstandings.


Successful image maintenance over time helps to settle up good reputation capital and also
key stages of reputation maintenance. Image maintenance is implemented on operational le
vel.
However, apart from daily image maintenance,
maintaining reputation from strategic level
calls for its notice. On strategic level, reputation maintenance entails the forecasting and
anticipating the trend of stakeholders’ value changes as well as the
strategy planning to
encounter such changes.

On strategic level, reputation maintenance demands a reputation
management principles and processes affiliated by technology adoption and innovation in
managerial ideology.



What mention above is some general a
rguments rather than listing the techniques like other
authors. Based on such arguments, the author can develop his own measures for reputation
management,
namely integrating and adopting risk management thinking and ideology for
reputation management.





33


3.1.4 STAKEHOLDER THEORY

In reputation management research, there is an important research area noticed by reputation
managers or academics: stakeholders. The term stakeholder was first recorded in 1708 as ‘a
person who holds the stake or stakes in a bet’
. Today’s standard dictionary definition is ‘a
person with an interest or concern in something’. The
definition
in this paper is the social
entities either person or organization who has interest in the company. Stakeholder theory
refers to the assumption
that company is an entity of the society. It is internal or external
environment is formed by social entities or individuals who have correlated interest within the
company. This social group can be influenced and also impact on company, either in macro
-
di
mension such as corporate strategy, achievement, policy, etc or in micro
-
dimension such as
specific project or program . Stakeholders can be resource holders. It is the exchange of
benefits or function requirement betwee
n company and stakeholders that
re
ac
hes
the balance
in company operation and its environment. As we stated in the previous parts, reputation is
formed by stakeholders and defined depending on which stakeholder group is mentioned.
Thus the role of managers in charge of reputation should recog
nize stakeholders’ need, deal
with the relation with them and also find out the network structure among the stakeholders
themselves. The stakeholder theory gives a fresh view over such issues.


Stakeholder or shareholder
,

who is more important for company, is a hot topic within the
corporate governance discussion. The paper here has no intention to make more argument
over such issue from corporate governance perspective, but wish to pinpoint their relation in
reputation ar
ea. Shareholder obviously is a member of stakeholders as it is the owner of
company with closest interest correlation. Because of this, company should represent
shareholder interest. The biggest interest of shareholders is profits earning and corporate
gro
wth in sustainable and long term manner. Reputation is the most valuable asset and often
regarded as a key competitive advantage for any company willing to be successful. Reputation
is valuable in that it stands for trust and belief from other stakeholder
group. It is such trust
and belief that keeps the resource exchanges vital for corporate survival and profits earning

34


currently and in the future. Therefore, shareholders should put reputation value into their key
interest and have to sacrifice their certa
in interest for reputation protection. This also means
that when conflicting with other stakeholders, the shareholder might sometimes be prioritized
to be lower rank. Thus under certain circumstance, the corporate
management should consider
other stakehold
ers’ interest first so as to maximize shareholders’ long term interest.


Apart from shareholder, company is surrounded by
other stakeholders

within or without
corporate entity. In Gramhame Dowling’s book, “corporate reputations”, 15 typical
stakeholders ar
e introduced. Croft Susan in her book “Managing corporate reputation” also
listed 14 stakeholders. The author concludes the common part of them and lists them below:



Customers: current and potential



Labors: current and potential employees



Government and

communities



Pressure groups and watchdog bodies: NGOs, audit agents, media and press, unions,
opinion leaders, etc



Investors or shareholders



Suppliers, distributors, service providers, business partners, alliance



Industry bodies and other social entit
ies: trade associations, professional societies,
competitors both current peers and new enters.



Stakeholders listed above is in just general scale and the identification of stakeholders depends
on corporate situations including its policy, strategy, p
rojects and the industry the company is
working in. Stakeholder identification is meaningless if it is not classified and prioritized.
Stakeholder classification

bases on the assumption that stakeholders are different, but share
certain similarities in cer
tain characteristics. Such classification helps to understand their
relationship, which would assist our reputation management from dealing with stakeholder
relations.
Grahame(1994)

classifies stakeholders into 4 groups: normative group, functional
group,
diffused group and customer group. Normative group is that have authority to in
influencing regulation compliance and rules fulfillment, such as government, regulation

35


agency. Functional group can impact your business operation in functional manner, such a
s
supplier, employees, business partners, etc. Diffused group is those stakeholders who take
interest in your organization concerning the interest protection for others. NGOs are a typical
example. Susan(2003)classifies stakeholders only into two groups: k
ey or primary stakeholders
and secondary stakeholders, respectively those directly affected or expect to benefit from an
organization and those with intermediary role
23
. Even from literatures outside reputation
management, relevant classification can still
be perceived. For example in relationship
marketing, six market framework, namely internal market, referral market, influence market,
supplier and alliance market, and recruitment market, can also be used for stakeholder
classification though concept expan
sion is required. From the author’s perspective,
stakeholder classification depends on research purpose and criteria settlement. There is no
unique method. Actually classification process is often mixed with prioritization and analysis
process by deciding
the power and influence stakeholders have on companies.


Stakeholder prioritization

is due to the fact that stakeholders are not of the same importance
to company who has limited
resource to do overall research

or tracing all stakeholders’
behavior. Shareholder prioritization aids company to concentrate its limited resource and
capability on key stakeholders group, namely those with significant power and importance to
company. In the marketing theory, opinion le
aders are the group of customers capable of
influencing other customers. Therefore, such person is normally becoming focus person in the
eyes’ of sales person. In stakeholders, there are still the same groups of person powerful
enough to influence other s
takeholders or directly react to the corporate action. These people
are powerful and company cannot omit their role in reputation management. There are other
people though powerless from the face, but their ideas, feelings, and needs are directly linked
to

corporate survival and successful, which means they are important enough to be prioritized
to the leading place. These two stakeholders are just two extremes and each member in the
whole stakeholders group can rank their status in power and significance,
which determines
their priority position in the corporate reputation management. It is also noticeable that the



23

Croft Susan 2003, Managing Corporate Reputation: the new currency, Thorogood press, London


36


rank for each stakeholder group can be changed, depending on concrete situation.


Normally such prioritization requires deep perception
an
d un
derstanding about

stakeholders
and is conjunct with stakeholder analysis.
Stakeholder analysis

is a process of profiling
stakeholder, figuring out their opinion and expectation over issues and problem you wish to
clarify, analyzing their mutual relation, p
redicting the actions and behavior of them over your
target issues, assessing the capability of different stakeholders and groups to participate and
support and assessing the appropriate type of participation by different stakeholders at
successive stages
in your project
24
. Stakeholder analysis provides important information about
stakeholders for priority and relevant strategy company can use for issue dealing. It is also
important for reputation building, maintenance and protection. Stakeholder analysis sh
ould
run through the whole stakeholder and reputation management process so as to maximizing
corporate value.



Stakeholder theory also merits the activities on
stakeholder relation management
. As might be
inspired from statements above, stakeholders mi
ght be different groups from groups but still
be integrated by certain network. A good reputation manager has to understand the network
amongst stakeholders so as to design proper strategies and methods to maximize reputation
value amongst them. Stakeholde
r relation management entails effective communication with
stakeholders: gaining their attention; knowing their need, requirement, and expectation over
company; tracing their demands changes; eliminating their misunderstanding about us; and
under circumsta
nce inviting them to participate our strategy design, decision making and
those actions affecting them. In general, stakeholder theory provides us a new view on
reputation management and reputation risk management. In the later chapters, the author
would u
se such theory in reputation risk managing model design.





24

Managing Corporate Reputation: the new currency, Croft Susan 2003, Thorogood press, London


37


3.2. RISK AND REPUTATION RISK

Risk is one of the most commonly used concepts in

business operation as well as daily life.
Although it is frequently mentioned, the definition of such term is ambiguous from our
intuition. As this paper is dealing reputation risk management issues, the first step is to clarify
the definition of our rese
arch target: risk and reputation risk. In this section risk definition and
reputation risk definition would be given as basis for further research.

3.2.1 RISK CONCEPT

Risk always accompanies uncertainty.
Uncertainty and risk is twin concept in any risk
ma
nagement literature with distinction. Uncertainty is anything out of possible prediction and
its impact is not able to be forecasted. Risk is a sort of uncertainty. The definition of it is
various depending on which risk categories and research aspect they

conduct. As most current
risk management literatures focus on financial risk, risk definition from this angle is referred
as various predicted outcome distributed in range possibilities, which means the possible
outcomes of uncertainties are identified wh
ile the exact outcome incurred is unknown but
followed a range of occurrence possibilities.

However, this definition does not work for most
of business risk such as brand risk since the possibility prediction of such risk occurrence is
harsh. Other definit
ion is more loosely given. Allen (1995) refers risk to fulfill four parameters:
susceptibility to changes or external influence, probability of occurrence, severity of impact
and degree of independency with other factors of risk.
25

The author prefers to ado
pt the
corporate risk definition stressed by Karsten Andersen and Anette Terp, which is expressed as

Internal and external uncertainties, events, or circumstance that the company must understand and
managed as it executes its strategies to achieve business

objectives and shareholder value
26
.


This definition explains the sources of risks and the importance of managing such risk for
company, which is to achieve business objective and shareholder value. Although this
definition omits the technique element in
risk which is probability and its distribution, it



25

Risk management in Business. Allen, D.1995. Cambridge University Press, Cambridge

26

Perspectives on strategic risk management, Torben Juul Andersen 2006, Copenh
agen Business School Press,


38


expands the scale of risk on research.


Apart from uncertainty, there are other concepts in risk meriting clarifying. Risk has cause and
effects. The cause of risk is called risk factor. Risk of one type
can generate other risk events in
a chain, for example the risk in food contamination can lead to ruins in corporate reputation.
The result of risk is normally regarded as loss, which is a cost for company. However, some
risks are not of negative outcome,
but alternatives in both loss and gain. The example of such
risk is investment risk, business risk, gambling, etc. The risk comes up only loss is referred as
pure risk, while that ends in either loss or gain is speculative risk. Pure risk is also called as

downside risk as it depreciates corporate value while speculative risk can create opportunity
and be called as upside risk. Therefore, the perception on risk should not be on the possible
loss but the opportunity for value creation, which means that somet
imes company should dare
to take risk, though special risk threshold
(or risk appetite)
have to be identified. Risk threshold
is determined by how much loss the company can bare and its attitude to risk. The occurrence
possibilities and severity of risk can

be increased by certain risk factors. Such risk factors is
named hazard. Hazard is distinctive from hazard risk, which belongs to risk classification and
is defined as risk from physical environment such as flood, fire, typhoon, etc.


3.2.2 REPUTATION R
ISK AND ITS MATTER

In the statement above we know the meaning of risk and its relevant concepts. In this part we
would set foot into the reputation risk and its matters. Defined as uncertainties or events
influencing corporate value, risk has its categori
es given which areas it has impact on. One of
risk categories is business risks where reputation takes part. Reputation risk has been defined
in many manners from different authors. David Abrahams(2008) gives his understandings on
reputation risk: reputati
on risk groups together those issues that arise from failure to meet
expectations of performance that apply to any comparable organization operating in the same
filed
27
. In the new draft
Integrated prudential Source Book

the Financial Service Authority( FSA
)



27

Brand Risk

Adding risk literacy to brand management, David Abrahams 2008, Gower Publishing


39


defines it as: “the risk that the firm may be exposed to negative publicity about its business
practice or internal controls, which could have an impact on the liquidity or capital of the firm,
or cause a change in its credit rating.”
28

In Reputation Ris
k consultants Ltd, reputation risk is
conclude to be failure in s
takeholders’ perception and loss

of trust for the public. Concluded
from all these definitions, we might find an anonymous aspect over reputation risk, namely
failure in meeting stakeholder expectation, which mainly is presented
by image gap.

However,
the author of this paper might quest
ion such definition. For one thing, the assumption under
such definition is that currently company has wide
-
spread identity awareness. If the
awareness depth or width is lower than corporate target
, it is also an uncertainty and loss for
company, which in
effect is a risk. For

another, such risk definition only emphasizes negative
image gap, namely reality is lower than expectation,
neglecting positive image gap,

which is
the circumstance that reality is
higher than expectation. Finally under such risk defi
nition, the
company would lose passion to change its image status as
0
compared

with competitors, our
image status is low and consequently our expectation is low and our
reputation risk is low.
However

as stated in the previous parts

image gap, especially n
egative gap is the main risk
factors leading to damage in reputation. Combining the definitions to risk and reputation, the
author in this paper gives his own definition over reputation, though far from perfection:


Reputation risk is uncertainties, event
s or circumstances that undermine the favored value judgment
hold by stakeholder over companies via impact on corporate identity, corporate image and long term