A Study on Reputation Risk Management and Crisis Response in Securities Firms

Abstract: With the rapid development of internet information technology, the importance of strengthening reputation risk management for securities firms and improving crisis response capabilities has become increasingly prominent. By analyzing methods, approaches, and strategies for reputation risk management and crisis response, and combining these with actual work practices in securities firms, this paper proposes ideas and recommendations for improving reputation risk management; the research conclusions can provide useful references and lessons for reputation risk management in the securities industry.

(Keywords: securities firms; reputation risk; crisis response)

I. Introduction

A good reputation is the cornerstone for securities firms to gain customers’ trust, maintain business stability, and achieve long-term development. After the issuance of various regulatory guidance documents such as the Guidelines for Reputation Risk Management of Securities Firms (hereinafter referred to as the “Guidelines”), securities firms have made substantial improvements. In practice, they have gradually built a relatively comprehensive reputation risk management and media crisis response system. However, with the rapid development of media communication methods and channels, the speed of the spread of negative public sentiment has increased and its reach has expanded, making it more difficult to control the impact scope of media crisis handling and reputation risk. Therefore, at present securities firms still face significant challenges in reputation risk management. Since public opinion events and media crises are important triggers of reputation risk, reputation risk management and crisis response by securities firms remain key areas of attention and important topics in the process of promoting the establishment of a compliance and risk-control culture in the securities industry.

II. Reputation risk and crisis

response mechanisms and models

Based on the reputation risk management principles of “whole-process and whole-staff, prevention first, prudent management, and rapid response,” and the crisis management principles of “centralized (by function) management, first-time response, responsibility assigned to individuals, and one voice,” as stated in the “Guidelines,” the following response mechanisms and models are constructed:

(1) Set up an organizational structure for media crisis early warning and handling. In accordance with the requirements of the “Guidelines,” and in combination with actual work, a securities firm should establish an effective reputation risk management organizational structure, clearly defining the division of responsibilities among the board of directors, the board of supervisors, the management layer, and each department in reputation risk management.

(2) Establish a tiered mechanism for crisis events. According to the degree of impact of media crisis events on the public, the media, and the corporate image, media crisis events can be categorized. This paper discusses, based on work practice, dividing crisis events into one to four categories: Category 1 early warning events refer to crisis events that have already been exposed by the media; Category 2 early warning events refer to crisis events that have been exposed on websites, forums, and other electronic media and are directly related to the securities firm involved; Category 3 early warning events refer to crisis events that have attracted media attention, or even news reports that have already been published and may involve the securities firm involved, which have already caused potential negative impacts on the enterprise and may trigger more attention and follow-up reporting, requiring the assistance of cross-line functional departments to handle; Category 4 early warning events refer to potential crisis events in which each department proactively issues an early warning and which are expected to lead to customer complaints or media attention.

(3) Improve the crisis handling process. Based on the results of crisis event tiering and investigation and research, we believe that securities firms should further clarify the crisis handling process. The process should include: crisis discovery, crisis early warning, follow-up investigation, risk assessment and judgment, formulation of messaging and talking points, communication and coordination, response guidance, and summary and evaluation—eight stages.

The following will focus on exploring and researching crisis assessment methods and models:

① Crisis assessment methods. Through qualitative and quantitative analysis of crisis events, weighted analysis can be used to obtain assessment scores for each independent event and each stage of each event; the higher the score, the more severe the potential crisis.

② Crisis event assessment methods. Set up an assessment disclosure framework. Media crisis event assessment coefficient = impact factor score × weight coefficient. For each sub-item under impact factors, the full score is 100; the higher the score, the more severe the crisis. Impact factors may be composed of keywords, distribution scope, degree of negative impact, media tier, and likelihood of escalation, with weights of 20%, 25%, 25%, 20%, and 10% in sequence.

From the radar chart (see Figure 1), it can be seen that for crisis events that have already been exposed, among factors such as keywords in news reports, the breadth of the distribution scope, the magnitude of negative influence, the tier of the concerned media, and the likelihood of escalation, the distribution scope and the degree of negative impact influence the overall handling strategy of the media crisis event to a greater extent.

Similarly, for various types of crisis events, scoring can be conducted according to the assessment coefficient (see Figure 2). In this way, judgments can be made based on the various impact dimensions of crisis events, and corresponding response strategies can then be adopted. It is worth noting that for the same crisis event, different assessment coefficients will be generated at different development stages. We can analyze the trend of the entire process of the event by examining changes in the coefficients.

III. Securities firms

Recommendations for improving reputation risk management

In response to the many challenges that reputation risk management of securities firms faces under the new situation, sufficient attention should be paid to high-frequency sources of reputation risk. By forming a closed-loop management system across the full process through three stages—pre-event, during-event, and post-event—securities firms can be encouraged to build a reputation risk management system, gradually form an effective media crisis response mechanism, and effectively safeguard the stability of the financial market and a favorable industry reputation image.

(1) Plan in a layered manner and improve institutional and mechanism frameworks. As the “gatekeeper” of the capital market, a securities firm should establish a sound institutional and mechanism framework to prevent reputation crises. Within a comprehensive risk management system, it should further clarify the primary responsibilities of the securities firm for building a reputation risk system and proactively preventing and handling reputation risk events. At the level of institutional development and overall planning for compliance and risk control, emphasize the role of reputation risk management, and formulate more detailed institutional mechanisms.

(2) Take initiative and improve the prevention system. Although reputation risk itself is unpredictable, early detection and early handling are still the management approaches with the lowest cost and the lowest expense. First, securities firms should actively and proactively communicate with the media. Taking industry and corporate culture development as the starting point, they should formulate publicity plans aligned with the development direction of China’s capital market, increase the general public’s and small and medium investors’ understanding of the securities industry, enhance trust, and accumulate reputation capital. Second, securities firms should build and make good use of reputation risk prevention mechanisms closely related to handling complaints, reporting, letters and visits, and so on, and proactively and promptly respond to and resolve customers’ reasonable demands. Third, improve the professional capabilities of personnel responsible for reputation risk management. For example, by setting up news spokesperson roles participated in by the company’s senior management personnel and conducting necessary training to enhance political quality, media literacy, and professional competency, ensure that relevant personnel are familiar with the company’s business and overall business management and have experience in handling emergencies. Third, based on actual circumstances, regular emergency drill mechanisms may be set up; formulate and continuously improve related reputation risk response plans for various types of reputation risks and media public-opinion situations.

(3) Respond effectively and ensure the risk response model is implemented. Reputation risk events—especially public opinion that is fermented through current new media channels—place higher requirements on securities firms in terms of timeliness, execution capability, and proactivity in responding to such risks. At the level of securities firms, they should deeply implement the reputation risk response principles in the “Guidelines” released by the China Securities Industry Association, improve the media crisis response model, clarify responsibility implementation mechanisms, improve the compliance and risk-control system, and ensure efficient and forceful handling of risk events.

(4) Whole-staff participation: do well in post-event accountability and reputation restoration for reputation risk. For internal development, efforts can start from mechanisms and talent cultivation. Establish an all-staff compliance and risk-control training system, promptly convey case studies and experience summaries of reputation risk to employees, strengthen the cultivation of public-opinion-related talent, and pay attention to building public-opinion responsibility positions. First, include the prevention, handling, and remediation of reputation events in the scope of performance evaluation and establish an accountability mechanism with clearly defined responsibilities. Second, securities firms should carry out reputation restoration work in a timely manner. After a reputation risk event occurs, take proactive responsibility with a sincere attitude, and properly conduct sincere communication with the media, the general public, and investors. At the same time, increase positive publicity, promptly advance publicity follow-up measures and subsequent improvement plans, and reduce negative impacts to the maximum extent.

IV. Conclusion

Outstanding reputation risk management has an important impact on securities firms’ business operations, corporate value, and future development.

Securities firms should, from a comprehensive perspective, require reputation risk management to cover all management processes across all levels of the securities firm. From the perspective of executability, they should promote securities firms to establish and improve a multi-dimensional reputation risk management system across multiple dimensions, including organizational structures, rules and mechanisms, and risk culture. From a forward-looking perspective, they should guide securities firms to proactively identify and prevent reputation risks, strengthen analysis and prediction of the causes of reputation risks, the degree of impact, and changes in development, and improve an efficient and forceful risk response mechanism; they should work together to build a capital market characterized by long-term, sustained, stable, and healthy development and contribute to the goal of building a “financial power.”

(Author: Dongguan Securities Co., Ltd. Lu Xiaoliang, Zhong Baoling)

Endless information and precise interpretation—exclusively on the Sina Finance app