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 their crisis response capabilities has become increasingly prominent. This paper, by analyzing reputation risk management methods and crisis response methods and strategies, and combining practical work experience at securities firms, proposes ideas and recommendations for improving reputation risk management. The research conclusions can provide useful references and insights for reputation risk management in the securities industry.

(Keywords: Securities firm; Reputation risk; Crisis response)

I. Introduction

A good reputation is the cornerstone for securities firms to gain clients’ trust, maintain stable business operations, and achieve long-term development. After the launch of various regulatory guidelines, such as the “Guidelines for Reputation Risk Management of Securities Firms” (hereinafter referred to as the “Guidelines”), securities firms have made significant improvements, and in practice have gradually built a relatively comprehensive reputation risk management and media crisis response system. However, the rapid development of media dissemination methods and channels has accelerated the spread of negative public sentiment and expanded its breadth, making it increasingly difficult to control the scope of media crisis handling and the impact of reputation risk. Therefore, securities firms currently still face substantial challenges in reputation risk management. With public-opinion events and media crises serving as important triggers for reputation risk, reputation risk management and crisis response by securities firms remain key areas of attention and important topics in the process of the securities industry promoting the construction of a compliance and risk-control culture.

II. Reputation Risk and Crisis 　　Response Mechanisms and Models

According to the reputation risk management principles of “full process, full staff, prevention first, and prudent management, and rapid response” stated in the “Guidelines,” as well as the crisis management principles of “centralized oversight, first-time response, clear accountability at the individual level, and one voice,” the following response mechanisms and models are constructed:

(1) Build a governance structure for media crisis early-warning and handling. In accordance with the requirements of the “Guidelines,” and combined with actual work, a securities firm should establish an effective reputation risk management organizational structure, and clarify the division of responsibilities among the board of directors, the board of supervisors, management at the senior level, and each department in reputation risk management.

(2) Establish a crisis event classification and tiering mechanism. Based on the degree of impact of media crisis events on the public, the media, and corporate image, media crisis events can be categorized. This paper discusses, based on work practice, dividing crisis events into four categories: Tier-1 early-warning events refer to crisis events that have already been exposed by the media; Tier-2 early-warning events refer to crisis events that have been exposed on electronic media such as websites and forums, and are directly related to the implicated securities firm; Tier-3 early-warning events refer to crisis events that have attracted media attention, and even news reports that are likely to involve the implicated securities firm that have already been published, which have already caused potential negative impacts on the enterprise and may lead to further attention and follow-up reporting, and therefore require cross-functional departmental assistance in handling; Tier-4 early-warning events refer to potential crisis events in which each department proactively issues warnings and which are expected to lead to customer complaints or media attention.

(3) Improve crisis handling procedures. Based on the tiering results of crisis events and investigation and research, we believe that securities firms should further clarify crisis handling procedures. The procedures should include eight stages: discovering a crisis, issuing a crisis early warning, conducting follow-up investigations, performing risk assessment and analysis, developing messaging guidelines/official statements, communication and coordination, guidance for response and management of the situation, and summary evaluation.

The following focuses on exploring and researching crisis assessment methods and models:

① Crisis assessment method. 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 method. Establish an assessment disclosure, with the media crisis event assessment coefficient = score from influencing factors × weighting coefficient. Each sub-item of the influencing factors has a full score of 100 points; the higher the score, the greater the severity of the crisis. The influencing factors may consist of keywords, distribution/reach of publication, degree of negative impact, media tier, and potential escalation. The weights are, in turn, 20%, 25%, 25%, 20%, and 10%.

From the radar chart (see Figure 1), it can be seen that for already exposed crisis events, among factors such as keywords in news reporting, the breadth of publication reach, the strength of negative influence, the level/tier of the media attracting attention, and the possibility of escalation, the breadth of publication reach and the degree of negative impact influence the overall handling strategy for the entire media crisis event to a larger extent.

Similarly, for crisis events of different types, scoring can be carried out based on the assessment coefficient (see Figure 2), so that judgment can be made according to each dimension of impact of the crisis event, and corresponding response strategies can be adopted. It is worth noting that for the same crisis event, different assessment coefficients will be generated at different stages of development. By analyzing the changes in the coefficients, we can analyze the overall trajectory of the event.

III. Securities Firms

Recommendations for Improving Reputation Risk Management

In view of the many challenges faced by reputation risk management of securities firms under the new circumstances, attention should be paid to the high-frequency points where reputation risks arise. By forming a closed-loop of end-to-end management across three layers—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 financial markets and a good industry reputation image.

(1) Plan at multiple levels to improve institutional and mechanism design. As the “gatekeeper” of the capital market, a securities firm should establish a sound institutional and mechanism framework for preventing reputation crises. Within a comprehensive risk management system, further clarify the subject responsibilities for constructing a reputation risk system and proactively preventing and handling reputation risk events. From the perspectives of institutional development and overall planning of compliance and risk control, place emphasis on the role of reputation risk management, and formulate more detailed institutional mechanisms.

(2) Take initiative to improve prevention systems. Although reputation risk itself is inherently unpredictable, early detection and early handling are still the management approaches with the lowest cost and the least expense. First, securities firms should actively and proactively communicate with the media. By using industry and corporate culture development as the focal point, they should develop promotional plans aligned with the direction of China’s capital market development, increase public and smaller investors’ understanding of the securities industry, enhance trust, and accumulate reputation capital. Second, securities firms should build and effectively use reputation risk prevention mechanisms closely related to handling complaints, tips/reports, and petitions/letters and visits, and proactively and promptly respond to and resolve clients’ reasonable demands. Third, improve the professional capabilities of staff responsible for reputation risk management. For example, by appointing senior executives of the company to participate as news spokespersons, and providing necessary training to enhance political, media, and professional competencies, ensure that relevant personnel are familiar with the company’s business and overall management/operations, and have experience in handling emergencies. Third, according to actual needs, relevant regular emergency drill mechanisms may be established; for various reputation risks and media public-opinion situations, corresponding reputation risk response plans should be formulated and continuously improved.

(3) Respond appropriately and implement risk response models effectively. Reputation risk events—especially the public opinion that has been fermented through current new media channels—place higher demands on securities firms in terms of the timeliness, execution capability, and proactiveness of their response to such risks. At the level of securities firms, they should thoroughly implement the reputation risk response principles contained in the “Guidelines” issued by the China Securities Association, improve media crisis response models, clarify responsibility-implementation mechanisms, strengthen and improve compliance and risk control systems, and ensure efficient and effective handling of risk events.

(4) Involve all staff to ensure post-event accountability for reputation risk and reputation restoration. In terms of internal development, start from mechanisms and talent cultivation: establish an all-staff compliance and risk-control training system, timely summarize and transmit reputation risk cases and experience to employees, strengthen the cultivation of public-opinion management talent, and pay attention to building positions related to public-opinion management. First, incorporate the prevention and handling status of reputation events into the assessment scope, and establish an evaluation mechanism with clearly defined responsibilities. Second, securities firms should promptly carry out reputation restoration work. After a reputation risk event occurs, take initiative to assume responsibility with a sincere and candid attitude, and handle sincere communication with the media, the general public, and investors in an appropriate manner. At the same time, increase positive publicity, promptly advance follow-up communication and remediation measures as well as subsequent improvement plans, and reduce negative impact to the greatest extent.

IV. Conclusion

Excellent reputation risk management has an important impact on a securities firm’s operations, corporate value, and future development.

Securities firms should, from a comprehensive perspective, require reputation risk management to cover all layers of the firm’s end-to-end management process; from an executability perspective, promote securities firms to build and improve multi-dimensional reputation risk management systems, including organizational structures, institutions and mechanisms, and risk culture; from a forward-looking perspective, guide securities firms to proactively identify and prevent reputation risks, strengthen analysis and forecasting of the causes of reputation risk events, the degree of impact, and development changes, and improve efficient and effective risk response mechanisms. Together, contribute to building a capital market that develops in a long-term, continuous, stable, and healthy manner, and make efforts to build a “strong financial country.”

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