Discussions about ethics and reputation often include the “front page of the newspaper” test: Would you take a certain action if you knew it would be on the front page of tomorrow’s newspaper? And while the concept may be a little dated (Newspaper? What’s a newspaper?), the underlying premise still holds true. In fact, in a world where anything can be posted, tweeted, and spread instantly, it is even more relevant.
Reputational risk continues to be considered one of the biggest issues facing board members, executives, and anyone charged with the welfare of an organization. Accordingly, it represents an important consideration for all internal auditors. But despite this focus, organizations do not understand the real impact and power of reputational risk in the decision-making process.
Recently, some nonprofit organizations have faced increased scrutiny for their spending practices. Donors have raised serious questions about the percentage of donations going to those in need versus the percentage going to questionable operational expenses. The nonprofits defend these as justifiable expenses. But the arguments fall on deaf ears, resulting in substantial and often debilitating decreases in donations, as well as an increasing list of castoff C-suite executives.
But imagine yourself sitting in the original meetings. A board member asks about the cost of entertainment at a function, or the investment in a glossy new building, or high-class travel expenses, or the CEO’s salary. Someone provides a clear, cogent explanation, citing standards that must be maintained, the ability to attract more affluent donors with larger investments, or the need to reward executives for their success. Based on these sound and logical explanations, you might find that you agree with the decisions.
The problem is that such internal decisions are seldom viewed through the prism of public opinion. In the boardroom it makes perfect sense; on the front page, not so much so.
You may well argue that you are nothing more than a lowly internal auditor who has never seen the inside of a boardroom, let alone been allowed to help with high-level decisions. However, the same principles hold true for every question you raise. Listen closely to the explanations — how a decision was made, how an event occurred, and how it will be ignored or corrected. Then consider how it would look on the front page of tomorrow’s paper.
Given the importance of reputation to organizational success, internal auditors need to keep it in mind at all times. Reputation should not just be considered during the first risk assessment; it must continue to receive focus until the auditors and clients come to a conclusion that satisfies everyone — even the people who might see it in tomorrow’s headlines.