Wednesday, November 28, 2007

Certification Systems as Risk Mitigation

Goldman Sachs has recently been lauded for its risk mitigation systems, taking actions months before the sub prime mess broke out. Some people have said that Goldman had a more integrated exposure risk mitigation system, while others attributed Goldman’s success to the use of realistic, hardnosed analysis, unclouded by rose colored glasses. What about companies trying to mitigate against brand risk? After all, brand is where much of the value of firms is tied up.

Economist and certification consultant Michael Conroy just spoke at the Carnegie Council about his new book Branded! How the ‘Certification Revolution’ is Transforming Global Corporations. The books and the seats at the lecture were both sold out.

Conroy said that a revolution in standards certification is underway and has been fueled by successful "market campaigns" by NGOs, the development of outside certification systems, the presence of champions for change within companies, and the growing market for ethical products. Market campaigns call attention to social and environmental problems in a corporate supply chain, problems that go beyond the jurisdiction of the WTO.

The growing power of corporate brands is two-sided. While a brand can help establish a company’s dominance in a particular industry, it also makes a company vulnerable to attacks from the public on that brand. A brand value can be estimated as the total value of a company minus its physical assets. Conroy estimated that McDonald’s brand is about 70 percent of its value and that figure is about 64 percent for Coca Cola.

Certification systems are a set of principles, criteria, and indicators negotiated by all stakeholders impacted by a company’s operations. The result of these negotiations is the highest politically accepted standard. These standards allow consumers and civil society to be more nuanced in signaling their preferences to companies—beyond just saying, “Stop what you are doing!”

The relationship between civil society and corporations allows companies to positively mitigate against brand risk. Certification systems are risk management systems against future attacks on brands, says Conroy.

It was a fascinating discussion and certainly a tribute to the growing power of NGOs. The audio from this event will be up on the Carnegie Council's online magazine Policy Innovations, a project that Conroy also was instrumental in helping to start.

Stay tuned.

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