June 8, 2022
A reputation crisis can have a devastating effect on a business, posing not only a threat to shareholder value but to the organization itself. Business leaders recognize this risk, and damage to reputation and brand consistently ranks among their top concerns in Aon’s Global Risk Management Survey.
Social media has made risks to reputation and brand even more acute. “With social media, perception quickly becomes reality in this world, so you need to be prepared to respond to whatever can affect your reputation,” says Bernhard Steves, global head of Crisis Management at Aon. “You need to be so much more mindful today than you did even 10 years ago because the news travels so quickly. We all know the old phrase it takes a lifetime to build a reputation and five minutes to lose it.”
Despite the potential significance of the risk, the impact of a reputation-threatening event can be difficult to quantify, and business leaders often have difficulty viewing reputation risk as a discrete peril.
“The C-suite often sees reputation as a consequence of other events, other perils,” says Scott Bolton, director at Aon Commercial Risk Solutions. “I think that the issue of reputation is being able to talk about it as a distinct issue, almost agnostic from the actual initiating peril. Then, we can begin to frame it in such a way that we can talk about the value of either the risk mitigation efforts that can be put into place or potentially some of the insurance solutions that are available.”
Preparing for reputation crises — and managing them effectively should they occur — is critical to businesses. A study by Pentland Analytics showed that between 1980 and 2020, poorly managed crises wiped out over $2 trillion in shareholder value.
“The way that we look at reputation risk is twofold,” says Ladd Muzzy, Global Enterprise, Reputation and Operational Risk Management leader at Aon. “One part is the pieces that you can build prior to an event occurring. The other is after the fact: how do you respond when an event happens?”
If organizations do not have a specific business unit tasked with managing reputation risk, they may struggle to navigate this type of challenge.
“It sort of gets lost in the portfolio of exposures,” says Muzzy. “It’s intuitively managed by different parts of the organization, like corporate communications, legal and compliance, which makes it hard to have a singular message coming from someone who has the full scope of where reputation can affect the institution.”
Different Businesses, Different Risks
Some industries are particularly susceptible to reputation risk. High-profile businesses that rely on consumer trust when marketing their services or products — life sciences companies, for example — may face greater exposures than businesses in other industries.
“Even within verticals, different companies can have different levels of exposure to reputation risk. That’s because different companies have different sets of values and purposes,” says Richard Waterer, Global Risk Consulting leader at Aon. Waterer illustrates this point by comparing a discount food retailer to a high-end retailer selling carefully sourced organic products. A negative environmental, social and governance (ESG) event would potentially be more damaging to the reputation of the high-end retailer than the discount business, as it would conflict with the values it projects to the public.
ESG and Preparing for Reputation Risks
As stakeholders of all types place an increasing emphasis on an organizations’ environmental, social and governance (ESG) performance, many businesses are increasingly focused on their public image.
“Companies want to be seen as the good company out there doing the right thing, because that’s really what their reputation is,” says Steves. Though a failure in meeting ESG commitments can negatively impact a company’s reputation, having solid ESG strategies in place and documenting progress toward meeting them can help businesses in the event of a brand-damaging event.
“Consider product recalls,” says Steves. “We’ve seen this in the recall world time and time again: some companies have had a situation occur, but they’ve handled it so well that they came out stronger for it. And we see other situations in which what should have been a minor incident was handled so poorly that it became a major incident.”
Understanding the Impact of Reputation Risk
Ultimately, business leaders need to realize that reputation risk can be quantified.
“We’ve convinced ourselves in the risk space that you can’t measure reputation,” Waterer says. “But chief marketing officers and people who are building brands for companies all around the world, can measure the value of that brand and the progress that a company is making towards growing its profile and the contribution of that brand to the company’s value.”
When examining reputation risk, companies should also consider a range of non-financial factors. This perspective can help an organization better understand the potential impact of a reputation-damaging event, as well as the threat posed by a crisis that erodes a brand’s reputation over time.
“Who are the most important stakeholders to your business?” asks Waterer. “These could include advocacy groups, regulatory agencies, customers and suppliers to your business. What matters to each of them, and what would impact their trust of you? Considering these questions helps you arrive at a different set of scenarios than you would if you approached it just through the financial lens.