An organisation’s reputation is the product of many things, from its financial performance to its workplace culture. Reputation can influence investors, consumers, suppliers, competitors, regulators, the cost of capital, talent acquisition and retention, public and media coverage and other stakeholders.
Such a prized intangible risk needs to be nurtured and protected, but building reputational capital comes with risk: the occurrence of any number of negative events could damage trust, impair stakeholder confidence, prompting regulatory investigations, loss of clients, or a total business collapse. A unique characteristic of reputation is its potential transience.
Reputation matters
In broad terms, reputation describes how a company is perceived by others. These perceptions are typically based on a variety of factors.
Some of these factors are tangible, and include elements such as a company’s performance against financial, social, and environmental assessments, including historical and present-day performance, as well as performance relative to competitors.
Other factors are more diffuse. Notably, concepts such as trust, integrity, and culture are key for companies when it comes to generating new business, forging effective sector relationships, and attracting and retaining talent.
Regardless of how reputation is defined, there is little doubting its importance. According to a 2019 study, the world’s top 15 market indices owe more than a third of their total capitalisation to corporate reputations (opens a new window), equivalent to $16.77 trillion in shareholder value.
Mastery of risks to reputation can enable a company to be seen as responsible and responsive and in tune with the changing requirements and expectations of stakeholder groups, often driven by external “geo” disruptors/influencers.
Mitigating threats to reputation
Because of the complex nature of reputation, the risks to reputation are equally complex, and may take the shape of one of several other risk events. Constant social media scrutiny means that reputation can be impacted by anyone within an organisation or any party that plays a role in fashioning or safeguarding the organisation’s reputation.
The risks include, but are not limited to:
Regulatory violations
Misconduct
Service failures
Ineffective governance or strategic decision making
Client failures
Risk contagion (e.g. association with damaging clients, or sector-wide reputational damage)
Where such negative events occur, it has the potential to damage trust. The consequences of this may lead to a reduction to an organisation’s future growth and earnings potential.
This can materialise in numerous ways:
Client defections and/or loss of prospective clients
Loss of business partners (alliances, vendors, suppliers or charitable foundations, sponsorships, or recruiters)
Recovery and resolution costs
Regulatory investigation and/or civil proceedings
Human capital flight risk
Inability to source contingent lines of credit (liquidity)
Other potential penalties
But that’s not all. An organisation must also be alive to the ways in which certain risks are affected by others, the interconnectivity of those risks and the strength of those connections, the velocity of risk, or how fast an event may affect a firm, and the potential for a cluster of risks to emerge. In doing so, they recognise that organisational distress rarely originates from a single risk event, but from the convergence of multiple risks into a broader reputational threat.
Organisations should have resilience, recovery, and resolution plans with tried and tested phoenix strategies in place, focusing on the interaction of crisis management, business continuity, communication and disaster recovery policies designed to mitigate the impact on brand.
Organisations of all sizes may also benefit from outsourcing elements of their risk mitigation to third parties, including public relations specialists and lawyers capable of handling that firm’s individual risk profile.
Bespoke solutions
New technology solutions within the field of reputational intelligence are advancing rapidly, and offer another useful tool for organisations seeking to mitigate against risk.
Such platforms typically draw together live open-source data from across a vast array of online sources for appraisal. By visualising the data, these platforms allow companies to gain foresight around issues on the horizon, plan a response, and react in advance.
The same data can also uncover opportunities to improve business performance and further enhance an organisation’s reputation.
Reputational insurance – an extra layer of protection
Despite the above, no risk management strategy can completely eliminate the possibility of a reputational risk event. For those seeking further safeguards against reputation harm, insurance may provide a solution.
Owing to the interconnected nature of reputational threats, many of the risks to reputation may be covered by traditional forms of insurance, such as professional indemnity, cyber, Directors and Officers (D&O), and business interruption insurance.
Such policies will vary in scope, but may cover the cost of engaging experts in the recovery and response process, or elements of financial loss. Where firms do rely on such policies to protect against reputational harm, they should seek out wordings that are sufficiently comprehensive and unambiguous to ensure coverage.
Alternatively, stand-alone reputational insurance products can provide cover for response protection costs, including:
engaging public relations specialists, lawyers, and Counsel
management time diverted from operational or client work
costs associated with any fundamental reorganisation of leadership or change in strategic direction/priorities
costs to prevent human capital flight risk
costs incurred by the involvement of the International Organisation or Network (as applicable)
Typically, this will also be offered in combination with revenue protection, addressing aspects of structure, measurability, timing, and risks that aren’t the subject of cover.
Quantifying the extent of reputational damage can often be difficult. Accordingly, this protection will likely focus on scenarios, triggers, and perils that could create severe and costly reputational damage.
To be most effective, these products should be tailored to an individual organisation’s needs and risk profile, dovetailing with internal response capabilities. Although insurance is unlikely to put an organisation in the same position it was prior to a negative reputational event, it can mitigate the impact of such events should they occur.
For further information, please contact:
Steve Claringbold, Strategic Consultant
E steve.claringbold@lockton.com (opens a new window)
T +44 20 7933 2418