Michael D. Moberly    February 5, 2014   ‘A blog where attention span really matters’!

The ACE Groups’ 2013 Survey of Reputation Risk…

For readers who may be unfamiliar with The ACE Group, it purports to be one of the world’s largest multiline property and casualty insurers for a diverse clientele with operations in 54 countries. In reviewing its 2013 report (survey) ‘Reputation at Risk’ authored by Andrew Kendrick, President, ACE’s European Group, there are some revealing findings that broadens current thinking regarding reputation risk. So much so that business decision makers globally would be well served at minimum, to read this entry, but also read ACE’s entire report.

Admittedly, I am a little unsure just how surprised I should be about ACE’s survey findings that merely one in five companies reported they are very effective at measuring external perceptions about their company.  My absence of surprise emanates from the reality that I have yet to meet a marketing practitioner or buyer, for that matter, in any business sector, who does not purport to possess a fairly high level of insight into their consumer base, i.e., likes, dislikes, preferences, etc., but actually (objectively) measuring and translating those insights into clarity about external perceptions, seems to fall somewhat short.  Obviously, marketing practitioners and buyers are likely to have little, if any, operational familiarity with company reputation risk or its management.

Need for measuring external perceptions…

For most of us working in this arena, we stipulate that measurement of external perceptions, i.e., reputation, can be challenging to get it right. Perhaps most of all, ‘getting it right’ is certainly not impossible, but it does require…

• an enterprise wide commitment, and
• not being considered sufficient if it merely a ‘snapshot-in-time’ description.

Companies today are obliged to engage in more frequent dialogue with external stakeholders to genuinely understand and assess their views and then…

• regularly monitor and (re-)evaluate their external environment as methodically as possible to identify reputational risks and/or threats that may be emerging – are on the horizon, and
• assess, if they materialize, the various ways they may adversely affect – jeopardize external relationships.

Some companies assume operational risks and reputation risks are synonymous…

While anecdotally, there is increasing evidence that some companies are treating reputational risk with the importance it deserves, a large percentage of companies are doing little, if anything of substance in this arena.  Regarding the latter, the reasons are varied but generally originate from two rationales, i.e., reputation risk management…

• appears as being somewhat of a frontier concept which company decision makers are reluctant – reticent to develop the necessary safeguards, and also
• some companies have not developed or integrated relevant process – practices to effectively address ‘their’ reputation risk challenges, thus, it is seldom an action – discussion items in c-suites, in boardrooms, or among management teams to move it forward, and still
• some companies appear determined to argue that no special measures are necessary to safeguard or manage a company’s reputation, because, they assume, reputational risks are merely the outcome or product of materialized operational risks, and since operational risk is already being managed, they must have reputational risk covered as well.

Neither stance is persuasive, and certainly neither is defensible from the point of view of directors’ fiduciary duties to shareholders to protect (and grow) the assets of the company (not to mention other duties increasingly being introduced to take account of other stakeholders’ agendas). Inaction by directors could eventually land them in hot water in terms of personal liability, but we should not see the reputational risk agenda as one simply of threat and downside. There are many positive reasons for taking steps to master this difficult challenge.

Increased prevalence of reputation risk…

Few could argue successfully in my view that increases in the prevalence of materialized reputational risks…

• is variously linked to an elevated intensity of public scrutiny of company behavior and expectations, along with the rising importance of corporate sustainability,
• which have placed more emphasis on companies to demonstrate strong (business, operational) ethics and thus, changed stakeholder expectations in terms of how companies should be behaving.

But neither can companies afford to ignore the demands of those who are not shareholders, if a company is publicly held, instead, they must balance the needs of a broad range of stakeholders, including the public, their employees and the communities in which they operate.  By doing so, creates a surer path to effectively safeguarding a company’s reputation. More specifically, as Warren Buffett is reported to have said, ‘we must continue to measure every act against not only what is legal, but also, what we would be happy to have written about it on the front page of a national newspaper.’

Underestimating reputation risk challenges…

Of course, I agree with ACE’S findings that (many) companies, and their management teams, underestimate the challenges associated with reputation risks, and their management.

Interestingly though, almost four in ten respondents to the ACE survey also report their companies have confidence in their ability to address and recover from a ‘crisis’ ala crisis management with 32% believing they are very effective at restoring reputation following the materialization of a risk event. Admittedly, I am skeptical about merging or assuming crisis management and reputation risk management are necessarily synonymous.

Most company management teams recognize however, that the time that companies now have to respond, be it a reputation risk that has materialized or some other form of crisis event, their potentially adverse impact should no longer be factored in weeks and months, instead, in hours and minutes, thanks in large part to the globally instantaneous functionality of expanding numbers of social media platforms. One outcome of this particular reputation risk phenomena is that fewer companies have the luxury of a second chance!

Quite understandably then, further findings of ACE’s survey suggest that companies actually be underestimating the speed which reputation risks can materialize and cascade, in other words, the various and multiple challenges associated with a crisis in what appears to be a ‘faster than real time’ context.

A reputation risk insurance perspective…

On the other hand, from an insurance perspective, two-thirds of ACE’s survey respondents feel inadequately covered for reputational risk. So, one can presume the respondents distinguished ‘crisis management’ from ‘reputation risk management’.

Broadly, survey findings indicate the insurance side has a potentially valuable role insofar as helping companies manage the more traditional – conventional types of risks more effectively initially, which can mitigate/reduce damages incurred by reputational risks by applying a ‘reputational risk lens’ which allows parties to more clearly recognize any (potentially adverse) external perspectives which are integral to a company’s reputation.

There is a lot at stake for companies…

‘Caught in the headlights’ may be an appropriate descriptor for a substantial number of companies, insofar as recognizing the speed and adverse realities of being the target of materialized reputational risks.  Many, if not most of my reputation risk management colleagues agree that balancing speed of recognition coupled with agility in terms of having multiple response options at the ready.

There is no question that reputation is now critical, more than ever, to the long-term financial and competitive advantage health of any company.

Materialized reputation risks can produce severe financial consequences…

It should be quite obvious by now that a materialized reputational risk can have severe, long terms, and in a percentage of instances, irreversible financial consequences on a company, e.g.,

• adverse media attention, such as a product recall or major accident, can rapidly cascade and lead to lost sales, which affects a company’s liquidity.
• investors and banks may become uneasy and withdraw or limit a company’s access to capital which places additional strains on balance sheets, and with
• current and future revenue streams being more dependent on a company’s reputation, which is also a source of competitive advantage, it can become even more challenging to rebuild brands and restore stakeholder confidence.

Examples of company reputation quickly evaporating…

Arthur Andersen Company is a good example.  Its demise in 2002, most agree, is attributed to irreparable reputational damage following terrible publicity the company received related to the Enron scandal. More recently, BP incurred significant reputation damage relative to its association with the Deepwater Horizon explosion in the Gulf of Mexico in 2010.

Of course, there are countless other examples, but, the corollary of this is that that companies with strong reputations should become beneficiaries to others’ (competitors in some instances) in terms of elevating share price performance, and stakeholder – customer trust.  Some suggest that a positive and resilient reputation helps companies to deal more effectively with future crisis – reputation risk events, should they occur, because it creates a reserve of goodwill referred to many time here as ‘reputation capital or equity’ that can help the business to better endure and survive future adverse (reputation risk) events.

Effective reputational risk management is not just about responding well to so-called crisis events. In addition, it is about safeguarding, building, and routinely monitoring reputation.

(A special thanks to Andrew Kendrick, President, ACE European Group, 2013 ‘Reputation at Risk’ Report for inspiring this post.)