The consequences and complexity of reputational risk are why many cite it the risk they worry most about, but peace of mind lies closer to home than many think, says partner, Magnus Boyd
Damage to reputation is increasingly cited as the main risk chief risk officers and heads of risk and insurance worry about. The all-pervasive, shape-shifting intangibility of reputational risk is what haunts them. However, peace of mind lies closer to home than many think. Although it has to be accepted that attacks to reputation take an increasing number of forms, the source of those attacks is often relatively predictable.
A 2013 survey found that six out of 10 respondents believed the crisis their businesses had been through should have been predicted. The same survey found that only 29% of crises were unpredicted and that, in 58% of cases, there had been between a few days, and several months’ notice. Anticipation is the key to the successful management of reputational risk and the best people to anticipate that risk are within the organisation.
Can risk to reputation be quantified?
Assessing risk to reputation begins by quantifying that risk – by defining and measuring it. Too often, this process resembles trying to fit a square peg in a round hole. Some people give up, concluding that the value of reputation can be measured only in the cost of repair. However, it is important not to accept defeat and nor to latch on to the first passing metric.
Quantifying risk to reputation begins with the acceptance that each organisation is different. Each has its own risk profile, its own risk appetite and, by extension, its own metrics for quantifying risk. Instead of looking outwards for comparables, risk officers can look within the organisation for the forms of measurement that have most significance to it. A crisis can result in employee resignations, the need for recruitment, increased borrowing costs, increased marketing, legal, communications and compliance budgets and a reduction in sales or turnover.
All these will have an indirect financial effect as distinct from the costs of operational recovery, a fall in share price or product recall that have direct financial consequences. The indirect affect of a crisis may be less obvious and less easy to monetise but could be far-reaching and financially significant in the long term. One of the key weapons to mitigate reputational damage is recourse to libel litigation. Corporate entities now need to demonstrate, serious financial loss if they are to bring a claim in libel. It is therefore more important than ever to be able to quantify the risk to reputation.
Where do risks to reputation come from?
The media’s increasing reliance on the digital world as a source for news and images, the intrusiveness of today’s reporting, the techniques of modern news gathering and the speed with which inaccurate and unfair allegations can be published to a global audience mean that a reputation that may have taken years to build can be destroyed in the time it takes to post a blog or send a tweet. This adds a further layer of complexity to the reputational risk assessment process.
Today’s news is no longer tomorrow’s fish’n’chip wrapping. Blogs lengthen the tail of a story and around one-third of articles accessed from newspaper websites are more than a month old, which proves that stories – some of which may be inaccurate – are living longer in the collective memory.
Many organisations leak gossip and rumours via texts, tweets and email. Unlawful disclosure no longer needs a third party such as a journalist to reach a global audience. The digital whistleblower disseminates their message via a personal blog, Facebook or YouTube video in a matter of minutes. On some occasions, such disclosure is in the public interest, but too often it is merely interesting to the public. However, the speed with which such material can be uploaded and spread around the globe often means such questions do not get asked in time. Too often, citizen journalists are merely citizen paparazzi who have dispensed with the necessary synthesis, contextualisation and responsibility required by journalism.
Mitigating risk to brand damage
In such a potentially hostile and fast-moving environment it is becoming increasingly difficult to deal with attacks to reputation when they emerge. Anticipation and strategic forward planning are the most successful and cost effective approaches to reputation protection.
Reputation risk audits can be a powerful tool to refocus attention on the long- term goals of managing issues to avoid them developing into crises. They can help every level in the organisation work together to prevent and manage problems that might otherwise attract unwanted media attention.
Escalation is always a concern when assessing risk to reputation. Relatively minor issues, if not dealt with quickly and appropriately can sometimes develop a life, and a story, of their own. The online profile of the organisation also needs to be actively monitored and immediate steps taken to correct any inaccurate information that appears.
Reputational risk insurance
Historically, insurance has been available for the costs of operational restoration after a crisis. However, increasing demand is for a more sophisticated product where the actuarial value of the covered losses is less meaningful than the expert risk mitigation and crisis management services provided in the policy. The creation and maintenance of a reputational risk register and regular reputation audits are the starting point for such policies.
Everyone can appreciate that risks to reputation can emerge at any time and from any area of the business and, for that reason, every area of the business should share in the task of protecting the reputation. It should not only be the reserve of risk officers, heads of communications and the corporate figureheads who will be the focus of attention.
Magnus Boyd, partner at Hill Dickinson