Reputational risk climbs the corporate agenda

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Businesses are becoming increasingly concerned about reputational risk and the severe impact it can cause to companies' revenues and profits.

A good reputation takes years to build but it can be damaged quickly following events such as network security breaches, product failures, employee disgrace and other circumstances that lead to adverse media coverage. Technological innovation such as social media, mobile internet and big data are accelerating the way reputational crises spread as well as their financial impact.

Reputational risk is widely seen as a top priority by executives, as a recent study by Deloitte and Forbes Insights confirms. According to a survey with 300 executives, mostly C-suite and board directors, reputation is considered the highest impact risk area to business strategy.

Reputational crises occur with such regularity that nine out of 10 S&P 500 companies now disclose that reputational risks, in addition to all their underlying operational risks, are material perils.

A few recent cases, such as ridesharing company Uber, have further boosted fear in company boards. A single claim of sexual harassment from one female engineer triggered a wave of accusations at Uber, culminating in more than 50 claims of sexual harassment and resulting in a $1.9 million settlement. But the problems did not end there. The investigation on sexual harassment uncovered additional issues relating to minority discrimination and suggestions of the existence of an unethical and hostile working environment at Uber. In 2017, the #DeleteUber campaign prompted hundreds of thousands of consumers to stop using the platform within days.

Another case in point is Facebook. Problems started with accusations that the social media group failed to protect the private and personal data of over 87 million of its users in the Cambridge Analytica scandal. Facebook's reputation suffered further as investigations suggested that the data was used to influence the 2016 presidential election in the US as well as that Facebook was being used to spread fake news. Among other things, Facebook resorted to advertisement to improve its reputation, boosting global advertisement expenses to $1.1 billion in 2018 from $324 million in the previous year, according to its 10-K filing document.

The threats to a company's reputation are hard to foresee. A scandal can be triggered by an unhappy consumer or disgruntled employee whose case receives media coverage, or an investigative news report revealing unethical behaviour at the company.

Brand and reputation issues often result from strategic and operational decisions and are influenced by factors outside of an organization's direct control. Businesses should therefore closely monitor their reputation to be able to proactively manage the risk, but this task is becoming increasingly complicated as social media plays an ever growing role in driving public opinion and stricter data privacy rules are put in place.

But there are ways to protect a company's balance sheet from the financial impact of a reputational crises. A new insurance solution addresses reputational harm by focusing on the consequential drop in business income following a reputational event. The end solution is a customized intangible business interruption policy triggered by a reputational event and subsequent drop in income.

Identifying the reputational events concerning your organization is critical to perfecting coverage. These specified events are then incorporated to become customized triggers for the policy. For example:

  • An actual or alleged product failure related to your brand or product.
  • An actual or alleged contamination event arising out of your product or business.
  • An actual or alleged network security failure or data breach event.
  • An actual or alleged "internet of things" vulnerability of your product.