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Reputation Risk

Fake News, Real Threat

Far more than a prank, the spread of fictitious news is wreaking havoc on businesses and institutions.
By: | February 20, 2017 • 5 min read

The phenomenon of fake news has been around for many years, making it hard for us to separate fact from fiction. One of the earliest examples was the “New York Sun” claiming to have discovered a civilization on the moon in 1835.

But it wasn’t until “Pizzagate” last December that the potential severity of its impact on individuals and companies really hit home.

On Dec. 4, Edgar M. Welch, a father of two from North Carolina, was arrested and charged with firing an assault rifle in the Comet Ping Pong pizzeria in Washington D.C.

Welch read online that the restaurant was harboring young children as sex slaves as part of a child-abuse ring led by Hillary Clinton.  Alarmed, he drove six hours from his home to see the situation for himself. Little did he know, he’d been reading fake news stories about the restaurant.

On a wider scale, many people believe that fake news impacted the outcome of the U.S. election. In November, Buzzfeed said it discovered more than 100 pro-Trump fake news sites operated by Macedonian teenagers as for-profit click-farms.

What Is Fake News?

Fake news, by definition, is a completely made-up story, manipulated to resemble a credible news report and to attract maximum attention and advertising revenue.

Given the power of the internet, and the fact that an estimated 62 percent of the U.S. population now gets the majority of their news from social media, fake news spreads wide and is hard to stop.

Elizabeth Carmichael, owner, Carmichael Associates LLC

“Fake news spreads faster than ever,” said Elizabeth Carmichael, owner of Carmichael Associates LLC, a firm that provides compliance and risk management services to educational institutions. “The authors make stories sensational to get as many clicks as possible by getting people to forward them and retweet them. The fact that many of these fake news sources are anonymous, and often passed on by millions of people, means it’s extremely difficult to stop or prosecute offenders.”

Despite Facebook’s plan to flag false news stories by using fact checkers, there’s still a long way to go to eliminate the problem altogether.

William Atak, CEO of SafeOnNet, an insurer specializing in online reputational risk, said the potential for reputational harm increased significantly in recent years. Along with it, the potential for millions in lost profits.

“Fake news has always existed. Only now, the perpetrators have the tools and knowledge to create stories at just the right moment and exploit social media and its algorithms,” he said.

Nir Kossovsky, CEO of Steel City Re, whose firm specializes in reputation insurance for publicly traded companies, said that fake news has the ability to undermine a company’s business model and the credibility of its leadership. Worse, it can impact any organizations it is associated with.

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“The specter of consequences arising from this post-fact type of communication can be far-reaching,” he said.

In the case of Pizzagate, Carmichael said, the restaurant’s owners faced not only reputational damage, but also the physical and psychological impact on its staff.

“The most worrying thing yet is that this has the potential to happen to almost any business in the world,” she said.

Pre-Emptive Strategy

In most circumstances where reputational damage has already occurred, a company would assess its losses and then take action, said Kossovsky. With fake news, however, he said, firms need to be proactive in dealing with the damaging misinformation that impairs their value as investors dump stock or threaten to sue directors for their actions.

“The general rule is lay low, shut up and say nothing until you have figured out what’s going on,” he said. But fake news can spread so rapidly that companies need to assess the potential consequences in advance.

Kossovsky said it is important to get all stakeholders on board from the outset, including investor relations, marketing and risk managers.

“Humans by their very nature tend to latch onto the first piece of information they find. Then it’s up to you to convince them otherwise,” he said.

“Therefore it’s key to take a position so that when fake news is circulated, stakeholders either don’t believe it or don’t pay any attention.”

Atak said that companies need to keep a watchful eye on the internet; act swiftly to communicate with customers, staff, boards of directors and investors; and utilize newsletters and social media.

“We have witnessed countless examples of companies that spent more than 25 years establishing a good reputation, only to see it ruined in an instant,” he said.

“The most worrying thing yet is that this has the potential to happen to almost any business in the world.” — Elizabeth Carmichael, owner, Carmichael Associates LLC

Carmichael said that denial is often the worst course of action once fake news is out. A better strategy is to put out an even bigger story to counter it.

She added that a company should include crisis communications in its disaster recovery or emergency response plan(s) and, once targeted, engage its communications team.

“That might be anything from putting out a disclaimer or a news story on their web page to getting the legitimate press to discredit the original fake news story,” she said.

“The big problem, however, is that once the fake news story has been banned or removed from one platform it quickly moves on to another.”

Reputation Insurance

Despite the viral nature of fake news, Kossovsky said, companies can take out insurance to cover themselves against reputational damage and losses to go alongside their risk mitigation strategy.

Nir Kossovsky, CEO, Steel City Re

“The whole point of the risk management process is firstly to pre-emptively mitigate against the impact of an assault of post-fact communication, and secondly to create a loss-absorption strategy to deal with the temporary panic that might arise.”

Carmichael added that while some insurers also offer crisis communications support, blanket specialized coverage for reputation risks is some way off.

“The best defense is to have good, well-monitored policies and procedures in the organization so the company can readily demonstrate with its own data the falsity of the story,” she said.

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A worrying recent development witnessed by Atak is the rise of criminal gangs that create fake news solely for blackmail purposes.

“It is easy to cover your tracks online and the authorities are not yet capable, nor do they have the tools, to fight this new type of digital crime,” he said.

In order to stem the flow of fake news, Kossovsky believes that large corporations need to partner with the media to develop a market-based solution.

“Social media firms have the technology to vet a lot of this content, but they can only attack pieces of information at one time,” he said.

“Having an industry-wide solution in the form of a panel that sets the standard for the quality of news would go much further towards tackling the problem.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance

The Profession

Curt Gross

This director of risk management sees cyber, IP and reputation risks as evolving threats, but more formal education may make emerging risk professionals better prepared.
By: | June 1, 2018 • 4 min read

R&I: What was your first job?

My first non-professional job was working at Burger King in high school. I learned some valuable life lessons there.

R&I: How did you come to work in risk management?

After taking some accounting classes in high school, I originally thought I wanted to be an accountant. After working on a few Widgets Inc. projects in college, I figured out that wasn’t what I really wanted to do. Risk management found me. The rest is history. Looking back, I am pleased with how things worked out.

R&I: What is the risk management community doing right?

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I think we do a nice job on post graduate education. I think the ARM and CPCU designations give credibility to the profession. Plus, formal college risk management degrees are becoming more popular these days. I know The University of Akron just launched a new risk management bachelor’s program in the fall of 2017 within the business school.

R&I: What could the risk management community be doing a better job of?

I think we could do a better job with streamlining certificates of insurance or, better yet, evaluating if they are even necessary. It just seems to me that there is a significant amount of time and expense around generating certificates. There has to be a more efficient way.

R&I: What was the best location and year for the RIMS conference and why?

Selfishly, I prefer a destination with a direct flight when possible. RIMS does a nice job of selecting various locations throughout the country. It is a big job to successfully pull off a conference of that size.

Curt Gross, Director of Risk Management, Parker Hannifin Corp.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

Definitely the change in nontraditional property & casualty exposures such as intellectual property and reputational risk. Those exposures existed way back when but in different ways. As computer networks become more and more connected and news travels at a more rapid pace, it just amplifies these types of exposures. Sometimes we have to think like the perpetrator, which can be difficult to do.

R&I: What emerging commercial risk most concerns you?

I hate to sound cliché — it’s quite the buzz these days — but I would have to say cyber. It’s such a complex risk involving nontraditional players and motives. Definitely a challenging exposure to get your arms around. Unfortunately, I don’t think we’ll really know the true exposure until there is more claim development.

R&I: What insurance carrier do you have the highest opinion of?

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Our captive insurance company. I’ve been fortunate to work for several companies with a captive, each one with a different operating objective. I view a captive as an essential tool for a successful risk management program.

R&I: Who is your mentor and why?

I can’t point to just one. I have and continue to be lucky to work for really good managers throughout my career. Each one has taken the time and interest to develop me as a professional. I certainly haven’t arrived yet and welcome feedback to continue to try to be the best I can be every day.

R&I: What have you accomplished that you are proudest of?

I would like to think I have and continue to bring meaningful value to my company. However, I would have to say my family is my proudest accomplishment.

R&I: What is your favorite book or movie?

Favorite movie is definitely “Good Will Hunting.”

R&I: What’s the best restaurant you’ve ever eaten at?

Tough question to narrow down. If my wife ran a restaurant, it would be hers. We try to have dinner as a family as much as possible. If I had to pick one restaurant though, I would say Fire Food & Drink in Cleveland, Ohio. Chef Katz is a culinary genius.

R&I: What is the most unusual/interesting place you have ever visited?

The Grand Canyon. It is just so vast. A close second is Stonehenge.

R&I: What is the riskiest activity you ever engaged in?

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A few, actually. Up until a few years ago, I owned a sport bike (motorcycle). Of course, I wore the proper gear, took a safety course and read a motorcycle safety book. Also, I have taken a few laps in a NASCAR [race car] around Daytona International Speedway at 180 mph. Most recently, trying to ride my daughter’s skateboard.

R&I: If the world has a modern hero, who is it and why?

The Dalai Lama. A world full of compassion, tolerance and patience and free of discrimination, racism and violence, while perhaps idealistic, sounds like a wonderful place to me.

R&I: What about this work do you find the most fulfilling or rewarding?

I really enjoy the company I work for and my role, because I get the opportunity to work with various functions. For example, while mostly finance, I get to interact with legal, human resources, employee health and safety, to name a few.

R&I: What do your friends and family think you do?

I asked my son. He said, “Risk management and insurance.” (He’s had the benefit of bring-your-kid-to-work day.)

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]