Reputational Risk

Social Media Has Doubled the Cost of Reputational Blows

A new study by Aon and Pentland Analytics shows the adverse affects social media has had on reputational threats, doubling the cost of a incident and placing the company in the global spotlight.
By: | September 28, 2018 • 4 min read

In the aftermath of a reputational crisis, most companies suffer a noticeable drop in stock value. A new study offers evidence that company response has a direct bearing on whether that initial dip has a lasting impact on shareholder value.

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Aon collaborated with Dr. Deborah Pretty of Pentland Analytics for the “2018 Reputation Risk in the Cyber Age Report.” The study looked at 125 reputation events over the last decade, measuring the impact on shareholder value for a year after the event.

The 2018 report builds on prior reputation studies published in 1993 and 2000. The biggest takeaway from the latest work is that since the introduction of social media, the impact of reputation events on stock prices has doubled — regardless of company size.

It’s also worth noting the strength of a company’s reputation prior to an event did little to insulate it against the loss of value. This suggests that while building up a solid reputation is obviously important, it isn’t enough in the face of a crisis to ensure an effective recovery. That said, companies that invested in corporate social responsibility did appear to enjoy a halo effect.

“The perception is these are just good guys who something bad has happened to,” said Randy Nornes, enterprise client leader, Aon.

Why the Galaxy Note7 Crisis Matters

The report included case studies illustrating the impact of a strong response vs. an inadequate response.

After Volkswagen’s vehicle emissions scandal, for example, estimates of direct costs, customer compensation and environmental repayments exceeded $20 billion. A year later, the company’s loss in value is also more than $20 billion — approximately 25 percent of the company’s pre-crisis value.

Randy Nornes, enterprise client leader, Aon

Compare that to the Samsung Galaxy Note7 crisis when phones began to spontaneously combust. This led to a recall of not only the original product but also the faulty replacement units. A year later, the company’s shareholder value is up by $50 billion.

The difference: Samsung sprang into action. It halted production of the Galaxy Note7 and announced a full global recall. The company was transparent, remaining open about the design flaw in the original batteries and the manufacturing defect in the replacements.

The company incurred significant cost to address the problem, and took ownership of the environmental implications of the wasted product, minimizing the impact by recycling or reusing materials unaffected by the previous problems.

“If you look at their behavior,” said Nornes, “they took it seriously. They bit the bullet from a cost standpoint, they took responsibility, they did the right things. They may have made some mistakes, but they were on the right trajectory.

“They’ve actually gained value, and the perception of them as a brand has grown.”

Fast and Focused Response

Nornes said one of the top takeaways of the report is that, in the age of social media, companies must respond to adverse events faster than ever before, swiftly and decisively, and on a global level.

Information is able to span the world in the bat of an eyelash; the public has come to expect corporate responsiveness will move at the same speed. Public statements a day or a few days after the fact are perceived as foot-dragging.

“The #1 lesson learned is that you have to respond instantly — it’s got to be global, it’s got to be one message, one focused response,” said Nornes.

Having a crisis plan in place is essential, he said. And it’s important to remember you don’t have to foresee every possible event that could befall the company. Many of the elements of a crisis plan are likely to apply to other situations.

“The #1 lesson learned is that you have to respond instantly — it’s got to be global, it’s got to be one message, one focused response.” — Randy Nornes, enterprise client leader, Aon

“This doesn’t require a huge effort,” he added, “just some purposeful organization, someone has to say ‘This is really important — what does it mean to us?’ ”

Key decisions include who should be the company spokesperson and what the lines of communications should look like between the legal team, the communications team and that spokesperson.

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A unified front is essential, said Nornes, and risk managers are in an ideal position to take the lead: “A risk manager could actually serve as a catalyst to have this conversation internally around what are the reputation events we could possibly face, and create a cross functional team to develop a response [plan].”

Risk managers bring additional value to the discussion, because they’re most familiar with the services afforded by their existing insurance programs, as there are often embedded elements of crisis response or event response, which include access to professional providers.

“A cyber policy might have that, a D&O policy might have that … understanding and integrating the things you already have access to into the [response] plan would be key.”

Too often, said Nornes, companies don’t put a crisis plan in place until the company itself has had a problem. Taking a more proactive approach is the best way to ensure the company can not only survive but also potentially thrive in the wake of a crisis.

“When you step up into the spotlight and you perform well, you show yourself as a leader and a strong team,” said Nornes. “That’s what people are investing in. When you step up into the spotlight and you stumble, people say, ‘what else are they not up to the task for?’ ” &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Scenario

A Recall Nightmare: Food Product Contamination Kills Three Unborn Children

A failure to purchase product contamination insurance results in a crushing blow, not just in dollars but in lives.
By: | October 15, 2018 • 9 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

PART ONE: THE HEAT IS ON

Reilly Sheehan, the Bethlehem, Pa., plant manager for Shamrock Foods, looks up in annoyance when he hears a tap on his office window.

Reilly has nothing against him, but seeing the face of his assistant plant operator Peter Soto right then is just a case of bad timing.

Sheehan, whose company manufactures ice cream treats for convenience stores and ice cream trucks, just got through digesting an email from his CFO, pushing for more cost cutting, when Soto knocked.

Sheehan gestures impatiently, and Soto steps in with a degree of caution.

“What?” Sheehan says.

“I’m not sure how much of an issue this will be, but I just got some safety reports back and we got a positive swipe for Listeria in one of the Market Streetside refrigeration units.”

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Sheehan gestures again, and Soto shuts the office door.

“How much of a positive?” Sheehan says more quietly.

Soto shrugs.

“I mean it’s not a big hit and that’s the only place we saw it, so, hard to know what to make of it.”

Sheehan looks out to the production floor, more as a way to focus his thoughts than for any other reason.

Sheehan is jammed. It’s April, the time of year when Shamrock begins to ramp up production for the summer season. Shamrock, which operates three plants in the Middle Atlantic, is holding its own at around $240 million in annual sales.

But the pressure is building on Sheehan. In previous cost-cutting measures, Shamrock cut risk management and safety staff.

Now there is this email from the CFO and a possible safety issue. Not much time to think; too much going on.

Sheehan takes just another moment to deliberate: It’s not a heavy hit, and Shamrock hasn’t had a product recall in more than 15 years.

“Okay, thanks for letting me know,” Sheehan says to Soto.

“Do another swipe next week and tell me what you pick up. I bet you twenty bucks there’s nothing in the product. That swipe was nowhere near the production line.”

Soto departs, closing the office door gingerly.

Then Sheehan lingers over his keyboard. He waits. So much pressure; what to do?

“Very well then,” he says to himself, and gets to work crafting an email.

His subject line to the chief risk officer and the company vice president: “Possible safety issue: Positive test for Listeria in one of the refrigeration units.”

That night, Sheehan can’t sleep. Part of Shamrock’s cost-cutting meant that Sheehan has responsibility for environmental, health and safety in addition to his operations responsibilities.

Every possible thing that could bring harmful bacteria into the plant runs through his mind.

Trucks carrying raw eggs, milk and sugar into the plant. The hoses used to shoot the main ingredients into Shamrock’s metal storage vats. On and on it goes…

In his mind’s eye, Sheehan can picture the inside of a refrigeration unit. Ice cream is chilled, never really frozen. He can almost feel the dank chill. Salmonella and Listeria love that kind of environment.

Sheehan tosses and turns. Then another thought occurs to him. He recalls a conversation, just one question at a meeting really, when one of the departed risk management staff brought up the issue of contaminated product insurance.

Sheehan’s memory is hazy, stress shortened, but he can’t remember it being mentioned again. He pushes his memory again, but nothing.

“I don’t need this,” he says to himself through clenched teeth. He punches up his pillow in an effort to find a path to sleep.

PART TWO: STRICKEN FAMILIES

“Toot toot, tuuuuurrrrreeeeeeeeettt!”

The whistles of the three lifeguards at the Bradford Community Pool in Allentown, Pa., go off in unison, two staccato notes, then a dip in pitch, then ratcheting back up together.

For Cheryl Brick, 34, the mother of two and six-months pregnant with a third, that signal for the kids to clear the pool for the adult swim is just part of a typical summer day. Right on cue, her son Henry, 8, and his sister Siobhan, 5, come running back to where she’s set up the family pool camp.

Henry, wet and shivering and reaching for a towel, eyes that big bag.

“Mom, can I?”

And Cheryl knows exactly where he’s going.

“Yes. But this time, can you please bring your mother a mint-chip ice cream bar along with whatever you get for you and Siobhan?”

Henry grabs the money, drops his towel and tears off; Siobhan drops hers just as quickly, not wanting to be left behind.

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“Wait for me!” Siobhan yells as Henry sprints for the ice cream truck parked just outside of the pool entrance.

It’s the dead of night, 3 am, two weeks later when Cheryl, slumbering deeply beside her husband Danny, is pulled from her rest by the sound of Siobhan crying in their bedroom doorway.

“Mom, dad!” says Henry, who is standing, pale and stricken, in the hallway behind Siobhan.

“What?” says Danny, sitting up in bed, but Cheryl’s pregnancy sharpened sense of smell knows the answer.

Siobhan, wailing and shivering, has soiled her pajamas, the victim of a severe case of diarrhea.

“I just barfed is what,” says Henry, who has to turn and run right back to the bathroom.

Cheryl steps out of bed to help Siobhan, but the room spins as she does so.

“Oh God,” she says, feeling the impact of her own attack of nausea.

A quick, grim cleanup and the entire family is off to a walk-up urgent care center.

A bolt of fear runs through Cheryl as the nurse gives her the horrible news.

“Listeriosis,” says the nurse. Sickening for children and adults but potentially fatal for the weak, especially the unborn.

And very sadly, Cheryl loses her third child. Two other mothers in the Middle Atlantic suffer the same fate and dozens more are sickened.

Product recall notices from state regulators and the FDA go out immediately.

Ice cream bars and sandwiches disappear from store coolers and vending machines on corporate campuses. The tinkly sound of “Pop Goes the Weasel” emanating from mobile ice cream vendor trucks falls silent.

Notices of intent to sue hit every link in the supply chain, from dairy cooperatives in New York State to the corporate offices of grocery store chains in Atlanta, Philadelphia and Baltimore.

The three major contract manufacturers that make ice cream bars distributed in the eight states where residents were sickened are shut down, pending a further investigation.

FDA inspectors eventually tie the outbreak to Shamrock.

Evidence exists that a good faith effort was underway internally to determine if any of Shamrock’s products were contaminated. Shamrock had still not produced a positive hit on any of its products when the summer tragedy struck. They just weren’t looking in the right place.

PART THREE: AN INSURANCE TANGLE

Banking on rock-solid relationships with its carrier and brokers, Shamrock, through its attorneys, is able to salvage indemnification on its general liability policy that affords it $20 million to defray the business losses of its retail customers.

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But that one comment from a risk manager that went unheeded many months ago comes back to haunt the company.

All three of Shamrock’s plants were shuttered from August 2017 until March 2018, until the source of the contamination could be run down and the federal and state inspectors were assured the company put into place the necessary protocols to avoid a repeat of the disaster that killed 3 unborn children and sickened dozens more.

Shamrock carried no contaminated product coverage, which is known as product recall coverage outside of the food business. The production shutdown of all three of its plants cost Shamrock $120 million. As a result of the shutdown, Shamrock also lost customers.

The $20 million payout from Shamrock’s general liability policy is welcome and was well-earned by a good history with its carrier and brokers. Without the backstop of contaminated products insurance, though, Shamrock blew a hole in its bottom line that forces the company to change, perhaps forever, the way it does business.

Management has a gun to its head. Two of Shamrock’s plants, including Bethlehem, are permanently shuttered, as the company shrinks in an effort to stave off bankruptcy.

Reilly Sheehan is among those terminated. In the end, he was the wrong person in the wrong place at the wrong time.

Burdened by the guilt, rational or not, over the fatalities and the horrendous damage to Shamrock’s business. Reilly Sheehan is a broken man. Leaning on the compassion of a cousin, he takes a job as a maintenance worker at the Bethlehem sewage treatment plant.

“Maybe I can keep this place clean,” he mutters to himself one night, as he swabs a sewage overflow with a mop in the early morning hours of a dark, cold February.

Bar-Lessons-Learned---Partner's-Content-V1b

Risk & Insurance® partnered with Swiss Re Corporate Solutions to produce this scenario. Below are their recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance.®.

Shamrock Food’s story is not an isolated incident. Contaminations happen, and when they do they can cause a domino effect of loss and disruption for vendors and suppliers. Without Product Recall Insurance, Shamrock sustained large monetary losses, lost customers and ultimately two of their facilities. While the company’s liability coverage helped with the business losses of their retail customers, the lack of Product Recall and Contamination Insurance left them exposed to a litany of risks.

Risk Managers in the Food & Beverage industry should consider Product Recall Insurance because it can protect your company from:

  • Accidental contamination
  • Malicious product tampering
  • Government recall
  • Product extortion
  • Adverse publicity
  • Intentionally impaired ingredients
  • Product refusal
  • First and third party recall costs

Ultimately, choosing the right partner is key. Finding an insurer who offers comprehensive coverage and claims support will be of the utmost importance should disaster strike. Not only is cover needed to provide balance sheet protection for lost revenues, extra expense, cleaning, disposal, storage and replacing the contaminated products, but coverage should go even further in providing the following additional services:

  • Pre-incident risk mitigation advocacy
  • Incident investigation
  • Brand rehabilitation
  • Third party advisory services

A strong contamination insurance program can fill gaps between other P&C lines, but more importantly it can provide needed risk management resources when companies need them most: during a crisis.



Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]