Top 4 Issues Driving Reputation Risk Solutions
As reputation tornadoes like #MeToo, #TakeAKnee, and #DumpNRA rip through society, it might appear that reputation risk is the peril of negative social media. But we’re seeing things differently. Our clients, most of whom are seeking tornado shelters for what can be most concisely described as the peril of economic damage from angry disappointed stakeholders, want reputation risk management, financing and transfer solutions for these four top issues:
- Compliance — Many of the world’s largest and brand-aware companies took to heart the Economists Intelligence Unit’s 2005 declaration that reputation was the “risk of risks.” Unable to find adequate risk transfer solutions at the time, they financed the risk through captives. Those companies, and the many others that followed in their footsteps, are now responding to regulatory pressures to upgrade their legacy underwriting and pricing support.
- Collateral Damage — Socially-driven reputation “tornadoes” evidenced by events named Weinstein, Wynn, ABC/Barr, Starbucks, and NRA have raised awareness that reputation risk, like fraud risk, is both complex and likely. Its three interrelated issues—expectations, experiences, and media amplification—literally define the elements of a robust enterprise risk management strategy. And its prevalence underscores the point that no person, company, institution or even country is immune.
- Termination — Boards and executives are recognizing the going-forward effects on their personal careers after run-ins with activists. When heading Salomon Brothers, Warren Buffett famously warned his employees that he would be ruthless if any lost a shred of his company’s reputation.
- Capital Costs — In the perennial quest for lower capital costs, an ERM and risk governance solution to what is now a decade-long top board concern has an ROI in terms of lower capital costs. How so? For more than a decade, reputation risk has been one of the highest ranked board-level concerns. 9/10 companies dutifully disclose reputation as a source of both value and as a risk in their 10K filings. Given its relative scarcity, a validated ERM solution to reputation risk is a simple, convincing and completely credible story for credit raters and bond buyers.
There’s now one more issue: mitigating D&O liability. (See this related post on the Harvard Law Blog)
Ever since shareholders in 2011 sued Buffett and Berkshire Hathaway’s Board for lax oversight and the “damage they caused to the company’s reputation,” litigators have been poking around the edges. With nearly every company disclosing reputation risk in its regulatory filings, the pitch to a jury is straightforward: The Board knew there’s a risk, the Board disclosed there’s a risk, but the Board didn’t define it, describe how exactly it could hurt the firm or what exactly the Board was doing to oversee its management. That’s lax oversight.
Reputation is soft power, and the leadership team that wields it best will sell more, faster, and at a higher price; will obtain labor, vendor and supplier services, and capital at a lower cost, and hold both regulators and activists at bay.
Reputation is soft power, and the leadership team that wields it best will sell more, faster, and at a higher price; will obtain labor, vendor and supplier services, and capital at a lower cost, and hold both regulators and activists at bay. It is unquestionably valuable, and threat to its value is still the “risk of risks.” It is now also measurable and more easily manageable, and its risk is financeable and insurable. Which means that irrespective of your strategic issues, there are practical measures that can limit or deter altogether the reputational tornadoes wreaking havoc in the corporate and financial sectors.