Why We Need to Trust Risk Management — Not Marketing — to Handle Blame for Reputational Harm

By: | July 31, 2019

Nir Kossovsky is the Chief Executive Officer of Steel City Re. He has been developing solutions for measuring, managing, monetizing, and transferring risks to intangible assets since 1997. He is also a published author, and can be reached at [email protected]

Reputational risk carries legal jeopardy. And board members are sitting ducks, unprotected and vulnerable to attacks that could damage them personally and destroy their future earning potential.

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In the past 12 months, 25 complaints were filed or amended in federal court that alleged, at least in part, board-level responsibility in connection with corporate reputational damage. Only six such cases were filed in the preceding year.

Companies do not seem to fully understand the nature of this existential risk. On one hand, nine out of 10 S&P 500 companies cite reputation as a material risk in public filings, but then most of them put their management in the hands of marketing departments.

This marketing-based approach sets off to the side operations and governance and relies too heavily on the aspirational “image” marketers seek to project. As a result, ESG scores (environment, social, governance) bolstered by fuzzy, feel-good corporate social responsibility campaigns deceptively report measures of reputational value and resilience.

It’s as if a company located near the Gulf of Mexico referred in its public filings the material risk of hurricane-related disruptions, created a committee of its board to oversee and mitigate that risk, and then handed operational responsibility to marketing and announced a large investment in global climate change research.

Customers and employees might amp up the company’s ESG scores for a while, but when a hurricane hits and financial losses mount, are the disappointed customers, vendors, creditors, investors and regulators going to feel good about the company’s social investments — or are they going to think they amounted to no more than corporate puffery, designed to create an image but never really intended to mitigate the business and financial risks?

Where Marketing Stands

Marketing is not risk management.

Marketers may know what they want a brand to stand for, but they have little, if any, impact on its operational undergirding.

Brand licensing further creates a disconnect between the operational and governance foundations of a brand’s values and its marketing taglines and graphical images, resulting in many brands making promises to customers the actual business behind the license can’t possibly deliver.

Reputation value is based on expectations.

A reputational crisis occurs when stakeholders who are disappointed or angry at a company’s failure to meet those expectations cause economic disruptions, such as raising the cost of credit, buying a competitor’s products or initiating a regulatory crackdown.

Who those stakeholders are and what they expect may change over time, but marketing sizzle is never going to take the place of operational strength and good governance.

Clearly, activist investors and plaintiffs’ lawyers know the difference. And they are making a statement with their actions: Companies and their board members are now being held accountable.

Practice Versus Aspiration 

Reputational resilience requires companies to have a simple and credible message that clearly and preemptively communicates their use of best operational and governance practices. Emphasis here is on practices, not aspirations.

Marketing is not reputation risk management.

Credibility requires authenticity. Aspirational marketing messages can actually undermine credibility. Reputational risk should be placed under the same umbrella as every other type of enterprise-wide risk — under risk managers who already have access to every aspect of corporate operations and the internal clout to bring together resources from disparate departments within the company.

Risk managers will also understand exactly what companies are missing from their risk management arsenal: The use of credible, objective, disinterested third parties who can vet corporate claims and validate their authenticity.

They are already familiar with the types of insurance products that do just that and their historical importance as an expressive tool that bolsters corporate reputations and stakeholder confidence by its usage alone.

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As with any enterprise-wide risk, no matter what systems or protection companies have in place, reputational risk will always be there.

Cultural norms change, political winds may shift or individual rogues within the company may act badly.

But what stakeholders want to know — and what directors may have to answer for under oath — is whether the company did everything reasonably expected of them to mitigate the risk. Insurance products, undergirded by solid underwriting, can send that message for reputation as they have done for other types of risk throughout history.

Now more than ever, with political winds turning against the corporate world and social media personalizing attacks and shining a spotlight on directors and officers, that type of protection and deterrence has become a necessity. &

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The R&I Editorial Team can be reached at [email protected]