Reputational Risk … at Risk

Corporate Citizenship Could Offer Tarnished Companies the Best Mitigation Strategy

Recent corporate crises have demonstrated that a company’s reputation, that may have taken years to build, can be destroyed in seconds. An inappropriate act, poorly-timed financial disclosure, product recall or a mishandled response all have the power to instantly tarnish a company’s respected reputation.

The concept of “reputational risk” barely existed in the 1990s. Now, it is part of the everyday business jargon.

The top three triggers of corporate reputational risk are:

• Financial irregularities;
• Unethical behavior; and
• Executive misconduct.

Barely a day goes by without some company facing an assault from one or more of the reputational risk issues listed above. The convergence of globalization, instantaneous news and online citizen journalism has magnified any corporate hiccup. We have come to learn that no company is immune to scrutiny. In today’s age of global transparency, what happens within a company no longer stays inside the company.

No One Is Immune

The success and sustainability of a business is dependent upon the firm’s reputation. Recent research substantiates the following:

• 33 percent of the global Fortune 500 — the world’s largest companies — have experienced reputational deterioration.
• Media coverage of reputation has increased by more than 100 percent in the past five years.
• 63 percent of a company’s market value is attributable to reputation.
• Nearly 90 percent of business executives see a growing trend of reputational damage.
• 66 percent of business executives believe that it is harder to recover from reputational failure than it is to build and maintain a firm’s reputation.

No industry is immune. Reputational loss can strike any company or organization. The accelerated growth in the internet, media scrutiny and public distrust make managing corporate reputation a challenging proposition.

We have seen first hand a number of highly regarded insurance and risk management firms struggling to turn the corner from reputational damage. The process is arduous and painful. According to global business executives, reputational recovery takes nearly four years and often has a devastating impact on corporate performance.

Abraham Lincoln once said, “Reputation is like fine china. Once it is broken, it is very hard to repair.”

Restoring a Broken Reputation

Restoring a company’s reputation is a monumental — but not an impossible — task. The most prudent road to recovery surrounds a commitment to becoming a better corporate citizen.

Many companies have come to realize that corporate responsibility and citizenship is imperative to restoring and enhancing image and brand identity. Those firms who are guided by a higher sense of social responsibility generally survive reputational damage better than those who have not made responsibility and citizenship a priority.

There is a correlation between corporate profitability and a reputation for trustworthiness and responsibility. Customers that trust a company’s reputation will pay more for a product or service, take a chance on a company’s new products, and be more loyal to the company. Consumers are more forgiving of occasional mistakes if a company has a demonstrated history of integrity.

As we are in the business of risk management, it makes sense that we make corporate responsibility and citizenship a top priority. The payoff will be huge as measured by enhanced industry perception, employee morale and impact to the bottom line. Corporate citizenship may well be the best mitigation strategy for reputational risk.

Topics Risk Management