REPUTATION AT Risk
ACE EUROPEAN RISK BRIEFING 2013
REPUTATION.
THE HARDEST
RISK TO MANAGE?
Companies have always faced risks that could damage their reputation.
But those risks have never been as pervasive and immediate as
they are now. A quick glance through recent newspaper headlines
underlines the extent of the challenge. Financial institutions and
internet retailers have faced scrutiny and censure for their tax
structures; supermarkets and food suppliers have faced a crisis over
horsemeat contamination in beef products; and fashion retailers have
been held to account following the tragic collapse of a garments
factory in Savar, Bangladesh.
There is no question that reputation is critical to
the long-term health of any company and that
it is now a key issue for every boardroom. Four
out of five executives questioned for this report
regard their reputation as their company’s most
significant asset. However, despite a widespread
understanding of the importance of reputation,
one of the major challenges that executives
responding to our survey identify is “getting
their heads around” the unique and often
intangible nature of reputational risk. Indeed,
an overwhelming nine in ten of our respondents
say that it is the most difficult risk category
to manage.
Some clear pointers emerge from our report as
to the drivers of the changing reputational risk
environment. One of these is the globalisation
of business. Today, complex supply chains,
expansion into new markets and the challenge of
maintaining consistent standards across multiple
borders all rank among the top factors cited by
our respondents. The other most noticeable theme
is regulation. Post-crisis, compliance has taken
on a new importance for many companies, and
02
businesses of all shapes and sizes are keenly aware
of its relationship to their corporate reputation.
“Insurance is not a panacea
for the fast-evolving
world of reputational risk.
Nevertheless, I believe there
is much that insurers and
brokers can do collectively
to help their clients.
”
Drilling down further, it is clear that damage to
customer relationships and the financial impact of
reputational damage (for example, loss of earnings
and the impact on share price) are the areas
that executives worry about most. There are also
three areas where companies judge themselves
to be weakest at reputational risk management:
measuring external perceptions of the company,
quantifying the financial impact of reputational risk
and restoring reputation after an incident. Fewer
than one-third of companies believe they are very
REPUTATION AT RISK
effective in each of these areas. There are
no magic solutions. Nevertheless, at ACE, we
believe that there are effective steps that can
and should be taken.
In our view, companies can do more to evaluate
and systematically track the perceptions of their
main external stakeholders – whether these
are customers, the media, pressure groups or
regulators – helping them to gain valuable insight
into potential trends and problems. Meanwhile,
our own experience worldwide tells us that better
preparation and more regular testing of crisis
response plans allows for a faster response
when disaster does strike – a vital component
of restoring reputation in the age of social
media. Finally, our research does not identify
any easy solution for quantifying the financial
impact of reputational risk, but by applying a
‘reputational lens’ to a range of more ‘traditional
risks’, companies can perhaps better evaluate the
reputational consequences of action or inaction.
Andrew Kendrick
President
ACE European Group
Insurance is not a panacea for the fast-evolving
world of reputational risk. Nevertheless, we
believe there is much that insurers and brokers
can do collectively to help their clients. This
could include the evolution of new more holistic
insurance solutions that involve the input of crisis
and PR specialists. More generally, it should
involve professional risk engineering to improve
risk management processes and governance. Last
but certainly not least, it might be through helping
clients manage those more ‘traditional risks’ better
to reduce the likelihood of a reputational event
happening in the first place. We hope you find
the research as interesting as we did and we look
forward to working with you to help you understand
and manage this important area of reputational risk.
03
executive
summary
1. Reputation is a company’s
greatest asset – and it is
increasingly at risk.
Four out of five executives believe that reputation is their
company’s most valuable asset. However, they believe they
are facing a rise in the risks associated with reputation – not
least as expectations around corporate behaviour change,
fuelled in part by the recent financial crisis and heightened
public scrutiny of business. In addition, they say the speed at
which reputational threats emerge is increasing. Two-thirds
point to social media as a key factor behind this.
2. Reputational risk is
especially difficult to manage.
Nine out of ten respondents agree that reputational risk
is more difficult to manage than any other risk category.
It can emerge from anywhere within the company or its
supply chain, making it difficult to predict. It is seen as
difficult to quantify and is generally less well understood
than more traditional and more tangible risks. At the
same time, more than two-thirds of companies believe
information and advice about how to manage reputational
risk is hard to find, compounding the sense of uncertainty
and confusion about how best to manage it.
3. Globalisation and
regulation are the biggest
sources of reputational risk.
Our survey respondents are particularly concerned about
two trends that are influencing reputational risk levels.
The first is their expanding global footprint and supply
chain, which accounts for three of the top five concerns.
The second relates to the increasingly dynamic and
challenging regulatory environment, which accounts for the
other two top five worries. With compliance now seen as
a core competence in many industries, failure to manage
regulatory change effectively will inevitably lead to serious
reputational damage.
04
REPUTATION AT RISK
4. Companies must get better
at measuring and managing
external perceptions.
This report shows that only a quarter of companies are
confident about how they evaluate the strength of stakeholder
relationships that form a crucial foundation for reputational
risk management. Just over one in five companies think
they are very effective at measuring external perceptions of
the company. Measurement can be complex and requires
commitment from across the business, but it need not be
impossible. Companies can start by engaging in more frequent
dialogue with stakeholders to understand their views and
monitoring the external environment more systematically
to identify the emerging reputational threats that put their
relationships at risk.
5. Companies may
underestimate the challenges
of crisis management.
Companies feel confident about their ability to handle and
recover from a crisis. Almost four in ten respondents say that
their company is very effective at crisis management, and
32% believe they are very effective at restoring reputation
following a risk event. However, the time that companies have
to respond to a crisis has fallen from weeks and months to
hours and minutes. Today, few companies get a second chance
and our results suggest companies may underestimate the
challenge of dealing with a crisis in “faster than real time”.
6. From an insurance
perspective, two-thirds of
companies feel inadequately
covered for reputational risk.
Many executives interviewed for this report believe that
reputational risk is difficult to insure. At the same time, some
see considerable potential for insurers and brokers to provide
more help. An increasing number now offer practical crisis
management support as part of the insurance product. More
broadly, they have a valuable role to play in helping companies
manage the more “traditional” risks effectively in the first
place, so the risk of reputational damage is reduced. The
insurance market can also help them to apply a “reputational
risk lens” to each of these risks, enabling them to see things
more clearly from the external perspective that is so crucial to
a company’s reputation.
05
EVERYTHING
AT STAKE
The rising importance of
reputational risk
Caught in the headlights
The speed with which reputational risks can
emerge to damage companies is now extraordinary.
In a non-stop, globally connected business world, a
problem can arise in a distant part of the business,
spread virally through social media and escalate
into a full-blown crisis in an instant. Companies
need to be quick and agile to respond.
The increased prevalence of reputational risks
goes hand in hand with a more intense public
scrutiny of company behaviour generally. The rising
importance of corporate sustainability has placed
pressure on companies to demonstrate strong
ethics and changed expectations around how they
are meant to behave.
Companies can no longer ignore the demands
of those who are not shareholders; instead, they
must balance the needs of a broad range of
stakeholders, including the public, their employees
and the communities in which they operate, if they
are to protect their reputation effectively. In the
words of Warren Buffett: “We must continue to
measure every act against not only what is legal,
but also what we would be happy to have written
about it on the front page of a national newspaper.”
One risk manager interviewed for this report believes
that the change in attitudes towards business has
been enormous in the wake of the financial crisis
and, as he puts it, there is a sense that everyone is
scrutinising and watching each other.
Reputational capital
There is no question that reputation is critical
to the long-term health of any company. In fact,
four-fifths of senior executives questioned for
this report regard their reputation as their most
significant asset (see chart 1).
06
A reputational risk event can have severe financial
consequences for the affected company. Negative
media attention, perhaps related to a product
recall or major accident, can quickly lead to lost
sales, which affects liquidity. At the same time,
investors and banks may take fright, withdrawing
access to capital and placing additional strain on
the balance sheet. In the longer term, reputational
risk can cause even greater damage as companies
seek to rebuild brands and restore stakeholder
confidence. Future earning streams are therefore
dependent on a good reputation, which is also a
major source of competitive advantage.
There are many examples that show how quickly
and easily corporate reputations that took
decades to build can be undone by a disaster.
Among the more well-known, experts attribute
Arthur Andersen’s demise in 2002 to irreparable
reputational damage in the wake of bad publicity
relating to the Enron scandal. More recently, BP
sustained significant damage to its reputation in
the wake of the Deepwater Horizon explosion in
the Gulf of Mexico in 2010.
“The increased prevalence of
reputational risks goes hand
in hand with a more intense
public scrutiny of company
behaviour generally.
”
The corollary of this is that that companies with
strong reputations should benefit in terms of share
price performance and customer trust (see the
value of reputation overleaf). A good reputation also
helps companies to deal with future crises because
it creates a reserve of goodwill (often called
“reputational capital” or “reputational equity”) that
can help the business to withstand future shocks.1
Good reputational risk management, therefore,
is not just about responding well to a crisis. It is
about protecting and, where possible, building the
corporate reputation every day.
REPUTATION AT RISK
Chart 1: Please indicate whether you agree with the following
statements:
% who agree or strongly agree
Reputational risk is more difficult to manage
than any other specific risk category
92
Reputation is our company’s most
significant asset
81
We monitor and measure our reputation on
an ongoing basis
77
We find it difficult to quantify the financial
impact of reputational risks on our business
77
Information and advice on managing
reputational risk is difficult to come by
68
We feel inadequately covered for our
reputational risks from an insurance perspective
66
Ultimate responsibility for reputational risk
lies with the CEO/managing director
56
Social media has greatly exacerbated the potential
for reputational risks to affect our company
56
The value of reputation
A company’s reputation forms part of its intangible assets, which
include brand, human capital, goodwill and knowhow. As such, it has
a value as part of the company’s market capitalisation and is an
important reason why companies that, on the face of it, should be
worth similar amounts can differ so widely. Some estimates say that
a company’s reputation for being able to deliver growth, attract top
Damage to existing customer relationships
talent and avoid ethical mishaps can account for up to 70% of the gap
between
book value and its market capitalisations.2
Loss
of earnings
3
Fall in share price/valuation
Reputation also has a significant impact on investor behaviour, which
drives media
valuations.
Negative
coverage Research by Ernst & Young suggests that about
35% of investment decisions are based on factors such as reputation
Ability to form new customer relationships
and image. It can take years, even decades, to develop a company’s
reputation and it can disappear quickly.
Litigation
35
33
29
The impact of trust factors and perceptions on corporate reputation 26
can be seen in the 2011 Edelman Trust Barometer. According
to this
8
Loss of key staff/ability to recruit employees
study, more than half of a company’s stakeholders will believe positive
information about a trusted company after hearing it once or twice.
Only one out of four stakeholders will believe negative information about
the company after hearing it one or two times. The results are very
different, however, when it comes to distrusted companies. Here, 57%
of stakeholders will believe negative information after hearing negative
information about the company once or twice. Just 15% will believe
positive information after hearing the negative information.3
Negative brand perception
Industrial equipment and manufacturing
13.2%
Communications
11.4%
Financial services
11.4%
07
A POORLY
UNDERSTOOD
RISK
A lack of definition
Reputational risk is not a new concept, but it
has no established definition and thinking on the
subject is still evolving. It is, for example, notably
absent from the 2004 framework for enterprise
risk management proposed by the Committee
of Sponsoring Organisations of the Treadway
Commission (COSO). It is also overlooked in the
Basel II international accord for regulating bank
capital, which was also issued in 2004.4
is effective at quantifying the financial impact of
reputational risk.
Experts on reputational risk management
certainly acknowledge that it is difficult to quantify
reputational risk. However, one measure that is
sometimes used is the difference between the
immediate costs of a crisis versus damage to a
firm’s market capitalisation. As a rule of thumb,
in the period following a crisis event, any losses
in shareholder value beyond general market
fluctuation, which cannot be accounted for by
financial costs from the event itself, may be
considered pure reputational losses.5
A lack of common standards or definitions of
reputational risk mean that companies perceive it
in different ways. Many view reputation as a “risk
of risks”. Others do not even classify it as a risk
category, but instead see it as an impact.
“Most things with a high level of risk severity that
affect large organisations can have an impact on
their reputation,” says Julia Graham, Chief Risk
Officer of DLA Piper. “I think that a negative effect
on reputation is a consequence of something going
wrong and therefore a consequence of risk rather
than a risk itself. Businesses take years to build
their reputation and can damage it by single or
repeat actions in a very short space of time.”
Measuring impact is a particular challenge
Is it possible to quantify reputational risk, both
in terms of the severity and likelihood of the risk,
but also in terms of its financial impact? Given the
degree of importance that companies now attach to
this issue, this is an interesting question. The reality
is that the tools and methods required to quantify
reputational risks are still evolving.
Not surprisingly given the complexities outlined
above, risk managers in the survey admit that
they struggle with this issue. For example, only
28% of our respondents believe their company
08
“Reputational risk is the potential
that negative publicity regarding
an institution’s business practices,
whether true or not, will cause a
decline in the customer base, costly
litigation or revenue reductions.
US Federal Reserve, 1995.
”
”
REPUTATION AT RISK
Point of impact
Whether or not companies can find robust tools
to actually quantify the impact of reputational risk,
it is highly instructive to look at the areas where
reputational risk is likely to have the greatest
Reputational risk is more difficult to manage
impact.
Forspecific
companies
in our survey, there are
than
any other
risk category
two coreis areas
of concern.
The issue executives
Reputation
our company’s
most
significant asset
fear most is the potential impact on customer
We
monitor and measure
reputation
relationships.
Over our
half
worry on
about the damage
an ongoing basis
reputational risk would have on their carefully
We find it difficult to quantify the financial
cultivated
existing
relationships,
impact
of reputational
risks
on our business while a third are
worried
about
the
effect
it would have on their
Information and advice on managing
reputational
risk
is
difficult
to
come
by relationships.
ability to form new customer
We feel inadequately covered for our
reputational risks from an insurance perspective
Chris McGloin, Vice President of Risk Management
that customer
relationships
are aexacerbated
fundamental
consideration. “No
Social
media has greatly
the potential
for
reputational
risksyou
to affect
ourthe
company
matter
where
sit in
supply chain, if you are
a global brand, then the face of your brand to the
customer is of paramount importance,” he says.
“Even if you are just a supplier to a customer with
a global brand, then that customer is relying upon
you. If you fail to deliver, you can expect that to
damage the relationship seriously.”
Ultimate responsibility for reputational risk
andwith
Insurance
at Invensys,
lies
the CEO/managing
director agrees
Mr Nornes, Executive Vice President at Aon, notes
that in business to consumer sectors, it can take
a very long time to restore a damaged reputation
and, in some cases, it may never be possible. “If
you’ve lost that connection
with the customer in
92
the consumer space, it’s really hard to rebuild that
81
reputation,” he says.
The other core77
area of concern is doubtless closely
linked, but can77
be separately categorised as
financial damage. Fully 43% of companies worry
68 of earnings from reputational risk
about the loss
and 39% about the impact on the share price (see
66
chart 2). Such
losses could arise for any number
of reasons,
ranging from the loss of customer
56
business as mentioned above, to governments
and regulators
taking a less sympathetic view of
56
a firm’s activities in important markets. In each of
these areas, reputational damage can have a very
real impact on a company’s future performance
and competitive position.
Chart 2: Which of the following potential impacts of reputational risk would cause you greatest
concern as a business?
% respondents
57
Damage to existing customer relationships
43
Loss of earnings
39
Fall in share price/valuation
35
Negative media coverage
33
Ability to form new customer relationships
29
Litigation
26
Negative brand perception
Loss of key staff/ability to recruit employees
8
09
Ability to form new custome
Between US$500m (€385m)
and US$1bn (€775m) 33%
Litigation
Negative brand perception
Loss of key staff/ability to re
Benelux (1)
15.2%
UK
15.4%
Quantification of reputational risk
remains elusive
Switzerland
Although
15.4%
France
most senior executives recognise that15.4%
reputational risk poses a serious potential threat
to their company, quantifying the impact remains
an inexact science. More than three-quarters of
the respondents agree that they find it difficult
to
Southern Europe (3)
Germany
quantify the financial impact of reputational risk15.4%
15.4%
on their business. Interestingly, our research MENA
also (2)
suggests that the ability to quantify this impact 7.8%
varies with size. In particular, once a company
grows and becomes more complex, this becomes
an even more difficult task.
The cost of reputational damage:
% who feel very effective at quantifying the financial impact of
reputational risk
35%
30%
32%
29%
24%
25%
15%
10%
5%
0%
Small companies (US$250m – US$500m)
Mid-sized companies (US$500m – US$1bn)
Large companies (over US$1bn)
Reputational risk events clearly have an impact
that is quantifiable, in part at least. If a company,
say, commits fraud and this is brought to light, its
market value is almost certain to fall as investors
start to question the quality of management and
the risk of further revelations. There may also be
fines to pay, which will also have a direct financial
impact on the value of the company.
Yet
this immediate loss is just one aspect of
80
the broader financial impact caused by the
68% may
70
damage
to reputation. Potential customers
be discouraged from doing business with the
60
company. Investors may be deterred from buying
49%
the
50 company’s shares in the future. Regulators may
30
Moreover, individual risk events that cause
reputational damage can vary widely, and there
is a limited amount of publicly available data on
which to base measurement. The reputational
damage also needs to be placed in context – does
it come after a run of events that have affected
the reputation of the firm; how well did the
company respond to the crisis; and how quickly
was it able to reassure stakeholders that the
underlying problems have been addressed? All of
these factors will affect the extent of the loss.
Industrial equipment and m
These subtleties mean that quantification of
reputational risk will inevitably rely on a number
of assumptions, and that could generate a false
sense of precision, leading companies to rely on
estimations that may ultimately turn out to be
wide of the mark.
Oil and gas
Despite the difficulties of quantifying the impact
of reputational risk, some companies, particularly
those in consumer-facing sectors such as retail
banking or fast-moving consumer goods, are
developing ways of tracking and measuring
reputation itself.
20%
40
10
impose a heavier compliance burden, and suppliers
may be more reluctant to extend favourable credit
terms or even do business with the company.
37%
40%
Media clippings services, which collect mentions
of companies in the press, radio and other
channels, have long been available. Today, however,
the approach is much more sophisticated.
Data analytics tools can track mentions of the
company across traditional and social media, and
use algorithms to identify and track positive and
negative perceptions of the company. This even
allows companies to measure the effect of a
new announcement, such as the launch of a new
product, or compare reputation in two different
markets. By understanding more about how they
are perceived, companies are in a better position
to target resources towards activities that will
improve reputation and scale back those
where damage could potentially be caused.
Communications
Financial services
Engineering and constructio
Travel and transportation
Life sciences
Media and entertainment
Professional services
Retail
Automotive
Utilities
Real estate
Building materials
Healthcare
Concerns about poor emplo
around the world
Heightened focus on fraud a
in foreign market subsidiarie
Difficulty keeping pace with
Difficulty managing product
practices across extended s
Corporate governance failur
financial or reporting irregula
Aggressive tax avoidance/ta
business environment
Increasing stakeholder and m
of business practices
Concerns about failure to pro
High-profile product recall in
Increasing corporate social r
REPUTATION AT RISK
Industrial equipment and manufacturing
13.2%
Communications
11.4%
IDENTIFYING
REPUTATIONAL
RISKs
Financial services
11.4%
Engineering and construction
7.7%
Travel and transportation
6.3%
Life sciences
6.2%
Media and entertainment
6.2%
Oil and gas
6.2%
Professional services
6.3%
Identifying threats
Just under half of the respondents think that they
are very effective at identifying threats to reputation
6.2%
Retail
(see chart 4). The risk experts interviewed for this
6.2%
Automotive
report express some surprise at this, however. They
caution that companies may be being over-confident.
Utilities
6.2%
“Companies
Real
estate
are often very good at identifying 6.2%
well-known risks, or those that have taken place
Building
materials
recently,”
says Anthony Fitzsimmons, Chairman0.5%
of
Reputability. “They are not as good when it comes
0.2%
Healthcare
to the real factors that drive reputational risks, such
as the overall culture of an organisation – how it is
structured, how it sets incentives and how leaders
receive information.”
Nevertheless, our research highlights two external
sources of concern that stand out among our
respondents.
Globalisation of risk
In recent years, many companies in Europe and the
Middle East have expanded their global footprints,
moving activities such as manufacturing to lowcost jurisdictions and seeking out revenue growth
in emerging markets. This process of globalisation
has generally made them more efficient and able to
capture new opportunities, but it has also exposed
them to new risks that could prove extremely
damaging to their reputation.
There are two specific factors related to
globalisation that currently cause companies
particular concern from a reputational perspective.
The first is poor employment conditions around the
world (see chart 3). In recent years, there has been
a steady stream of tragedies and controversies
related to employment conditions in emerging
market factories that supply large multinationals.
Without question the most devastating of these
in recent years, and one which will have been top
of mind during the research, was the May 2013
factory collapse in Savar, Bangladesh, which
claimed the lives of more than 1,100 people. But
others, including a series of suicides at factories
owned by the Taiwanese electronics manufacturer
Foxconn, have also captured global attention.
Chart 3: Which of the following do you consider to be the biggest potential sources of
reputational risk for your company today?
Concerns about poor employment conditions
around the world
Heightened focus on fraud and corruption
in foreign market subsidiaries
41
36
25
Difficulty keeping pace with regulatory changes
Difficulty managing product quality and/or working
practices across extended supply chains
Corporate governance failures leading to
financial or reporting irregularities
Aggressive tax avoidance/tax evasion in the
business environment
Increasing stakeholder and media scrutiny
of business practices
25
22
21
21
21
Concerns about failure to protect customer privacy
20
High-profile product recall incidents
Increasing corporate social responsibility
expectations
Concerns about discrimination in the workplace
Increased attention on executive compensation
16
15
14
11
The second major source of reputational risk relates
to the heightened focus on fraud and corruption
in foreign subsidiaries. There is no country in the
world that Transparency International considers
“very clean” with a perfect score of 100 on its
Corruption Perceptions Index. But as companies
come to rely more and more on emerging markets
for both demand and supply, they inevitably find
themselves operating in countries where fraud
and corruption are more significant problems than
they may be used to in their home markets. The
cleanest ranked emerging market on the Corruption
Perceptions Index is Chile, in 20th place, but among
the countries below 100th place, all are classified as
emerging markets.6
of reputational risk. This is a particular concern
for manufacturing and production companies in
the survey, where only 30% feel very effective
at managing supply chain issues leading to
reputational risk.
Higher concern about this issue in manufacturing
and production companies is understandable given
their increased reliance on external production
partners and suppliers when bringing their products
to market. “Efficiency has been the watchword
for supply chain management in recent years,”
says Mr Nornes. “But managers need to think about
how these cost savings might increase risk-taking
in the system.”
“Compliance has taken on a
new importance for many
companies and they are
more aware of the link to
their reputation.
”
The new regulatory paradigm
Dealing with regulation is part and parcel of doing
business. But as companies continue to globalise,
and as governments seek to impose stricter
controls on corporate behaviour in the wake of
the financial crisis, the perception among many
companies is that the regulatory environment
has become more difficult than ever to manage.
Compliance has taken on a new importance for
many companies and they are more aware of the
link to their reputation.
Dealing with fraud and corruption risks has now
become a major board-level challenge for many
multinationals. Investors, regulators and other
stakeholders are increasingly seeking evidence
from companies that they are managing these
risks appropriately. In some jurisdictions, such
as the UK, company directors can also be held
personally responsible if they are found to have
collaborated or consented to bribery by company
executives in overseas markets.
Managing these challenges across highly complex
global supply chains has become a major source
12
From a reputational risk perspective, compliance
failures send out a message that companies may
be failing to manage the broader risks to the
company. “For most companies, the regulations
that they need to observe should be considered
core to the industry in which they operate,” says
Alex Wittenberg, a Partner at Oliver Wyman and
head of consulting firm’s Global Rick Center. “If
you fail to meet regulatory requirements, then it’s
going to have a disproportionate impact on the
reputation of the firm if you breach or mismanage
a core risk.”
REPUTATION AT RISK
John Harris, Group Head of Insurance and Risk
Management at the Wood Group, echoes this
perspective. “Regulatory problems leave you open
to allegations of wrongdoing and, in the current
environment, the media and the public think the
worst,” he says. “If a company hasn’t complied,
then the public and the media assume it’s
because they’re avoiding compliance. They can’t
say ‘we just didn’t understand’ because they
are supposed to understand regulation, however
complex it is.”
Nevertheless, with more products reaching
more customers, the total number of recalls
globally remains high. This implies that companies
need more robust and well-developed crisis
management plans specifically designed to
enable a quick and effective response to a
product recall issue.
Recall risk
Product recall is also seen as an important source
of reputation risk by one out of five respondents.
This is understandable, given how commonplace
product recalls are, as well as the considerable
damage they can cause to corporate reputations.
The damage is increased because, in many cases,
the product recalls are driven by health and safety
concerns that affect the general public.
To take just one industry affected by product
recalls, automotive manufacturers regularly have to
put in crisis management procedures to mitigate
the reputational damage caused by product
recalls. Toyota received widespread negative
attention when it had to recall 8 million cars due
to a sticky accelerator back in 2009 and 2010.7
Although this was one of the more sizeable events
to hit a single company, product recalls still occur
quite frequently in the industry.
“Product recall is also seen
as an important source of
reputation risk by one out
of five respondents.
”
Recent examples in 2013 include Toyota, Nissan,
Honda and Mazda, recalling 3.4 million vehicles
because of a problem with their airbags.8
Research suggests that improvements in quality
assurance processes, the introduction of advanced
technologies and increased government regulations
will lead to a substantial reduction in crises related
to product quality.9
13
Automotive
24%
25%
Utilities
20%
Real estate
15%
Building materials
10%
Healthcare
5%
0%
Small companies (US$250m – US$500m)
Reputation
by region: A north-south divide
Mid-sized companies (US$500m – US$1bn)
on reputational risk?
Large companies (over US$1bn)
The survey reveals some striking differences
between respondents from the UK, France,
Germany (grouped for the purposes of this
analysis as northern Europe) and Benelux
countries, compared with those from southern
Europe (Italy and Spain) and MENA and Turkey.
Culture and the value of reputation
% respondents who strongly agree that reputation is their company’s
most significant asset
80
68%
70
60
may implement change rapidly or unexpectedly,
which can make it harder for businesses to
anticipate developments and to remain compliant.
By contrast, northern European companies may
have had greater past experience of multinational
business and of managing multiple compliance
programmes, and these issues may be a more
familiar challenge.
For northern European respondents, poor
employment conditions around the world are
viewed as a key source of reputational risk. This
is particularly notable for Benelux executives,
51% of whom worry about this issue. This may
reflect these countries’ greater integration into
global markets, in terms of their supply chains and
trading links.
49%
50
37%
40
40%
30
20
10
0
Benelux
Southern Europe
Northern Europe
MENA
Respondents from all countries think reputation is
an important asset. But this is particularly marked
in the MENA countries, where 68% of executives
strongly agree with this notion. Almost half of
executives from southern Europe also strongly
agree, versus a significantly smaller proportion
(40%) of executives from northern Europe.
This difference most likely comes down to
cultural perceptions. Southern European
60
countries
are also especially sensitive to the risk
52
of damage to customer relationships caused
by
50
reputational
issues.
44
On
40 potential sources of reputational risk facing
36
their companies, the southern European and
MENA
executives in the survey are particularly
30
concerned about keeping up with the pace of
regulatory
change (43% cite it as a top concern).
20
One issue in faster-growing markets such as Turkey
or
10 MENA is the speed of implementation of new
legislation. Emerging market regimes, generally,
When it comes to managing reputational risk, the
northern European executives acknowledge it is a
difficult area, but they tend to be more confident
in their capabilities. For example, half of them
(49%) say their companies are very effective at
identifying threats to reputation, whereas only
34% of southern European and 44% of MENA
executives feel the same degree of confidence.
Similarly, 36% of northern European executives say
they are very effective at managing reputational
risk across the supply chain, but only 26% of
southern European executives feel the same.
Concerns about poor employm
around the world
Heightened focus on fraud an
in foreign market subsidiaries
Difficulty keeping pace with re
Difficulty managing product q
practices across extended sup
Corporate governance failures
financial or reporting irregular
Aggressive tax avoidance/tax
business environment
Increasing stakeholder and me
of business practices
Concerns about failure to prot
High-profile product recall inc
Increasing corporate social re
expectations
Concerns about discriminatio
Increased attention on executi
Interestingly, although they place great value
on reputation, only 32% of southern European
countries strongly agree that they monitor their
reputations on an ongoing basis. This compares
with 40% in northern Europe and as many as 47%
in Benelux who do so.
Overall, it is the northern European countries that
seem to have been more active in developing
strategies to manage reputational risk. It is clear,
however, that companies from all regions have a
long way to go in tackling this issue.
Instilling a culture of reputatio
throughout the company
Identifying threats to reputati
Crisis management
Putting in place governance s
manage reputational risks
Ensuring that reputational ris
across the entire supply chain
Restoring reputation following
0
14
Small companies (US$250m – US$500m)
Mid-sized companies (US$500m – US$1bn)
Large companies (over US$1bn)
Quantifying the financial impa
Measuring external perception
0%
Small companies (US$250m – US$500m)
Mid-sized companies (US$500m – US$1bn)
REPUTATION
AT RISK
Large companies (over US$1bn)
MANAGING
REPUTATIONAL
RISKs
80
68%
70
60
Three complicating factors
50
49%
40%
37% are nearly unanimous that
Risk professionals
they face particular challenges in managing
30
reputational risk. Among our respondents, 92%
20
either agree or strongly agree that reputational risk
is more difficult to manage than any other specific
10
risk category (see chart 1).
40
0
Large companies
with their
high-profile
brands
Benelux
Southern
Europe
feel particularly
vulnerable
in this regard: 52% of
Northern Europe
MENA
executives from companies with over US$1bn in
annual revenues agree strongly that reputational
risk is the most difficult risk to manage, versus
only 36% who felt as strongly on this issue from
small companies (under US$500m).
The larger the brand, the bigger the problem:
% that strongly agree that reputation is the most difficult category of
risk to manage
60
52
50
40
44
36
There are various reasons why reputational risk
is so difficult to manage and our research points
to key factors:
Concerns a
around the
Heightened
in foreign m
Difficulty k
• First, reputational risk can come from a wide
range of different sources – both within the
company and across the broader supply chain,
making it harder to track.
• Second, as noted above, companies also
find it difficult to define, or even categorise,
reputational risk, and there remains
debate among risk managers about whether
it is a distinct risk category or merely an
effect of other risks, and therefore how best
to manage it.
Difficulty m
practices a
Corporate
financial or
Aggressive
business e
Increasing
of business
Concerns a
High-profil
Increasing
expectation
Concerns a
Increased a
• Third, advice about how to manage reputational
risk is scarce – almost 70% agree that
information and advice on managing reputation
risk is difficult to find (see chart 1).
• Fourth, reputational risk is also difficult to
measure. More than three-quarters of the
respondents agree that they find it difficult to
quantify the financial impact of reputational risk
on their business.
The Chief Executive of UK risk management
association AIRMIC summarises this well.
“Organisations are good at being very precise
about the value of their brands,” says Mr Hurrell.
“Reputation is much more difficult because it goes
beyond brand, and there is no balance sheet item
that looks at reputation.”
30
Instilling a
throughou
Identifying
Crisis man
20
Putting in
manage re
Ensuring th
across the
10
Restoring r
0
Quantifying
Small companies (US$250m – US$500m)
Mid-sized companies (US$500m – US$1bn)
Measuring
Large companies (over US$1bn)
15
Healthcare
0.2%
Three steps to more effective reputational
risk management
Concerns about poor employment conditions
Measure
external perceptions
around
the world
Heightened
focus on
fraud
and corruption
Reputational
risk
differs
from other
in foreign market subsidiaries
risk categories
in that it is defined by external perceptions.
Difficulty keeping pace with regulatory changes
A company can take steps to enhance its own
Difficulty managing product quality and/or working
reputation but it does not control it. Reputation
practices across extended supply chains
consistsgovernance
of a combination
Corporate
failures leading of
to perceptions held by
financial
or
reporting
irregularities
external stakeholders, including the public and
Aggressive tax avoidance/tax evasion in the
communities
at large, its customers, suppliers,
business
environment
Increasing
stakeholder
and media scrutiny This reputation does
politicians
and policymakers.
of business practices
not always reflect reality. According to a 2007
Concerns
failure
to protect
customer privacy
article about
in the
Harvard
Business
Review, many
companies
suffer
from
a
“reputation-reality
gap”.
High-profile product recall incidents
This
can
go
either
way
of
course
–
a
company
Increasing corporate social responsibility
expectations
may have a reputation that is either better or
worse than
the underlying
reality.4
Concerns
about discrimination
in the workplace
Increased attention on executive compensation
It is therefore essential for companies to
understand how external stakeholders perceive
them. There are now many best-practice
examples of putting resources into enhancing this
knowledge. Among our respondents, nearly half say
they monitor and measure their reputation on an
ongoing basis. But this is an activity where many
admit they struggle – just 25% of companies say
that they are very effective at measuring external
perceptions of their company (see chart 4).
Monitoring external perceptions of the company
can be a complex and costly business. To do it
properly, companies need to invest in the staff,41
resources and technology that are required. They
36
need to reach into the full range of channels
where
their company may be being
discussed
–
in
both
25
traditional and social media – and they must
25
also take a global approach, tracking external
22 markets, because these
perceptions in different
can vary widely. “Global reputation is very difficult
21
to assess and control,” says Mr Dennery of FERMA.
21
But there are some relatively simple steps that
21
any company can take
to measure things more
systematically. This 20
might include directly testing
the perceptions of the general public as well as
16
important stakeholders (for example customers,
15
employees, investors)
through surveys, forums and
focus groups. The PR industry provides services to
14
track positive and negative media coverage. More
recently, the advent of powerful software to collect
and analyse data on social media channels relating
to brand perceptions has created extremely powerful
tools that companies can use to understand how
their brand is perceived at any given time.
It is clear that most companies are still developing
these tools, but some industries in the survey
seem to be more active on this issue. For example,
almost half of services companies (46%) strongly
Chart 4: How effective is your company at managing the following aspects of reputational risk?
% who say they are very effective
Instilling a culture of reputational risk management
throughout the company
51.1%
Identifying threats to reputation
46.8%
Crisis management
39.2%
Putting in place governance structures to
manage reputational risks
39.2%
Ensuring that reputational risks are managed
across the entire supply chain
35.4%
Restoring reputation following a risk event
Quantifying the financial impact of reputational risk
Measuring external perceptions of the company
16
32.0%
28.2%
25.2%
REPUTATION AT RISK
agree that their company monitors its reputation
on an ongoing basis, whereas only 32% of
manufacturing and production companies do so.
“Leading companies are getting much better at
monitoring how they are perceived outside their
four walls, even B to B companies,” notes Mr
Wittenberg of Oliver Wyman. “Many have invested in
social media groups that monitor what people are
saying about them in order to correct any factual
inaccuracies or misinterpretations.”
Undertaking stakeholder analysis need not always
be complex or costly, and companies can tackle
the challenge iteratively, in phases, to make it more
manageable. But it does require a measure of
commitment, says Mr Baud of Tala PR. “It requires
a level of sophistication, and you need strong
support within the company and good external
facilitation to make it happen effectively.”
Apply a reputational risk lens
The identification and effective management
of reputational risks starts with a clear view of
the other underlying risks that may threaten the
company. “When it comes to reputational risk
management, traditional risk management is your
first port of call,” says Mr Harris of Wood Group. “If
you get that right, your chances of a reputational
incident are reduced.”
Modelling the precise impact of reputational risk
may be an elusive holy grail. But when considering
the impact of any significant “traditional” risk
on their business, companies can at least think
about the impact on customer relationships and
the potential financial impact on earnings and
the share price. They can then ask the question:
if this risk is not managed and things get out of
control, how much of an impact could it have on
these key areas? Such an approach helps focus
attention on some metrics of core concern and
also encourages an awareness of reputational
consequences more generally.
As Henry Ristuccia, a partner at Deloitte & Touche
LLP, noted in a recent report, this requires taking
an “outside-in” view of risk to supplement the
more traditional “inside-out” approach to avoiding
risks and protecting assets. “The traditional
approaches often focus too much on risks within
the organisation and not enough on the “outsidein” view,” he says. “They don’t consider risks that
can be seen by observers outside the company –
an organisation’s stakeholders.”3
This “outside-in” perspective on risk has
implications for the risk management profession.
Traditionally, risk managers are less experienced
in using the tools and techniques designed to
understand, measure and influence a company’s
reputation. A more cross-disciplinary approach
may be required, that draws in experts from the
worlds of account management, stakeholder
engagement and PR, and social media, to help
companies formulate a more effective strategy to
tackle reputational risks across the business. The
risk manager, undoubtedly, has an important coordinating role to play in this.
Crisis management
Another challenge is that, with many reputational
risk events, damage does not result from the initial
crisis, but from how well the company responds to
it. Industrial accidents or contaminated products do
not have to cause permanent harm to reputation.
“It all depends on the way the companies handle
the problem,” says Mr Nornes. “When they have the
right response, companies can actually create value
and brand equity from dealing with a reputational
risk event.”
Crisis management is therefore a critical subset
of reputational risk management. If a company
has the right processes and approach to dealing
with a crisis, it can protect its reputation, and even
enhance it. Failure to manage a crisis effectively,
however, will lead to reputational damage that
could be difficult to repair.
17
Among our respondents, 39% say that they are
very effective at crisis management and 32% think
they are very effective at restoring reputation after
a risk event (see chart 4). Most companies have in
place some process to deal with a crisis, but the
challenge today is that the time in which this needs
to be implemented has dramatically shortened. “In
the past, an incident would occur and you would
have the luxury of planning a careful message and
response over a period of weeks or even months,”
says Mr Nornes. “Now, if you had a day or two,
that’s probably a lot more time than usual.”
Companies today therefore need to consider
velocity as an important parameter. Technology,
and social media in particular, have changed the
speed and power with which reputational damage
can strike. Among our respondents, two-thirds
agree that social media has greatly exacerbated
the potential for reputation risks to affect a
company (see chart 1).
These findings are aligned with other global research.
In a recent IBM study on reputational risk, nearly
two-thirds of study respondents said their company
will focus more on managing its reputation in the
future, and out of this group of respondents, 43%
said the change in focus is driven by the growth of
technology and social media.10
According to Mr Baud, an effective crisis management
plan will be short and practical, and will identify
who does what, when and where. “A good crisis
management plan should list the crisis management
team, as well as internal and external contact details,
like direct dials to local emergency services or
public health protection contacts,” he says. “Most
importantly, all key people should have full working
knowledge of the plan.” In summary, a good crisis
management plan will enable the organisation to
spring into rapid action when trouble hits.
As ever, communication is key and needs to be
appropriate and targeted to the needs of different
stakeholders. “Companies need to craft consistent
different messages and responses to their various
stakeholders, including customers, employees,
shareholders and government regulatory agencies,”
says Mr Nornes.
Role of the insurance industry
Among the respondents to our survey, 66% say
that they feel inadequately covered for their
reputational risks from an insurance perspective.
Undoubtedly, through its underwriting and risk
engineering expertise, the insurance industry
can and should play a role in helping a company
understand its core risks, first by adequately
assessing their impact and cost. It can then help
it to apply a reputational risk “lens” to determine
which risks, if any, could cause long-term damage
to the company’s reputation.
The potential severity of reputational risk has also
increased calls from companies for new insurance
products that help to mitigate the potential
exposure. Companies want assurance that, should
the worst happen, they have the advice, back-up
and financial support to get through the crisis and
start rebuilding their reputation.
“Many companies don’t realise that they have a
crisis on their hands until it’s too late, and the ability
to influence a situation diminishes exponentially
over time,” says Mr Baud. “Extensive planning in the
months beforehand and then working hand in hand
with the PR team as the issue escalates is the best
way to protect the business.”
18
In recent years, a number of insurers have launched
certain products that provide cover for reputational
risk as part of a broader proposition. Many
reputational risk insurance products have grown out
of existing cover, related to events such as product
recall. They typically provide cover for financial loss
associated with named risk events that damage
reputation, leading to reduced sales and profitability.
REPUTATION AT RISK
Products may also cover the costs of dealing with
the event, which may include the use of external PR
and crisis management teams, and the operational
costs of addressing the risk event, such as physically
removing products from the shelves. Some also
include an advisory component, providing access to
specialist expertise to help companies prepare for
and recover from a risk event.
“From an insurance standpoint, it’s important that
companies can respond quickly,” says Mr Nornes.
“What you don’t want is to have an incident occur
and then have the company worried about the
expense of dealing with it. You want everyone to
focus on doing the right thing almost instantly, and
that’s where well-designed insurance can provide
an immediate benefit.”
“The emphasis is on helping
companies to respond in a
way that helps mitigate the
damage early and ideally
preventing reputational risk
events from happening in the
first place.
”
Connie Germano, Regional Middle Market Casualty
Manager for ACE in Continental Europe, points to
two areas where reputational risk management
plays an integral role in the company’s proposition
for mid-market companies in Continental Europe.
The first is product recall, where the insurer
provides 24/7 access, with local language
capability, to crisis management and PR experts in
the event of contamination or malicious tampering
for food and drink companies. These services are
particularly valuable for mid-market companies,
she believes, that don’t always benefit from the
same infrastructure and consultancy support
network that larger companies have.
parties to distribute their product in the US, for
example, face added potential litigation risk,
something which ACE automatically covers.
Second, reputational risk may be elevated if the
company is not properly prepared to respond to
product deficiencies (whether real or perceived)
identified in a local market. According to Ms
Germano, the exporter needs to be certain that
it can respond quickly to an incident – especially
when venturing into a new market for the first
time. ACE’s new proposition therefore provides
immediate crisis support and expenses cover
for companies purchasing a primary casualty
programme from the insurer. In the event that
there is an export incident that is likely to involve
the casualty programme, the policy will provide
catastrophe management support from external
experts up to a certain limit as well as access
to PR expertise.
Beyond the immediate crisis response, insurance
becomes more complex. Quantification of
long-term reputational risk damage remains
challenging, which makes it difficult to set
parameters around insurance coverage.
Reputational risk events can come from anywhere
in the business, which means that moving beyond
a set of named triggers becomes very difficult.
It is also hard to demonstrate direct causation
between a reputational risk event and long-term
damage to financial performance.
Ms Germano expects to see further developments
in reputational risk insurance, but believes that the
main emphasis should be on helping companies
to prepare for and prevent reputational risk
events. “The insurance community has become
more comfortable with reputational risk and
there will continue to be experimentation and
development but, for now, the emphasis is on
helping companies to respond in a way that
helps mitigate the damage early and ideally
preventing reputational risk events from
happening in the first place.”
The other area is export liability, where the
company is developing a new solution for midmarket firms exporting products overseas,
an area where there is significant potential
reputational risk. First, companies using third
19
REPUTATIONAL
GOVERNANCE
Mind the gap
Effective reputational risk management depends
on strong governance. Because risks to reputation
can emerge from any corner of the business,
companies need robust processes and reporting
lines to ensure that key decision-makers are
informed as early as possible about emerging
problems. Among our respondents, fewer than
half (39%) think that they are very effective at
putting in place governance structures to manage
reputational risk (see chart 4).
Good governance starts with the board and
management team. Faced with a more severe risk
environment, boards are becoming much more
active in demanding assurance that reputational
outcomes of risks and events are identified and
measured. “Boards are requesting a lot more
information because they don’t necessarily have the
intrinsic knowledge of the business to defend their
decisions in the same way management would,”
observes Mr Wittenberg.
The CEO plays a critical role in reputational risk
management. Among our respondents, 57% agree
that ultimate responsibility for reputation risk lies
with the CEO or managing director (see chart 1). As
Michel Dennery puts it: “The CEO is the very first
risk manager of the company.”
But companies must ensure that there is absolute
clarity over where exactly the CEO’s responsibilities
lie. A common problem arises when a gap starts
to open up between strategy and operations.
“Boards and the CEO understand strategic risk and
the consequences of failing to execute effectively
on strategy, but they may not be close enough to
operations to truly understand the reputational
consequences of an operational failure,” says
Mr Hurrell. “Often, there is a distinct separation
between the board, which owns strategy, and the
business, which owns operations.”
20
This highlights the importance for the CEO to play
a co-ordination role in managing reputational risk.
He or she should set the tone, lead by example and
ensure that everyone in the corporate hierarchy
understands their role in managing reputational
risk. The CEO may be ultimately responsible for
reputational risk, but cannot manage it alone.
Effective reputational risk management comes from
complete alignment across the entire business and
from ensuring that every activity is carried out from
a risk-aware standpoint.
Role of the risk function
The risk function plays an important part in the
governance of reputational risk. A key part of its
role is to serve as the conduit for risk information
– collecting it from across the business, analysing
it, and ensuring that it is passed onto the board
and management team in the right format and
at the right time. “The board wants to know
that the risk function is helping and supporting
the business in the way risks are reviewed and
addressed,” says Mr McGloin. “It’s about facilitating
communication and sharing new information so
the board can take the right decisions.”
As the most senior executive in the risk function,
the Chief Risk Officer (CRO) must be the “eyes and
ears of the CEO on reputation risks”, according to Mr
Dennery. The CRO or senior risk officer can help their
companies understand and define their risk appetite,
and then put in place a strategy and efficient
processes that reflect these attitudes to risk.
Although many risk officers perform a very
valuable role in managing reputational risks,
they may be hampered by their position in the
hierarchy. “heads of risk, even CROs, report to the
finance director or somebody below the finance
director and, from that position, they are unable
to report on problems that come from above
them, such as those related to culture, ethics
and leadership, which is where the root causes of
many, if not most, reputational risks can be found,”
says Mr Fitzsimmons of Reputability.
All about culture
The culture of an organisation sets the tone for
the way in which reputational risk is managed.
REPUTATION AT RISK
Companies that develop and embed a strong risk
culture, so that every employee understands the
importance of reputation and how easily it can be
compromised, will be well placed to identify early
warning signs and ensure that employees across
the workforce act in a way that will support, rather
than damage, reputation.
More than half of the respondents say that their
company is very effective at instilling a culture of
reputational risk management throughout their
company (see chart 4). “Leading companies are
focusing on trying to develop a culture of risk
mindfulness across the company and embedding it
among the rank-and-file staff,” says Mr Wittenberg.
and contractors. There needs to be a common
understanding of the risks confronting the
organisation’s reputation so that employees can act
as successful “reputational ambassadors.”3
A commitment to quality helps to minimise the
risks that can lead to reputational damage. At
Agfa-Gevaert, a company that produces analogue
and digital imaging systems, a culture based around
keeping standards high and minimising faults,
reduces overall exposure to reputational risk and
builds a culture of excellence across the business.
“Every individual in the company is using these skills
to deliver the best possible product,” says Johan
Willaert, Corporate Risk Manager at the company.
There are various pieces that, together, start to
make up a strong risk culture. First and foremost,
a company needs a management team that is
committed to driving a culture of risk management
throughout the company. They should set the tone
through their actions and behaviour, and use this
to embed certain processes and behaviours into
the business that help to support a risk culture.
“More than half of the
respondents say that their
company is very effective
at instilling a culture of
reputational risk management
throughout their company.
”
At HSBC, for example, employees are expected
to live up to certain behaviours and values, and
they will be measured on this in their performance
reviews. “Everyone at HSBC is so conscious about
reputational risk,” says Jeremy Sharpe, Global
Head of Insurable Risk Management at HSBC
Group. “If you don’t meet the behaviours and
values of the group, you won’t get a good review.
It’s very clearly articulated in the company.”
This approach should also extend beyond the
company into the broader supply chain. In the end,
every individual working in or with a company shares
responsibility for protecting and strengthening its
reputation, from the executive team to suppliers
21
CONCLUSIONS
Companies need to put in place a clear framework for
measuring and managing reputational risk.
efinitions of reputational risk vary widely, and different companies take a variety of approaches to
D
identifying, assessing and mitigating the reputational risks they face. This is fine, as long as the company
has a clear and appropriate framework and approach in place that is well understood across the business.
More broadly, taking a multi-disciplinary approach that involves the CEO, PR specialists and other business
functions will help to build the broader perspective that is necessary for identifying and managing less
obvious reputational risks.
Companies should work harder at measuring how their
reputation is perceived, investing more resources in
measuring external perceptions to identify trends and
potential problems.
Although a company can directly influence its reputation through its actions and behaviour, it does
not control it. Reputation exists independently of the firm and is determined by the perceptions of a
wide range of external stakeholders, including customers, the media, pressure groups and regulators.
Understanding the interplay between these different stakeholders, and their impact on corporate
reputation, is essential. Companies must ensure that they are collecting an “outside-in” perspective on
reputational risks to complement their own internal perspective.
Companies should sharpen up their crisis management
plans to keep pace with today’s faster-moving world.
ith the increased velocity of media communications and enhanced business interconnectedness, a
W
company’s reputation can be made or broken within moments. Speed of response is of the essence,
because the ability to influence a crisis situation diminishes dramatically over time. Our research suggests
that many companies may be over-confident in their abilities to respond to a crisis, and regular review
and testing – including the incorporation of social media scenarios – will allow a faster response when
disaster strikes.
anagement teams and boards also need to put in place
M
a culture and processes to minimise the potential for crises
to emerge in the first place.
eadership and tone from the top are critical. Companies that strive for quality, behave ethically and curb
L
unnecessary risk-taking are inherently less prone to reputational risks. Achieving full clarity throughout
the organisation on corporate culture and values is key to this. Equally, instilling a culture on risk and
understanding of risk appetite is vital: not every risk can or should be avoided, but companies must be
aware of their implications.
he insurance market can do more to help companies
T
manage reputational risk.
The launch of new products that include crisis response assistance in different scenarios is one example
of how the insurance market can help. More generally, taking a more holistic approach to reputational risk
is a trend likely to grow. Where insurers and brokers can arguably help most is in assisting companies to
take a “reputational lens” to the traditional risks and evaluating the reputational consequences of action
or inaction in each case.
22
Ten steps to managing reputational risk
1
2
3
4
Put the CEO in charge of reputational risk.
he Chief Executive, together with the board, needs to instil and drive the risk
T
culture within the organisation and demonstrate the right behaviour by example.
Incentivise employees to guard your reputation.
eading companies are already making an awareness of reputational risk
L
part of their performance management and employees can make a valuable
contribution as “eyes and ears” of the business.
Develop an “outside-in” perspective on risk.
pply a “reputational lens” to your key traditional risk categories to help
A
understand how damage to reputation might result if they are not properly
managed and take steps to close any gaps.
Value your reputational capital.
lthough methods of placing a financial value against reputation are still in their
A
infancy, getting experts to review the impact of various reputational issues and
communicating this widely across the company can certainly help drive the
message home.
5
6
7
Monitor reputation across your markets.
ctively listen to your main groups of stakeholders on the issues that affect
A
your reputation, and learn how to use new tools such as social media to monitor
external perceptions more systematically.
Create transparency and accountability.
ncourage a sense of ownership for the brand among your employees, and
E
ensure that information is not “sanitised” or kept from senior management.
Communicate your values, then live by them.
8
9
10
eputations are managed through positive actions, not just through defensive
R
measures. Make sure there is clear, common understanding about the
company’s values throughout all levels of the organisation and measure personal
performance against them.
Plan for the next crisis.
he cause of a reputational event may be hard to predict, but identifying the
T
right team and processes to address these issues will help your company handle
a crisis faster and more effectively.
Develop a multi-disciplinary approach to reputational management.
he CRO has expertise in risk management, but must work with PR experts
T
and other stakeholder-facing business functions to protect and enhance
something as broad as the company’s reputation.
Learn from others’ mistakes.
Many of the major corporate reputational disasters of recent years provide text
book examples and there are many lessons and best practices that can be
adopted from their analysis.
23
REPUTATION
AT RISK
About this report
This research report has been produced by ACE
European Group as part of its continuing series
of European Risk Briefings in collaboration with
Longitude Research. It is based on two main inputs.
ACE EUROPEAN RISK BRIEFING 2013
First, we conducted a survey of 650 EMEA risk
managers, including 159 chief risk officers (CROs),
162 chief financial officers (CFOs) and 162
chief operating officers (COOs), with the balance
made up of other senior managers responsible
for risk management and insurance purchasing.
Respondents represent larger companies (above
US$1bn in annual revenues) and mid-sized
companies (ranging from US$250m to US$1bn
in annual revenues) across a range of industries
and 15 countries in the Europe, Middle East and
North Africa region. Interviews were conducted by
telephone in the late spring and early summer of
2013 by Longitude Research on behalf of ACE.
Respondents were chosen at random from a preselected database and were screened for eligibility.
Participants spent an average of 20 minutes on
the survey. They were not compensated for their
participation and ACE was not identified as the
research sponsor.
A research report exploring the views of
business executives across EMEA on the
subject of reputational risk.
We would like to thank the following individuals,
who gave very valuable contributions to the
development of this report:
– Andrew Baud, Managing Director, Tala PR, UK
–M
ichel Dennery, Vice President, FERMA,
France
– Anthony Fitzsimmons, Chairman,
Reputability, UK
– Julia Graham, Chief Risk Officer,
DLA Piper, UK
– J ohn Harris, Group Head of Insurance &
Risk Management, Wood Group , UK
– John Hurrell, Chief Executive Officer,
AIRMIC, UK
–C
hris McGloin, Vice President, Risk
Management & Insurance, Invensys plc, UK
– Randy Nornes, Executive Vice President,
Aon, US
– Jeremy Sharpe, Global Head of Insurable
Risk Management, HSBC Group, UK
– Johan Willaert, Corporate Risk Manager,
Agfa-Gevaert, Belgium
24
Second, we conducted qualitative interviews with
a range of senior corporate risk managers and
others with expertise in the field of reputational
risk. These are named above and they are quoted
throughout this report.
Chief financial
officer 24.9%
Chief risk
officer 24.5%
Other risk executive 0.5%
REPUTATION AT RISK
57
Damage to existing customer relationships
More than US$1bn
(€775m) 34%
Loss of earnings
Respondents by job title (%)
Respondents by size of annual
39
Fall in share price/valuation
Risk and/or insurance
manager 25.2%
Chief operating
Negative
media coverage
officer 24.9%
More than US$1bn
(€775m) 34%
35
33
Ability to form new customer relationships
We find
impact o
Informat
reputatio
8
Loss of key staff/ability to recruit employees
Chief financial
officer 24.9%
We feel i
Between US$500m (€385m) reputatio
and US$1bn (€775m) 33%
Ultimate
lies with
Chief risk
officer 24.5%
Other risk executive 0.5%
Respondents by company sector (%)
Between US$500m (€385m) Social m
and US$1bn (€775m) 33% for reput
Respondents by Country (%)
Industrial equipment and manufacturing
13.2%
Communications
11.4%
11.4%
Between US$250m
(€190m) & US$500m
7.7%
(€385m) 33%
UK
15.4%
Benelux (1)
15.2%
UK
15.4%
Switzerland
15.4%
Benelux (1)
15.2%
France
15.4%
France
15.4%
Travel and transportation
6.3%
Life sciences
6.2%
Switzerland
15.4%
Media and entertainment
6.2%
Southern Europe (3)
15.4%
Oil and gas
6.2%
Professional services
6.3%
Automotive
We mon
an ongoi
26
Negative brand perception
Retail
Between US$250m Reputati
(€190m) & US$500m than any
(€385m) 33%
Reputati
significan
29
Litigation
Financial services
More than US$1bn
(€775m) 34%
Engineering
and construction
Between US$250m
43
(€190m) & US$500m
(€385m)
turnover
(%) 33%
6.2%
Between US$500m (€385m)
6.2%33%
and US$1bn (€775m)
Germany
15.4%
Damage
Loss of e
MENA (2)
7.8%
Germany Fall in sh
15.4%
Southern Europe (3)
15.4%
(1) Benelux: Belgium, Luxembourg, Netherlands
Negative
(2) M
ENA: United Arab Emirates, Egypt, Bahrain, Saudi Arabia,
MENA (2)
Pakistan, Turkey
7.8%
(3) Southern Europe: Italy, Spain
Ability to
Litigation
Utilities
6.2%
Real estate
6.2%
Building materials
0.5%
Healthcare
0.2%
Negative
UK
15.4%
Benelux (1)
15.2%
35%
30%
35%
25%
30%
20%
32%
France
15.4%
24%
29%
24%
25%
15%
Switzerland
15.4%
Loss of k
32%
29%
20%
10%
15%
5%
25
10%
0%
5%
Industria
Commun
Small companies (US$250m – US$500m)
Endnotes
1. Louisot & Rayner, Managing Risks to reputation – From theory to practice
2. Business Week, What Price Reputation? July 2007
3.Deloitte, A risk intelligent view of reputation, 2011
4. Harvard Business Review, Reputation and its Risks, February 2007
5. IBM Risk Analytics, Reputational risk: crisis and cleanup in the risk society, December 2010
6. Transparency International, Corruption Perceptions Index, 2012
7. CNN Money, Toyota recalls total 8.1 million vehicles, February 2010
8.Reuters, Japan carmakers recall 3.4 million vehicles for Takata airbag flaw, April 2011
9.CIRANO, Corporate Reputation: Is Your Most Strategic Asset at Risk? April 2012
10.IBM, Reputational risk and IT: How security and business continuity can shape the reputation and value of your company, 2012
26
27
The opinions and positions expressed in
this report are not intended to provide
legal or other expert advice. It is
presented as information only. Readers
should consult legal counsel or other
experts, as applicable, with any specific
questions they may have. Any references
to insurance policy provisions are not
intended to amend or alter any final
policy or contract. The terms and
conditions of the ultimate, final policy or
contract will govern the rights and
obligations of the parties.
About ACE Group
The ACE Group is one of the world’s largest multiline property and casualty insurers.
With operations in 53 countries, ACE provides commercial and personal property and
casualty insurance, personal accident supplemental health insurance, reinsurance and
life insurance to a diverse group of clients. ACE Limited, the parent company of the
ACE Group, is listed on the New York Stock Exchange (NYSE: ACE) and is a component
of the S&P 500 index. Additional information can be found at www.acegroup.com.
ACE European Group
The ACE Building
100 Leadenhall Street
London
United Kingdom
EC3A 3BP
Tel: +44 (0) 20 7173 7000
Fax: +44 (0) 20 7173 7800
www.acegroup.com/eu
© Copyright 2013
The ACE Group. All rights reserved.