How to manage reputational risk

14 June 2017

Reputations can be damaged quicker and more extensively than ever before, so companies must manage the risks and have the right insurance cover in case their reputation does take a hit.

The answer is 64. It’s not the meaning of “life, the universe and everything” author Douglas Adams famously posited on the number 42, but it is a key figure for business. According to Reputation Institute, it’s the measure of an average company’s reputation.

The research and advisory firm says there is a strong correlation between this and consumers’ willingness to buy from a business.

“In today’s world, where products are becoming a commodity, it is more about who you are as a company than what you sell,” says Kasper Ulf Nielsen, Executive Partner at Reputation Institute.

The Institute goes further though and argues that reputations can be measured using the RepTrak® framework. It does so on a scale of 0 to 100. A score of 40 or below is considered weak, above 80 is excellent and 64 is the global average.

Reputations at risk

While they might not have given it a number, most companies acknowledge the importance of reputation.

The best-known corporate scandals inevitably involve high-street brands, but smaller mid-market businesses are equally at risk – if not more so, says Edel Ryan, Partner at JLT Specialty.

“If you have several thousand customers, it takes something big for a significant percentage to take umbrage. For a mid-market business selling B2B, one client could be worth 10 per cent of their revenue.”

The impact of social media on reputation

In the consumer space, meanwhile, smaller businesses are often more likely to trade on ethics, environmental credentials or health. 

That’s the case in food production where Fairtrade, organic produce and health food markets support thriving niche players.

“It’s one way you can differentiate yourself from the Nestlés or Unilevers,” says Simon Lusher, Head of Food & Agri at JLT Specialty. “People are willing to pay a premium for something they see as healthy or equitably sourced.

”That can quickly change if something undermines it though – particularly with social media. In the time it takes to read this sentence, 50,000 tweets have been sent out.

“If someone starts tweeting about slave labour or workers paid below the minimum wage, it can quickly become a crisis,” says Lusher.

RepTrak® perceptions about companies’ ability to deliver in seven key dimensions 

How to manage reputational risk RepTrak

Built on reputation

This gets to the heart of which risks most impact reputation, says Nielsen: protecting reputation means first recognising the factors that it is built on. 

His organisation identifies seven areas (see RepTrak® model). These include product quality and value, but also factors like corporate citizenship and workplace conditions and leadership.

Anything that casts doubt on a major contributor to reputation will carry the risk of a big impact to the business.

There are some common factors: senior executives represent the public face of a business, and can therefore have a strong influence on its identity.

“Reputation is a matter of trust so, if senior executives are found to be cheating on taxes or engaging in other unethical behaviour, it’s often a major risk to the business,” says Nielsen.

However, the precise contribution each factor makes to reputation will vary for each business.

For food production, where quality and safety are prerequisites, contamination is a major risk. 

Particularly for those trading in ethical niches, meanwhile, the key danger may be the discovery of abuses within the supply chain.

“For issues like food contamination, there are regulations to guide businesses to ensure food safety. There’s perhaps been less attention on supply chains and risks of discovering your coffee beans are being sourced with child labour, for example,” explains Lusher.

The key is not always to avoid an incident – which is sometimes not possible – but to ensure a good response should one occur. A product recall is a major risk for a food manufacturer but, handled well, the damage can be minimised significantly.

Wahaca, the Mexican restaurant chain, proved just how important the response to a crisis can be to avoid long-term damage. 

Takings plunged in the aftermath of the norovirus outbreak late last year, but the chain is now quickly recovering after voluntarily closing nine sites for deep cleaning and apologising in person to many of those who fell ill.

Owner Thomasina Miers reported that she was proud to have tackled it head on and threw everything at it, costing the business an absolute fortune but with a determination not to jeopardise what they had built.

Insurance cover for reputation risks

Conversely, data breaches are increasingly a fact of life in the communications, technology and media sector, says Ryan, but a failure to be seen to respond effectively and quickly can have an impact beyond the costs of the attack itself. 

The TalkTalk data breach in 2015, for example, was reported to have cost the company in excess of 150,000 customers.

Traditional insurance offers some help for when things do go wrong. Financial lines for risks such as cyber breaches or directors’ and officers’ liabilities, as well as product recall policies, often include PR services to deal with media fallout from an incident.

However, reputation risk goes beyond this, says Nielsen: “If you are in the midst of a crisis and need to put out the fire, you call your PR agency. Reputation risk management, though, is about putting up smoke detectors.”

Nielsen says reputation itself could be covered by measuring how incidents change stakeholders’ attitudes on the issues that really matter to a business.

“Since we know how to measure it, we could insure it,” he says. In the meantime, insurance can already mitigate some of the damage a reputational hit can cause.

Recognising different risk scenarios 

At JLT, Ryan has worked with a number of businesses to identify scenarios that would harm their reputation, and cover the losses that would result, but aren’t covered elsewhere. 

By either writing a separate policy or attaching cover to existing insurance, such as a cyber policy, this loss of business can be insured against.

The approach is likely to become increasingly common as businesses recognise that their risks are changing, says Ryan: “Traditional fire and flood damage aren’t necessarily the real dangers to business anymore, particularly when you consider that major brands do not have any physical assets at all; take Airbnb and Uber as examples,” she points out.

Nielsen is right, though, that reputation risks are different for every business. That’s why it can’t be left to the insurance market to come up with policies, says Ryan.

“Given the opportunity, we will find a solution, but we need the business’ to influence the markets complete understanding of their particular risks and the scenarios that could have a catastrophic impact on their reputation,” she says. “Our role starts with listening.”

Seven ways to build a strong reputation

For further information please contact Edel Ryan. Partner on +44 (0)20 7528 4745 or email edel_ryan@jltgroup.com