The rise of instant communication and connectivity has amplified firms’ reputation risks, and the direct impact of reputation crises on share price, according to a joint study by Aon and Pentland Analytics.
Reputation events include product recalls, executive malfeasance, or cyberattacks that affect a firm’s standing. The combination of the 24/7 news cycle with widespread use of social media puts brands at risk that their reputation event will have long-term negative consequences, both in public perception and in the marketplace, according to the report.
The firms scrutinized 125 reputation crises over the past 10 years, measuring the impact on shareholder value over the course of the following year. They found that the value impact of reputation crises has doubled since the introduction of social media. Neither company size nor reputation premium offers any protection against value loss in the wake of a crisis.
Data showed companies could add 20% of value or lose up to 30% of value depending on their reputation risk preparedness, and management behaviour in the immediate aftermath of a crisis.
The study identified key drivers of successful recovery from a reputation event, including:
- Crisis communications must be instant and global
- Perceptions of honesty and transparency are essential
- Active, social responsibility is critical
“Although risk management awareness and tools have evolved, reputation risk continues to weigh on corporate executives as one of their leading concerns. For the past 10 years, reputation risk has occupied one of the top spots on Aon’s bi-annual Global Risk Management Survey,” said Randy Nornes, enterprise client leader, Aon. “Savvy companies that develop and use a robust risk management framework can not only better navigate reputation events but can often see a net gain in value post-event.”