We’ve known for years that sexual harassment and abuse existed in many workplaces. We’ve known that a deranged individual can acquire a gun and devastate numerous lives. And we’ve known that we were surrendering personal information to Facebook and third-party companies in return for a more customized user experience. But the behaviour of Harvey Weinstein, Steve Wynn, Cambridge Analytica and the tragedy of the Parkland, Florida, school shooting have upended our society’s tolerance for industry sins. As a result, companies and their leaders now face the threat of economic damage from angry stakeholders.
We are living through a time of cultural change, when shifting attitudes are altering public perceptions of what’s important and what’s tolerable – basically, what different stakeholders expect. Companies are recognizing the need to react to external events in ways that meet stakeholder expectations, as Chubb and Lockton did when they disassociated themselves from the National Rifle Association. A credible threat of a consumer boycott no doubt spurred their action.
That’s why, in the face of the Cambridge Analytica scandal, Facebook shares dropped dramatically. Initial reaction to the company’s attempts to explain itself has been mixed; many stakeholders feel the company failed them by not recognizing their implicit expectations and therefore not acting sooner, more forcefully and more transparently.
Financial damage due to what The Economist termed a “reputation meltdown” is not just manifesting itself at Facebook. The cost of reputational attacks against companies has risen by more than 500% over the past six years, according to research conducted by my firm, Steel City Re. The onslaught is fuelled by weaponized social media; it’s ironic that the cultural shifts we are seeing today are occurring at so sweeping a pace in part because of Facebook itself, which has made rapid communication so prevalent.
Social media is being harnessed by influencers, including politicians, who are adept at channelling the public’s anger or disappointment toward specific targets. The generally angry mood that exists today has led politicians, the media, activist investors, customers and other stakeholders to direct their anger not only at the corporate entity, but also toward the individuals who lead it. And while large companies have significant marketing resources available to protect and rehabilitate their brands, individual executives and board members are far more vulnerable and will often wear a ‘scarlet letter’ for life.
At the moment, this climate is coinciding with shifts in expectations that are suddenly and profoundly changing the risk environment for businesses. Today, it is crucial for companies to consider reputational risk sideby-side with operational risk; they are both threats to assets of value that can be managed, measured and insured.
An operational crisis occurs when something a company is expected to control goes wrong. Often this involves a failed control for ethics, innovation, safety, security, sustainability or quality. A reputational crisis occurs when stakeholders believe the company didn’t make an authentic effort at mitigation – and they’re disappointed or angry that the company’s leadership failed them.
Companies that want to thrive in this new cultural climate need to embrace the concept that reputational risk is at least as consequential as operational risk. They need to task their enterprise risk management teams with the mission of understanding stakeholder expectations and building reputation resilience. And they need a risk management plan that enables them to build an affirmative narrative about corporate practices and governance before a reputation risk storm hits. Such a narrative requires the storytelling power of third-party warranties, insurances and bonds to reassure stakeholders that the company is well run in a way that is pre-positioned, simple to understand and completely credible.
Building these defenses can mitigate risk, deter attacks, and provide outside validation of the company’s practices and governance, with the added benefit of casting potentially damaging events as anomalous rather than systemic failures.
Dr. Nir Kossovsky, CEO of Steel City Re, writes extensively on corporate reputation, arbitrages algorithms measuring its value, and helps companies forge reputation resilience with innovative mitigation and insurance-based strategies