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Firms that are perceived to have a poor reputation, or high reputational risk, face higher costs when it comes to acquiring capital, says Aon Risk Solutions following its latest report. The firm’s ‘2018 Reputation Risk in the Cyber Age’ research released this month found that the impact of reputation-related events on shareholder value has doubled in the digital age, with companies now facing up to 30% loss or 20% gain in value post-crisis.
But organizations will also be met with higher costs when seeking capital, according to Eddie McLaughlin, chief commercial officer EMEA at Aon’s risk management business.
“This has a direct impact on your cost of capital. By that, it means that when you start going into the debt markets and asking for money, they’re going to charge you a higher interest rate because their perception of you as a firm is riskier,” he told Corporate Risk and Insurance.
“I think that’s the bit that people sometimes miss. This isn’t just some kind of notional, theoretical gesture. When a firm is seen to be riskier and it’s built into their capital asset pricing model, then when they go to raise funds they will pay more for those funds, because the market perceives them as more risky.”
McLaughlin said that as well as the impact of social media, we live in a more uncertain world today which means there are more “instinctive, knee-jerk reactions” than there were in the past.
While businesses are increasingly waking up to the heightened state of reputational risk, McLauglin said very few are complacent – and rightly so.
“There’s definitely more effort going into looking at the potential events, preparing for them and planning scenarios. But companies are still feeling that they’re not fully equipped yet to deal with them, because they happen so fast and with so many different moving variables,” he said.
For risk managers looking at how they can prepare their organization, McLauglin advises beginning as one would with a traditional enterprise risk management process.
“The starting point should definitely be the strategy and the stakeholder community – who are we looking to serve, and what are the products and services we are selling,” he said. “After that it’s the risk – what are the risks that could undermine that strategy or that community of stakeholders?”
But what many organizations fail to do is analyze how the top risks they face as a whole could manifest themselves in terms of reputation.
“Reputational risk as a term itself is a bit of a misnomer,” he said. “It’s not actually a risk itself, it’s a consequence of something that happens.”
His advice to companies is to “do the rehearsals, be prepared, be absolutely open and transparent, and be consistent.”
“Most of the worst crises we see tend to be where there has been some kind of misinformation along the line,” he said.
