Jonathan Bernstein, president of consultancy at Bernstein Crisis Management Inc. in Sierra Madre, Calif., which provides crisis response, prevention, planning and training services to organizations, spoke to Business Insurance New York Bureau Chief Gloria Gonzalez about reputational risk and critical risk management initiatives to minimize the exposure.

Q: What are the key components of reputational risk?

The most critical component of risk is preparedness. If you have done the right kind of vulnerability assessment up front to really know what your risks are and taken steps to ensure that you have a system in place for rapid response, then you will avoid some types of crisis altogether and minimize damage from others.

Q: In your experience, what types of events have you seen that have created the biggest reputational issues for organizations?

Probably one of the biggest is any situation where you're perceived to have covered up the truth. Certainly, Arthur Andersen and the whole death of that organization was one of the biggest examples in modern history. They went out of business in the court of public opinion. They didn't go out of business in the court of law. And it was strictly a reputation issue that wiped out an international organization. The perception was that they were trying to cover up the truth.

The other is profit-motivated shortcuts in the operational process. If in order to make more money, for example, people are sourcing product to China, to cite an example that's painfully well-known, and you haven't done everything possible to make sure that your China sources are reliable, you end up paying the price when they prove to be unreliable, whether you're talking about toys or whether you're talking about food.

Q: Are there particular types of companies that are more vulnerable to reputational risk than others?

I think any company that has products or services that directly affect the health and welfare of human beings and the potential for in any way of harming them or their loved ones, people they care about, have a higher risk because there's nothing that people react more strongly to than having their health and welfare threatened.

Q: What should companies do before, during and after a crisis to minimize reputational risk?

The first thing they need to do is a vulnerability assessment before a crisis ever occurs--essentially it's like a full-body scan for an organization--of every single division of the organization. The question needs to be asked where could we have a situation exist within these different operational areas that has the potential for turning into a reputation risk. And then all of those possibilities need to be brought to the table for a discussion of "OK, how can we mitigate any of these before they ever occur?"

Then you have to undergo training and actually should do some simulation, some actual testing of the systems to make sure that they work when you come into a real situation. And if you've done all of that in advance, you're going to really minimize risk because it doesn't matter if you're insured against it. That might cover your inventory losses or short-term losses, but insurance won't cover reputation.

Q: What is the risk manager's role in minimizing reputation risk?

Good risk managers have already done a fair amount of vulnerability assessment and preparedness and mitigation and the work that they've already done becomes a building block of the comprehensive crisis preparedness process that an organization should go through.