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ARC: HOW TO CONTEND WITH EMERGING RISKS AS THE ECONOMY CONTINUES TO RECOVER

Reputational risk is a growing concern for businesses

Events that damage a company's reputation can have a significant financial effect on its shareholder value and can come from any number of directions.

In a world of Web-based communications and social media, the risks of reputational damage are exacerbated, while the time to respond to a reputational threat has been reduced dramatically, experts say.

Not only can the impact of a reputation-damaging event be detrimental, there's evidence that such events occur frequently. A new report, Reputation Review 2012, prepared by analytics and advisory firm Oxford Metrica and sponsored by Aon P.L.C., suggests there is an 80% chance of a public company losing at least 20% of its equity value in any single month over a five-year period because of a reputation crisis.

“Having a robust, evidence-based reputation strategy in place will minimize the likelihood of a critical event turning into a reputation crisis and will maximize the probability of recovery,” according to the report.

“Probably the first takeaway is how prevalent reputational events are,” said Randy Nornes, executive vice president with Aon Risk Solutions in Chicago. “It's not something that's rare. Over five years, it's quite likely.”

Jonathan Copulsky, principal at Deloitte Consulting L.L.P. in Chicago, said, “It's not a question of if, it's a matter of when. We encourage people to think about what they would do” when an event occurs.

Reputation-threatening events can come at organizations from any number of directions.

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“Product safety is one big category that we see. A second big category we see is unhappy customers,” Mr. Copulsky said. “A third can be behavior on the part of either employees or the CEO.”

Regulatory pressures also can pose reputational risks, particularly in the financial services industry, he said.

Rob Yellen, chief underwriting officer for financial lines in the U.S. and Canada at Chartis Inc. in New York, cited the reputation effect of data breaches and computer system hacks, and the experiences of companies that faced supply chain disruptions or radiation fears after the March 2011 earthquake and tsunami in Japan.

He also mentioned the situation after last year's cantaloupe listeria outbreak. While the outbreak was tracked to a Colorado producer, other producers and even companies selling different sorts of melons felt a reputational impact, Mr. Yellen said.

“You have some incidents that affect the whole category,” Mr. Copulsky said. “Categories can lose trust in the same way that individual companies can.”

“It's anything, anywhere. If you have a company that's valuable, you have a reputation and you need to protect it,” Mr. Yellen said. “It's easy in today's world for anybody to attack a company's reputation.”

Social media and the Internet exacerbate reputational exposures, allowing reputation-threatening information to spread widely and very quickly, while also reducing response time. Because items have a long lifespan on the Web, it also increases persistence. “You've got to manage all these factors: dispersion, speed, need for a quick response and persistence,” Mr. Copulsky said.

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“We are in the midst of an evolution of how we communicate,” Mr. Yellen said. “You've got Twitter out there, and anybody can post anything about anybody, and there's very little recourse.”

Tracy Knippenburg Gillis, global reputational risk and crisis management practice leader for Marsh Inc.'s Marsh Risk Consulting unit in New York, said the advent of the 24-hour, seven-day-a-week cable news cycle at least 20 years ago changed the game in terms of responding to reputation risks. “Social media is changing the game in a different way. Things can go viral very quickly,” she said. “But it also creates the challenge of when and how to respond.”

It's important to recognize whether the social media activity is actually sufficient to merit a response, Ms. Gillis said. If the volume of social media activity is small, “It's not to say that you then ignore it. But it doesn't drive your strategy at that level,” she said. “You're always doing a balancing act, and now social media is one more outlet to consider.”

A common mistake in addressing reputation threats involves a lack of “understanding when you should just let it go,” Mr. Copulsky said. “Not every tweet, not every post to Facebook matters.”

Another common error is that many companies automatically decide to address events through their CEO and public relations staff rather than considering whether it might be more effective to involve frontline employees, Mr. Copulsky said. “It's a delicate balance,” he said, stressing the value of “properly equipping employees to be an ambassador for you.”

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Allowing the legal department's liability concerns to prevent the organization from addressing the event in a way that satisfies the public is another frequent mistake.

“Let's say the CEO wants to make a public statement about the issue but the legal people want to be careful about how the statement's worded,” Mr. Nornes said. Ultimately the statement might only lead to more questions about the organization, he said.

“Sometimes the fear of saying something that will make you legally liable prevents you form saying anything,” Mr. Copulsky said.

With reputational risks coming in various and sometimes unpredictable forms, preparation for reputation-threatening events is essential.

“When an event occurs, you need to respond promptly, effectively and efficiently,” Ms. Gillis said.

In addition, it's important to have an “early warning system” such as a media-monitoring mechanism in place as a bridge between the understanding of reputational risk and the preparations for dealing with events.

Mr. Yellen stressed the value of bringing in an outside expert to help with discussing the risk, scenario planning, building a plan for dealing with reputation-threatening events and testing the plan.

“We believe the right thing to do is facilitate our insureds, the policyholders, getting really good advice on crisis communications,” both before and during an event, he said.

Mr. Nornes said the Oxford Metrica report identified another benefit to such preparation in its suggestion that there can be winners and losers in reputational events, with proper preparation leading to organizations' seeing increased shareholder value after a reputation event.

“Because you have the potential for value creation, that's part of the upside for reputation risk management,” he said.

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