Managing reputational risk in unprecedented times

July 2020  |  FEATURE  |  RISK MANAGEMENT

Financier Worldwide Magazine

July 2020 Issue

Among the potential risks that can impact a company, the risk of reputational damage generally ranks at or near the top of the list. With reputation one of a company’s biggest assets, any loss thereof could lead to a serious downturn in fortunes, perhaps even a cessation of business in worst-case scenarios.

External adverse events, defective workplace practices, data retention failures, product recalls, bad financial statements and senior management missteps – all of these, and many others, have the capacity to threaten a company’s standing as a reputable entity.

“Reputational risk is material, enduring and triggered when companies violate their values,” says George Bradt, founder and chairman of Prime Genesis. “Values are the things a company will not compromise on the way to delivering its mission and achieving its vision. People will remember what companies did or did not do and how they treated their customers, employees and communities. We have seen companies destroy their reputations by not living up to their values. In a crisis, think physical safety first, reputation risk second and financial risk third.”

Speaking of crisis, the onslaught of coronavirus (COVID-19) has undeniably raised the stakes in terms of companies’ risk management strategies, bringing forth an entirely new reputational threat which companies must meet with a measured response.

“At times like these, people tend to scrutinise companies’ behaviour more than usual,” suggests Shahar Silbershatz, chief executive of Caliber. “The reasons are manifold. Actions have serious consequences on people’s lives and livelihoods, people are more vulnerable due to circumstances and there is a greater public expectation of solidarity from each other and from companies.

“Customers think twice before deciding which company they give their money to, and employees take note of how companies act for future reference,” he continues. “This heightened scrutiny means that the reputational impact of actions that are perceived as inappropriate or unethical is compounded – it may be of greater extent and may last longer.”

Due to the immediacy and severity of the pandemic, virtually anything companies do or say in direct relation to the crisis has the potential to do tremendous damage. “A company may engage in ‘corona-washing’ by touting a donation, but it turns out that they spent more money talking about it than they did on the charitable gift itself,” says Anthony Johndrow, chief executive of Reputation Economy Advisors. “Right now, American auto insurers are under scrutiny for their premium refunds – not just whether or not they offered one to drivers who are not driving during lockdowns, but how much. Another example would be of businesses that cut back on pay and benefits to vulnerable workers while management remains unaffected.”

Adapting to uncertain times

Avoiding insincere ‘corona-washing’ is but one example of how companies can safeguard their reputation during these particularly trying times. However, as the crisis evolves, senior management will come under increasing pressure to thoroughly adapt their extant reputation management strategies accordingly.

In its assessment of how best to manage reputational risk amid COVID-19 – ‘Protecting your reputation during the COVID-19 outbreak’ – Maxim proposes a number of key actions that senior management should take to ensure they behave responsibly. These include identifying the top threats their company faces, developing and practicing a crisis response plan, and reacting speedily and appropriately. Boiled down, being unprepared is no excuse.

“Many companies are totally unprepared to deal with a real crisis, and very few have developed and practised a plan,” states Maxim. “It is frequently on the to-do list, but that is too late if a crisis suddenly arrives. Given that companies know some of the threats, they should be prepared.” Ideally, companies should know the answers before they are asked the questions.

“Knowing the risks is just part of the battle, preparing for questioning is the next stage,” adds Maxim. “The first step in getting ready for any crisis is identifying the most difficult questions and, more importantly, preparing appropriate answers.” Companies are therefore well-advised to have a series of pre-prepared statements on file that can be rapidly approved, thus delivering a faster response.

Furthermore, in these unprecedented times, companies should not be averse to taking advice. “Many business leaders would accept that they are often too close to a situation and the prospect of a crisis occurring could colour their judgment,” suggests Maxim. “Before a crisis strikes, and as part of the planning, many companies benefit from taking outside, impartial advice. An independent adviser, unfettered by internal politics, is able to consider the potential threats without bias, and provide clear counsel to senior management.”

Satisfying the court of public opinion

One issue that companies cannot ignore is the importance of the court of public opinion – whether factually and legally correct or not – which can ruin a good company with enough public support.

“At the heart of many decisions will be senior management’s need to balance their legal obligations against the reaction from the public, when it comes to considering the likely impact it could have long term on the company and the value of its brand,” believes Maxim. “Winning in court could be a Pyrrhic victory if the public’s perception of the company is one of guilt and mistrust.”

For those companies that play a particularly significant role in society, such as large employers or providers of essential products and services, the realisation that they are currently very much in the public eye means they need to consider their actions carefully. “This is mostly reflected in clear efforts to prioritise employee health and safety over commercial considerations, and attempts to support, and be shown to be supporting, communities and societies,” says Mr Silbershatz, “whether it is supermarket chains allowing the elderly to shop first, or manufacturers transitioning production lines to focus on medical equipment.

“The initial public response to the crisis was positive in terms of perceptions of businesses, especially when it came to negatively affected sectors like airlines and transportation,” he continues. “However, as the crisis continues perceptions are becoming more nuanced and dependent on specific actions. Companies seen to be acting poorly, like laying off people, are penalised reputationally, while those seen to be reacting well to the crisis – for example paying suppliers faster to support small businesses – are rewarded.”

A necessity, not a luxury

Prior to COVID-19, some companies may well have viewed the importance of reputation management with a certain degree of indifference. However, in these uncertain times, the message that needs to be conveyed to risk practitioners is that reputational risk management should be viewed as a must-have, not a nice-to-have.

“In its simplest form, the discipline of reputation management is simply the act of taking the views and priorities of multiple stakeholders into account when determining strategy or making business decisions,” says Mr Johndrow. “That is not a luxury in a crisis like this, it is an absolute necessity. Every chief executive is feeling the pressure to communicate right now, to explain what they are doing, or not doing, to the people who matter most to them. Chief executives are using stakeholder research as a way to ‘listen before they leap’. Those who do not have those capabilities, nor that mindset, are flying blind and are quite likely to suffer self-inflicted wounds.”

Despite the extensive reputational challenges that COVID-19 poses, many believe that companies should also take the view that every cloud has a silver lining. “While not always evident at the time, many crises do present an opportunity,” suggests Maxim. “Often the scale of the opportunity is determined by the professionalism of the response to the initial crisis. Before the dust settles, a company’s senior management should be asking themselves what they need to do to ensure they protect their reputation in the long term.”

Expectation management

In a scenario almost without parallel, and in conjunction with an unknown time frame, managing expectations to effectively manage reputation risk is a mammoth task for companies in the months, but presumably not years, ahead.

“Many companies take a very sophisticated approach to reputation risk, and this crisis has created scenarios for them that were unimaginable a few months ago,” says Mr Johndrow. “As a result, they are convening their diverse, cross-functional reputation risk workgroups to first identify these new risks and then re-evaluate all of their risks in light of the dramatic, and evolving, marketplace changes. Companies need a dedicated group, guided by outside-in thinking expert facilitation to help them step away from the business to identify, evaluate and create recommendations for what to do about their new risk landscape.”

To help manage expectations, Mr Silbershatz suggests that companies: (i) have a sharper-than-ever focus on employees, and then customers, more than any other stakeholder groups; (ii) identify ways they can contribute to the collective societal effort to deal with the crisis and execute on that, whether it is through their knowledge, production, financial resources, R&D or a change in operations; and (iii) communicate with stakeholders continuously to inform them of changing priorities and actions. “These procedures should mitigate current reputational risks better than any business-as-usual risk management process,” he adds.

Game changer

The extent to which the current COVID-19 crisis will ultimately prove to be a game changer for companies’ future reputation risk management posture is a question that practitioners will no doubt mull.

“This crisis is a game changer in the sense that it exposed a lack of crisis readiness, even among those companies that consider themselves competent risk managers,” contends Mr Silbershatz. “The sheer magnitude and unprecedented nature of this crisis demonstrate how principles trump processes – principles such as demonstrating purpose at tough times, communicating with stakeholders continuously and authentically, and placing employees and customers before shareholders. Going forward, in the context of risk management, such principles will matter more than any processes, as elaborate and comprehensive as they may be.”

In the view of Mr Bradt, the best run companies are the ones that prepare to manage risk in advance and then focus on physical safety, reputation and finances, in that order. “Those that do not focus on physical safety first will not, and should not, have any customers or employees within a few months. The world does not need them. Those that do not manage their finance risks will also go away.

“Those that focus on finances ahead of reputation will survive, but just barely,” he continues. “The companies that emerge best positioned for the future will be the ones that managed physical safety risks in a reputable way, managed finances well enough, and concentrated most of their efforts on preserving and enhancing their reputation with the agility required to adapt to the changes that are coming.”

© Financier Worldwide

BY

Fraser Tennant