Key Considerations When Confronting Reputational and Brand Risk Concerns

November 26, 2015

Legal-Risk-Management-for-In-House-Counsel-and-ManagersReputational risk or the risk of damage to a company’s brand is of course very important these days.  It is of primary importance to executives and risk managers in many multinational companies and is seen as one of the top risks a company may face.  In fact, in Aon’s Global Risk Management Survey 2015, of the top ten risks that are of concern to companies, damage to reputation/brand is listed as number one.   In its 2014 global survey on reputational risk, Deloitte said that 87% of the 300 companies it surveyed rated reputational risk as more important than strategic risk with more than 41% of those surveyed stating they had suffered a brand risk or reputational risk event.  According to the respondents in the Deloitte survey, the major impact of a reputational risk event was the impact on brand value or a loss of earnings.

Damages caused by reputational or brand risk events are not tied to just domestic related issues. Approximately half of the executives that Kroll polled for its 2015 Global Fraud Report  opined that  their companies are at risk of vendor, supplier, or procurement fraud tied to overseas expansion.  40% of those  surveyed  felt  their companies were highly or moderately vulnerable to corruption and bribery risks which can of course lead to reputational risk or loss of brand as well as FCPA investigations and fines.  According to the respondents in the Kroll Global Fraud Report, ethics and integrity (or lack thereof) was the major cause of reputational risk.  Protiviti  as well surveyed companies on risk and found that in 2015, its respondents felt that reputational risk was of a key concern, especially in the inability of those surveyed to sufficiently or properly handle an unexpected crisis impacting brand risk or reputation.  Reputational risk caused by supply chain issues (can a company actually control its supply chain?)  can escalate out of control unless properly managed.  Loss of brand value can happen quickly if a fraudulent event becomes public or if a bribery scandal is publicized in the media.

Just look at the some of the crisis that happened over the last two decades . Many people have been affected (some have died) because of the crises or mega-crises that have happened.  Many of them also included reputational risks as well.  Examples include:

  1. 1. Coke and Pepsi were implicated in tainted products in India
  2. Enron, Worldcom, and Tyco were accused of financial scandals
  3. The World Trade Center towers in New York were destroyed.
  4. The financial and housing collapse and major recession of 2008
  5. Toyota implicated in recalls because of brake issues
  6. The tsunami affecting Thailand and Indonesia, resulting in deaths of approximately 250,000people.
  7.  The Fukushima Daiichi nuclear disaster which is still ongoing
  8.  Major banks having their credit card customers’ names stolen by computer hackers
  9. Volkswagen was implicated in a pollution emissions scandal
  10. Target’s customers  had personal data stolen due to lax security systems. Over 40 million credit and debit card customers effected
  11.  Sony Pictures- Sony as well as its employees had confidential information stolen

As you can see from the examples above, there are numerous kinds of crises that a company should be prepared to handle, especially in an international context. Among them are financial crises, natural disasters, product failures, workplace violence, cyber-attack, or hacking, and, of course, terrorism.  However, most if not all have resulted in brand or reputational crisis.

It is undisputable that a major crisis can pose serious threats to a company, and, therefore, the crisis must be managed. Crises can result in (a) government fines, (b) loss of retailer confidence, (c) loss of investor confidence, (d) loss of employee confidence, and (e) massive litigation, including class actions. In other words, the end of the company!  Crises can also result in brand  or reputational risk which may have a greater effect on the company’s bottom line than the damage caused by the original crisis itself.

The problem facing any risk manager or in-house counsel is that the media in today’s society has become very anti-business. As this anti-business culture of attack has gotten worse over the last twenty years, a crisis can no longer be handled by a simple PR or marketing statement. A full-fledged crisis management operation must be put in place. Damage control is now a very serious matter for any potential crisis, no matter how small.  Today, more and more companies have to consider issues that negatively affect the company’s brand and how best to counteract them.  Therefore, not only should companies develop crisis management programs to handle crisis, but they must also think about how to proactively prevent crisis from happening in the first place.

Key considerations when considering potential brand or reputational risk caused by ethical or fraudulent behavior within the company or within the company’s supply chain:

  1. Compliance- does the Company have a compliance program and is it up to date?
  2. Compliance- does the Compliance program and code of conduct promote an ethical culture within the company?
  3. Supply Chain- has the Company’s vendors  involved in the supply chain been vetted?  Do they follow the Compnay’s code of conduct?  Do they have compliance programs?
  4. Is there sound corporate governance and control processes in place ?

When considering key issues for handling brand risk once a crisis has started  ask yourself the following questions::

  1. Is there a Crisis Management Plan in place to handle brand risk once a crisis starts?
  2. Does the Company have an effective internal investigation process in place or corporate investigation process in place that may shorten the time taken to discover internal risks and mitigate reputational harm?
  3. Has the appropriate decision makers been trained to handle PR and media issues once a crisis has occurred?
  4. Does the Company have appropriate 3rd party consultants , including risk management companies and media crisis companies in place to help mitigate reputational/brand risk once a crisis event takes place?
  5. Does the Company have an appropriate international Crisis Management Plan in place in case the crisis is international in scope?

Companies must realize that there are many risks associated with doing business internationally as well as domestically.  Brand or reputational risk is very serious and can lead to the loss of money or even the destruction of a company unless the right steps to mitigate or prevent brand risk are in place.  So when considering what risks should be addressed on a regular basis, remember reputational risk should be of major concern.

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