Of all the risks facing companies in today’s business world, reputational risk is one of the most serious. Reputational risk can not only damage a company’s brand, but can even lead to the demise of the company. It is of primary importance to executives, in-house counsel 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 recent Global Risk Management Survey, it is one of the top ten risks that are of concern to companies. Deloitte surveyed companies as well and found out that the majority of companies it surveyed rated reputational risk as more important than strategic risk. Many of those surveyed acknowledged they had suffered a brand risk or reputational risk event that resulted in a loss of 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 recent Global Fraud Report opined that their companies are at risk of vendor, supplier, or procurement fraud tied to overseas expansion. Many 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.
The reputational risk caused by supply chain issues 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 decade. 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:
The financial and housing collapse and major recession of 2008
Toyota implicated in recalls because of brake issues
Major Banks having their credit card customers’ names stolen by computer hackers
Volkswagen was implicated in a pollution emissions scandal
Target’s customers had personal data stolen due to lax security systems. Over 40 million
Credit and debit card customers effected
Sony Pictures- Sony as well as its employees had confidential information stolen
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 also result in reputational risks or damage to the company’s brand which may have a greater effect on the company’s bottom line than the damage caused by the original crisis itself.
When considering brand risk issues during a crisis ask the following questions:
• Is there a Crisis Management Plan in place to handle brand risk once a crisis starts?
• Does the Company have an effective internal investigation process in place that may shorten the time taken to discover internal risks and mitigate reputational harm?
• Has the appropriate decision makers been trained to handle PR and media issues once a crisis has occurred?
• 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?
• 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 primary importance.
