Understanding Reputational Risk in the Digital Age - The Impact on Shareholder Value
Damage to reputation and brand has been consistently voted as the number one risk in Aon’s Global Risk Management Survey.
In recent years that risk has been amplified by the threat of cyber-attacks and the exposure through social media, creating a potentially unstoppable contagion that can shred an organisation’s reputation, or even end it completely.
With only 15% of the value of the S&P 500 now attributable to tangible assets, intangible assets such as brand are highly valued, and hence coming into greater consideration in terms of their protection.
Speaking as part of a panel session at Aon’s Advanced Risk Conference 2018 in Melbourne, the founding director of advisory firm Pentland Analytics, Dr Deborah Pretty, shared her latest research commissioned by Aon, Reputation Risk in the Cyber Age: The Impact On Shareholder Value. Dr Pretty described how the advent of camera phones, wearable devices and social media had come together to make the spread of news – be it true or otherwise – cheaper, easier and faster than ever before. And that in turn had significant consequences for reputational risk, with the damage to shareholder value from reputation crises now double what was suffered at the start of the century.
While the average long-term impact of crises on shareholder value was shown to be in the single digits, closer analysis revealed two distinct groups of clear ‘winners’ and ‘losers’. While winners would often go on to outperform market expectations by as much as 20% - proving that it is possible to benefit from a crisis - losers would underperform on average up to 30%.
Interestingly, when Dr Pretty compared her research from 2018 with the same research she conducted in 2000, we saw the impact on shareholder value from reputational crises has doubled with the introduction of social media and other technology.
Also clear was how quickly the market was able to make its assessment, the divergence between winners and losers becoming clear in the first few trading days following an event. Dr Pretty said this is because crises prompt intense periods of scrutiny and disclosure for a company, revealing much about the quality of management that simply was not available previously. Investors and analysts then use this new information to re-evaluate their expectations of future cashflow, reflecting their revised confidence in the ability of management to generate value.
What it takes to be a winner
Using qualitative analyses, Dr Pretty identified five distinctive traits that were most often visible across the winning organisations.
- Deep commitment to loss prevention and mitigation
- Strong, visible leadership from CEO
- Accurate and well-coordinated communication
- Instant, global response and action
- True remorse and commitment to meaningful change
“No matter the rights and wrongs of one’s position, perception is everything, and we ignore it at our peril,” Dr Pretty said.
Risk culture
The head of talent for the Pacific region at Aon, Gerhard Diedericks, also spoke on the topic of risk culture and how it could be both measured and matured. Diedericks described culture as the emergence of social learned behaviour. He said this could be measured by assessing the attitudes of staff to questions such as whether they felt whether they thought their organisation treated staff and other parties fairly, whether they could freely speak up regarding potential misconduct, and how responsive they perceived their organisation to be in terms of addressing concerns.
Risk culture could be expressed as the percentage of employees that generally agreed with these points, enabling benchmarking and segmentation to determine areas of risk culture weakness and identify which people in the organisation were most influential in terms of risk culture.
But while the issue of reputational risk looms large, the options for transferring that risk remain somewhat undeveloped.
Transferring the risk
Also speaking on the panel was managing director for global and corporate at Aon, Bruce Gordon, who said there is an increasing number of insurance opportunities that exist to address brand and reputation risk. He said the basis of coverage offered divides into two effective categories; the first furnishes prioritised access to, and provides indemnity for, the deployment of the appropriate cyber consulting expertise to contain, mitigate and resolve the incident. The second category of insurance also provides cover for the financial loss attributable to the incident in addition to prioritised access to the ‘right’ cyber expertise.
Buyer uptake has been limited to date, perhaps because insurance market responses are still in their infancy. But the same was true of D&O insurance at one time. Buyer demand for D&O coverage evolved over time in response to societal expectations and increased regulatory and litigious environments. Similar external forces are likely to accelerate focus on brand and reputation insurance in future.