Blog

The use of the term “reputation risk” fits the pattern of hyped buzzwords, but the significant volume of money now spent managing corporate reputation risks proves it is more than hype. Reputation dynamics are forcing pivotal business decisions. Penn State increased its acceptance rate to offset a decline in out-of-state applications and an expected drop in the matriculation rate. Deutsche Bank’s CEO Josef Ackerman refused 3-year loans from the European Central Bank concerned it would damage the bank’s reputation with customers. While risk managers generally view reputation as a consequence or a secondary risk relative to other risks, is it taking a more central position in enterprise risk management programs and corporate decision making?

The digitized Google Books database reveals authors have addressed business reputation since the 1830s, but the term “reputation risk” first appeared in 1988 and its use quickly accelerated. From 2003 through 2011, Factiva’s database shows the terms “reputation risk” and “corporate reputation” in print and online news publications expanded at a compounded annual growth rate of 13%. My skepticism as an industry analyst heightens when terms are hyped to this extent, but the match of supply and demand in this case seems to justify reputation as a vital category in any risk market taxonomy.

On the supply side, hundreds of public relations firms, crisis consultants, and business consultants promise to help corporations manage, protect, and recover their reputations. Social media launched another set of suppliers with online reputation software vendors and consultants positioned to help monitor and manage reputation in the cyber world.

On the demand side, executive perception of reputation risk is evolving quickly. Here are some stats:

• A 2005 EIU survey showed 52% of senior risk managers believed reputation deserved to be a category of corporate risk on its own with severity far surpassing natural disasters, regulatory, human capital, information technology, and market risks.
• The 950 worldwide business executives participating in a 2007 Weber Shandwick survey considered 63% of their company’s market value on average to be attributable to reputation.
• A 2011 Zurich-sponsored HBR study indicated 50% of the 1,419 business executives surveyed identified corporate brand reputation as a risk that has risen most significantly in the past 3 years.
• The 2011 EisnerAmper Board of Directors Survey revealed, after financial risks, reputational risks is the top concern for U.S. boards with 69% of the 142 respondents noting it as most important.
• Steel City Re highlights 30% of the S&P500 members identified reputation risk as material to their enterprise value in their 2010 10K report. In 2011, this percentage rose to 57%.

Does the rhetoric on both the supply and demand sides constitute a market? I’ll complete full research of total spending on risk reputation products and services at a later date, but initial analysis indicates it crosses my threshold of $5 billion to define a sustainable market segment.

Insurance companies have taken notice. Phil Ellis, chief executive of Willis’ Global Solutions Consulting Group, observes 95% of major corporations suffered at least one major reputational crisis in the last 20 years, but less than 10% of these were insurable. Ellis notes the insurance industry needs innovative products to meet this challenge.

Three companies launched such products in October. Aon’s reputational risk product, underwritten by Zurich Financial Services, provides up to $100 million in limits of coverage triggered by 19 named perils combined with financial loss and adverse publicity. Willis rejected the peril-based criteria and is developing products by industry sector starting with Hotel Reputation Protection. Chartis is taking a more general stand-alone, no named peril approach with Chartis ReputationGuard. One common element to the offerings is access to leading global public relations firms for both preventative work and crisis support (cue the race for every PR firm to align with an insurance provider as their very own sales channel).

As a market analyst, I have to recognize, albeit with some reluctance, that demand and supply side factors justify defining reputation risk as a major risk category. Is this elevation of reputation risk justified in the eyes of risk managers and risk consultants? Is your crisis response plan the primary vehicle for managing your reputation risks or do you manage reputation proactively as a core integrated risk in your ERM program to support corporate decision making? What makes one company ignore reputation risks while another invests in extensive reputation monitoring and purchases multi-million dollar reputation insurance coverage?