Guard Your Reputation With Your Life

A rising trend of corporations who have suffered severe losses as a result of extreme and sometimes unjust adverse media has seen the emergence of a specialist insurance product in the Lloyd's market.

So, is reputation insurance cover necessary and is there sufficient demand for it?

Reputation

The value of reputation has long been recognised as a vital quality.  Writing in the 1st century BC the Latin writer of maxims, Pubilius Syrus, said that "a good reputation is more valuable than money".  From a business perspective, this rings true since reputational value is the basis for the world's stock markets whilst goodwill is accounted for on balance sheets to reflect the premium that a purchaser would pay over and above the fair market value.  This can, and often will be, well in excess of the basic assets minus liabilities figure.

But the problem with reputation is that it is subjective and intangible, and this makes it a distinctly fragile and transient "commodity".  Warren Buffett, who has made his fortune from the identification of risk in the stock market, has cautioned that "it takes 20 years to build a reputation and 5 minutes to ruin it.  If you think about that, you'll do things differently".  As a result of the fragility of reputation companies have developed multiple policies, procedures and measures to mitigate the risk of reputational damage.  These include:  (i) strict confidentiality agreements for employees to prevent information leaks; (ii) diversionary "good" deeds to mask negative publicity elsewhere; (iii) the use of trusted and exclusive channels through which a company disseminates information publicly; (iv) the employment of PR agents to mitigate bad news and actively promote good news; (v) business continuity plans; and (vi) a readiness to issue legal claims for defamation, libel and slander. 

As a result of these techniques reputational damage, historically, has been broadly containable.  A good example of a company overcoming reputational damage through its actions is pharmaceutical company Johnson & Johnson when adverse publicity arose in relation to its painkiller product, Tylenol.

In 1982, a batch of Tylenol had been contaminated with cyanide by a third party resulting in the deaths of 7 people in Chicago.  The company immediately enacted a vast corporate effort which included recalling product worth $100m, sending 500,000 apology letters, setting up toll-free hotlines and re-launching the product with safety packaging to prevent tampering.  The latter element was combined with a campaign that advocated protecting the public interest and resulted in legislation being brought in to regulate product packaging and labelling for safety purposes.  The swift and socially responsible actions of the company actually engendered positive coverage for Johnson & Johnson in its handling of the matter and increased its stock as a reputable company.

Reputational harm in today's world

Times have changed, however.  Many of these methods are now redundant in today's information-ready society with the rise in: 

• the use of social media, which gives a platform to all for the dissemination of information anonymously (even where the information is confidential or legally protected, such as the recent high-profile exposures of celebrity identities in defiance of super-injunctions);

• the use of portable IT and data equipment, which heightens the risk of sensitive information leaking out [Please see the RPC TraineesTakeOnBusiness article by Katie Barnett for more details on this subject];

• online data security hackers, who threaten business's security and are extremely expensive to defend against (in particular, recently in the cyber sphere there have been numerous distributed denial of service (DDoS) attacks on financial firms.  DDoS attacks are launched to fuel public discourse with the intention to influence share prices by damaging reputation); and

• organisations such as Wikileaks, which make the sensational uncovering and/or revealing  of corporate/governmental information their primary business. 

The interconnected society that we live in today means that reputation can be a largely uncontrollable factor for businesses, who may suffer great losses as a result of negative publicity and adverse media. 

This seems all well and good for consumers when the reputational damage is caused by rogue, fraudulent, or other dishonest company behaviour.  It is absolutely right that companies should be held accountable for illegal or grossly unacceptable practices and that consumers are made aware of such failings. 

However, sometimes there can be a gross imbalance between the company breach, which may be minor, and the scale of the social media reaction, which may be ferocious.  Perhaps the best example of this scenario is the significant loss suffered by United Airlines when a disgruntled customer posted a YouTube video after his guitar was mishandled and broken by baggage operators in 2008.  The video has to date been viewed almost 14 million times and within 4 days of being posted online, United's share price fell 10%, costing shareholders $180 million in value.  This highlights both the fickleness of the public and the vulnerability of companies to social media generated reputational damage.  In such circumstances, it is hard not to feel some sympathy for the company.

And what about the situations where a company suffers reputational damage through no fault of its own?  For example, when the horse meat burger scandal came to light in early 2013, four subsidiaries of ABP Food Group were accused of supplying adulterated meat.   Immediately, ABP's contracts with major distributors and food chains, including Tesco, Waitrose and Burger King, were cancelled.  ABP obviously suffered significant losses as a result, although arguably since the accused companies were its subsidiaries, this was to be expected.  However, the impact spread much wider, with national sales of frozen hamburgers and frozen ready meals falling 43% and 13%, respectively, in the month after the scandal broke, affecting all producers of such products.  Perversely, therefore, the reputational harm caused by the actions of ABP and its subsidiaries directly impacted its competitors in the sector, even though those competitors were entirely innocent of wrongdoing.

So - what can companies do to mitigate the impact of reputational damage in this information-ready society?

Reputation insurance

The answer may lie with a new specialist insurance product that is being written by insurers in the Lloyd's market.  This is aptly referred to as "reputation" or "reputational harm" insurance and sits as a distinct product alongside other intangible insurance offerings such as intellectual property infringement insurance, cyber risks and non-damage business interruption insurance.  Although, insurance solutions already exist to protect companies from sales losses, such as political risk insurance, business interruption insurance and trade credit insurance, these are often linked to tangible or physical damage/interruption to goods or the supply chain.  Reputation insurance differs as it is completely innovative in indemnifying the insured from fortuitous lost profit or sales volume where no tangible or physical damage/interruption has occurred, such as where loss is caused by adverse media.

The reputation insurance product is currently entirely bespoke (tailored to the precise reputational needs and concerns of the client) and is only written by a handful of insurers, with Kiln and Liberty amongst the most prominent.  Kiln's enterprise risk underwriter, Thomas Hoad, acknowledges that companies are generally good at managing short term reputational harm but that the insurance product is designed for the serious situations where reputational harm lingers.  Quite often it is not the event itself which causes the loss, but the on-going hype surrounding it (as demonstrated by the United Airlines example above).  In the words of Hoad:  "The risk in today's environment is not that these problems occur (and they do occur in many businesses) but it’s just the real amplification of that problem through social media…[The product is] the last bastion of financial support for when things go wrong". 

The future?

Interest in and uptake of this bespoke insurance product has already been positive.  As companies are subjected to increased scrutiny and potentially exposed to media vilification, it is possible that reputation insurance cover will be very much in demand going forward.  Reputation insurance could, therefore, be the perfect solution to addressing business losses attributable to reputational damage.  The product could well be a useful risk mitigation tool for a company, if not a mandatory requirement of those financially involved with a company, such as investors, management and lenders.

However, since the product is in its infancy, it is too early to analyse its effectiveness in protecting the insured from reputational harm and at some point there will be disputes over the interpretation of wordings relating to trigger events and the definition of loss.  Alternatively, the product may be deemed surplus to requirements given the numerous other insurance solutions that partially or fully address this enterprise risk.  In extreme cases, reputation insurance may even escalate the reputational damage:  one commentator has already questioned whether having "social media insurance re-amplifies the social media problem" in that further outrage may be generated should the public become aware that a wrongdoing company has been indemnified for that wrongdoing.  This situation should not arise since the purchasers of reputation insurance are supposed to be kept confidential but, these days, leaks are hard to plug and information can be readily disseminated, so the issue is worth considering.

Unfortunately for businesses, scandal and intrigue will always be newsworthy - so it will be interesting to see whether reputation insurance takes off.  In the meantime, though, Robert Greene's 5th Law from his bestselling book "The 48 Laws of Power" (1998) is worth bearing in mind:  "So much depends on Reputation:  Guard it with your life".

Oliver Knox

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