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January 30, 2014

Protecting Your Corporate Reputation

Summary:

Since 2010, there has been an outbreak of “new and improved” reputation insurance policies from name-brand insurance carriers like Zurich (Brand Assurance), AIG (ReputationGuard), Munich Re (Reputation Insurance) and a number of Lloyds syndicates, including a standalone reputation policy produced by Steel City Re.

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A company’s reputation, which is core to its profitability and long-term competitiveness, faces new challenges as information speeds blindly through online media and social networks. Lanny Davis, former assistant to President Clinton on crisis management and principal in Lanny J. Davis & Associates, recently noted that, in the age of the Internet, “you never get a second chance to change a first impression. Once your reputation is smeared and your character unfairly attacked, the eternal misinformation echo chamber of the search engine allows the harm to continue eternally, unless you fight back — early, with all the facts, often yourself — until the truth gets in the way of the search engine lies.”

When a corporate reputation is tarnished, a company can lose its trust factor; investor confidence is weakened; and a company’s share price can be reduced.  In extreme cases, a damaged reputation can lead to a company’s downfall. “Hackgate,” “Rupertgate,” or “Murdochgate” -– names given by the press to the News International phone-hacking scandal – led to the demise of News of the World newspaper.

Let’s make a list of some leading triggers to reputation failure: 

  • unethical behavior such as Sears’ management team’s unrealistic performance quotas for its car repair business, which led to overbilling and created a scandal in the 1990s.
  • financial irregularities, such as those that led to Enron’s bankruptcy.
  • executive misconduct, such as the conviction tied to insider trading that led to Martha Stewart’s resignation.
  • environmental violations, such as Nike’s exploitation of workers in sweatshops, failure to provide work environments that are safe and contact with cotton factories using slave labor—issues that dogged Nike through the 1990s and beyond.
  • safety & health product recalls, such as followed allegations of “unintended acceleration” in Toyota cars.
  • security breaches, such as the recent one at Target in which tens of millions of people had credit-card data stolen.

In other words, much as Murphy’s Law says:  “Anything that can go wrong will go wrong.” 

What should a corporation do to protect its reputation? 

  • Use your CEO: Fred Smith, FedEx’s legendary founder, is a good example.  A good CEO embodies and reiterates a company’s values, code of ethics and vision.  Your CEO regularly communicates honesty and transparency and is trusted with your corporate reputation. 
  • Perform an S.W.O.T. analysis: Identify your company’s strengths, weaknesses, opportunities and threats. 
  • Develop a corporate reputation strategy:  Johnson & Johnson is still reaping reputation benefits more than 30 years after its swift and sweeping recall of Tylenol and institution of tamper-proof packaging after some maniac laced some pills with cyanide and put them in bottles on store shelves, killing seven people.
  • Monitor your reputation online.  Constantly check social media sites and your own website. No company can afford to be reputation-blind, and no suit of armor is impenetrable.
  • Be honest, factual and open with the media. 
  • Create a plan to manage an unexpected crisis.  Execution is the cornerstone. Train everyone on identifying the crisis, what to do and who gets contacted.   Preparation is essential to managing potential and actual crises in a timely fashion.  Communication is no longer one-way; it’s now two-way. 
  • Evaluate the purchase of corporate reputation insurance. For 20 years, the insurance industry has known that how a company manages a reputation crisis will have a dramatic impact on the cost of civil litigation arising out of that crisis.  For this reason, insurance purchased for the risk of shareholder lawsuits, directors and officers insurance, has from time to time included an option to purchase, or included automatically, “crisis management” insurance. This reimburses the company for the cost of crisis management expert fees up to a set amount, usually $50,000 to $200,000.

However, since 2010, there has been an outbreak of “new and improved” reputation insurance policies from name-brand insurance carriers like Zurich (Brand Assurance), AIG (ReputationGuard), Munich Re (Reputation Insurance) and a number of Lloyds syndicates, including a standalone reputation policy produced by Steel City Re.

Some carriers emphasize reimbursement of crisis-management expenses while others are more geared toward reimbursing a company for a loss. Finding the right one, or right combination, can be challenging, but they are worth a look.

Be sure to check out Thought Leader Ty Sagalow's recent appearance on New York News!

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