May 31, 2022
Chief marketing and communications officers don’t usually spend a lot of time with their companies’ chief risk officers. Risk management is about buying insurance, isn’t it?
Risk managers are now central to the process for managing risks to reputation: a process marketing and communications professionals need to be a part of.
Courts continue to rule that reputation is a “mission critical function” and oversight of its management is the responsibility of the board of directors. Courts are also ruling that marketing statements companies make–if they are related to issues that affect their reputation, like Environmental Social Governance (ESG)–are potentially material for investors.
The Security Exchange Commission proposed new rules requiring disclosures from public companies related to their ESG activities. Those statements can become a communications and reputational minefield.
As a result, reputation risk management is evolving into an intelligence-gathering operation spanning the entire enterprise, roping in the enterprise risk manager, compliance counsel and, increasingly, reporting up to the chief legal officer. There is a growing recognition that reputation is not a product merely of marketing and media coverage, but of the degree to which stakeholders’ expectations are aligned with actual performance. The reputation risk management process requires a thorough and ongoing analysis of stakeholder expectations, the risks of disappointment and a plan for either managing those expectations or assessing and insuring against the cost of failure.
This is a tremendous opportunity for anyone whose job involves communication with all stakeholder audiences: customers, employees, vendors creditors, investors, regulators, social license holders and activists. This presents a risk management imperative for communications leaders to have a seat at the table in discussing the operational activities and challenges that are often given to marketing and communications after the key decisions are made.
This shift is an opportunity to weigh in on reputational risks as the experts within the organization on public perceptions and the tangible impacts of shattered expectations. While media and social discourse may not be the underlying cause of reputational crises, they certainly amplify the effects after the fact. Including marketing and communications in the risk management process ensures this important perspective will be part of the analysis.
It's also important to have a seat at the table because companies that have robust reputation risk management processes in place–and then communicate publicly about them–earn a “reputation premium,” outperforming their peers in the performance of their stock price.
A study conducted by reputation and ESG insurer Steel City Re found that companies with ESG and reputational risk protection strategies have seen their stock prices outperform the market by 5% within two weeks of a reputational challenge, and by almost 10% for companies that have communicated publicly with stakeholders about those strategies.
Apollo Global Management (NYSE:APO) is a case in point. Last year, it took a very public step to protect its enterprise value by detailing and authenticating its enterprise reputation risk governance and management systems in a report written by a respected third-party, an outside law firm. Shareholders the next day increased Apollo’s equity value by 7.2%. Equity market momentum over the next two weeks sustained and grew the increase to 11%, adding a total of $1.1 billion to Apollo’s market capitalization.
Building the reputation risk management apparatus was rewarded – once the company communicated about it in a very public announcement. The communications strategy and execution remain an important value add.
The advice we offer to marketing and communications leaders is this: when the risk management team or general counsel engage you about a shift in reputation risk management, rather than fighting over budgets and protecting your turf, embrace the opportunity. Reputation risk management requires a breaking down of silos. And it will provide you with a seat at the table for the kind of cross functional, operational planning and policy discussions you’ve always wanted to be a part of.
Perhaps most important, it will be an opportunity to place a clear value on the effectiveness of your communications related to a function that is core to the organization’s future.
Nir Kossovsky is CEO of Steel City Re, which mitigates the hazards of reputation risk with parametric reputation insurances, ESG insurances, and risk management advisory services.
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