5. Damage to Reputation/Brand
At the end of each year, many international media outlets and public relations firms release their lists of notable events relating to corporate reputational crises to illustrate the importance of brand and reputational management. This was no exception in 2020. We have culled 10 high-profile cases from their lists to gauge how these headlines affect companies’ perceptions of reputational risks.
- The CEO of a U.S. food company triggered a massive boycott of his company on social media after meeting with U.S. President Donald Trump in the White House and showering him with praise.
- An international hotel chain disclosed a new data breach impacting 5.2 million guests.
- More than 10,000 workers became sick from COVID-19 at a U.S. food-processing plant during the first three months of the outbreak. A plant manager organized a betting pool to wager how many employees would test positive for COVID-19.
- U.S. airports were unprepared for chaos when passengers came rushing back from abroad during the pandemic, forcing passengers into packed lines and raising fears of fresh outbreaks.
- A European carmaker pulled social media ads after public outcry and apologized for their racist overtone.
- Multiple Western banks and corporations faced accusations of supporting China’s new security law in Hong Kong.
- A U.S. fast-food chain launched a vegan burger that contained eggs and was cooked on the same grill as burgers made of meat.
- A European software giant fell victim to a double extortion attack, resulting in a forced shutdown of internal systems.
- A U.S. technology giant reached a $310 million sexual harassment settlement.
- A Canadian apparel company promoted an Instagram link with a T-shirt bearing an image that netizens say could stir up anti-Asian sentiment and racism.
Given the devasting impact of the global pandemic on global businesses, many assumed that corporate reputational issues would be overshadowed. A veteran public relations expert even joked, “If you were going to have a PR disaster, this was the year to do it.” Obviously, the 2020 headlines we have just cited invalidate such an assumption and affect the perception of this risk.
In Aon’s 2021 Global Risk Management Survey, damage to reputation or brand is listed at number five, two ranks above pandemic risk and health crisis. In Aon’s previous three surveys, the risk of damage ranked at number one and number two, respectively.
This risk perception is justified. A joint Aon-Pentland Analytics study reveals that a major reputational crisis causes shareholders to lose an average of 26 percent of value at some point during the post-crisis year. Pentland Analytics’ Reputation Crisis Databank currently includes 300 corporate reputation crises spanning the last four decades. In 36 of the 300 global reputation crises studied, more than 50 percent of value is destroyed. Across the 40-year study period, reputation crises destroyed $1.2 trillion in shareholder value.
In North America, where corporate reputational crises such as financial fraud, neglect of employee health during the pandemic, racially offensive messages in advertising and inappropriate executive tweets frequently dominate the headlines, participants rated damage to reputation or brand at number three.
In the Asia Pacific region, there has been a spate of high-profile corporate scandals in countries such as China, Japan, Singapore and Thailand. That explains why surveyed businesses in the region rank damage to reputation at number four.
Public sector participants see reputational damage as a number one risk. This is probably due to governments’ poor handling of the COVID-19 crisis, a series of high-profile political scandals and extreme partisan politics in many countries, all of which undermined the public’s trust in government institutions.
From these major headlines in recent years, experts have detected a new trend: Reputational risks are increasingly caused by incidents that are sometimes unrelated to the company’s products and services, but instead emanate from areas such as their environmental, social and governance (ESG) agenda, internal workplace relations and association with other firms, suppliers or industries. Media attention (social or traditional) often amplifies their impact, sparking widespread public backlash.
For example, there is a growing trend of CEOs taking public stances on political and social issues about which they traditionally would have remained silent, sometimes out of their own convictions or at the instigation of employees or customers wanting to know their positions, says Harvard Professor David Larcker. The CEO of a big tech company voiced support for an abortion law in Texas, triggering calls for boycotts of the company’s products and services.
Often, multinational companies are caught in geopolitical quagmires. In “Crisis Review, Top 20 Crises of 2020” by Provoke Media, the author points out that when forced to take sides on geopolitical conflicts, corporations always find themselves “between a rock and a hard place.” Western financial institutions and fashion brands with operations and stores in Hong Kong and mainland China are no stranger to this dilemma. They face the demands of the Chinese authorities on one hand and their stated values and the expectations of western stakeholders on the other. In the summer of 2020, after some companies voiced support for the Chinese government’s new security law, they were slammed by the media and lawmakers in the West. At the same time, companies that criticized the abuse of Uyghurs by Chinese authorities faced boycotts and threats from Chinese consumers. The Chinese technology champion Huawei, which is increasingly ensnared in the global tech cold war between the U.S. and China, constitutes another example.
In this fast-paced digital world with social media readily available to almost everyone, incidents or innuendo that undermines corporate brand and reputation can quickly lead to earnings volatility. It is important for corporate leaders to identify these exposures, however remote they may be, and develop their enterprise risk management programs. Our research shows that scenario analysis, quantification and response rehearsal remain critical to the mitigation of this risk and also to accessing capital to support development of scalable risk transfer products in this space.