Out-Law Analysis | 09 Oct 2015 | 4:04 pm | 4 min. read
Damaged reputations can cost significant sums and companies will want to protect themselves. Insurers such as Tokio Marine Kiln are already providing some protection for losses connected to reputational damage.
Building and maintaining a strong reputation is at the core of any organisation's success, and the digital world is making that job harder.
Companies can face attack on their image from a range of sources, including via social media rumours, mis-reporting in the media, unfounded statements made by competitors, action taken by regulators or from cyber attacks.
A new study shows protecting their image is a top priority for businesses. Insurers have an opportunity to meet that demand, but must also take steps to address the risks facing their own business.
Corporate reputation a top priority
According to a new report by Aon, damage to brand and reputation is the number one concern for businesses.
In its global risk management survey, which charted more than 1,400 companies' attitudes towards risk, damage to brand and reputation was rated as a greater concern by businesses than economic slowdown, regulatory changes and increased competition, among other risks.
The report said: "Major headlines about massive data breaches, large-scale product recalls, mysterious plane crashes, and aggressive government investigations have raised concerns about corporate reputation and brand damage. The unpredictable nature of such crises in an age of 24-hour news cycles and instant social media poses a serious threat to a company’s hard-earned global image."
The Aon survey results accord with findings in a Deloitte survey on reputational risk in 2014. According to the Deloitte study, 87% of executives rate reputation risk as more important than other strategic risks, and 88% of executives believe their companies are explicitly focusing on managing reputation risk.
In the new digital world, threats come from all quarters
Whilst risks to corporate reputation can stem from 'old world' media reports, and require companies to consider how they can control coverage through PR and potentially tackle serious false allegations with the threat of legal action in defamation and malicious falsehood, the rise of social media and cyber risk are two newer threats that businesses need to be prepared to deal with.
Social media enables instant, global and unfettered communication. Some content is spontaneous, ill-considered and misjudged; some forms part of a carefully planned campaign, for example by an organised action group. Companies do not want to be seen to be taking heavy handed action against disgruntled customers who vent frustrations on social media. However, in cases where the line is crossed, businesses will often have no option but to use legal tools to defend their brand. Last year, the number of libel cases prompted by social media posts rose 300%.
Considering cyber risk, for most organisations the question is not whether they will suffer a security incident, but when they will be hit, and what they will do when it happens. Whether a cyber attack involves online theft or exploitation of intellectual property, business information and customer data, or a denial of service, it can go to the heart of any organisation.
The fallout from cyber attacks can be significant. Businesses need only to look at incidents involving the US retailer Target, where senior executives left their jobs following a major data breach, or the more recent attack on Ashley Madison, to see the potential risks to corporate reputation cyber attacks bring.
However, just 33% of respondents to a Pinsent Masons study said their businesses are well equipped to deal with cyber risk. Businesses need a data breach response plan to ensure that their reaction to cyber security incidents is decisive and effective.
A myriad of other risks to corporate reputation can arise from other sources. Businesses face potentially unscrupulous attacks from competitors. They can face regulatory investigations that damage their image in the public eye. Rogue employees and whistleblowers can expose business practices to criticism, whether fairly or not.
Risks to reputation arise too when faults are found in products and recalls are required, or if major health and safety issues occur. The accident at the rollercoaster at Alton Towers earlier this year shows the negative media attention such incidents can spur and the effect it can have on profits. The actions of company directors can also sometimes hit the headlines, and bring negative publicity that can damage brands. The scandal that engulfed the Co-operative Bank is a case in point.
Insurers' role in brand protection
Businesses can use a mix of PR and legal tools to protect their corporate reputation when it is under attack. Sometimes a nuanced PR strategy, and/or social media response, will be necessary when damaging, but true, allegations about the company go public.
In other cases, a harder-line response, reliant on laws on defamation, malicious falsehood and intellectual property for companies, and potentially privacy, harassment, and data protection for individuals such as employees or directors, will be appropriate.
However, the insurance market is now recognising the broad risks and threats companies face in protecting their corporate reputation. Some have already developed products that allow clients to transfer those risks, such as Tokio Marine Kiln whose indemnity is triggered when companies lose profits as a result of an adverse media event.
The reputational harm market provides an opportunity for insurers. Customers are increasingly aware of the importance of protecting, and value of, corporate reputations.
There are also steps insurers should take to manage reputational risks themselves internally. Measures might include staging regular staff training, to setting out robust and well developed policies and procedures, for example regarding the use of social media.
A particular threat for insurers is where underwriters move to new employers and take with them confidential information, such as client lists or details of premiums and renewal dates. The law of confidence and those on database rights can help insurers prevent staff using this information when they move on.
Insurers should consider rehearsing how they respond to mock incidents that would have the potential to impact on their corporate reputation if they were to play out in reality.
Ian Birdsey is an expert in corporate reputation management at Pinsent Masons, the law firm behind Out-Law.com