Advisen

Corporate directors who 'overpromise and overpromote' risk liability for reputational harm

By Erin Ayers, Advisen

In a time of 24-hour news cycles, a global pandemic, and economic uncertainty, organizations face more risk of damage to their reputations now than at any time, and corporate boards of directors increasingly face liability for not managing stakeholder expectations effectively.

“In this era, the importance of reputational risk management cannot be understated,” said Nir Kossovsky, CEO of Steel City Re, which specializes in reputational risk resilience and parametric insurance. Research shows that global executives attribute 63% of their market value to their good reputations.

For corporate board members, reputational damage carries more legal liability now than ever, making it imperative for risk professionals to guide the risk mitigation process. A bad reputation can become a governance risk when it negatively affects stock price.

“If boards don’t give risk professionals the authority and resources they need to build an expansive reputation risk management process, the vast majority of those board members will suffer personally if their firms are called to account in the courts of law and public opinion,” observed Kossovsky.

Lawsuits alleging reputational damage increased 60% this year, according to the Steel City Re’s research, and 72% of board members feel they are personally harmed by the litigation.

“Every time a company overpromises and overpromotes itself, it is exposing itself and its board members to legal and reputational risk,” said Kossovksy. “Risk professionals need to be able to make a compelling case to their boards that the world of reputational risk has changed, and a new approach is necessary.”

Steel City Re has been analyzing reputational risk for over 20 years, Kossovsky explained. The firm has done extensive research into some of the top corporate crises over the past decade and how events such as Johnson & Johnson’s product liability litigation, Boeing’s 737 Max safety issues, and Target’s data breach ultimately affected those firms’ reputation and the steps that should be taken by corporate governance, finance, and risk professionals to mitigate harm.

The “story” an organization tells to support its actions can make all the difference, Kossovsky said, but he warned that reputational risk management must not fall only to the marketing and communication after a crisis. Emotions, particularly fear around the COVID-19 pandemic, can drive reputational crises and stakeholder expectations need to be factored in long before a crisis.

Directors and officers are missing an opportunity if, during the talk of cashflow and economic shutdowns, they aren’t talking about reputational risk management and resilience, according to Kossovksy.

“The management of fear, anger, and disappointment is going to be that x factor,” he said. That message of resilience and managing expectations needs to be driven throughout an organization by the board and statements, particularly around environmental, social, and corporate governance (ESG) need to be backed up by quantifiable action.

“Bottom line – companies that meet stakeholder expectations will be rewarded, no matter what is going on anywhere in the world,” said Kossovsky.