What Financial Leaders Don’t Know About Reputational Risk

By Nir Kossovsky, CEO, Steel City Re

Wells Fargo agrees to a $2 billion settlement over mortgage backed securities issues and negative coverage appears in media outlets across the country – but there’s little or no impact on the company’s stock price or other financial metrics.

Facebook faces withering headlines over privacy issues and see no negative impact until months later, when additional revelations come to light and it becomes clear that fixing their problems is going to be more costly and complicated than they’d originally thought.

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President Trump returns from Helsinki to a devastating barrage of negative media coverage and his poll numbers remain steady.

Rarely has the disconnect between negative media coverage and reputational damage been this clear. And it demonstrates in vivid and tangible ways how leaders of financial institutions need to rethink reputational risk – how to define it, defend against it and mitigate the damage when reputational events occur.

President Trump clearly recognizes that reputational damage doesn’t occur because of screaming negative headlines or hostile, bruising media coverage.  Damage is only done when your “audience” – stakeholders in the corporate world – feel you haven’t lived up to their expectations.

Nir Kossovsky
Nir Kossovsky

It would be hard to imagine anyone being the target of more negative commentary than President Trump has been in the days following his meeting with Vladimir Putin.  There seemed to be no refuge as even normally friendly media outlets, pundits and politicians reported on events with an air of almost breathless shock and disappointment, using words like “unprecedented,” “disgraceful,” and “the biggest mistake of his Presidency.”

And yet, in the wake of this sustained public flogging, reports showed: “After Putin Meeting, Most Trump Voters Dig In” and “Poll Finds 71 Percent of Republicans Approve of Trump’s Handling of Russia.”

That provides an important lesson for corporate executives, but particularly for those leading financial institutions that are routinely in the media crosshairs. Only when there is a gap between stakeholders’ expectations and actual performance, does negative media coverage actually make a difference – accelerating the decline.  But when you’re doing what they expect you to do – even when they don’t particularly care for it, even when the media hammers you for it – reputational value remains stable.

Even though reputational risk has long been considered a significant issue in the corporate world, included in annual reports by 90% of the S&P 500as among the material risks they face, most executives and board members still consider it a marketing issue – an intangible, difficult to quantify risk defined largely by negative publicity and the volume of social media attacks.  And while they disclose it in their SEC filings, they usually fail to describe a systematic, enterprise-wide process for mitigation or governance, leaving its management to the marketing department.

That approach leaves directors and officers exposed.  When you recognize and disclose your perception that reputational risk is meaningful, but you fail to take steps to define it, quantify it and mitigate it on an enterprise-wide level, you are setting expectations and not meeting them.  Perhaps that crisis will never come, but if it does, the media will be merciless in amplifying it, stakeholders will be angry, the company will be damaged financially, and directors and officers may find their jobs and future income in jeopardy.

Reputation is not merely a marketing issue – it is an enterprise risk management issue that affects the entire organization and requires enterprise-wide systems to protect it.  Companies need to consider these risks and plan to mitigate them just as they would an operational crisis, but at the same time with one eye on crisis communications strategies and the third eye on pre-emptive stakeholder expectation management.

Stakeholders will forgive an unanticipated operational failure if they believe the company did everything before the crisis it said it could to avoid the situation. That’s what they expect of companies they invest in or do business with.  Setting those expectations accurately and prudently at the outset is also a key.  When President Trump famously said that he could “stand in the middle of Fifth Avenue and shoot somebody” and not lose any of his support, he was actually setting expectations for unprecedented behaviors.  That strategy is serving him well as he acts in ways that outrage many observers, including those in the media, but are completely consistent with the expectations of the people who elected him.

We’re not advocating a lowering of the expectations bar to the “shoot somebody on Fifth Avenue” level. Rather, companies need to raise and integrate their expectation management, risk management, and risk governance games to address and defend against the reputational tornadoes we know are on the horizon.

Dr. Nir Kossovsky is CEO of Steel City Re, which analyzes the reputational strength and resilience of companies and provides tools to protect those companies, their officers and directors against financial losses when reputational crises occur.

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