Page 28 - Demo

COVER FEATURE l REPUTATIONAL RISK
Corporate boards are increasingly asking risk managers to find ways to protect their reputations. But important ques- tions remain: What is a reputation? What is it worth?
Damage to a reputation is a nebulous, intangible thing, lead- ing to some debate among risk managers as to whether it is, strictly speaking, a risk.
“There’s never a risk to your reputation,” says Christine Maligec, president of the Northern Alberta RIMS Chapter. “What happens to your reputation is an outcome. You do good things, good things happen, and people see you favour- ably. You do bad things, people see you unfavourably. It’s not a risk, it’s an outcome.”
Tina Gardiner, RIMS Canada Council president, sees Ma- ligec’s point. But she still believes that reputational damage qualifies as a risk. “When I look at a corporation, and I look at the things that could go wrong — or that could lead to opportu- nities, if viewed properly — you have to follow the basic man- agement steps,” Gardiner says. “You have to be able to identify what those potential risks or opportunities are. You have to an- alyze the likelihood and severity of something going wrong, and you have to be able to assess it and prioritize.... From that per- spective, it’s a risk, because you are applying risk management techniques to control the outcomes.”
To underwrite a risk, you need to define it in an insurance
Damage to a reputation is a nebulous, intangible thing, leading to some debate among risk managers as
to whether it is, strictly speaking, a “risk.”
policy. And that’s where things get tricky.
Carol Fox, vice president of strategic initiatives at RIMS, is
among a group of risk managers who produced the 2013 re- port, Understanding Reputational Risk. She refers to the paper’s comprehensive definition of reputational risk: “Reputational risk can be defined as the uncertainty related to those internal- ly- and externally-generated events, issues, perceptions and actions that could materially enhance or detract, either incre- mentally or abruptly, from the value of an organization’s assets including performance, core business practices, and manage- ment decisions within and outside of the organization.”
The paper goes on to note that “reputation is generally un- derstood as the recognized standing of a business or entity — what we actually are seen to be.”
And who is doing the “seeing” (or judging) in this scenario?
An organization’s reputation can shift at any time in the eyes of its public shareholders, creditors, investors, regulators, politicians, consumers, business clients, media, supply chain partners, associates, and employees. And in today’s age of so- cial media, whatever bad behaviours may be exposed, becomes readily apparent to everyone in the world with a simple tweet.
IS REPUTATIONAL RISK INSURABLE?
Can something so amorphous as “public opinion” lead to a quantifiable insured loss for an organization?
“When we look at insurance, we are really talking about fi- nancialization of risk,” says Gregory Eskins, who leads Cana- da’s FINPRO practice within Marsh. “We’re looking to quan- tify and price risk. That leads back to the question, ‘How does an organization view the value of its reputation?’ By extension, what inputs and variables go into making up the financial value of that reputation?”
Stock price is often cited as one of those variables or inputs, as noted by Darius Delon, president of Calgary-based Risk Management 101. “Let’s say your stock is at $30,” he explains. “Something happens tomorrow, and your stock is at $20. You can argue that your reputation was harmed to the tune of $10 [per share]. If the stock rebounds, then what is the actual dam- age to the reputation? You could look at the revenue: did the revenue rebound as the stock market came back up? There’s a
28 September 2019 | Canadian Underwriter