Exploring the option of reputation risks

Tope Adaramola

Companies operating in today’s complex and fast changing business environment are exposed to an increasingly diverse set of risks. For many, these risks can be divided into three distinct categories – operational, financial, and business – with different individuals in the company being responsible for each one. However, one which has continued to cry for cover within and beyond our clime is image or reputation risk.

We are definitely in an epoch when image matters above all things. This underscores the popular aphorism that image is everything. Whether as an individual or corporate institution, image projection and protection have remained valued endeavours that must be factored into decisions of individuals or organisations. Image – or reputation, as some prefer to call it – comprises three fundamental elements: personality, which has to do with the character and ethos of the organisation (which guide its operational behavior); identity, which is the totality of what the organisation says or wants to be seen as; and perception, which denotes how stakeholders view the company or impression they hold about the organisation.

Reputational Compliance

Reputational Compliance

A company’s reputation is important because it affects the way various stakeholders behave towards it. This applies in equal measure to employees, investors, customers and the general public and influences such key issues as employee retention, customer satisfaction, customer loyalty and investor relations. Organisations that will have sustainable existence need to constantly realise that reputation is built in the realm of the mind as a set of memories, perceptions and opinions that sit in the stakeholders’ consciousness.

In spite of the crucial place of reputation building, it is most regrettable that different stakeholders prioritise corporate reputation in a different order. For example, investors believe that financial performance is by far the most important characteristic, followed by quality of management. For customers, however, the quality of services and products, together with customer service, are the highest priorities.

An x-ray of accountancy practices shows that such practices do not allow many companies to put a financial value on their own corporate reputation in the balance sheet. Such companies treat the inclusion of individual product brand value or directors’ reputation lackadaisically in their financial calculus. Contrariwise, PR pundits have continued to hold the views that a company’s reputation constitutes (conservatively) between 66 and 100 percent of its annual revenues.

The question that may be agitating for answer is: How can a company’s reputation be at a risk? Although a single occurrence or event on its own may rarely threaten a business reputation, more often than not, it is an event – followed by poor management of the consequences – that jeopardise corporate reputation. Events that sound reputation alarms include fraud, marketing fiasco, hostile take-over, loss of regulatory approval, etc.

So, how does the insurance industry mitigate reputation risks? Traditionally, there are three types of risks underwritten by the industry, namely: occupational risks, such as property damage and employers’ liability. In such cases, quantifying the immediate losses involved is straightforward. For property, it is a case of establishing the value of the property; and in liability, losses are defined by the courts. Additional losses are often covered under insurance policies. What is not covered is the impact on the company’s reputation.

Of the various types of risks, reputation risk is perhaps the hardest for insurers to tackle. Reputation is essentially an intangible asset that accountants and specialist firms are still struggling to quantify in monetary terms. Because of this, very little cover has been available to companies that want to protect themselves against damage to their intangible assets, brand value and reputation, and future income these will generate. Although insurance may respond to the immediate losses resulting from product failure, it has not traditionally provided an effective method of protecting a brand.

Given the unstable nature of the Nigerian society and economy and its attendant negative impact on corporate existence, the insurance industry must begin to think about how to make itself relevant in providing covers for reputation risk. It is a known fact that traditional insurance offers no protection for reputation, despite the fact that research has shown adverse publicity to be directors’ greatest fear. For instance, the nation’s financial services sector, of which the banking sector is a principal arm, not too long ago witnessed terrifying summersaults, leading to the closure or merger of some banks, while their high profile managers of yesterday found themselves in the nadir of social significance. The same goes for other companies in other sectors of the economy whose image ratings in the general and stock market had nosedived considerably, with negative impact on the fortunes of the companies.

As part of the increasing desire to grow the insurance industry in Nigeria, it has become apposite for the industry to critically view and address its mind to this area of risk. To avail itself of help on how to go about this, the industry needs to engage the services of specialist consultants and PR practitioners who would assist with the identification of image risks and proactive action needed to soften their impact. This would ultimately mark another avenue for growing the Nigeria insurance market in order to bolster its direly needed contribution to the nation’s Gross Domestic Product.

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