How reputational risk has risen in the age of social media

Public Relations with Lenox Lizwi Mhlanga

When we propose to clients that they need to have a social media presence, the response is almost predictable.

They would rather stay out because that would reduce the likelihood of their exposure to unwarranted attacks from the Twitter mob! Whether you are on social media or out, like it or not, people are still going to talk about your brand and what is bad about it.

Several Zimbabwean brands have established this as fact, but after paying an enormous price in the form of battered reputations. Staying out of social media is no longer an option for executives concerned about their share value.

A survey by Pentland Analytics and Aon’s Global Reputational Risk Management found that businesses around the world see reputation damage, amplified by social media, as their top risk management concern.

The rise of social media and online sites means bad news travels far and quick. So, when companies run into reputational risk, they need a quick and strategic response—if at least to minimise harm.

Communications have changed, both the opportunity for error, punished by social media and the sped-up response times, says Dr Deborah Pretty, founding director of Pentland Analytics, co-authors of Aon’s Global Risk Management Survey.

The survey shows how there is a direct correlation between an attack on a company’s reputation and shareholder value. It is therefore critical that the C-suite (that is, the decision-making team) makes the connection between the risk and shareholder value and take measures to protect their reputation should a crisis occur.

The study also finds that companies facing an adverse event, such as a crippling cyber-attack or a major product recall, the impact on value is significant. On average, they lose 5 percent of shareholder value over the year following the event.

Following a reputational crisis, the study divides companies into two distinct groups: winners and losers.

Winners are people who outperform investors’ pre-crisis expectation and gain shareholder value within the year following a reputational crisis, while losers experience a worth decline that exceeds the typical.

The effect of a crisis amplifies a company’s visibility because the market receives substantially more information about it and its management than when the situation is normal.

In Zimbabwe, the opacity of a company’s performance in-between annual financial reports has led to shock in the markets as shareholders scrabble to react to bad news. Journalists have bemoaned the reluctance of executives to part with more insightful information, unlike what happens in the so-called civilised world.

Investors need such information to reassess their expectations of future cashflow. The result could be a dramatic impact on market price. Some management teams impress, and expectations of future performance are even above before the crisis. Others disappoint, and it destroys investor confidence in management.

Companies that “win” in terms of shareholder value following a reputational crisis typically are marked by responses that embrace several key characteristics. These are key actions that companies took not only to overcome the crisis but thrived afterward.

Responding immediately is critical. A delayed response is almost always costly. Delays can lead markets and the public to question the company’s ability to respond adequately and whether the information provided to the public can be trusted.

Delays also provide more time for social media fires to be stoked, dictating the narrative around the crisis. Rather than letting the corporate control its crisis response message. A deep commitment to preparing for risk helps to reduce delays when crisis strikes.

Knowing and sharing the facts is always important. That means moving quickly to gather accurate information about the crisis and its potential impact on the company and the public. Having to issue corrections as the response is rolled out will undercut confidence in the company’s crisis efforts.

Show leadership. A leader who responds decisively in a crisis earns respect. The public reward companies that exhibit strong, visible leadership. This is pivotal to a value-creating response. The CEO who moves quickly to protect consumers by shutting down production of a flawed product and swiftly announce recall plans is a rare yet commendable asset.

Be open. Winners move quickly to tell the general public of the crisis and supply detailed information about the event, the steps they are taking to contain it, and what they are doing to protect the public. They will also keep the public aware of the progress of their response and any changes to the response plan, should they occur. Showing genuine concern is key.

Respond globally. The impact of the reputational crisis is best managed by addressing the crisis globally, whether it’s in terms of the knowledge the corporate shares with markets and therefore the public or the remedies it provides, rather than responding during a piecemeal fashion.

Make amends. Whether with the public for the impact of the crisis, or it is in terms of future product features, consumer protections or restitution, customer data monitoring after a data breach, or engaging in environmental protection activities.

Among the significant cultural shifts affecting the current reputational risk climate is an increasing expectation that companies should not only acknowledge but also make up for their mistakes.

Reputational events often arrive with little or no warning, forcing organisations to respond quickly and in real-time, the report said, adding that it is important for companies to have a comprehensive reputational risk control strategy in place to preserve the consumer’s trust.

The choice for executive management is clear: They can either react to a reputation event or be proactive when it inevitably occurs. To react is to lose control of the event’s narrative, which subjects your brand to the uproar of all those wanting to voice their opinion on social media.

But those proactive brands that properly plan for such adverse events and communicate genuinely will find that the market not only forgives them but may also reward those that embrace and respond effectively to their reputation event.

 Lenox Mhlanga is managing consultant at Sunshine Corporate Communications, a boutique PR agency that specialises in reputation, image, and digital platforms management. He can be contacted at [email protected] Mobile: 0772 400 656