Nir Kossovsky is CEO of Steel City Re, which analyzes the reputational strength and resilience of companies and provides tools including insurance to protect companies, their officers and directors against financial losses when reputational crises occur.
Reports of African swine fever in China are a clear public health concern. Beyond any issues that may affect the actual supply of pork, an outbreak of this disease could be a reputational catastrophe for the pork industry worldwide — regardless of whether a particular company has actually been affected. This is an example of vicarious risk — fear on the part of stakeholders about the potential spread of the disease potentially affecting an entire industry.
How can U.S. suppliers distinguish themselves and mitigate the consequences of such a scare? Fortunately, history provides some examples of successful — and unsuccessful — strategies.
Take, for example, the 2009 deadly salmonella outbreak that was linked to peanut butter produced by Peanut Corporation of America. Not only did the offending brand come under fire for the incident, non-offending brands from J.M. Smucker and Conagra did as well. In hopes of quelling consumer fears and encouraging purchases, these other brands tried to differentiate themselves from the contamination scare through the traditional method of marketing. They ran ads and offered coupons, but their jarred peanut butter sales had already been driven down by stakeholder fear by as much as 24%.
This outcome is not surprising. It’s not unusual for companies to mistakenly treat reputational risk as a marketing and communications issue. But reputational risk is not merely the peril of negative media. It’s an enterprisewide emotionally charged peril. Rather than handing it off to marketing departments, reputation risk needs to be managed and mitigated with enterprise risk management solutions.
Successful solutions date back to the 19th century. As a result of a number of explosions, steam boilers had developed a reputation for being dangerous. The Hartford Steam Boiler Inspection and Insurance Company began offering insurance, but only after it had inspected a boiler and determined it to be safe.
That seal of approval was more important than the actual indemnification. It differentiated safe boilers from unsafe ones by signaling to the public that any boiler carrying this insurance had been inspected and validated by a third party.
Likewise, the creation of the Federal Deposit Insurance Corp. in the 1930s, at a time when bank failures had caused a reputational crisis for the entire industry. The FDIC sticker in a bank’s window signaled to the public that the bank’s operations and practices were sound and could be relied upon, even in an economic downturn.
What these successful examples have in common is the recognition that reputational crises are not caused by negative media, but by operational and governance issues that could affect the entire enterprise.
Negative media – and especially social media – merely amplifies the crisis. As a result, responsibility for reputation should be vested in the risk management department and treated as an enterprisewide risk. Clear expectations can be set. Foreseen and unforeseen reputation-related events can be clearly analyzed, and third-party warranties —such as reputation insurance products — can be used to attest to the soundness of companies’ practices and governance.
Taking such measures builds trust in companies’ management and products and allows the average stakeholder to remain steadfast in his confidence in the brand. It’s like insurance for a town in tornado country — reassuring residents that their town’s system of alerts, storm shelters and building codes have all been reviewed and validated by the third parties who write their insurance policies.
The entrance of foreign animal disease into the United States — and the subsequent reputational consequences that would have on the market — is obviously a major risk, but it isn’t the only one. The pork industry faces other reputational perils every day.
Other issues may include supply chain failures that affect quality, safety or delivery schedules; recalls stemming from issues in manufacturing or packaging; or cultural changes companies may or may not foresee, but over which they have little if any control, like opinions on the ethical treatment of pigs. Each of these issues, and how quickly media sources amplify them, have the potential to build into a crisis that destroys companies’ reputations and damages bottom lines.
When stakeholders are confident in a company’s governance and operations, they are more likely to consider incidents to be anomalies. But when stakeholders lack confidence, they are more likely to fear that an incident is a symptom of a larger problem in the enterprise’s C-suite or board room.
If pork companies want to come out on top of a reputational crisis, they need to have a pre-positioned, simple to understand and completely credible affirmative story in place to counteract misinformation, curb scares and encourage stakeholders to give companies and their leadership the benefit of the doubt.