The situation faced by BP as the oil spill in the Gulf of Mexico ran on for weeks with increasing amounts of pollution washing ashore was a collapse of its reputation due to operational failures in the original oil rig accident and the subsequent cleanup effort.
The stock price plunged as the oil producer, which can trace its origins back to 1908, faced a battery of legal and liability claims that threatened to empty even its very deep pockets.
Companies sometimes have to adopt massive and costly measures to stem the threat of reputational risk. In late 2009 and early 2010, Toyota had to recall some 9 million vehicles after a number of fatal accidents were attributed to unintended acceleration. The auto giant also had to suspend sales of several models while fixing the problems.
Banks, the quintessential managers of risk, have wrestled with the problem of how to measure reputational risk and how to safeguard against it. Many banks consider it an effect of failures in the three major risk categories – credit risk, market risk, and operational risk, says staff writer David Benyon in a specialist publication on bank risk management.
But operational risk itself was considered impossible to measure just a decade ago, Benyon adds, so that some risk managers anticipate an evolution in assessing and managing reputational risk.
Goldman Sachs acknowledged the issue in a filing earlier this year with the Securities and Exchange Commission after a spate of negative publicity about its actions in selling the mortgage-backed securities blamed for causing the 2008-09 financial crisis.
The “adverse publicity … can also have a negative impact on our reputation and on the morale and performance of our employees, which could adversely affect our businesses and results of operations,” Goldman said in the filing.
The Spanish bank Santander spent an estimated 500 million euros in early 2009 to make good the losses by investors in one of its funds that placed money with Bernie Madoff, an investment manager who pleaded guilty to running a Ponzi scheme that led to investor losses of some $50 billion altogether.
Sometimes these efforts fall short and lead to the company’s demise, as was the case with Enron and Andersen. In June 2010, the security firm Blackwater put itself up for sale after various efforts to repair damage to its reputation from actions in Iraq were unsuccessful.
A roundtable discussion at the Association of Insurance and Risk Managers in April found that risk managers overwhelmingly agree that reputational risk is important to their organizations, but only 6% felt they were leaders in this field.
While Toyota seemed on the road to recovery after its decisive action, the eventual fates of BP and Goldman Sachs remained to be determined in mid-2010. What was certain is that corporate risk managers will be paying more attention to reputational risk.
“Why chatter matters,” by David Benyon,OpRisk & Compliance, January 2010.
“A good name? Priceless,” Strategic Risk, April 1, 2010