ESG pledges, unmet, will leave stakeholders disappointed and pose the greatest enterprise risks of all, warns Nir Kossovsky and Denise Williamee
The cost of Directors & Officers (D&O) liability coverage is rising to unsustainable levels. Boards are incurring increasing personal risk as their duty of oversight expands to cover a wide array of corporate citizenship pledges – ranging from the aspirational reordering of stakeholder priority to the commitment to meet new environmental, social and governance (ESG) performance goals.
Companies are setting stakeholder expectations and betting their reputations on these aspirational commitments – sometimes without a matching operational commitment. This can be a recipe for reputational disaster. Boards that fail to oversee these activities effectively are going to find their own reputations dragged down at the same time.
According to Agenda, a Financial Times service, “72% of directors say that companies’ reputational crises reflect negatively on board members.” Agenda also found that, in the year ending in June 2020, the number of lawsuits seeking to hold directors accountable for missteps that harmed corporate reputation increased nearly 60% from the prior year.
A joint whitepaper recently released by AIRMIC and RIMS suggests that the insurance industry is aware of the litigation costs of reputation loss: “Reputational loss can be significant and can include…litigation expenses.”
Insurers are clearly aware of the benefits of reputation risk management and the RIMS/AIRMIC whitepaper credits them with “establishing a link between the reputational event and financial consequences.”
The executives charged with managing enterprise risks need to take action. And they need to be provided with the resources and authority to address issues that in management and governance that are mission critical to their companies. ESG pledges, unmet, will leave stakeholders disappointed and pose the greatest enterprise risks of all.
A reputational crisis is when stakeholders, disappointed by a company’s failings, make choices that adversely affect the company. The actions of those stakeholders can cascade to include reduced sales, impaired employee morale, nuclear verdicts and increased cost of capital. All of which can drop stock prices and trigger lawsuits alleging a board’s failure to fulfil its duty of loyalty. In short, many perils, many forms of economic loss, and one overarching name: reputation risk.
Which is why risk professionals must upgrade their reputational risk governance, operational oversight and reputation insurance portfolio.
Reputation risk can be identified, managed, mitigated and insured – just like any other class of risk. Doing so requires risk professionals to be part of an integrated group that can gather intelligence from across the entire enterprise.
Risk professionals must understand all promises made, their stakeholders’ expectations, and where gaps exist between those expectations and reality. Utilising these “centralised intelligence” tools and reputation insurances in connection with ESG commitments communicates a simple, easy to understand, and completely credible story of good corporate governance to stakeholders. It is a story marketing and investor relations professionals would love to share.
Oddly, however, some in our industry are still mystified by the intangible nature of reputation. It’s not a mystery.
Clear parametric definitions for reputation and reputational crises have been in use for years. The definition of reputation is very clear to board members sued for damaging it, CFOs trying avert a liquidity crisis because of its loss, risk managers trying to mitigate damage to a range of corporate tangible and intangible assets, marketing executives trying to rebuild it, and insurers willing to help underwrite the risk.
This should not merely be an imperative for risk managers, but for insurers as well. If ever there was a bright flashing light alerting insurers to an opportunity, this is it.
Reputational insurance products – diligently underwritten – will mitigate many of the exposures that traditional D&O policies typically cover. Used in tandem, reputation insurance could enable D&O carriers to soften the premiums that are alienating customers and leaving many searching for alternative solutions.
More expansive thinking about risk management, greater oversight by boards around reputational challenges posed by ESG and other pledges, and insurers’ openness to rewarding companies for credible insurance-backed reputation risk management, could provide an answer to some critical issues companies, managers of risk, brokers, and insurers commonly face.
Nir Kossovsky is CEO of Steel City Re, which combines financial modeling strategies with insights from informational and behavioral economics to provide reputation risk management and insurance solutions for companies and their directors and officers.
Denise Williamee is Steel City Re’s vice president of Corporate Services, where she heads client relations and education for integrated reputation groups.