The potential for damage from corporate reputational crises isgreater than ever, with market cap, sales, margins and profits allin danger. But in today's heated social media environment — inwhich the public and key stakeholder groups seem all too ready topersonalize their criticism and affix blame on individuals — CEOsare now personally at great risk.

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Professional risk managers — whatever their positions — need tounderstand that traditional executive liability solutions areineffective for these new risks. They need to be able to advisecompany leadership on new tools available to deter attacks and toinsulate their clients when attacks do occur.

Reputational risk evolution

In the past, companies had to worry only about the directfinancial consequences of workplace accidents, lawsuits orinvestigations, officers and directors felt secure with traditionalD&O policies, and brand executives were skilled at deployingthe full spectrum of the marketing tactics.

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Now, the nature of reputational risk is different. A firestormmay ignite as the result of a factual incident — or it may simplybe a case of “fake news” circulating on social media. Thespeed with which lasting damage can occur is daunting andreputations can be damaged — with consequential financial losses —rapidly and substantially.

A recent study by Steel City Re, which analyzes reputational risk andprovides insurance products to protect companies and theirleadership, found that financial losses related to reputationalattacks have increased by over 400% in the past five years — atrend which continues to rise.

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CEOs under fire

This same study also found an increase in public anger and apreference for stakeholders to direct their frustration towardindividuals, namely CEOs and board members. Directors, feeling theheat from activist investors and other stakeholders, areincreasingly looking toward what they believe is a more appropriatetarget — their CEOs.

(Photo: Shutterstock)

Consider these points, embodied by a recent Wall StreetJournal headline: “Activist Investors Have a New Bloodlust:CEOs.”

• The turnover rate among CEOs is increasing. In 2016, accordingto SpencerStuart, 58of the S&P 500's CEOs transitioned, although not all werepushed out following crises. That is the highest number since 2006,a 13% increase over 2015, and a 57% increase over 2012.
• Fewer CEOs are chairing boards. According to data analyticsfirm Equilar, among S&P500 companies, 35.1% now have a non-executive chairman, up from27.7% in 2012.
• While strong companies and brands tend to recover quickly,individual reputations do not. When a CEO is forced out ofhis position, with related attempts to claw back compensation, thereputational damage affects his or her career and earning capacityfor years to come.

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Proper protection

Protecting against these risks is now crucial and new tools arepresenting themselves that can provide that protection. Thesetactics include:

• Preemptively using third party endorsements and warranties, inthe form of new insurance products that both validate the stronggovernance measures being undertaken and protect against thedownside of unpredictable attacks. Such products make it lesslikely an attack will occur and provide a credible built-in defenseif they do.
• Strategically creating a record of good governance that allowsindividuals in leadership to respond quickly and effectively whenattacked personally. The development of a positive story line as analternative to whatever criticism may surface may get directors thebenefit of the doubt, at least among some stakeholders.
• Providing resources to compensate corporate leaders in theevent all other strategies fail and financial losses areunavoidable.

Companies and executives have long assumed that if they practicegood governance and adopt best in class systems, their reputationswould be secure. The same could have been said a generation ago ofcompanies and their directors and officers in the pre-D&Oinsurance era. That generation learned that dutifully doingthe right thing doesn't always prevent lawsuits.

This generation of corporate leaders is learning the same lessonwith respect to reputation. The damage now is being done inthe court of public opinion, but it happens faster, is morepersonal, and as real as the damages in any litigation. Prudentrisk managers and their advisors need to employ all the toolsavailable to protect them.

Related: D&O: How low can it go?

Nir Kossovsky, MD, is CEO of Steel City Re,which analyzes the reputational strength and resilience ofcompanies and provides insurance products that protect thosecompanies, their officers and directors against financial losseswhen reputational crises occur. He can be reached at [email protected].