Navigating reputational risk in the ‘social’ & digital business age

The age of social media and an increasingly digitised business environment has significantly altered the way companies operate, hold data and disseminate information. Whilst use of social platforms to reach your audience, gather reviews and capture ratings can have great benefits, it can also pose a threat to its reputation (including the business’ board directors and officers) if reviews and ratings are negative, maliciously false, incorrect or not effectively monitored for prompt remedial action.

Corporate risks associated with improper or unethical conduct, poor customer service and sensitive data breaches  can tarnish a business’ brand and devastate its good name.  Loss of reputation is a significant risk for any business as it can potentially impact on both current and future earnings. Brands or businesses which took time and investment to create and build, could even disappear or be publicly ‘cancelled’ if reputational risk is not effectively managed.

These risks, being complex and dynamic in nature, require ongoing review to be effectively managed. The ability to access and use data on a wide geographical base along with its high velocity for disseminating information requires vigilant corporate governance and appropriate insurance coverage to manage reputational risk. Ongoing review of risks is the responsibility of the business including its board directors, who must review:

  • The adequacy of system and data security and enhance network controls where required.

  • Type of data including sensitive customer records required to be held for business purposes and arranged only to hold data which is essential.

  • The currency and appropriateness of policy, procedures and controls over data collection, maintenance and dissemination.

  • Staff training regarding the proper use of the business systems and data including, social media usage.

  • Changes to government regulation, recent court decisions and emerging business trends, and determine their impact on the business.

  • The appropriateness of insurance cover for addressing reputation risk arising from digital crises.

The unique characteristics of social media can make it a powerful medium and a high-risk media tool when used incorrectly or for nefarious purposes. Social media can create business and legal risks for the company, which must be addressed to mitigate adverse impacts. Reputational loss can manifest in many ways including:

  • Loss of trust and confidence in the business and its products and or services

  • Concerns over the ability and integrity of the business’ directors and officers

  • Tarnished company image and brand name

  • Termination or withdrawal of commercial sponsorships, brand partnerships and endorsement contracts.

Reputational loss can directly damage businesses profitability and its shareholder value in terms of:

  • Lost clients, both current and future leading to revenue loss, loss of future earnings and opportunities.

  • Urgent and emergency corrective action to rectify the crises event which diverts resources away from key business operation. Response costs could be significant.

  • Fines and penalties imposed by regulators or third-party legal suits.

  • Lost resources, poor public and market perception can deteriorate the value of the company.

There are also legal risks for the company to consider and manage with the use of social media, including:

  • Use of a wider variety of IP when involved with social media for example, photos, videos, text, music and other content

  • Unintentional and unauthorised use of a company’s trademark, logos and copyright content

  • When soliciting user generated content such as reviews, videos and other postings. These may not comply with digital copyright legal requirements

  • Conforming with advertising laws for anything written or posted about a product to avoid false or misleading statements.

Appropriate risk transfer and insurance should be considered by businesses to help manage reputational risks. The following insurance policies are available:

  1. Reputation insurance – this can be purchased as a standalone policy to cover impacts to business profitability and financial losses incurred as a result of negative publicity, press and public image concerns.

  2. Cyber liability insurance – purchased as a standalone insurance policy covering financial expenses incurred as a result of a cyber breach including restoration costs, privacy notification and forensic investigation expenses. Some cyber policies contain an extension covering crises management costs, increased cost of working and public relation expenses incurred to re-establish business reputation or public image to the extent that it was damaged as a direct result of a data breach.

  3. Directors and Officers Liability – purchased as a standalone insurance policy covering defence costs incurred from allegations made against the directors and officers the company which may be brought by shareholders, employees, regulators, creditors, competitors, liquidators claiming mismanagement, wrongful acts or breaches of a company’s fiduciary duties which could potentially derail the financial health, continued service and reputation of any company.

  4. Product contamination and recall insurance – purchased as a standalone insurance policy covering first and third-party recall costs and reputational expenses incurred.

Recent examples of business reputational harm in the media:

  • Cristiano Ronaldo snub of Coca-Cola at the Euro 2020 news conference coincided with a $4B drop in the brand’s market value.

  • Global fashion label Balenciaga’s reputation in tatters after their inappropriate and widely condemned campaign imagery incited accusations of child exploitation.

  • Gina Rinehart’s withdrawal of $15M partnership with Netball Australia following player concern over wearing the Hancock Prospecting logo due to historic comments by Lang Hancock calling for sterilisation of indigenous Australians in the 1980s.

  • Class action lawsuits launched against Medibank and Optus after millions of customer’s data was compromised in a data breach. See our article on recent high profile data breaches here.

  • Regulatory fines imposed against the Star Entertainment Group for alleged money laundering breaches.

  • Volkswagen Group diesel scandal which shook customer confidence after false claims regarding emission standards worldwide.

To obtain advice on risk transfer relating to reputational risk, including a list of available coverage, please contact us via the form below.

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