Investors are not good predictors of reputation value loss as seen in this graph comparing the equity performance of three companies with reputational crises. When normalized against respective peers, the over or under-reaction in the first few weeks is striking. At day 71, Crowdstrike, Boeing, and Southwest were, respectively, -20.8%, -28.1%, and -23% relative to the performance of the Nasdaq Cyber Index, FTSE|US Aerospace Index, and the Dow Jones US Airlines Index.

Investors Poorly Gauge Reputation Value Loss

Investors are not good predictors of reputation value loss as seen in this graph comparing the equity performance of three companies with reputational crises. When normalized against respective peers, the disparate immediate equity returns seem to stabilize in the early period around the same value. At day 71, Crowdstrike, Boeing, and Southwest were, respectively, -20.8%, -28.1%, and -23% relative to the performance of the Nasdaq Cyber Index, FTSE|US Aerospace Index, and the Dow Jones US Airlines Index. These are all much lower than the Steel City Model Average of -8.8% indicating that at 71 days, investors expected all three to be worst than average. Normalized to the returns of the S&P500, the same firms’ equities were -20.2%, -34.6%, and -11.2%. Spoiler alert: We know Boeing and Southwest have more to lose, Crowdstrike, likely not.

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Investors are not good predictors of reputation value loss

Steel City Re: October 2, 2024

About Steel City Re. With reputation risk forecasting, management, and insurance, Steel City Re helps companies build and prove to stakeholders their thoughtful risk management and dutiful governance over all that is mission-critical. The benefit is an insurance-authenticated story stakeholders can appreciate and value.

Reputation is Mission-Critical

Today’s sophisticated risk managers are strategic corporate talents, helping the C-suite and board meet stakeholder expectations for resilience. They know that enterprise damage from reputation risks might be their greatest and longest lasting peril, so they monitor for red flags. They foster a culture that respects those warnings and facilitate processes to mitigate those risks. Their diligence strategically builds enterprise-wide resilience that informed stakeholders can appreciate, and they use insurance two ways: operationally, to foster resilience; and strategically, to authenticate their thoughtful risk management and dutiful governance systems.

The results of strategic reputation risk management are evident in reputation resilience. More than crisis recovery, they include customers buying, not boycotting; employees working, not fleeing; investors buying, not selling; lenders adjusting interest rates down, not up; regulators deferring, not enforcing; and social license holders acquiescing, not protesting. Investors struggle to calculate the impact of these behaviors on cash flow, which is why at day 71, all three firms are performing about the same relative to their respective peer indices: Crowdstrike, Boeing, and Southwest were, respectively, down -20.8%, -28.1%, and -23%.

Having a robust Reputation Resilience Program in place offers, amongst other benefits:

  • Protection for the company, its staff, executives, and board from litigation and regulatory challenges
  • Improved governance processes and better enterprise risk management protocols; i.e., measuring reputational risk
  • Establishment of an agile operating, communications, and decision-making team, with clear roles and responsibilities, trained and ready to handle all reputational threats; i.e., a reputation risk management framework
  • Proactive management of risks that could give rise to delays or derailing concerns around new product and strategic partnership launches
  • Captured behavioral economic value from stakeholders; i.e., value of reputation
  • Reduced costs of debt and risk transfer while boosting equity value; i.e., boosting reputational value

A hazard of reputation risk is a lurking gap between stakeholder expectations and reality. Another hazard is the emotional intensity associated with expectations. The expected surge in litigation in 2024 around environments, social and governance issues reflects both that emotional intensity and is one manifestation of the anger from disappointed stakeholders. This video explains the behavioral economic features of the many perils of reputation risk.

Mitigating risk strategically through expectation management and operational adjustments evinces thoughtful management and dutiful governance. Financing such risks evinces prudence, and doing so publicly enables stakeholders to appreciate and value the effort.

One Question

Reputation risks are prevalent, material, and place both corporate viability and profitability at risk. Is enhancing and promoting the quality of your risk management program part of your strategy?