Building Defenses

Reputational Tornadoes

Reputational tornadoes will hit - how much damage will they do?

By Dr. Nir Kossovsky

Food and beverage companies face crises and potential crises every day. They may have to deal with issues like supply chain failures affecting quality, safety or delivery schedules; recalls resulting from issues in manufacturing or packaging; or cultural changes that companies may or may not see on the horizon, but over which they have little if any control, ranging from opinions on obesity to GMOs to ethical treatment of food sources. All of these have the potential to build into storms that can destroy companies’ reputations.  

But reputational tornadoes can be defended against. When an incident occurs, will stakeholders consider it to be an anomaly in a company in whose governance and operations they have steadfast confidence? Or will they be fearful that it is part of a larger story – that something is amiss in the executive ranks, the board’s oversight and the enterprise’s risk management processes?  

The prevalence of these issues, and how quickly media sources amplify them, makes food and beverage companies particularly susceptible to reputational damage and the significant financial impact that damage can cause. And it’s not just individual companies under fire that are affected – whole industries can fall into the harsh spotlight.  

“Even companies that market products similar to a recalled food can suffer,” said the Deputy FDA Commissioner in a recent Food Safety Magazine article. “The worst thing that can happen to a food sector or the food industry is the loss of consumer confidence due to recalls or disease outbreaks.” These are losses driven by fear.  

Fear-Driven Impacts

Concerns over finding glyphosate in popular cereals, oatmeal, granola and snack bars is a recent case in point. Although the herbicide was found in select name and store brand products – like General Mills’ Cheerios, Quaker’s Old Fashioned Oats and Great Value’s Original Instant Oats – consumers are afraid that other breakfast products and other brands are also unsafe.  

That’s why building defenses and managing stakeholder expectations in advance of any crisis is so important. When it comes to food products, if stakeholders are surprised by product-related news, their response is going to be fear – fear that products they put into their body could potentially be a cause for concern. Companies without preemptive strategies in place will see tangible impacts on revenue, sales, market cap, brand value, customer/investor relationships and their ability to attract and retain talent.

Reputation Tornadoes 2Take for example the linkage of a deadly salmonella outbreak to contaminated peanut butter produced by Peanut Corporation of America in 2009. Non-offending brands like J.M. Smucker and ConAgra worked hard to differentiate themselves from the contamination scare and they did so in the traditional way – they turned to marketing. They ran advertisements and offered coupons to assuage consumer fears and encourage purchases. Unfortunately, fear had already driven down their jarred peanut butter sales as much as 24 percent.

This pattern is not unusual. Companies traditionally consider reputational risk to be a marketing and communications issues and vest responsibility for dealing with it in their marketing departments. But reputational risk is not merely the peril of negative media; it is an enterprise-wide emotionally-charged peril that needs to be managed and mitigated with enterprise risk management solutions.  

Stakeholders expect safe foods. Reputation risk in this industry is largely the peril of real economic losses from angry, disappointed stakeholders when their expectations for safety are not met.  

When treated as an enterprise-wide risk and vesting it in the risk management department, clear expectations can be set through clear analysis of reputational risks on the horizon and the use of third-party warranties, such as reputation insurance products, attesting to the soundness of the companies’ practices, approach and governance. That builds trust in management, the companies and their products; and serves as insulation against financial impacts when crises hit. The average stakeholder can engage a company with confidence, in much the same way as residents of a town in tornado country rest easier knowing the town’s system of alerts, storm shelters and building codes have all been reviewed and validated by the third parties who write their insurance policies.  

Other commercial sectors with socially-material exposures have recognized for years that insurances can head off fear. In the late 1800s, insurance products helped stakeholders shed their fear of steam boilers that had developed a bad reputation for exploding. In the 1930s, insurances – specifically, Federal Deposit Insurance – helped stakeholders shed their fear of bank failures. These products helped reinforce a story of safety and quelled fears.  

Companies in the food and beverage industry need to have an equally simple, compelling, accurate and affirmative story – pre-positioned, simple to understand and completely credible – in place at the outset to counteract misinformation and encourage stakeholders to give companies and their leadership the benefit of the doubt. We can be certain that reputational tornadoes will be part of our future – where and when they’ll hit may be unpredictable, but the damage they cause is something companies can, indeed, do something about.

 

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Dr. Nir Kossovsky is CEO of Steel City Re, a company that analyzes the reputational strength and resilience of companies and provides tools and insurances to protect those companies, their officers and directors against financial losses when reputational crises occur. Kossovsky can be reached at [email protected]

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