Dr. Nir Kossovsky, Steel City Re John J. Kelly, CPCU, Hanover Stone Partners Peter J. Gerken, CPCU, Steel City Re December 2016

Reputation Risk Explosion: Weaponization of Social Media, False News and Outsized Expectations Causing Increased Damage to Corporate Reputations

The spotlight on corporate America is hotter than ever, with the public, the media and elected officials from the White House to Congress to City Halls around the country, more focused than ever on the behavior of companies that have been essential parts of the fabric of our economy for years.

This increased focus comes amidst an historically unique convergence of several factors:

• A breakdown in trust by the public of societal institutions, including banks, Wall Street and large corporations;

• Diminished influence of traditional media, which has acted in the past as an arbiter of accuracy and importance;

• Social media vehicles that allow for the democratization of communications – any individual citizen or interest group has the capacity to become a “media source;”

• The difficulty in differentiating between accurate and false information when receiving it through social media;

• A heightened level of generalized anger in our country, seeking direction and outlets;

• Market forces and a business environment generally that has led investors to have expectations for corporate performance that are not always aligned with reality.

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Reputation-Linked Losses Have Increased by 461% Over Five Years Steel City Re, which offers proprietary solutions for protecting companies, directors and officers against reputational risk, has conducted an actuarily sound analysis of reputationrelated losses for approximately 7,500 companies over the five-year period from 2011 to 2016. That analysis included more than 60 million data points and also included publicly available information gathered through Google and Twitter. That analysis concludes that:

• Reputation-linked losses at public companies have increased by 461% since 2011;

• Losses experienced due to reputational issues or attacks directly correlate to increases in generalized public anger as demonstrated by angry posts on social media;

To protect the reputations of both companies and their leadership… defenses need to be deployed strategically and preemptively before the first strike.

• That heightened level of anger, constantly seeking outlets, combined with the speed and penetration of social media, has allowed for the weaponization of social media – the ability of individuals or small groups to mount devastating campaigns with the potential of destroying reputations with unprecedented speed, whether or not the attacks are accurate or factual;

• Outsized expectations by investors about corporate performance have created increased vulnerability and potential for losses when attacked;

• Corporate directors and executives are personally at greater risk than ever before when detractors swarm and seek vulnerable targets;

• To protect the reputations of both companies and their leadership in these asymmetrical battles for the hearts and minds of stakeholders – exploding at Internet speeds – defenses need to be deployed strategically and preemptively before the first strike.


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Definitions and research methods
 Reputation, risk, and loss

Actuarial measurements

Reputation:

Indicators of reputation value

• is an expectation held by stakeholders that can be changed through news, rumors and malicious fabrications.

• is an intangible asset that affects all corporate revenues, expenses and market capitalization.

• is a strategic corporate asset Board Directors have a fiduciary duty to protect.

Reputation risk

• forms when stakeholder expectations greatly exceed a company’s operational capabilities

• manifests when stakeholders believe a company has failed to meet expectations

• loss is measured by the economic consequences of stakeholder disappointment.

Reputation loss

• usually begins with news (or false news) of an adverse operational event for which disappointed stakeholders deem management culpable.

• Is the “cost of disappointment” as stakeholders becoming disloyal customers, disengaged employees, distracted suppliers, distrustful creditors, dismissive investors, and determined litigators & regulators.

• will amplify operational losses by 200 to 700% with immediate recognition in enterprise value (stock price) and goingforward impact recognition in the statement of profits and losses..


In our world of quantitative risk management, reputational value is an indexed value that, like the consumer price index, is based on a basket of quantitative indicators of stakeholder expectations. Normalized by sector, these indicators impact the P&L through their effects on sales cycle times, unit volumes, and pricing power; terms from employees and vendors for services, and terms for capital from creditors and equity investors.

Indexing and parametric analysis

Steel City Re has amassed an actuarial database by indexing such values for approximately 7500 public companies each week since late December 2001. Using tools developed for operations and quality management, the value and volatility of this parameter, the reputational value metric, provides upper and lower control boundaries. Material sustained deviations below the lower control boundary constitutes objective evidence of reputational value loss. The magnitudes of such losses are quantified in terms of standard deviations from the mean value of the control boundaries, and are reported colloquially as Loss Severities ranging from 1 (minimum) to 5 (maximum).

2011-2016 data

What follows is an analysis of 60 million data points representing more than 700,000 years of loss experiences for approximately 7500 companies between 2011-2016. 


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Reputation-linked losses increased 461% since 2011 The costs to a company from a significant loss of reputational value have increased 461% since 2011, and have almost doubled since the last major jump in 2013 (Fig 1). These losses result from a progressive increase in both the frequency and severity of adverse events (Fig 2).

(1) Relative cost of reputation damage, 2011-2016

Internet-borne anger, false news, and a growing gap between expectations and reality are likely explanations according to a regression analysis of principle variables (Fig 3). The former is evidenced by the Google Trend plot for the joined terms “Twitter” and “Anger” that indicates a population-based response to a perceived phenomenon.1 The latter is evidenced by the growing gap between the S&P500 Index and the median reputational value due to share buyback regimens heavily promoted by activist investors.

(2) Frequency and severity patterns of reputation events, 2011-2016

Regressing these two variables over time against the frequency of loss yields a statistically significant model (F test p