Reputational Risk

I like to watch live sports. One of the drawbacks of watching live sports is you’re kinda stuck watching the ads. Two ads running a lot lately are for Wells Fargo and Facebook, and they are basically the same ad. They say, “We screwed up. We might have lost your trust. But, trust us, we’re better now. Please don’t leave.” That’s not an exact quote from either ad, but it gets the gist. Clearly these ads are an attempt by both companies to mitigate damage to their reputations. But, every time I see the ads, I can’t help but wonder why they bother.

Reputational Risk is something companies spend a lot of time worrying about. And that’s mostly a good thing. It’s what got Roseanne taken off the air and Kevin Spacey fired from his show. Wikipedia defines Reputational Risk as, “a risk of loss resulting from damages to a firm’s reputation, in lost revenue; increased operating, capital or regulatory costs; or destruction of shareholder value, consequent to an adverse or potentially criminal event even if the company is not found guilty.” But how often does a company actually suffer losses due to a bad reputation?

Do you remember a company called Exxon? They were an oil company who had a tanker crash, causing one of the most public environmental disasters in history. Of course you remember them, because they simply found the loose change to pay the fines in their couch cushions and went on to become the world’s richest company for a while. Think that’s a fluke? Try looking up BP.

How about AIG? They were the largest insurance company in the world. Then, they took a huge chunk of the blame for the 2008 financial crisis. Then, they continued being the largest insurance company in the world.

Volkswagen is my favorite. Never mind the fact that this company was Hitler’s brainchild. And after World War II, they didn’t even feel the need to change their name. More recently they developed a way to cheat the sensors on emissions tests. They then marketed the cars with this cheat as “clean diesel” to try to appeal to green minded people. They sold a lot of cars before it was exposed. Yet they are still vying with Toyota to be the world’s largest automaker.

Google was stealing private data from people’s home Wi-Fi. They claimed it was an accident, which doesn’t even make any sense. Then, they continued to be the most visited website in the world generating billions in ad revenue.

It would be easy to blame the people for not caring. If ruining the world economy isn’t enough to get people to change insurers, what is? But I don’t actually blame people. I think it is a failure of the regulators. We need some good old fashion trust busters. Reputational Risk is actually a big deal for small companies. Bad word of mouth can ruin them. But being too big to fail makes a company’s reputation irrelevant. It doesn’t matter how upset we get at these companies. Only governments have the power to do anything to them that will hurt. And governments just don’t seem to care.



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