Protecting your organisation’s reputation from known unknowns

Managing Grey Swan events takes critical pre-and post-event decisions to determine the trajectory of shareholder value, says Richard Waterer

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Richard Waterer, Aon

In association with Aon

Business reputation provides considerable value for an organisation, and is built on trust, clear communication and action. An important factor as companies build their customer base is their reputation in the industry and across multiple stakeholder groups. However, in a highly volatile world, how do companies protect themselves from reputational risks? How do they know where these risks lie? And how do they mitigate them? More often than not, they learn once it’s too late.

The goal is to get ahead of these incidents and plan for what we know. Black Swan event cousins, known as ‘Grey Swans’ events which can greatly impact firms. Unlike Black Swans, which seem inconceivable before they happen, Grey Swans are known beforehand. Grey Swans are ‘known unknowns’, we know there are significant risks that could impact an organisation, we just don’t know when they’re going to occur and thus organizations have often neglected to invest scarce resources to prepare for them. Many extreme events, such as the 9/11 attacks, the 2008 financial crisis and, most recently, the Covid-19 pandemic, are considered Grey Swan events because of the size of the impact and the many warning signs that were ignored. Other types of reputational Grey Swans come from within an organisation, including, governance crises or product failures.

Brand and reputational risk has been a key concern for most organisations over the past 40 years. It’s ranked as one of the top five risks in Aon’s 2021 Global Risk Management Survey and has ranked in the top 10 consistently since Aon started publishing this report 16 years ago. The demand to assess, mitigate and transfer brand and reputational risk continues to increase. In response to this demand, Aon recently acquired the brand and reputational risk data and analytics from Pentland Analytics, a provider of advanced analytics and advisory services that focuses on reputational crises. This includes an extensive database of over 300 historical crises that have occurred to listed companies across the world and the impact that these events had on shareholder value.

In early 2021 Aon released a whitepaper in conjunction with Pentland Analytics, Respecting the Grey Swan: 40 Years of Reputations Crises, which focuses on Grey Swan events, the impact on shareholder value from these events and how to manage them. The report draws attention to cognitive biases and explains how ambiguous and uncomfortable data are easy to ignore, how the impact of Grey Swan events is substantial and enduring, and how value recovery is a function of critical pre- and post-loss decisions.

Aon’s continued investment in understanding brand and reputational risk will assist organisations in understanding how to prepare for a crisis, but most importantly how to act both during and after the crisis has occurred.

“In this highly volatile world, risk is ever present – and because we are more interconnected and interdependent than ever before – it is also more severe. It is why at Aon we are not only focused on helping clients navigate the risks they are now facing, but we are also more keenly focused on helping them see around the corner to help them prepare for what comes next,” said Greg Case, CEO of Aon.

What you need to know

Understanding the impact of Grey Swan events allows businesses to improve risk management strategies and make value-enhancing decisions.

Key findings from the report include:

• Limited, ambiguous and uncomfortable data are easy to ignore. We neglect preparing for low probability, high severity events.
• The impact of Grey Swan events is substantial and enduring. In over 10% of reputation crises, over 50% of shareholder value is destroyed.
• Value recovery is a function of critical pre- and post-loss decisions. Grey Swans require focused attention and investment.
• The report also found that directors and officers are facing increased risk exposure, especially following a Grey Swan event. On average, shareholders can expect to lose 26% of value at some point during the post-event year.

The research suggests three areas that organisations should focus on to build resilience: reimagining the risk landscape through a broader risk assessment, acknowledging the seriousness of impact with a focused investment in risk preparedness and crisis management, and translating understanding into action while fostering a responsive and agile culture.

Managing reputation in our unpredictable world

To tame these Grey Swans, it takes critical pre-and post-event decisions to determine the trajectory of shareholder value following an event. While organisations have uncertainty over their timing and impact, we know that these events will happen during our time. Organisations need to use what we know about the impact of these events to make informed decisions and invest in risk preparedness and resilience.

Our world is unpredictable with new forms of volatility exposing organisations to risks that impact their colleagues, customers and reputation. Aon helps clients navigate this risk landscape to cope with the unexpected, helping to protect their assets and enabling them to continue to grow their organisations. These insights help clients make better decisions to mitigate risk and respond to reputational crises.

Richard Waterer is global risk consulting leader, Aon