Category Archives: Reputation Risk

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The Risk of Being Too Delicious

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Shockwaves were felt around the wing-eating world last week, when Buffalo Wild Wings announced it will be discontinuing its Tuesday night half-priced wing promotion.

According to reports, the franchise’s decision was a difficult one as the promotion was “a major driver of traffic” and “boosted same-store sales” for some locations. Ultimately, the deal was just too delicious. With wing prices on the rise (jumping 11 cents per pound in a year), the promotion started to impact the company’s bottom line. In fact, the food chain blamed the historically high wing prices for its 63% profit drop in the second quarter, turning the crowd-pleasing promotion into a losing proposition.

It is an interesting risk that many organizations, especially in retail, must take, however. How do organizations develop a promotion that attracts new customers and entices existing ones to visit more frequently, purchase something new or add a service without causing any financial hardships? And, perhaps more importantly, at what point is the promotion no longer worth it?

The majority of promotions go off without a hitch. It is probably safe to say that most of them have either a positive or neutral effect. Companies must be prepared, however, for those rare deals that negatively impact businesses’ finances or reputation.

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While Buffalo Wild Wings’ risk management approach to this promotion may have intervened in time to save them from a worse fate, others have not been so lucky.

Take, for example, seafood chain Red Lobster’s 2003 all-you-can-eat summer crab leg special that ultimately put the company in hot water. Parent company Darden’s then Chief Executive Joe Lee was quoted as saying, “It wasn’t the second helping, it was the third that hurt.” “And the fourth,” then Red Lobster President Dick Rivera added on a conference call to investors.

The deal lasted a bit too long and was linked to the wipeout of $405.9 million in stock value in a single session, with stock prices dropping 12%.

Red Lobster isn’t alone. In 2009, Kentucky Fried Chicken decided to introduce its new grilled chicken option by hiring mega star Oprah Winfrey to make an announcement during her show, giving away an online voucher for a free lunch. About 16 million people printed out the voucher. Stores ran out of food and eventually stopped accepting the coupon. Even worse, competitors jumped in and offered discounted meals to voucher holders.

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Then there was McDonald’s, which gave away MP3 players with viruses; an unapproved promotion code for free Domino’s pizza was leaked to 10,000 people; and the obvious consequences of a 10 cent beer night at a Cleveland Indians game. What could go wrong? (Hint: chaos ensued.)

Risk management can play a vital role in supporting marketing initiatives, like the creation of an effective promotion. And, for practitioners managing an enterprise risk management program, it highlights just how important collaboration between different business areas really is.

Companies can be blinded by opportunities that include increased traffic, return customers and add-on purchases. Some deals are just too good to be true—not just for the consumer, but the company making the offer as well. It is apparent that the downside of the promotion must be carefully assessed and that tolerance limits be set in order to know when to pull the plug on a deal.

When developing a risk tolerance statement for a promotion, it’s important to also realize that sometimes the financial losses associated with a promotion is not the only thing to look at and might not be a bad thing at all.

Take a look at Costco, that refuses to raise the price on its .

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99 rotisserie chicken and $1.50 hotdogs.

“I can only tell you what history has shown us: When others were raising their chicken prices from $4.99 to $5.99, we were willing to eat, if you will, $30 to $40 million a year in gross margin by keeping it at $4.99,” the bulk wholesale giant’s Chief Financial Officer Richard Galanti told the Seattle Times in 2015.

The philosophy is rather simple and has worked for Costco. Cheap, delicious rotisserie chicken brings people into their warehouses. And, hopefully, on their way to pick up dinner, they will also grab new patio furniture, a television, golf clubs, a 64 oz. jar of mayonnaise and a five pound bag of cashews. The wholesaler banks on statistics indicating that consumers spend on average $136 each time they enter the warehouse.

Developing a promotion should not be done on a whim. Careful consideration must be taken before the promotion is introduced. Many different groups within the organization should be included in the conversation…and risk management can take the lead on bringing those groups together and initiating the dialogue.
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So, before the company serves up that next mouth-watering deal, risk management must realize that it has a real opportunity to support value creation and show its worth way before the pot boils over.

Reputational Crises Put CEOs at Risk

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When reputational crises hit, market cap, sales, margins and profits are all on the line. And these situations are becoming more frequent—and more costly—than ever, with a recent study showing an increase in losses from reputational attacks increasing by more than 400% in the past five years.

But it is not only the corporate entity facing challenges, individuals in leadership—particularly CEOs—face personal risk as well. It has become clear that CEOs need tools to protect themselves as well as their companies’ reputations. Since damage from reputational attacks takes place in the court of public opinion, traditional liability solutions, such as directors and officers coverage, are not effective. But new tools are available in the form of a reputation assurance solution that can help deter attacks from even happening and bundled insurances to mitigate the damage when they do occur.

Research by Steel City Re has found that:

  • Financial losses related to reputational attacks have increased by more than 400% in the past five years, a trend that continues.
  • There is an increase in public anger and, as a result, more blame is being cast upon recognizable targets, such as CEOs.
  • Anger by stakeholders is fueled by disappointment—the gap between expectations and reality—which is all too often fueled by the company’s own actions.

Against that backdrop, the turnover rate among CEOs is increasing, with 58 of the S&P 500’s CEOs transitioning out of their jobs in 2016 according to SpencerStuart (although not all as a result of reputational crises). That is the highest number since 2006, a 13% increase over 2015, and a 57% increase over 2012.

If that weren’t enough reason for concern, history shows that when strong companies and their brands come under fire, their reputations eventually recover, despite the initial and medium-term impacts. Individual reputations of those companies’ leadership are not nearly as resilient, however, especially at a time when society; be it the media, social media, politicians or direct stakeholders; seems intent on personifying crises and affixing blame on individuals in positions of authority. And for CEOs, a reputational crises can affect their career and compensation for many years ahead.

In this environment, it is essential that risk managers understand the tools that are available to protect both companies and senior executives personally. Serving as a third-party warranty and available only to highly qualified insureds, reputation insurance attests to the efficacy of the company’s governance and operational practices, as adopted and overseen by the board and implemented by the CEO. Such coverage can deter reputational attacks in much the same way as a security sign on the front lawn deters burglars. It is a sign of quality governance. And when incidents do occur, it provides a built in alternative narrative to counter the attacks that are bound to occur. Finally, it gives the company and key individuals financial indemnification to mitigate any damage that ultimately does take place.

Just as “doing the right thing” did not protect directors and officers from liability in the era before the wide adoption of D&O insurance, it is no guarantee that attacks in the court of public opinion won’t take a significant financial toll. But it is one of the few solutions proven in the court of public opinion. In today’s culture, reputations are in jeopardy as never before and risk managers must utilize all tools available to protect those on the front lines.

Implementing a Safety Culture for Company Drivers

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Organizations with a safety policy in place for drivers of company vehicles may believe they are protected from liability in case of an accident. What they may not realize, however, is their defense could hinge on documentation of steps they have taken to ensure that the policy is being followed by employees, according to the study, Creating a Safety Culture: Moving from politics to habits, by SambaSafety.

The study found that, regardless of the policy in place, “simply saying that you didn’t know about poor driving behavior will no longer cut it – not when people’s lives and companies’ well-being are at stake.

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With the data readily available today, the courts are sure to ask how you didn’t know.

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”

To implement a successful program, it is important for employees to understand that the company’s policies must be followed by employees at all levels. “If someone in senior management breaks the rules and suffers no aftereffect, what’s the motivation for others to keep things in line?” the study asks.

Additionally, safety policies are not limited to employees whose primary responsibility is driving, or to those who drive company-owned or leased vehicles. According to the study:

Employee-owned or rented vehicles that are used for work-related journeys also must be part of the equation. To decrease liability (in addition to improving safety), policies should clearly state this fact and affirm that the same safe behavior is expected of every driver in the organization – on and off the job.
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That behavior might include non-distracted driving, for example, or even properly maintaining a personal vehicle used for company business to ensure safety and a positive refection of the organization.

Employees need to know that their employer can be held responsible for anything that happens while employees are conducting company business.

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Organizations also need to see that reimbursed drivers have adequate insurance, as well as administering signed driver agreements, providing uniform driver training – and ensuring that all drivers’ behavior and records are continuously monitored.
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To move into a safety culture, SambaSafety advises organizations to keep their program in line with company principles, values and brand. Also important is working with the company’s existing culture:

Employees in a high-energy, competitive environment, for example, may enjoy contests between regions vying for the safest driving records. In a top-down culture, on the other hand, employees might respond best to regular tips and reminders from respected senior leaders.

In any case, clear communication can keep drivers from feeling micromanaged or worrying about their privacy and personal information. It can also mean fewer accidents and a higher level of safety for employees.

In a Changing World, Questions For the CRO

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Before the financial crisis in 2008-2009, many businesses didn’t think of risk as something to be proactively managed. After the crisis, however, that paradigm shifted. Companies began perceiving risk management as a way to protect both their reputations and their stakeholders.

Today, risk management is not just recommended, it is considered crucial to successful operations and is required by federal and state law. The SEC’s Proxy Disclosure Enhancements, enacted in 2010, mandate that organizations provide information regarding board leadership structure and the company’s risk management practices.

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Company leadership is required to have a direct role in risk oversight, and any risk management ineffectiveness must be disclosed.

The CRO’s role

Volatility in the current business environment—a confluence of factors including transfers of power, the world economy and individual markets—is nothing new. Political transitions have always been accompanied by new agendas and shifting regulations, economies have always experienced bull and bear markets, and the evolution of technology constantly changes our processes.

Even so, recent events like Brexit, the uncertainty of a new administration’s regulatory initiatives, and thousands of annual data breaches have contributed to an unprecedented atmosphere of fear and doubt. To navigate this environment, the chief risk officer needs to adopt a proactive risk management approach. Enterprise-wide risk assessments grant the visibility and insight needed to present an accurate picture of the company’s greatest risks. This visibility is what the board needs to safely recognize opportunity for innovation and expansion into new markets.

To grow a business safely—by innovating and adding to products/services and expanding into new markets—risk professionals should not focus on identifying risk by individual country. This approach naturally leads to a prioritization of “large-dollar” countries, which aren’t necessarily correlated with greater risk. Countries that contribute a small percentage of overall revenue can still cause major, systemic risk management failures and scandals.

A better approach is to look at risk across certain regions; how might expanding the business into Europe, for example, create new challenges for senior management?

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Are there sufficient controls in place to mitigate the risks that have been identified?

When regional risks are aggregated to create a holistic picture, it becomes possible for the board to make sure expansion efforts are aligned with strategic goals.

Three processes that require ERM

Risk management is an objective process, and best practices, such as pushing risk assessments down to front-line process owners who are closest to operational risk, should be adhered to regardless of the current state of the international business arena.

While today’s political climate has generated a significant amount of media strife, it’s important not to let emotion influence decision-making. By providing the host organization with a standardized framework and centralized data location, enterprise risk management enables managers to apply the same basic approach across departments and levels.

This is particularly important when an organization expands internationally, which involves compliance with new sets of regulations and staying competitive. Performing due diligence on an ad hoc basis is neither effective nor sustainable. Instead, the process should follow the same best-practice process as domestic risk management efforts:

  1. Identify and assess. Make risk assessments a standard part of every budget, project or initiative. This involves front-line risk assessments from subject matter experts, revealing key risks and processes/departments likely to be affected by those risks. For example, financial scrutiny is no longer a concern just for banks. Increased attempts to fight terrorism mean transactions of all kinds are becoming subject to more review. Anti-bribery and anti-corruption processes estimate and quantify both vulnerability and liability.
  2. Mitigate key risks. Connect mitigation activities to the resources they depend on and the processes they’re associated with. ERM creates transparency into this information, eliminating inefficiency associated with updating/tracking risks managed by another department.
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    Control evaluation is the most expensive part of operations. Use risk management to prioritize this work and reduce expenses and liability.

  3. Monitor the effectiveness of controls with tests, metrics, and incident collection for risks and controls alike. This ensures performance standards are maintained as operations and the business environment evolve. Evidence of an effective control environment prevents penalties and lawsuits for negligence. The bar for negligence is getting lower; technology is pulling the curtain back not only internally but (through social media and news) to the public as well.

Lastly, the CRO role is increasingly accountable for failures in managing risk along with other senior leaders and boards—look no further than Wells Fargo.