VideoWhen Martha Stewart was denied a new trial last month, shares of Martha Stewart Living Omnimedia Inc. took another dip, further illustrating the particular peril faced by companies closely identified with a "brand name." As many have learned lately, corporate reputations polished for decades to a high luster can be instantly tarnished by ineptitude, malfeasance, or plain bad luck. It may be a show-biz truism that there is no such thing as bad publicity, but employees and shareholders of companies as diverse as Royal Dutch/Shell Group, Carnival Cruise Lines, and Bridgestone/Firestone know too well that when the corporate name is sullied, the damage can be devastating.
"All you have to do is read the papers every day to see the challenges companies have had in this regard," says Bradley Wood, senior vice president of risk management at Washington, D.C.-based Marriott International Inc. "The exposure to reputational loss is greater than ever, and there's no insurance product to cover it."
Not yet, anyway. The insurance industry has been interested in offering such coverage for many years, but the difficulty in determining the value of a brand or reputation, and the cost of restoring same, has proven extremely challenging. Whatever the source of bad publicity — be it genuine tragedies that cost lives, the peccadilloes of management, or a host of things in between — the result can affect stock price, sales, and every other barometer of success.
For many years, insurers have offered piecemeal approaches that address certain facets of reputational damage but don't begin to approach comprehensive coverage. Liability insurance can pay for a legal defense, and additional coverage may address costs associated with a product recall or business interruption. Beyond that, about the only help toward restoring reputation or brand value comes in the form of limited crisis-communication coverage, a relatively new offering that covers some of the costs associated with public relations and advertising campaigns.
Wood is among a number of executives who have been pressing insurance companies to do more. He wants to see the industry design a product that would tie reputational coverage to corporate value lost in a crisis. Marriott's brands, including Ritz-Carlton and Ramada, are, he says, "among our most important assets, and protecting our reputation is a natural extension of our brand-management strategy."
The terrorist attacks of 2001 stalled nascent efforts to develop such coverage, but recently research has been conducted in both the United States and Europe into how to place some insurable value on brands and aid companies facing reputational damage. "I've been working on this for four or five years, and now we're at the stage of trying to get the pricing to work," says John Bugalla, San Francisco based managing director of the Aon Risk Services unit of risk-management giant Aon Corp. A product is probably still more than a year away, "but the market is opening up," according to Bugalla, as large companies express more interest in protecting against a catastrophic decline in shareholder value wrought by a damaged corporate reputation — including the potential impact of Sarbanes-Oxley violations.
What's a Brand Worth?
CFO interest in such insurance appears to be growing. At Dallas-based Brinker International — the parent company of several restaurant chains, including Chili's, Romano's Macaroni Grill, and Maggiano's Little Italy — CFO Charles Sonsteby immediately sees its appeal — if it is priced affordably. "Our job is to maintain shareholder value," he says, so if an insurance plan can provide a suitable level of protection at a reasonable price, "you would have to take a look at that."
But determining what would constitute a fair price is far from easy, in part because the value of a brand is difficult to quantify and the list of things that can harm it is long and varied. Even companies that value their brands highly, such as Marriott and Brinker, do not, as Sonsteby says, "actually put dollars and cents to [the value of the brand]." Where does that leave the insurance industry?
One admittedly rough way to measure that value is stock price, but the specter of compensating companies for steep declines in their shares doesn't excite insurers. "You can't just insure a stock price," says Robert Hartwig, chief economist at the Insurance Information Institute, in New York. "The damage could be anywhere from trivial to cataclysmic, and with larger corporations the loss could be so large it isn't coverable by any single insurance company."
In addition to the potential scope of such losses, carriers refrain from covering reductions to market capital because "it's a moving target," notes Bugalla. "If you're an insurance company, when would you know when to pay the loss" for a perceived reputational damage, since at any point the stock price could begin to recover? Yet another issue is that some CEOs may have greater skills in managing through a crisis, a quality that's difficult, if not impossible, to quantify. Would premiums vary based on the insurer's assessment of those abilities?
James Gregory, CEO of CoreBrand LLC, a brand-valuation consultancy in Stamford, Connecticut, has been talking with insurers about how to quantify reputational worth. He believes that valuations can be developed that satisfy insurance-company standards. "Our database tracks companies at risk, and we have all the bells and whistles to go with it," he says, alluding to CoreBrand's methodology of combining survey-based "favorability" ratings and financial analyses to estimate what part of market capitalization represents brand value. (On average, CoreBrand puts it at 5 to 7 percent.)
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