From the August 2013 issue of Investment Advisor • Subscribe!

July 29, 2013

The Weakest Link

Are your clients’ business reputations at risk because of a weak link in their supply chains?

Bangladeshi volunteers and rescue workers assist in rescue operations after an eight-story building collapsed in Savar, on the outskirts of Dhaka, on April 25, 2013. Photo: MUNIR UZ ZAMAN/Getty Images Bangladeshi volunteers and rescue workers assist in rescue operations after an eight-story building collapsed in Savar, on the outskirts of Dhaka, on April 25, 2013. Photo: MUNIR UZ ZAMAN/Getty Images

While it’s hardly news that businesses are exposed to reputation and liability risk through suppliers, the factory collapse in Bangladesh in April has upped the ante considerably. Retailers in the United States and abroad found themselves doing damage control as the death toll topped 1,100 and company after company uncovered ties to the garment factories involved in the disaster. Responses differed from company to company, but people everywhere reacted furiously.

While there has been substantial outcry after providers of products like fruits and vegetables, tires or pet food have been targeted for harm they caused, the factory collapse may have taken public outrage to a new level. In a sign of the times, that outrage was focused through social media.

For instance, when Benetton denied any ties to the tragedy, photos of Benetton garments found in the wreckage went viral on the Internet. Similarly, when Walmart and the Gap declined to sign on to the Accord on Fire and Building Safety in Bangladesh, social media campaigns and online petitions sought to make the companies change their minds amid blistering criticism.

Many weeks later, the reputational damage continued to grow as not just the general public, but politicians and other retailers weighed in. Rep. George Miller, D-Calif., after touring some of the factories in Bangladesh where U.S. garments are made, said that retailers “have to make a decision now whether you want to have blood on your labels.” American Apparel CEO Dov Charney has gone on the record saying that retailers should pay workers more or get out of the business: “They shouldn’t be making clothing. If they can’t pay $50 a week, don’t make clothes.”

Where does this leave U.S. companies? Probably looking for reputation insurance, lest trouble online translate to trouble at the cash register. A recent Harris poll indicated that almost four in 10 U.S. consumers are now unwilling to buy garments made in Bangladesh. Caroline Sapriel, managing director of international risk and crisis management firm CS&A, pointed out that companies could end up paying a price for the cheap cost of manufacturing garments in factories there.

“There have been some petitions calling for boycotts of certain retailers connected to the tragedy,” she said. While she was “not sure how much traction they have . . . so far,” she added that “[s]ocial media has been used to expose consumer/public outrage at this tragedy and . . . pockets of consumers with a higher consciousness are definitely rejecting some brands.”

Tracie Grella, global head of professional liability for AIG, said that reputation risk is “one of the emerging risks and exposures now that insurance companies are looking at.” Products that insure against reputation damage are actually fairly new, said Grella, so, even given the magnitude of the disaster, she doesn’t anticipate any changes in underwriting to such policies as a result of the Bangladesh factory collapse. However, there is always the chance that could change in the future. Information gathered each time a problem occurs provides guidance for underwriters on where industry-specific risks may lie.

One thing Grella does expect, however, is that such coverage will grow. The spread of bad news via social media exponentially increases the damage to a company’s reputation. “It could be a little restaurant down in South Carolina where something bad happens, and nobody outside the city would know,” Grella said. “Now, the whole world knows.”

George Haitsch of Willis Group recently pointed out on the WillisWire blog that risk management includes prevention of problems: “Strong risk management aligned with corporate values and business strategy works not only to manage the financial, supply-chain and reputational risks of outsourcing, but also to proactively prevent disasters before they occur. Aligning loss control best practices into contracts and partnerships can help to ensure that your firm’s brand and reputation are protected regardless of where and who is producing your product.”

Companies in search of reputation risk coverage might do well to heed his words.

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