Managing Reputation Risk: What the Hospitality Industry Can Learn from the Banking Industry

By Nir Kossovsky CEO, Steel City Re | May 27, 2018

The hotel industry today operates in the reputational equivalent of a tornado zone, where external events or incidents involving malicious individuals can cause serious damage at such a rapid speed that it is almost impossible to respond to if defenses are not put in place well in advance. Among the most rapidly evolving and potentially most damaging risks arise from security breaches and the loss of confidential information, ethical breaches by leadership and talent, and the overarching risk of reputation loss arising from angry and disappointed stakeholders. Once a crisis strikes, it quickly spins out of control and the going-forward economic impacts are often long-term.

Any incident, whether it is customer-facing - a physical assault on the premises by a guest, a claim of food poisoning in the restaurant or a burglary - or an internal breach of legal compliance or financial controls, or general poor execution of change management and growth, can trigger a social media barrage. In the competitive hospitality marketplace, the ensuing cascade of economic impacts could amount to a drop in bookings, lost revenue, concerned lenders and shareholders and a higher cost of attracting and retaining key employees. All these costs are the consequences of reputation risk, which broadly stated is the threat of economic damage from angry, frightened and/or disappointed stakeholders.  

Like natural disasters, many types of incidents from rogue customers, rogue employees, rogue regulators and well-intentioned but bad decisions can occur that are beyond management's control and can destroy a brand's or a group's reputation and impact its business in significant ways quickly.  If customers decide to avoid a property for whatever reason, the costs can be profound. Consider how quickly Wynn Resorts lost nearly 20% of its market capitalization in the aftermath of #metoo.

While every industry needs to manage stakeholder expectations, mitigate disappointment, and address the failure to meet expectations when incidents occur, the speed and intensity at which destructive tornado force attacks can occur at any time in the hospitality industry is just like the banking industry.

Under intense regulatory pressures, the banking industry has amassed large enterprise risk management apparati to address a range of perils whose common path of value destruction is the decision by customers, business partners, and peers to stop doing business with them. The core risk, called "liquidity risk," is what brought on the major global equity market collapse, and was largely precipitated by stakeholder fear. In other words, "reputation risk."

Today, the banking sector only has major meltdowns when global events manifest; localized institutional failures have been largely mitigated by the success of an insurance product-federal deposit insurance-that helped mitigate anger and fear and avert actions by potentially disappointed stakeholders. It did so by telling a story of sound governance and security in a way that provided assurance without inviting rouges to test the integrity of that assurance.

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Eco-Friendly Practices: Corporate Social Responsibility

The hotel industry has undertaken a long-term effort to build more responsible and socially conscious businesses. What began with small efforts to reduce waste - such as paperless checkouts and refillable soap dispensers - has evolved into an international movement toward implementing sustainable development practices. In addition to establishing themselves as good corporate citizens, adopting eco-friendly practices is sound business for hotels. According to a recent report from Deloitte, 95% of business travelers believe the hotel industry should be undertaking “green” initiatives, and Millennials are twice as likely to support brands with strong management of environmental and social issues. Given these conclusions, hotels are continuing to innovate in the areas of environmental sustainability. For example, one leading hotel chain has designed special elevators that collect kinetic energy from the moving lift and in the process, they have reduced their energy consumption by 50%  over conventional elevators. Also, they installed an advanced air conditioning system which employs a magnetic mechanical system that makes them more energy efficient. Other hotels are installing Intelligent Building Systems which monitor and control temperatures in rooms, common areas and swimming pools, as well as ventilation and cold water systems. Some hotels are installing Electric Vehicle charging stations, planting rooftop gardens, implementing stringent recycling programs, and insisting on the use of biodegradable materials. Another trend is the creation of Green Teams within a hotel's operation that are tasked to implement earth-friendly practices and manage budgets for green projects. Some hotels have even gone so far as to curtail or eliminate room service, believing that keeping the kitchen open 24/7 isn't terribly sustainable. The May issue of the Hotel Business Review will document what some hotels are doing to integrate sustainable practices into their operations and how they are benefiting from them.