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.