Recessions Always Put Banks in the Path of the Storm – Which Ones Will Be Positioned to Withstand Reputational Tornadoes

The 10-year anniversary of the 2008 financial collapse brought with it voluminous reporting and analysis of what happened, how it happened and whether it could happen again. It also brought forth commentary from angry individuals who never expected to be affected by the crisis and who, in some cases, are still trying to recover from harm caused by “the system.”

That generalized anger poses a reputational threat to banks and other financial institutions that many hold responsible for the events of a decade ago. It is not a threat of negative media. There’s been plenty. Rather, it is a threat of real economic damage from angry stakeholders who will be let down and disappointed by “the system” yet again when the next economic downturn inevitably strikes.  

The reservoir of anger that still exists from a decade ago will come to a frothy boil and the wind from politicians in Washington will turn into a tornado, unleashed full force at whatever targets seem most vulnerable. In this context, strength and vulnerability are reputational issues. Stakeholders – from customers to politicians to Main Street citizens – will be judging whether the institutions they’ve known and trusted have, in fact, lived up to their expectations.

That’s what reputation is based on: expectations. Our firm has built its business by developing methodology for analyzing the reputational strength and resilience of companies, underwriting and insuring for reputational value losses – essentially, tangible economic impacts resulting from disappointed customers, disaffected employees, dismissive investors, distrustful creditors, disengaged vendors and determined regulators. We’ve seen up close how strong companies recognize this link and, therefore, treat reputation as an enterprise risk management issue, starting in the C-Suite and the board room and informing a wide range of operational decisions. These are firms that are committed to resilience, in operational terms as well as reputational terms.

Other companies mistakenly view reputation purely as a marketing and communications issue and they address it by doing good works in their community and through corporate social responsibility campaigns. These companies are spending millions of dollars on misdirected attempts to bolster their reputations with the expectation that there will be reputational credit that will mitigate the anger of a financial crisis. 

But is this reasonable? When a crisis hits and stakeholders look back, what do they expect to see? How will they evaluate whether a bank or any other institution lived up to their expectations? If the story the institution tells is that it is worthy of future confidence because it has made micro-loans in under-developed countries or was sensitive to environmental issues or invested in financial literacy programs in low-income communities, how will stakeholders and decision-makers react? Is that narrative going to meet their expectations or will it merely fuel their anger? 

Do the already angry stakeholders who are most likely to be harmed in the next downturn care that the bank is doing a range of good works for others? Will that record of good works make it more likely the company will be forgiven by stakeholders for future harm?

As a practical matter, almost all companies disclose reputational risk as a material risk in their SEC filings.  But since most of them see it as a marketing problem rather than a governance and risk management challenge, they fail to describe the steps they are taking to mitigate that risk. Have they defined the risk correctly? Do they clearly understand what the many different stakeholders expect – and what they place the most value on?  What steps are they taking to ensure that, on an enterprise-wide level, they are working to meet most of those expectations? 

Have board members discussed it in an engaged manner? What level of corporate executive is charged with spearheading reputational defense? Have they brought in third-party experts to evaluate their systems and an insurer willing to stand behind and validate that their efforts are sincere, authentic and effective?

Stakeholders rarely expect perfection from the companies they’re connected with.  They do expect that, when they look back after a crisis, it will be clear that the company acted swiftly and prudently – that it did everything it reasonably could to avoid it and, most important, to protect its stakeholders from being harmed themselves. They expect companies to have been honest and transparent, to have set expectations accurately and to have disclosed those issues about which their stakeholders should be most concerned.

Now that there are living wills planning for the winddowns of failing institutions, reputation is going to be an even more important factor. Imperfect individuals, influenced by political considerations, emotions, media coverage and public opinion polls are going to be making life and death business judgments. Does Bank A deserve to be bailed out?  Should Bank B be taken over and liquidated? How a bank sets expectations, and by doing so, communicates that it cares about its stakeholders – what is important to them and what they fear – will help win support when push comes to shove.

As inevitable as the next recession is, it is just as inevitable that these decision makers holding the fate of banks’ lives in their hands are going to take into consideration whether institutions have done – in the months and years leading up to the collapse – everything that could reasonably be expected of them to avoid getting into that situation and has set and managed expectations appropriately. They will be answerable to the public and will need to justify their decisions with evidence that the bank in question recognized their risks, treated them as enterprise-wide priorities, addressed them in their board rooms as strategic issues, and employed warranties and insurance products from third-party entities that reviewed and validated their systems.

Just as we can predict that certain regions will eventually be struck by tornados, we can predict that our banking sector will once again come under attack. Are their foundations strong, have they built hardened storm shelters, is there an early warning system in place to warn local residents? Those who wait for the tornado to appear on the horizon may be too late.