Reputational risk: It’s time to pay attention

When we think of risk, we often define it in financial terms as risk by its very nature often comes with financial consequences. From a benefits plan perspective, we frequently focus on how benefits are funded and underwritten—how the risk is shared between plan sponsor, employee and insurer. However, not all risks are explicitly financial—some risks are more subtle but increasingly important. One such risk is reputational risk.

In simple terms, reputational risk is the potential damage to an organization should the benefits program fail to deliver on the promises made—real or perceived. Damage could be in the form of strained employee and/or union relations, and, ultimately, it could result in damage to the commercial brand—how customers view the organization. And, like most risk, reputational risk can have negative financial consequences.

There are a number of reasons why plan sponsors should pay attention to their reputational risk, including the following:

Bigger risks – From a benefits perspective, the risks are getting bigger. Everyone has heard about biologic drugs and the potential cost impacts. From a financial risk management perspective, it might make sense to simply put an overall cap on how much the drug plan will pay. That might be fine for most situations, but what about the 35-year key employee who has given his all to the organization and the drug plan will now pay only $10,000 of his $100,000 drug bill? From a reputation perspective, how do you defend limiting access to these drugs, which can significantly improve the quality of life for those people most in need?

Social media – We have all recently seen many examples of the power of social media—the power to elect politicians, the power to bring down governments, the power to network and communicate—in ways never thought imaginable. People are more connected today than ever before through this form of communication that is immediate and sometimes lacking context. The court of public opinion is now infinitely larger with very little substance on which to develop a reasoned point of view. This is the new world within which organizations operate, so all decisions—including benefits plan decisions—must be well thought out and defensible, and take into consideration how information is shared.

Stakes are higher – It has been well documented that Canada will experience a labour shortage in the coming years. The ability to attract new employees and retain the ones you have will be critical to the future success of many organizations. The values of an organization—its reputation—will be increasingly important in this war for talent.

Corporate social responsibility – Many Canadian organizations have embraced corporate social responsibility as a value—as a business imperative. There are many social issues in Canada worthy of focus; however, the health of Canadians is arguably the most significant social issue for this country. We cannot afford the health system we have today, and the future does not look any better. Corporate Canada has an important role to play in health promotion, in illness prevention and, ultimately, in the funding of certain medical supplies and services such as prescription drugs. Yet there is a growing school of thought that would suggest that benefits plan sponsors need not, or should not, cover high-cost medicines, forcing the government to step in to fill this void. Despite the obvious question (From where would the funding come?), this type of behaviour seems to run contrary to the new mantra of corporate social responsibility.

From a benefits perspective, the best way to mitigate reputation risk and for organizations to be seen to be delivering on the values they have carefully developed for themselves is to pay everything—do not decline a claim. This is clearly impractical and is not at all what I am advocating. What I am suggesting is a well-thought out risk management strategy that not only deals with traditional risk issues but also specifically addresses reputational risk:

  • Understand your risk exposure today and how this might change in one, two and five years. Risk is not static, and you should regularly revisit how well you are managing your benefits plan risk.
  • Understand your corporate values and the link to your HR strategies, including employee benefits. Understand how benefits plan decisions could reflect on these corporate values and, ultimately, on the company brand.
  • Implement a risk mitigation strategy that addresses all risk, including reputational risk. I am prepared to bet that the majority of Canadian benefits plan sponsors do not have a well-articulated risk mitigation strategy in place—and it is well past the time that they should.
  • Establish a decision-making framework for benefits plans. It is common for pension plans to have pension committees to oversee decisions related to plan design, funding, etc. It is a risk management strategy. Most plan sponsors, other than in multi-employer or collectively bargained situations, do not have a similar framework in place for benefits. It is perhaps time to consider the adoption of a formal governance structure for benefits plans given the emerging risks. As a minimum, organizations need a well-articulated process to make benefits plan decisions that include consideration of all risks.
  • Reaffirm the promise. Reputational risk exists in some cases in which the benefits plan fails to deliver on the perceived promise—what employees expect. It is important to regularly communicate with employees about their benefit entitlements, particularly in hot-issue areas such as prescription drugs.

    Reputations are hard-earned and easily sullied. Ten years ago, it was unlikely we would be having this conversation about how benefits plan decisions could reflect on the reputation of an organization. But the world has changed, with the table stakes getting larger. It’s time that organizations pay attention to this issue.