The temporary halo effect

May 17, 2021
Pharma's reputational luster could be short-lived

The pharmaceutical industry would be gravely mistaken if it expects the momentary investor enthusiasm and popular adoration spawned by its speedy development of life-saving COVID-19 vaccines to diminish reputational headwinds on the horizon. 

If companies fail to exploit this window of opportunity with a substantive reputation resilience strategy, this short-lived halo will succumb to the gravity of historical grievances. Spoiler alert: This does not mean more corporate social responsibility or feel-good marketing.

In fact, once pharma companies’ remarkable success with COVID vaccines is in the rearview mirror, stakeholders could well begin to question why pharma is not having similar successes in combatting other diseases.

The fact that pharma’s biggest companies have spent more on marketing and sales than on drug R&D indicates a fundamental flaw in their reputation risk management strategy. Pharma companies need to take the time to understand who their stakeholders are and what they expect — and how those expectations may have shifted.

Pharmaceutical companies can’t leave their reputations entirely to marketing. They need to build more expansive reputational risk management and governance processes that address the interests of both shareholders and stakeholders, using a framework that is sensitive to expectations, behaviors and economics.

Filling the gaps

The risk management process requires intelligence gathering among all the disparate corporate functions, identifying where gaps exist between stakeholder expectations and the company’s ability to meet them. And companies need to take meaningful steps to manage those expectations, operate to meet those expectations, or mitigate the reputational damage from persisting gaps. The act of balancing the costs and benefits of triage for each of the stakeholder groups to yield a coherent enterprise reputation risk strategy, usually under the supervision of general counsel and with oversight from the board, comprise the underpinnings of an effective reputation resilience solution.

Here’s some additional color to how a reputation resilience solution can be delivered by a firm’s enterprise risk management apparatus. Clear metrics and quantitative rigor are essential in demonstrating a company’s credibility and authenticity, and metrics measuring one’s reputational value should be built on a track record of performance. Consider, for example, the metrics used over nearly 20 years by stock indexes, which predict what companies will outperform their peers based on their reputation.

Pharma’s risk management process going forward needs to engage its board while also enabling it to focus on strategic issues and avoid a constant stream of piecemeal issues and potential threats. A reputation risk solution framework should be a coherent, seamless business process packaged for oversight.

Reputational resilience is also something bond raters and investors are currently rewarding, especially when it is authenticated. Bringing in third parties, whether outside corporate counsel, consultants, or underwriters, can help both authenticate the framework and protect the enterprise if reputational crises do occur through insurances and financial risk transfer through captives.

Pharma’s reputational risk headwinds have implications for every company in the industry. And it’s not just proxy advisers, bond raters, institutional investors and the courts of public opinion that they need to be worried about.

Reputational stakes

Courts of law are increasingly holding corporate boards accountable for financial setbacks related to reputational damage. They are upholding pleadings that argue reputation is mission critical and, therefore, falls under a director’s duty of loyalty. Federal lawsuits mentioning reputation saw a nearly 60 percent increase last year from the year before, according to Agenda, a publication used by public board directors and company executives.

If Big Pharma doesn’t create systems and oversight processes to manage their reputational risks and build in reputational resilience, their COVID vaccine sheen will quickly wear off, opening the industry to public ire once more. Companies that build a robust reputation risk management infrastructure, however, will have a compelling and credible story to tell.

About the Author

Nir Kossovsky | CEO, Steel City Re