Le préjudice réputationnel : la spécialité du cabinet

La réputation, un actif incorporel

As such, corporate image — like reputation — qualifies as an intangible asset. It does not appear on traditional balance sheets but plays a vital role in value creation. Its worth lies in its ability to drive future cash flows, differentiate the company in competitive markets, and foster stakeholder trust.

The company's reputation has become such an important matter that monitoring it is now an integral part of overall risk management. This is easy to understand when you consider that when a company's way of communicating with its market is hampered, it can have a direct impact on its business, leading to a drop in sales — but not only.

Extrait — Introduction

Faute, dommage, lien de causalité : ce qu'est un préjudice réputationnel

It then becomes mandatory to rebuild this image in order to restore its communication potential, and this involves substantial investment. But is this mandatory process a prejudice? In this case the event would have to be proven as wrongful — that is the lawyer's part. Then, what about the damage? How to evaluate a damage coming from a reputation loss? That is the financial expert's role. Finally, a causal link between these elements must be demonstrated.

However, if there is a fault (the event), a loss (loss of business, additional costs) and a causal link between these elements, then yes — there is a prejudice for the company, which we will describe as a corporate reputation damage.

Extrait — Introduction

Les deux phases d'une crise : le choc, puis la reconstruction

A corporate reputation damage crisis can be broken down into two phases of interest to the financial expert: the crisis phase and the reconstruction phase.

A reputation crisis manifests itself as an event or series of actions that damage the perception of the company by its supporters, resulting in negative economic impacts. This period is marked by an initial shock, followed by measures to limit the damage. The crisis is often triggered by a scandal, public controversy or media incident.

In the crisis phase, there are many issues at stake for the company: restoring credibility, regaining immediate consumer confidence, and avoiding loss of sales. To minimize damage, the company needs to react quickly by implementing structured crisis management. The costs associated with this period are numerous:

• Crisis management: specialist consultants and crisis units
• Communication: investment in advertising, public relations and social networking campaigns to restore image
• Personnel costs: mobilization bonuses for crisis management teams and additional costs for recruiting communications or PR experts

Extrait — I.A Crisis, Shock and Damage Control

The image reconstruction phase takes place once the peak of the crisis has passed. It is a long-term process that involves redefining and restoring the company's image through structured, long-term actions. As Warren Buffett's quote reminds us, the company once again starts a long period during which investments will be needed to rebuild what has been destroyed or damaged.

During the reconstruction period, additional costs should not be forgotten, including human resources costs (an image crisis can affect employee morale and make it difficult to recruit new talents), and cost of debt (banks and investors may perceive the company as a higher risk, thereby increasing the cost of borrowing).

Extrait — I.B The Long Haul: Reconstruction

Une démarche d'audit avant tout chiffrage

The financial expert's context is as follows: a company has suffered damage to its reputation and is seeking compensation for this damage. In many cases, compensation will be sought through the courts, from the legal or natural person who caused the damage. The financial expert, tasked with establishing the quantum of the damage, must adopt an audit approach to understand the company's context, and then focus on building up a body of evidence to characterize the damage.

The audit process begins with a contextual analysis that explores the company's history, sector of activity, core values and strategic focus. The Expert's objective is to set a quantum that enables full compensation to be paid to the victim company, all other things being equal — the Expert must not allow the company to "enrich itself" because of the compensation.

Extrait — II.A An Audit Approach

Caractériser le préjudice avant de le quantifier

Characterizing the damage is the central point of an image damage assessment report. The Expert must be careful not to confuse quantification with characterization of the loss:

Extrait — II.B A Clustering Method

Among the financial elements available to characterize damage:

• Stock market price: In 2019, AMO Strategic Advisors published a study showing that corporate reputation accounts for 35.3% of the market capitalization of the companies studied, equivalent to almost $16.8 trillion (USD). A fall in share price uncorrelated with the reference market could be a sign of a negative and damaging event.
• Cost of debt: An increase in borrowing costs during the crisis or reconstruction period is evidence of a detrimental event.
• PR Value: This measure evaluates the effect of media coverage on brand sentiment, measuring both the volume ("media noise") and tone (positive vs. negative) of press articles. If negative articles outweigh positive ones from the date of infringement, the Expert has a strong argument to characterize the prejudice.

Extrait — II.B A Clustering Method

Coûts immédiats et pertes de revenus

While damage to reputation requires a specific methodology — notably with the need to characterize the damage — the quantification itself is of a classic nature. The Expert will endeavour to evaluate the gains lost (lucrum cessans) and/or the losses suffered (damnum emergens). There are immediate costs of damage and costs of rebuilding the reputation.

Extrait — III. Calculating Corporate Reputation Damage

The immediate costs of damage are those that arise in the first part of this chronology: the crisis phase. These include legal, litigation and communication costs, which can be grouped in a "litigation costs package". Financial expert fees would also be included in this package.

Next come costs that are more difficult to measure — notably those linked to the mobilization of top management. A real image crisis is likely to mobilize a company's highest hierarchical level. Subject to solid argumentation and tangible evidence, the Expert may consider that these are "non-amortized costs" corresponding to the allocation of part of the company's resources to work unrelated to its operating process.

For investors, an image crisis is likely to erode support, translating into higher financing costs. The Expert could compare the cost of credit before and after the damage: the difference, all other things being equal, would be the result of the harmful event.

Then there's the question of lost profits. Damage to image can result in customers being less attracted to the company's products. The costs and profit loss described above are directly linked to the crisis and can be detected very quickly after the prejudice has occurred, which is why they are classified as "immediate costs" — though they will last for a long time, probably until the company manages to restore its reputation.

Extrait — III.A Immediate Costs of Damage and Loss of Revenues

Investissements de reconstruction : l'approche différentielle

The costs of rebuilding a company's image are sometimes out of sync with the period of crisis — the company may be unable to communicate effectively during peak crisis, delaying restoration investments. These costs include:

• Marketing costs
• Media buying for advertising campaigns
• Communication costs
• Logo change, change of slogan, change of graphic charter

Extrait — III.B Investments to Restore Reputation

Experience has shown that, following an image loss, the company no longer communicates solely on its products but also on its values, since these have been attacked by the loss. As a result, the company incurs costs for a corporate campaign. After the "dieselgate" affair, the Volkswagen Group changed its slogan and launched a "corporate" advertising campaign presenting the Group's new strategy — featuring no products, so no commercial spin-offs were possible.

Extrait — III.B Investments to Restore Reputation

Scénario contrefactuel et trois dates clés

The construction of an actual and counterfactual scenario makes it possible to model the impact of the damage. The actual scenario corresponds to the company's financial performance including the damage, whereas the counterfactual scenario reflects the performance the company should have achieved in the absence of the said damage. The difference between the two corresponds to the damage, "all other things being equal".

The Expert will have to decide on three key dates:

• The date on which the damage began — distinguishing between the legal triggering event (the date the harmful facts are committed) and the financial starting point (when the facts are revealed)
• The end date of the damage — when the company returns to a normal situation, which is particularly complex for reputation damage given residual long-term effects
• The damage assessment period — under French law, this date is that of the judgment, to guarantee full compensation

Extrait — IV.A Classic Tools — The Counterfactual Scenario

Note: Figures are illustrative only. Under French law, past losses are capitalized to the judgment date to guarantee full compensation. The period July–December 2023 was excluded as damages could not be entirely linked to the prejudice.

Les nouveaux outils : RepTrak, équivalence média, text mining

The Reptrak model measures reputation based on seven indicators: product quality, innovation capacity, employee relations, ethical conduct, societal impact, leadership, and financial performance. From there, the Expert could use the model — comparing it before and after the loss — to understand which indicator has fallen and better target the costs incurred.

The Expert can also use the media equivalence method. The basic idea is to measure media noise and its general sentiment, then estimate how much this media coverage would cost at that tone. To rebuild the image, the company will have to spend at least the same amount on media to cancel the negative effects. Other "marketing" costs could also occur, such as changes to logos and colors.

Finally, the Expert could conduct sentiment analysis using text mining methods. Text mining refers to the process of analyzing and extracting meaningful information from large quantities of unstructured text. A sentiment analysis carried out using the TextBlob library evaluates:

Extrait — IV.B The New Tools

These tools can be used both for the characterization stage and for estimating the loss.

Extrait — IV.B The New Tools

Un cadre pour objectiver le chiffrage

This issue is the responsibility of corporate governance, who must address it before any damage is done, with a reputation monitoring policy. It should also be noted that the rise of generative artificial intelligence is only reinforcing the reputational risk for companies, with the risk of "deepfakes" in particular.

The aim of this methodological proposal is not to describe what needs to be done, but rather to propose a framework or toolbox for rationalizing and objectifying the quantification of financial loss in case of corporate reputation harm — which is currently more a matter of trying to obtain additional compensation than real compensation for the full damage suffered.

The growing importance of this subject means that financial Experts need to be trained in these matters and to apply a rigorous method, as they do for other types of damage.

Extrait — Conclusion