Your biggest financial risk: exposure to product contamination or failure may be the most critical evolving financial risk for a company. Careful planning and swift actions can reduce the likelihood of a product recall and minimize the damage to the company's reputation.

• Author: Cahill, Katherine

The reputation of a company can be directly tied to the safety and integrity of the products it sells to the public. The risk of making an unsafe product can cause financial damage to a company from which it can take years to recover.

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If it seems as though news of product recalls surface daily, you're probably correct. Last year, the U.S. Food and Drug Administration issued more than 900 alerts, withdrawals and recalls for food products, drugs, cosmetics and medical devices.

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Meanwhile, from October 2008 through September 2009, the U.S. Consumer Product Safety Commission announced 465 product recalls and assessed $9.8 million in penalties against 38 companies. The Commission reported nearly 70 toy-related deaths and more than 500,000 injuries to children under age 15 between 2006 and 2008.

Legislative statutes combined with the authority of federal agencies, such as the CPSC, FDA and the National Highway Traffic Safety Administration, grant the federal government control over any entity that manufactures, distributes or retails any goods that are put into the stream of commerce in the United States. Federal agencies have the authority to subpoena, assess fines and penalties and suspend a company's manufacturing and distribution capabilities.

When businesses violate product safety or federal reporting standards, a recall can be mandated. Further, when products fail and consumers believe them to be unsafe, scrutiny from both federal regulatory agencies and Congress can mount against any company that makes or sells the product. Most importantly, if people are afraid of a company's products, they won't buy them and in some cases they won't buy anything carrying the same brand.

A key point to understand is not the amount of the fines--which are growing--but the increased effort by the government to test and remove dangerous products from the stream of commerce. The government's motivation is to protect the public, regardless of any potential impact on shareholder value.

Amid this increased regulatory involvement in product safety issues, one especially important trend is emerging: Losses are getting larger. Given the proliferation of the 24/7 news media and Internet, it's obvious how quickly bad news spreads. What was once a bodily injury case involving a dangerous product can now rapidly become a global news story.

The increase in the losses is approaching an important milestone. In a growing number...