Reputation Defenders

What is the reputational risk?

What is the reputational risk?
Kim Calloway
Reputation Defenders Team
16 min
Reputation

What is the reputational risk?

Reputational risk is a serious issue for businesses of all sizes. It can devastate a company's reputation, decreasing revenue and customer trust. Reputational risk can occur without warning, leaving companies vulnerable to negative publicity and public perception. This can lead to an unfavorable narrative in search results, which further affects customer opinions and sales.

43% of executives believe that removing unwanted search results would increase sales. This statistic highlights the importance of managing reputational risk and taking proactive steps to protect a company's online reputation. Companies should consider investing in SEO strategies to help them control their online presence and ensure their brand is portrayed positively in search engine results. Additionally, they should take steps to monitor their online reputation and react quickly to any negative reviews. By taking these measures, companies can reduce the potential for reputational damage and protect their brand from harm.

Reputation is a complex beast. It's not just how well-known someone is online; it's a combination of reputation metrics like trustworthiness, expertise, influence, and authority. Reputation is also subjective — people don't always agree on whether something is good or bad. And it's constantly changing.

So what exactly does it mean for your business? What happens when your brand suffers a negative reputation impact? How do you protect yourself?

This post covers the basics of reputation management, including why it matters, what causes it, and how to mitigate risks. You'll learn about the different types of reputational risk like defamation, how to identify potential problems, and what you can do to prevent or recover from a disaster.

What is reputational risk, and how to manage it?

Reputational risk is the potential damage that can occur to your business when it fails to live up to the standards set forth by its customers, employees, partners, shareholders, suppliers, regulators, competitors, etc. This could include poor customer service, product quality issues, regulatory violations, unethical behavior, workplace discrimination, and bankruptcy. In short, reputational risk is people's negative perception of you.

How can reputational risk be managed?

  1. Identify and assess potential risks. The first step in managing reputational risks is to understand them. Ask yourself how likely they are to happen and how damaging their consequences might be.
  2. Understand who your stakeholders are and why they're important. Your Risk Assessment Process should include identifying the stakeholder(s) expectations. Make sure you consider all types of stakeholder(s). The survey, poll and interview them to get an accurate picture. Use various objective sources to do so.
  3. Assess your business operations. To be able to assess whether stakeholders' expectations match up with your company's performance, you must be objective and realistic. You can't just assume they will be happy no matter what.
  4. Choose a strategy. After an overview of your business, you will need to develop a plan for handling any potential risks. You could use the insights from your analysis to help you decide which risks you want to tackle first.
  5. Make sure they're working properly. If there are things you can do to minimize the risks, you should consider doing them. For example, digital solutions, better policies and procedures, and good employee education are all ways to minimize reputational risk.
  6. Watch out for potential risks. Circumstances may change even if you've identified, assessed, and treated risks. So be proactive and continue monitoring stakeholder expectations and your company's operation so that you can rapidly react and adjust to any changing situations.
  7. Consider utilizing technology. Software solutions can help you manage your company's risk by providing greater insight into its operations. They can also help you monitor emerging risks throughout the risk assessment and mitigation processes.

Reputation risk vs. strategic risk

Reputational risk is a type of corporate risk often overlooked or confused with other risks. Understanding the difference between reputational and strategic risks is important to manage both effectively. Strategic risk is specific, measurable, and predictable, which can be controlled through careful planning and implementation. Reputation risk is largely unpredictable and can be tied to events outside a company's control. This makes it difficult to plan for and manage reputational risks as they arise.

Companies need to recognize the differences between reputational risk and strategic risk to properly prepare for any potential issues that may arise from either one. Companies should have plans in place to address both types of risks, as well as strategies for mitigating them when necessary. By understanding the differences between these two types of risks, companies can better protect their reputation and ensure their long-term success.

Types and causes of reputational risk

Reputational risk is the potential for a company to suffer damage to its reputation due to an event or action. It can be caused by various factors, including outside adverse occasions, workplace practices, data retention losses, product recalls, poor financial statements, and CEO reputation issues. These risks can have far-reaching consequences for businesses and their stakeholders.

Outside adverse events such as natural disasters or political unrest can cause reputational damage if a company is perceived as not responding adequately or quickly enough. Poor workplace practices such as discrimination or sexual harassment can also lead to reputational harm if they become public knowledge. Data retention failures can lead to customer information being compromised and trust in the company being lost. Product recalls due to safety concerns are another common source of reputational risk, as customers may no longer feel safe using the product. Bad financial statements that show mismanagement of funds or lack of transparency can also lead to reputational damage. Finally, CEO reputation issues such as unethical behavior or nefarious activities can cause significant harm to a company's image and brand value.

Reputational risk occurs when the expectations of stakeholders – such as your customer, employee, supplier, investor, or regulator – are higher than the actual performance of your organization. Organizations should build an effective reputation management strategy to reduce the impact of reputational risk.

  • Poor workplace operations and culture – The actions of your staff, including your CEO, and any third parties who work with you can affect your company's image. Poor behavior by your CEO – or even just one team member – could result in your company receiving negative media coverage and damaging repercussions.
  • Poor service quality and inadequate product quality can damage your company's reputation. For example, if your software meets its requirements, it might be able to perform at peak capacity. If your bank has a security breach, it could lose the trust of its clients.
  • If companies don't change their business practices to match their stakeholder groups' changing beliefs, they risk losing their reputation. Expectations can change yearly, and they may differ by region and country. You need to know who your stakeholder groups are at all times. It would be best if you kept abreast of regulatory and industry developments to respond quickly and effectively to any change.

Reputation risk may arise from other risks faced by an organization. It is important to address these risks before they become a problem for your business.

Poor operational risk management can result in things going wrong at work. Likewise, inadequate management of compliance issues can raise the possibility of your business failing to meet company and regulatory guidelines, which might lead to fines or even criminal charges.

These risks can have serious consequences for any business. Let's examine some cases where this has been true for prominent companies.

Companies' reputational risk examples

Scandals have plagued the advertising industry over the years. From infidelity to product placement, companies are often forced to take action against their brands due to negative publicity. Sometimes, these actions lead to a loss of reputation for the brand itself. A few examples include the following:

  • Infidelity - When Tiger Woods cheated on his wife, Elin Nordegren, he lost his endorsements and sponsorships. He ruined his career.
  • Product Placement - Coca-Cola paid $1 million to put its name on the side of a building in New York City. The mafia had owned the building, and Coke wanted to distance itself from the association.
  • Advertiser Liability - Companies like McDonald's and Nike have been sued because of their ads. These lawsuits claim that the companies needed to do more to ensure that their products weren't being used inappropriately.
  • Brand Manipulation - As mentioned above, Pepsi Cola released an ad featuring Kendall Jenner. The ad received backlash for trivializing the Black Lives Matter movement.

In addition to the reputational risks associated with these types of incidents, there are legal consequences. If you want to avoid getting involved in a lawsuit, ensure you understand the full implications behind each situation.

CEOs, company leadership, and employees

The reputation of a CEO is inextricably linked to that of the company they lead. A negative reputation for the CEO can have a detrimental effect on the company's performance, leading to decreased revenue, investments, and shareholder value. Research has shown that 45% of a company's reputation is attributed to its CEO, while 25% of its market value is directly attributable to its reputation. Even if a beleaguered CEO quits the company, their negative reputation may still linger and damage the brand.

It is, therefore, essential for companies to ensure that their CEOs are seen in a positive light by stakeholders and customers alike. Companies should strive to create an environment where their leaders are respected and admired, as this will help protect their brand image and ultimately increase profits. Furthermore, companies should also take steps to ensure that any potential issues with their leadership team are addressed quickly and effectively to minimize any potential damage caused by negative publicity or reputational damage.

Negative articles

Negative articles can have a devastating impact on businesses, particularly those in the financial services sector. Company layoffs, lawsuits, scandals, and regulatory fines can all lead to decreased revenue and brand perception. According to a newly commissioned study by Forrester Consulting, 42% of brands believe lowering unfavorable search results would improve lead generation. In comparison, 54% of executives believe improving search results would drive revenue growth. This is because these negative articles are often seen as the first impression potential customers get when they search for a company online. Removing these articles from Google search results is essential for any business looking to maintain its reputation and increase profits.

The Forrester Study provides valuable insight into how SEO shapes brand perception and how businesses can take steps to reduce negative press coverage. The study found that companies should focus on creating positive content that will outrank any negative press coverage to improve their online presence. Companies should also consider investing in reputation management services that can help them monitor their online presence and take proactive steps to address any issues before they become too damaging. By taking these steps, businesses can ensure that their online presence remains positive and that potential customers are not deterred by negative press coverage.

Social media

Social media can be a double-edged sword when it comes to reputation management. On the one hand, it can effectively spread positive messages and build customer relationships. On the other hand, it can also be a source of negative publicity if not managed properly. When company leaders post controversial mentions online, their statements can have far-reaching implications for the entire business. Additionally, unsolicited brand comments by influential political figures or celebrities can lead to social media backlash that may damage the company's reputation.

Furthermore, social networks can boost negative press that may have gone unnoticed. Even small incidents or customer complaints can quickly spiral out of control if shared on social media platforms. Companies must be aware of this risk and mitigate potential damage to their reputation by monitoring their online presence and responding quickly and appropriately to any criticism they receive.

Services and pricing

Businesses need to hold a good reputation to remain competitive and successful. Poor service or overcharging customers can lead to negative publicity, damaging a business's reputation. For instance, if a journalist discovers that a company has been using shady sales tactics or charging hidden fees, they may publish an expose about it. This could cause potential customers to lose trust in the company and look elsewhere for their needs. Similarly, if a financial analyst writes an article criticizing the quality of investment funds offered by a company, this could also have serious repercussions on its reputation and customer base.

Companies should strive to provide excellent services at reasonable prices to avoid such situations. They should ensure that all sales techniques are transparent and honest and that any fees charged are clearly stated upfront. Companies should also make sure that their investment funds are of high quality so as not to attract criticism from financial analysts. Doing so will build trust with their customers and maintain a positive reputation in the market.

Data loss

Data loss is a serious threat to any business, especially those that handle sensitive customer information. Companies in the finance industry are particularly vulnerable to data breaches, as they store and process some of the most confidential personal information. This includes names, social security numbers, passwords, logins, PINs, and bank account numbers. A data breach can devastate an organization's reputation and financial standing. It can lead to significant losses in terms of both money and customers. In addition to the direct costs associated with a data breach, such as legal fees or fines from regulators, there are indirect costs, such as lost revenue due to decreased customer trust or increased marketing expenses needed to rebuild brand loyalty.

Organizations must proactively protect their customers' data from loss or theft. This includes implementing strong security measures such as encryption technology and multi-factor authentication systems. Additionally, organizations should regularly review their security policies and procedures to ensure they are up-to-date with the latest industry standards. Finally, organizations should provide regular employee training on identifying potential threats and responding appropriately if a breach occurs. Businesses can help protect their customers' data and minimize the risk of costly data by taking these steps.

Regulation changes

Government regulations can have a major impact on financial institutions. With each election cycle, the regulations banks and other financial institutions must adhere to can change drastically. This can create great uncertainty for those in the industry, as they may face new requirements or restrictions they should have been expecting. For example, under one administration, a bank may meet all the stress test requirements, but under another, they could face liquidity risk due to stricter regulations.

When this happens, it can cause the public perception of an institution to become unstable, and customers may take their money elsewhere. This is why it is so important for financial institutions to stay up-to-date on any changes in government regulations and be prepared to adjust their operations accordingly. By doing so, they can ensure that their customers feel secure in their investments and trust that their money is safe with them.

Reputational damage

Reputational damage can devastate businesses, particularly those in the banking and financial services industry. When a company's reputation is damaged, it can lead to a loss of trust from customers and investors, leading to fewer sales and customers. This can also result in higher costs for hiring and retention, which further erodes operating margins and prevents higher returns.

Moreover, reputational damage increases liquidity risk, impacting stock prices and ultimately reducing market capitalization. This can be especially damaging for companies that rely heavily on their reputation as a source of competitive advantage. A tarnished reputation can lead to decreased customer loyalty, reduced brand recognition, and even legal action from disgruntled customers or investors. To protect their business from reputational damage, companies must take proactive steps such as implementing strong corporate governance practices, engaging with stakeholders regularly, and responding quickly to any negative publicity or allegations of wrongdoing.

Reputational risk examples for banks

Wells Fargo is a prime example of the potential damage caused by reputational risk. The bank's employees opened millions of faked accounts, overcharged for mortgage insurance, signed up clients for excessive car and pet insurance, and accidentally foreclosed on hundreds of homes. These actions had serious consequences for the bank, leading to the firing of 5,300 workers, the replacement of longtime CEO John Stumpf with Tim Sloan, and replacing board chairman Stephen Sanger and several directors.

The scandal has had a lasting impact on Wells Fargo's reputation. The bank has been forced to improve its customer service practices and rebuild customer trust. It has also implemented new policies, such as enhanced customer authentication processes and improved oversight of sales practices. Despite these efforts, it will likely take time before Wells Fargo can fully recover from this reputational crisis.

Why is reputation risk management very important?

Reputation loss can severely damage your brand image and cost you money. If it happens, how do you recover? What steps are taken to prevent it from happening again? And what happens if it does happen? These are just some of the questions we asked ourselves while developing Reputation Risk Management. We wanted to find out whether there was a way to ensure reputation risks don't become a problem. After all, reputation is everything.

We found that many organizations needed to formalize their approach to managing reputation risks. They relied on ad hoc processes, spreadsheets, and manual systems. This often led to poor decision-making and missed opportunities, resulting in significant losses. A lack of visibility into the potential impacts of reputation risks meant that managers needed to figure out where to start.

So we set about designing a system that would provide real insight into reputation risks, helping organizations manage them effectively and proactively. By combining automated data collection with expert analysis, Reputation Risk Management provides a comprehensive view of reputation risks across your organization.

The system allows you to identify areas of concern, prioritize risks and take action. It helps you understand what's driving reputation issues and gives you the tools to address them.

You'll see how Reputation Risk Management works, why it matters and how you can use it to improve your reputation.

Four steps of reputation risk management

Reputation risk management is an important part of any business strategy. It involves assessing the potential risks to a company's reputation and taking steps to minimize or eliminate those risks. The four steps of reputation risk management are measuring, monitoring, managing, and mitigating damage.

Measuring involves assessing the current state of your reputation and understanding how it could be affected by external factors such as customer feedback, media coverage, or industry trends. Monitoring helps you stay on top of changes in your reputation by tracking key indicators such as customer satisfaction surveys or social media sentiment. Managing involves developing strategies to protect and enhance your reputation by responding quickly to negative feedback or addressing customer complaints promptly. Finally, mitigating damage involves taking proactive steps to reduce the impact of any reputational issues that arise, such as launching public relations campaigns or issuing corrective statements.

By following these four steps, businesses can ensure their reputations remain intact, and their customers remain loyal:

1. Measuring reputational risk

Measuring reputational risk is important for any company to protect its image and reputation. The first step is to execute a reputational risk assessment, which will help you determine the public perception of your company and competitors and the industry in which you operate. Reputational risk is highly subjective, so segmenting stakeholders into separate groups to identify exposure areas is important. This could include regulators, analysts, investors, clients, or employees. Once these groups have been identified, it's important to indicate the level of danger for each segment. This will help you understand where your company may be vulnerable and how best to protect its reputation.

It's also important to consider external factors that could affect your company's reputation, such as economic conditions or changes in the industry landscape. By taking a proactive approach and measuring reputational risk regularly, companies can ensure they are prepared for any potential risks that may arise and maintain their positive public image. Additionally, by understanding the level of danger associated with each stakeholder group, companies can tailor their strategies accordingly and focus on protecting their most valuable relationships.

2. Managing reputational risk

Reputational risk management is an important part of any business. It involves assessing the potential risks to a company's reputation and developing strategies to mitigate those risks. A comprehensive reputational risk management plan should include processes for identifying, monitoring, and responding to reputational threats. This includes identifying the risks that could damage the company's reputation, such as customer complaints or inappropriate CEO comments on social media, and then developing strategies for addressing them.

It is also important to plan to respond quickly and effectively to active crises. Working with a crisis management firm or public relations agency can help ensure that any issues are addressed promptly and professionally. Once the crisis has been resolved, it is important to invest in corporate reputation management strategies to restore your search results and rebuild customer trust. These strategies include improving customer service, creating positive content about your brand online, and engaging with customers on social media platforms.

3. Mitigate reputational risk with ORM

Online reputation management (ORM) is essential for mitigating reputational risk. It involves actively managing a company's online presence to reflect its real-world accomplishments and values accurately. This requires a comprehensive strategy that includes social media management, brand control, content creation, strategic outreach, digital content creation, and, most importantly, search engine optimization.

Working with the right reputation management company is important to mitigate reputational risk effectively. They should be able to develop and execute a plan that will shift the negative narrative and repair any damage done to the brand's image. Additionally, marketing campaigns should promote positive messages about the company and its products or services. With the right approach, companies can successfully manage their online reputation and protect their brand from potential risks.

4. Monitor your reputation

Monitoring your reputation is an essential part of any reputational risk management program. Tracking brand perception against your baseline is important to identify potential issues and address them quickly. To do this, you should monitor the opinions of workers, customers, vendors, shareholders, analysts, and activists.

There are a few ways you can continuously monitor your brand reputation. You can run surveys to gauge customer satisfaction or employee morale. You can hire a brand sentiment tracking agency to keep tabs on what people say about your company online. You can also set up Google alerts to receive notifications whenever someone mentions your company or product online. These methods will help you stay on top of any potential reputational risks and take action if necessary.

Reputational risk insurance policies

Reputational risk is a major expense affecting any company's bottom line. It can be difficult to detect, and the damage it causes can be long-lasting. For this reason, many companies are considering taking out reputational risk insurance policies to protect themselves from the financial costs associated with a damaged brand image.

While insurance may help cover some of the costs of repairing a tarnished reputation, it won't fix the underlying issue. Therefore, it is important to consider whether or not the cost of an insurance policy is worth it. Instead of investing in insurance, companies should focus on strengthening their online presence and developing strategies for mitigating reputational risks before they occur. This will ensure that their brands remain strong and resilient in the face of potential threats.

Conclusion

Reputation risks are becoming increasingly common due to the rise of social media. In fact, according to Altimeter Group, reputation risks increased by 40% globally in 2017. This increase largely because organizations now have access to data about their customers, employees, and partners – information that could damage their brand.

Updated

December 30, 2022

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