Reputation Defenders

What is reputational risk?

What is reputational risk?
Barbara Worley

6 min

read

What is the reputational risk?

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.

What are the causes of reputation risk?

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.

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.

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.

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

November 18, 2022

Share it
social media sharing

Build a stronger with Reputation Defenders

Get Started