Reputation is one of the most valuable assets a company can possess in an extremely competitive business environment. Reputational risk implies the risk of destruction to an organisation's credibility, trustworthiness, or public image, which can arise due to many internal and external events. A major incident or failure of a product, ethical misadventures, or poor customer service, be it big or small, can quickly spiral into something virulent and cause massive losses to the business. Organisations must understand what reputational risk means, what usually causes it, and its various forms so as to build resilience against it, protect stakeholders' trust, and sustain market success in the long run.
Understanding Reputational Risk
The hidden dangers of reputational risk can strike the hardest at the survival of the largest and best-managed companies. Often there are no easy metrics for identifying and quantifying reputational risk; this is one of its tricky aspects. However, damages inflicted upon profitability and valuation used to be its orderly and ugly manifestations. It may clean millions or billions in value for market capitalisation or revenues and spur a change in the very top strata of management.
Reputational risk can also arise from the actions of errant employees, such as fraud or massive trading losses disclosed by some of the world's biggest financial institutions. In an increasingly globalised environment, reputational risk can arise even in a peripheral region far away from the home base.
In some instances, damage limitation can reduce the effects of reputational risk in this instantaneous communication and social media era. In contrast, in some cases, this risk may hang about unnoticed for several years. For example, activists have targeted oil and gas companies, claiming their extraction operations have damaged the environment.
It can be a slow process to monitor online interactions like negative reviews that can negatively impact the company's reputation. Various ORM systems allow companies to keep a watch on what consumers say about a brand on review sites, social media, and search engines. Many of these programmes allow it to analyse and respond to reviews all from one dashboard.
Why is Reputational Risk Important?
For every firm, independent of its size, understanding the importance of reputational risk is vital. While influencing media perception and talent acquisition, it directly impacts consumer loyalty, sales performance, and resource distribution. Some points below show how drastically reputational risk can affect a business:
Trust and Loyalty from Customers: A company's reputation really depends on trust at its core. Years may pass to rebuild that trust once it is damaged by subpar product quality or negative customer experiences. Faithful clients could begin looking elsewhere, making luring new ones a Herculean undertaking.
Effect on Sales: Usually the first to show the effects of a reputational hit are sales figures. Whether caused by product recalls, unfavourable media, or customer boycotts, the bottom line can suffer noticeably. Rebuilding sales momentum takes effort and money, hence sometimes shifting resources from growth projects to damage control.
Bad Media Attention: Once the media picks up a tale, it may spiral out of the corporation's control as every element is examined and debated on several channels. This sort of attention could turn off possible partners, investors, and consumers who are reluctant to affiliate with a brand embroiled in controversy.
Difficulties in Recruitment and Retention: Strong reputations bring talent as well as clients. Top candidates may think twice about applying when a company is seen as immoral or a source of negative headlines; current workers may think about leaving for a more stable and favourably seen organisation.
Types of Reputational Risk
Reputational risk can come from many different sources, from a company’s overall business model or corporate culture to embarrassing actions or employee disparaging remarks. A company can even face threats to its reputation through “guilt by association” if a business partner or high-profile client is having trouble with its public image. Here are 5 common types of reputational risk.
1. Poor Quality Products and/or Services
Providing products and/or services that don’t meet customer expectations is a quintessential reputational risk. This is especially true in an age of rapid communication over digital channels. Even if most customers are satisfied with what they get from an organisation, dissatisfied customers can spread negative publicity quickly over the internet. And if an organisation doesn’t do a good enough job of addressing these concerns (or at least appearing to), while it may not lose loyal customers, it can have a more difficult time bringing in new customers.
2. Security Failures
This can refer to both physical security and cybersecurity. If someone breaks into a company’s physical office and steals or destroys property, that can lower the faith of outside parties in a company’s ability to protect its assets. Even more damaging to reputation, however, can be a business suffering a cyberattack like a DDoS attack, data breach, or malware attack.
There are two reasons for this. The first is that a cyberattack can cripple a company’s functionality and prevent it from delivering its services (at least much easier than physical theft can). The second is that cybercriminals can steal customer data and use it to commit all manner of fraud.
3. External or Internal Fraud
This category goes hand in hand with risks caused by security failures and representative misconduct. Failure of a business to prevent fraud by outside actors, such as identity theft, account takeovers, and other deceptive abuses of their systems, can scare customers away because they feel unsafe or that the platform is allowing unfair dealings. In turn, that can sow doubt in stakeholders about the company’s ability to operate profitably (more on this later).
On the other hand, organisations with inadequate internal controls may get taken advantage of from the inside. Employees may exploit process weaknesses to steal money, property, or information. Or senior officials can abuse the powers and information granted by their positions to do things that are for their own benefit instead of the organisation. If these actions happen repeatedly and get exposed to the public, they can cause a business significant reputational damage.
4. Partner Company Failures
A company can also face reputational risk due to failures by its business partners. For example, say a retail or eCommerce business hires a logistics company to deliver its products. Said logistics company develops a bad reputation because it habitually misses deliveries, mixes up orders, or delivers items late or broken. The original business may also take a hit to its credibility, even though it wasn’t directly responsible for these mistakes because the unreliable logistics company was acting on its behalf.
5. Lack of Profitability
Stakeholders in a company expect returns on their investments, and a company can’t provide these if it’s not profitable. This shortfall can be caused by a number of factors: failure to adapt to market circumstances, poor executive decision-making, bad corporate governance, victimisation by financial criminals, discipline by industry regulators, and so on. Whatever the reason, failing to meet stakeholder expectations can create reputational risk for a company. It can drive away current investors and make finding new investors difficult. To address such vulnerabilities, the British Academy for Training and Development offers a Crisis and Disaster Management course, designed to equip professionals with the tools to handle financial crises, reputational threats, and stakeholder confidence issues effectively.
What causes reputational risk?
Though there are many causes, they all revolve around standards. Risk results from a corporation failing to meet the requirements established by law, the requirements it establishes itself, and the demands stakeholders set for it inside the sector. Usually a mix of the following are the primary drivers of reputational risk:
Bad working environment: Flawed equipment, hazardous premises, and a culture of overworking all help to produce circumstances below stakeholder expectations.
Bad products: Poor-quality goods and services regularly spark public outcry.
Bad managers: For a business, disaster could follow if CEOs, boards, or other senior executives. These are the flag flyers of the company and the goods it markets. Should they be caught behaving dishonestly, the degree of confidence in the company would fall.
Bad adaptation: Stakeholders' viewpoints are always changing; businesses should adapt along with their products. For instance, airlines wanted planes that would maximise capacity in 2000; by 2020, they wanted aircraft that would maximise fuel efficiency to lower their chances of being labelled "antisustainable", so manufacturers changed appropriately.
How to manage reputational risk?
Recall this essential fact: controlling risk is a constant performance analysis against the standards, not a fast one-time cure.
Encourage a risk-awareness culture: make sure boards and management understand the value of reputational risk and that it cascades down the organisation.
Locate and evaluate: Match minds with whoever is relevant for however long it takes to identify reputational risks and how much of an impact they could have.
Know your brand: Know who purchases it, who invests in it, and what they hope for from it. This is absolutely vital if you want to make sure your products never fall short.
Invest in public relations: your chances of keeping a respectable image are increased if you have a team of specialists behind you even if your company is in crisis management mode.
Learn and listen: Should someone raise a warning that could cause significant reputational risk, avoid dismissing it, undervalue it, and put it on a lengthy to-do list hoping it may be brought up at the following quarterly meeting. Deal with issues as they come up.