What Reputational Risk Is and How Your Business Can Protect Itself

Reputation is an intangible asset that, over time, provides companies with competitive advantages. A positive brand reputation, for example, attracts better employees and gains and retains more customers. But without reputational risk management, a damaging event may arise and lead to major financial losses. The solution is to have a solid crisis management plan in place.

What Is Reputational Risk?

Reputational risk is the possibility of adversely impacting a company’s reputation and revenue due to certain circumstances, including uncontrollable events. While failing to meet stakeholders’ expectations is, at best, embarrassing, it is the least of your concerns. More severe consequences of a damaged business reputation include:

• Customer attrition
• Employee attrition
• Financial losses
• Reduced shareholder value
• Ill will towards the general public
• Government or regulatory agency scrutiny

It takes 20 years to build a reputation and five minutes to ruin it,” Warren Buffet said. “If you think about that, you’ll do things differently.

To avoid damaging their reputation, companies can employ good governance practices and uphold transparency and social responsibility. But more than anything, they need reputation marketing to proactively enhance brand image and prevent irreversible damage to the company name.

Causes of Reputational Risks

Reputational risk can be due to internal or external factors. It may be direct, indirect or peripheral. The best way to manage a crisis is to prevent one from occurring, which is why understanding these potential triggers is of utmost importance. This way, the risk manager can develop a crisis management plan and, if applicable, incorporate it into the enterprise risk management strategy.

1. Direct Actions

These are reputational risk examples of a company’s direct actions and business practices.

• A poorly or erroneously developed business model and business plan.
• Poor decision-making and mistakes by the founder, CEO, management team and any of the executives.
• Non-compliance with any applicable laws and regulations and governing standards within their industry.
• Poor or exploitative working conditions, layoffs, internal scandals and purposeful misactions.
• Unsafe or inadequate security measures that lead to a data breach, threatening the safety and privacy of stakeholders.
• Failing to meet customers’ expectations by delivering poor products and services.
• Legal action against the company.

2. Indirect Actions

These are indirect reputational risk examples caused by the actions of leaders, investors, employees and anyone who represents or has had a relationship with a business.

• CEO, CFO or COO who engaged in unethical conduct.
• Business leaders and investors with a tainted reputation.
• Employees involved in misconduct, especially towards customers, or poorly representing a company.
• Negative posts on social media by a person connected to a company.

3. Peripheral Actions

These are examples of direct actions of business partners, including third-party suppliers/providers, that pose reputation risks.

• A service or supply interruption from a partner, resulting in disruption of the operations of a company.
• A business partner or supplier engaging in misconduct that concerns the general public and their sensitivity.
• A current or former partner or supplier speaking negatively about a business.

4. External Actions

These are examples of reputational risks customers bring – the most common cause and reason for using an online reputation management software.

• A negative or critical post from customers about a company on social media.
• A negative review on one of the trusted review sites.
• Negative press and articles.
• A malicious attack on a company’s reputation.

Examples of Damaging Reputational Events

These are risk examples of failing to understand what is reputational risk.

• Data Breaches. According to Small Business Administration, phishing emails to employees are the leading cause of data breaches. While transparency is necessary to gain trust, disclosing such an event to the public can harm or increase the reputation risk of a business.
• Recalls and Defective Products. A recall is a common practice. Although seen as a negative, it nonetheless projects the impression that a company is being responsible. But if product or service issues become too frequent, the damage caused to a brand’s image is potentially disastrous.
• Employee Issues. Any employee or individual affiliated with the company who broke the law or caused a scandal can damage a company’s reputation. That is why, for example, companies disassociate themselves from endorsers who get entangled in controversy and bad publicity.
• Workplace Accidents. Accidents can occur at any time and are very damaging, especially if there is negligence and violations of safety guidelines provided by the Occupational Safety and Health Administration (OSHA) on the part of the company.
• Negative Reviews and Posts. Customers with bad experiences may express their frustrations on social media. Some may also leave negative feedback on review sites. Unless mitigated, these negativities can turn away many potential customers.

What Is Reputation Management?

Reputation management influences how consumers perceive a company, its brand, products and services. It can be standalone or integrated into a comprehensive Enterprise Risk Management (ERM) strategy used in brand reputational risk prevention and mitigation.

A reputation crisis management plan involves several aspects of a business, such as:

• Communications
• Sales and marketing
• Customer experience and loyalty
• Legal and other regulatory requirements

Since many communications and customer engagements occur online, the measures revolve around monitoring, tracking and responding to brand mentions on Google, review sites and social media platforms.

Companies can choose to hire a risk manager and use online reputation management software. One advantage is that they can create crisis management and incident response plans on internal processes without revealing sensitive information, as in the case of using a third-party risk management provider. At the same time, they can also enhance reputation marketing to promote a positive brand image.

Hiring a risk management team may not be feasible for some companies, especially startups and smaller organizations. In this case, the better solution is to outsource their online reputation management to a third party.

How Companies Protect Themselves From Reputational Risks

The explosive growth of social media and other user-generated content platforms opened up new opportunities for entrepreneurs. Many companies now sell products and services on their website or an ecommerce platform. Marketing has also evolved, with many companies allocating at least half of their budget to the digital space.

While connecting with customers online is a great way to build a relationship, it also brings about a new front for reputational risks. Businesses are vulnerable to negative posts on social media and review platforms now more than ever. Not surprisingly, nearly 8 out of 10 risk managers feel their C-suite are either somewhat or very committed to investing in reputation risk management, according to WTW.

Enterprise risk management is necessary for large organizations because the stakes are too high. Most other companies, meanwhile, must have at least a form of crisis management plan in place, ready to respond to any unseen crisis. Using online reputation management software, for example, simplifies the tasks of reputation marketing and risk mitigation.

Here are some ways businesses can reduce reputational risks.

1. Understand the Consequences of Negative Public Perception

What is reputation management to CEOs, CFOs and COOs that makes them think of investing more in mitigating risks to protect their business reputation? It is the solution to their most pressing concerns.

Table. Top 5 C-Suite Concerns on Reputational Risks

Source: https://www.wtwco.com/en-GB/Insights/2021/01/global-reputational-risk-management-survey

Companies can prevent ruining their business reputation by getting executives and leaders to understand and be proactive in taking measures to reduce reputational risks. They should also adapt training, policies and procedures to ensure that all employees conduct themselves properly and respond appropriately if any incident occurs.

Even if a reputational risk was never made public, it could cause internal discord. Per the survey conducted by WTW, loss of talent is one of the most significant concerns. When an employee leaves, work disruption affects other employees too. It is also costly to find, hire and train new employees.

2. Anticipate, Control and Respond

The best way to eliminate or reduce risks is to stop preventable reputational issues. Generally, it entails thoroughly reviewing all aspects of the business: shareholders, stakeholders, policies, procedures, workplace and assets. Then, identify weaknesses and possible reputational events.

Risk managers and third-party risk management providers analyze the information gathered to create a crisis management plan. They also determine the likelihood of an incident happening, its severity and its potential impact on the business. Then, they would recommend measures to prevent a crisis and develop incident response plans.

Should an incident occur, respond promptly and responsibly. Time is of the essence, and the earlier the problem is solved, the less likely a reputational risk may spiral out of control.

3. Public Backlash Is Disastrous

In any reputational event, companies respond in two ways.

One is to downplay the incident and keep it hidden from the public and other stakeholders. While this may work in some instances, it is generally not recommended. Once revealed, its negative impact might be amplified, affecting not only one particular stakeholder but all of them, from the organization to the management, employees and customers.

The second option – and the more preferable way to address reputational concerns – is to consistently send positive messages and signals to build a good reputation. This way, companies can forge brand trust and customer loyalty. In this case, higher sales and revenues are not the only main benefits. They would also have enough reputational capital to withstand a negative perception. As such, they turn an adverse event into an advantage by being honest and transparent, which stakeholders will appreciate.

Never Underestimate Reputational Risk Management

Most companies start by focusing on creating a value proposition and customer acquisition. But one thing that the founder and management team should never ignore is creating incident response plans. No matter how large an organization is, one adverse publicity can result in substantial financial losses.

Following regulations, conforming to best business and ethical practices and exercising corporate social responsibility is a great start. Meanwhile, corporate reputational risk management strategies ensure that operations run smoothly.

For more information on managing your reputation, call 866.325.0303 for a free consultation on protecting your business reputation.