What is reputational risk?

Reputational risk is the threat or risk of damaging a business’s good name or standing in the eyes of the masses.

Reputation risk can occur in a few ways. For example, it can be:

• A direct risk because of something the company did
• An indirect risk due to the actions of the company’s employees
• A tangential risk due to something a partner or supplier did

To have a good reputation or allow the public to have a generally good opinion of your company, it must be transparent in its practices and conscious of its environmental role.

Companies should also push to be diverse, inclusive and socially responsible to be held in good regard in the public eye. Any action that goes against socially accepted behaviors puts your company at risk of damaging its reputation, even if it wasn’t directly responsible for the action.

What can cause reputational risk?

Reputational risk occurs when your company fails to meet the expectations of its collaborators, including customers, employees, investors or any other party.

Here are some things that let your collaborators down and risk your company’s reputation:

1. Workspace conduct

Inappropriate work actions or misconduct of your leadership and employees can lead to your business receiving negative media coverage that hurts your reputation. For example, if your CEO mistreats employees or there was a workspace sexual harassment claim.

2. Unsafe work conditions

If your company puts its employees in danger while performing their jobs due to unclean or unsafe office, warehouse, or work environments.

3. General employee misconduct

The personal life choices of your employees can also affect your company’s reputation. For example, suppose an employee is indicted for fraud, domestic violence or drunk driving, it could remain in your customers’ minds and affect your company’s reputation long after the employee has served their term.

4. Poor quality products or services

A simple slipup in your process can damage your reputation. For example, if an insect or a strand of hair was found inside your company’s packaged food product, it could hurt your business reputation.

5. Failing to adapt

Not keeping up with changing beliefs of collaborators can hurt your business’s reputation. It’s essential to understand your collaborator’s expectations, stay updated with industry trends and adapt to changes in laws or regulations.

6. Lack of data security or data breaches

Not upholding standards for the security of your customer’s data can cause your company to lose the public’s trust and damage its reputation. Customer information leaks put your company at tremendous reputational risk.

7. Malware attacks

If customers receive phishing emails, phone calls or any other scam messages from your company or another scammer after signing up with your company, they may lose trust in you and be less likely to continue doing business with you.

8. Poor delivery services

Late deliveries or damage during delivery can also cause reputational damage to your company.

Understanding reputational risk

Reputational risk threatens the profitability, valuation and survival of even the biggest companies in any industry. Damage to a company’s reputation causes loss of revenue, loss of business partners, loss of employees and loss of confidence from investors and collaborators. In addition, it can leave your company vulnerable to fines, lawsuits and heavy compensation demands.

The effects of reputational risk can be severe and long-lasting, and it can take something as simple as a viral tweet to change the public opinion of your company. However, monitoring online activity like tweets or negative reviews can be time-consuming. Consider investing in online reputation management software (ORM) to help track what people say about your brand and take damage control measures if necessary.

In some cases, prompt management of reputational risk can mitigate the threat. For example, you might send a damage-control message on social media channels. In other cases, it might take mass firings and a whole new organizational structure to redeem your company’s reputation.

Hire risk managers to evaluate all possible risks and take preventive measures to minimize them.

How to manage reputational risk

With the stakes of reputational risks so high, you want to be prepared to avert any risks and manage them swiftly if and when they arise. Here’s a detailed risk-management process that you can use.

1. Identify potential reputational risks

The first step in effective risk management is identifying and pinpointing potential risks to your company’s reputation. List anything likely to go wrong and how detrimental it could be.

2. Get to know your collaborators

Identify who your collaborators are, what their values are and what expectations they have of you. You can also conduct surveys and interviews to determine what your collaborators care about. This survey should include all internal and external collaborators and ask critical questions to better understand what you can do to satisfy them.

3. Assess your current operation strategy

Take a close look at your current business operation strategies and look for areas where they differ from collaborator expectations. This is a chance for you to find any weak links in your current strategy that could cause a reputation risk.

4. Define your values and strategies

Now that you have a solid understanding of your collaborators’ expectations, lay down a standard for the values and strategies of all business operations going forward. To remove possible risks, utilize digital solutions and improve existing policies and procedures. Consider training your employees and leadership about your company’s values, risks to avoid and protocols. Then, formulate a strategy to deal with any other possible future risks that might arise.

5. Keep monitoring any risks

Risk management isn’t a one-time thing. You should proactively evaluate the collaborators’ changing expectations and alter business operations accordingly to avoid stagnating. Regularly look out for any new risks that may arise and stay updated with social and political trends so you can adapt and quickly take preventive measures to avoid damage.

6. Consider using technology

Modern technology solutions can make risk management more straightforward and efficient, and hiring the right manager or using technology can help you recognize emerging risks and manage them promptly.

A tarnished reputation can have long-lasting effects on your revenue, business growth and organizational structure. Hire a risk manager and establish a risk management process for your company to quickly avert any emerging risks before they damage your reputation.