What is Reputational Risk?

Definition of reputational risk

Reputational risk is defined as anything that threatens your company’s reputation. This includes negative publicity and changes in public perception about your company. Risks to your reputation can hurt your profits and affect your ability to find skilled employees.

Types of reputational risk to guard against

The risk to your company’s reputation can come from a few different sources. Some are within your control, but most aren’t. Being aware of potential sources of reputational risk can help you guard against and minimize any potential damage. The main types of reputational risk are:

Direct risk

Direct reputational risk develops when employees working on behalf of your company do something that directly affects your brand reputation. Bad customer service, breaches in data security that expose clients’ personal information and errors that cause direct harm to workers or consumers all fall in this category.

Indirect risk

An indirect reputational risk comes from the employees associated with your business when they are not directly acting as representatives for your company. This might include bad behavior of employees during their off-time that comes back to haunt your company once people discover that you are their employer.

Tangential risk

Tangential reputational risk occurs when your company or brand aligns itself with organizations, individuals or companies that develop a bad reputation. Partnering with a charity that does controversial things or working with a celebrity who does something that fans turn against can taint your own company by association.

Examples of reputational risk

Reputational risks often seem to come out of nowhere, and you might have trouble identifying whether something is a true long-term risk to your brand or something that could pass quickly. These examples of reputational risk can help you identify potential problems:

Negative reviews

Many consumers check online reviews before making a purchase or booking a service, and negative reviews can make potential customers shy away from your company.

Management and employee misbehavior

If the people at the head of your company develops a bad reputation, this can drive customers to head to a competitor instead and make it harder to hire and retain good employees. Accusations of sexual misconduct, incidents involving racial bias or crimes such as embezzlement can all affect the public view of the entire company, not just the person who committed the act. This is especially important when individual members of your team deal with the public directly, such as insurance agents and direct sales associates, because bad behavior by that specific employee reflects on your entire organization.

Security concerns

Data breaches that put customer privacy at risk can damage your reputation and make consumers hesitant to trust you with their information. In some cases, industry-wide data issues or changing attitudes toward data privacy that aren’t specific to your company can affect consumer trust.

Steps in reputational risk management

Managing reputational risk means identifying the potential threats and taking control over promoting a good image to consumers, potential hires and the community at large. Here are some steps to take control of your company’s reputation and reduce these types of risk:

1. Plan for reputational risks ahead of time

Assess potential reputational risks on a regular basis and strategize to prevent impacts under your control. This may mean improving your customer service to head off bad reviews or creating training programs to ensure that employees understand the behavior standards you expect from them. You can use a project risk register to brainstorm potential risks and develop possible solutions.

2. Track expectations

Understanding what clients, employees and the general public expect from you helps you live up to your reputation and avoid disappointments. Sometimes reputational damage occurs when companies make promises they can’t keep. Managing expectations helps you avoid this scenario. Consider developing a formal code of conduct that lets workers and management know what your company expects from those who work there.

3. Create a defined process for handling reputation risks

Have procedures in place to handle negative reviews and customer complaints. When things that could affect your reputation occur, you should have a standardized process to halt the damage. Assign someone to respond to negative press and put processes in place to quickly and decisively deal with employee issues that could affect your reputation.

4. Work on developing a good reputation

When you have a good reputation to start with, consumers are more likely to give you the benefit of the doubt when you make a mistake. A company with a reputation for good customer service can handle a few bad reviews, and a business that regularly treats employees fairly might be able to withstand false accusations from a former employee that might significantly damage a less reputable company. Strive to be a company that attracts high-quality hires and keeps customers happy so you can weather any unexpected hits to your reputation.

FAQs

Is reputational risk part of operational risk?

Reputational risk is typically not considered part of operational risk, and most definitions of operational risk specifically exclude things related to brand or company reputation. Operational risk typically includes errors or problems in the processes and structures that support business operations. Failures of these things can affect your company’s reputation, so operational risks could lead to an eventual reputational risk once the results of operational failure come to light.

How do you quantify reputational risk?

Reputational risk is measured by determining the value of your company and how much it might suffer if your reputation is harmed. While this cannot be directly measured before a reputation-damaging event occurs, you can seek out data on prior events in your industry. A series of bad reviews on social media might reduce sales by a particular percentage in your industry, while data breaches could cause a percentage of customers to switch to a competitor.