This post discusses reputational risk and how to manage reputational risks. In this post, you will understand the meaning of reputation, reputational risk, and reputational risk management.

WHAT IS A REPUTATIONAL RISK?

Reputational risk is the potential for negative publicity, public perception, or uncontrollable events to negatively impact a company’s reputation negatively, thereby affecting its revenue. Reputational risk strikes without warning. It shifts a firm’s landscape, impacts revenue, and causes chaos. Even worse, it affects customer opinions and organic traffic by weaving harmful content into search results.

All organisations are exposed to reputational risks regardless of its size, structure, and nature of operations. All risks are significant directly or indirectly, but reputation damage may be more severe, as reputation is one of a company’s most important assets. Sometimes, it takes a negative rumour to make the public lose confidence in an organisation, negatively impacting its reputation. As Warren Buffet said, “it takes 20 years to build a reputation and five minutes to ruin it”.  

Reputational risk is the risk that negative publicity regarding an institution’s business practices will lead to a loss of revenue or increased litigation. An institution’s reputation, particularly the trust placed in the organisation by its customers, may be irrevocably blemished due to perceived or actual breaches in its ability to conduct business ethically, securely, and responsibly. For example, companies publicly condemned for their poor environmental policies or high greenhouse gas emissions might eventually damage their reputation.

A tarnished brand can negatively influence voters who sit in judgment in court cases, community decision-makers on corporate expansion and new construction, reporters who cover a corporation’s business activities, potential customers, environmental activists who may protest a company’s operations, and investors.

RELATIONSHIP BETWEEN REPUTATIONAL RISK MANAGEMENT, RISK MANAGEMENT AND STRATEGIC RISK

Unfortunately, reputational risk is often neglected or must be clarified with other corporate and business risks. Let us examine the inter-relationship of ‘reputation risk’, ‘risk management and ‘strategic risk’. Enterprise risk management is the process of minimising costs and damage to strategic risk. Board directors understand strategic risk because it is specific, measurable, and predictable. Hence, it is controllable.

Reputation risk, on the other hand, is vastly unpredictable. Opinions of clients, investors, business partners, and the public can significantly impact the firm’s revenue. It can even be associated with events that are not the company’s fault. It is essential to be aware of potential hazards that may cause business reputation damage. Hence, the essence of a sound reputational risk management within an organisation.

SOURCES OF REPUTATIONAL RISKS

The reputational risk appears when organisations fail to act ethically, fulfil their duties, and satisfy customers. Many situations and circumstances could negatively impact an entity’s reputation. Potential sources of reputational risk include poor working conditions, publishing misleading information to investors and the public, poor quality, corruption, inadequate data security and privacy, and poor regulatory compliance. Hence, the need for a sound reputational risk management.

TYPES AND CAUSES OF REPUTATIONAL RISKS

Organisations are susceptible to several risks, including outside adverse events, workplace practices, data retention failures, product recalls, wrong financial statements and CEO reputation issues. 

Here are six potential causes of reputational risks. 

1. CEOs, Company Leadership and Employees.

2. Negative Articles and Publications.

3. Social media: Social media can be both a cause and a catalyst for a negative reputation.  

4. Services and Pricing. 

5. Data Loss.  

6. Regulation Changes.

DETERMINANTS OF REPUTATIONAL RISK

There are three major determinants of reputational risk:

1. Reputation reality gap: Reputational risks will increase when an organisation’s reputation exceeds its character.
2. Changing beliefs and expectations: Shifting the expectations and opinions of stakeholders can widen or narrow a firm’s reputation gap.
3. Quality of internal coordination: Poor coordination of decision-making between business units and functions increases reputational risks.

REPUTATIONAL DAMAGE

A business reputation is the most valuable asset, especially if it is a bank or financial institution. A negative corporate reputation harms client and investor trust, erodes the company’s customer base and hinders sales. A poor reputation also correlates with increased hiring and retention costs, degrading operating margins and preventing higher returns. Business reputation damage can also increase liquidity risk, which impacts stock price and ultimately slashes market capitalisation.

REPUTATION RISK MANAGEMENT PROCESS

Developing a framework for managing reputational risk before an issue is essential. The following steps will assist businesses in (1) measuring, (2) monitoring, (3) controlling, and (4) mitigating damage to their reputation.

HOW TO MANAGE REPUTATIONAL RISKS

There are several vital steps in preventing and responding to reputational risks. Here are seven significant ways of managing reputational risks: 

1. Make reputational risk part of the company’s strategy and planning,

2. Control Processes,

3. Understand that all the firm’s actions can affect public perception,

4. Understand stakeholder expectations,

5. Focus on a Positive Image and Communication,  

6. Create Response and Contingency Plans, and 

7. Purchase reputational risk insurance policies to cover the organisation’s reputation risk.

REPUTATIONAL RISK INSURANCE POLICIES

Unfortunately, reputational risks are myriad, encompassing failure to meet customer needs, product recalls, technology breakdowns, cyber-attacks, adverse news reporting, and damage to premises or property, among many others. These events could significantly dent a corporate reputation for a considerable period. Being able to guard against this is an appealing prospect, and the advent of reputational risk insurance has been a welcome fillip for companies with fragile public profiles.

Reputational risk poses a severe threat to organisations. Reputation risks may exist and be undetected for years. Since it poses a substantial danger, firms weigh the benefit of taking out a reputational risk insurance policy. Although insurance can help pay for the cost of a damaged brand image; but, it will not address the underlying issue. Is reputation risk insurance policies worthwhile, given the high premium? Rather than wasting capital on reputation risk insurance, the company should consider strengthening its online presence. However, reputational risk is essential for businesses to ensure a good reputation and increased customer patronage.

How Reputational Risk Insurance Works

Reputation insurance may be a clause bundled into a broader policy, such as a business owner’s liability insurance. This will likely be minimal and focused on libel, slander, or false advertising. Alternatively, it might form part of a cyber threat policy, covering the consequences of a cyber breach, including sensitive customer data being disseminated. Although relatively embryonic in development, standalone reputation insurance has become increasingly relevant to large organisations. Its value covers the cost of lost income due to a damaged brand. The high premium of reputational insurance policies reflects how severe reputational losses might be.

WHO NEEDS REPUTATIONAL RISK INSURANCE?

Reputational risk insurance should be a consideration for:

1) Businesses with high-value brands are vulnerable to damage by shifts in public perception. 

2) Companies within industries whose operations expose them to high reputational risk.

3) Organisations with sensitive data caches will likely be targeted by cybercriminals or have previously suffered breaches.

4) Any business for which a damaged reputation costs more than the insurance premiums.

REPUTATION RISK MANAGEMENT DURING CRISES

Controlling public perception is always important, but it is crucial in a crisis. Managing public perception will prevent a simple mistake from becoming catastrophic when something goes wrong in an organisation. Critical sectors for crisis management include ethics, quality, safety, security, and risk management. 

Reputational risk management is beneficial to organisations. To ensure the organisation is ready for any crisis, here are five steps for managing reputation: 

1. Prepare in advance – Have plans and strategies before something happens.  

2. Have a working crisis team.

3. Focus on a practical and quick recovery. 

4. Use the crisis as a learning opportunity. 

5. Use social media appropriately.

See video on Reputational Risk and Reputational Risk Management: https://youtu.be/235a56IsJx0