What is reputational risk? Here’s everything you need to know

There are two things you should know about reputational risk. One, it can occur unpredictably and, in the worst case, devastate your business and career. Two, it can be successfully managed and catastrophes can be averted.

Previously, we explored the many types of risk your business will need to manage. This blog is a guide to all things reputational risk. We explain what it is, what causes it and some real-world examples, and we show how to manage it so that you can safeguard your business.

Let’s get into it.

What is reputational risk?

Reputational risk is the risk of damage to your organisation’s reputation, and of the losses that follow, when you fail to meet the expectations of your stakeholders and are negatively perceived as a result. Those losses can include lost customers and revenue, a falling share price, regulatory action and the departure of senior leaders. It can affect any business, regardless of size or industry.

What are the causes of reputational risk?

Reputational risk happens when the expectations of stakeholders, such as your customers, employees, third-party suppliers, investors and regulatory bodies, are higher than the reality of what your business delivers. But what can cause this gap? And what types of reputational risk are there? Key areas to be aware of are:

• Poor workplace operations and conduct – The actions of employees, including upper management, and any third parties you work with can affect your reputation. Poor behaviour by your CEO, or even a single employee, could lead to negative media coverage and other harmful consequences.
• Inadequate quality of services and products – Shortcomings in your systems, processes and products can contribute to a damaged reputation. For example, in manufacturing, a faulty product that must be recalled could lose you the trust of your stakeholders. In financial services, mishandling or a breach of sensitive customer data could also lead to a loss of confidence in your business.
• Failing to adapt – According to Harvard Business Review, reputational risk can occur when businesses don't keep up with the changing beliefs of their stakeholders. Expectations can change over the years, and they can vary between regions and countries. You must understand your stakeholders at all times. It is also important to stay up to date with regulatory and industry expectations, so that you can adapt quickly and effectively to any changes.

Another way of looking at reputational risk is that it can stem from other risks faced by your organisation. To properly protect your reputation, you must ensure you have all areas of risk management covered.

For example, poor operational risk management can mean that things go wrong in the workplace. Similarly, inadequate management of compliance risks can increase the likelihood of your business not meeting industry and regulatory standards, which could lead to fines or criminal penalties.

All these types of reputational risk can have serious consequences for your business. Let’s look at some examples where this was the case for high-profile organisations.

3 real-life examples of reputation damage

1. A CEO blunder: the case of Gerald Ratner

Ever heard the phrase ‘doing a Ratner’? It refers to the infamous 1991 speech delivered by Gerald Ratner, CEO of jewellery chain Ratners Group, in front of influential industry stakeholders and the media. In the speech, Ratner joked about his business’s products, calling them low quality and terrible value for money. The resulting catastrophe was instant: Ratner was let go as CEO and the company’s shares plummeted by £500 million, which is over a billion dollars in today’s money. Now, Gerald Ratner is remembered for this blunder rather than his previous successes.

If this example shows anything, it’s that the conduct of your employees and your CEO is closely tied to the success of your business. Misbehaviour can lead to huge losses and irreparable damage to your company’s reputation.

2. Poor quality products and food fraud

Perhaps one of the best-known scandals in the food industry is the horsemeat incident of 2013. Beef burgers in Ireland and the UK were found to contain equine meat, and the impact on the supermarket’s reputation was severe. Tesco was the subject of media jokes, customers lost their appetite for beef burgers (sales fell by 43%), and Tesco’s market value dropped by €360 million.

This further shows how reputational risk can stem from other risks not being managed properly. If manufacturers adopt robust quality management systems, mistakes can be avoided, and so can the reputational damage that would follow.

3. Regulatory penalties and staff misconduct

Companies that fail to meet obligations set by regulators can expect consequences, including a tainted reputation. This was the case for James Staley, Chief Executive of Barclays, who did not adhere to the Financial Conduct Authority’s (FCA) new SMCR regulation. As a result of his misconduct, he was fined £642,430, and Barclays was required to report annually to the FCA.

The impact on Staley’s reputation, and by extension Barclays’, could have been avoided if he had adapted to the new expectations of the regulator.

These three examples show how severe the consequences of reputational risk can be. In these instances, poor CEO conduct, inadequate product quality and a failure to adapt to regulations caused serious problems. Managing reputational risk can help you avoid the same fate.

How can reputational risk be managed?

1. Identify and assess the risks

The first step in the risk management lifecycle is to identify risks. You will need to pinpoint the situations that could harm your company’s reputation. In your reputational risk assessment, ask yourself how likely these risks are to occur and how detrimental the impact could be.

2. Get to know your stakeholders

Your risk management process should involve identifying the expectations of your stakeholders. Consider all types of stakeholders, internal and external, as they may have different expectations of you. Surveys, polls and interviews can help you determine this. Use a range of objective sources for an accurate picture.

3. Assess your business operations

To identify any gaps between stakeholder expectations and company performance, you will need to evaluate how well you are able to meet those expectations. Be objective and realistic so that you can identify any weaknesses and areas that could cause reputational risk.

4. Choose a strategy

Now that you have a better oversight of your business and the risks you may face, you will need to prepare a strategy for dealing with them should they occur. As with all other types of risk, there are different ways you can approach this. Use the insights gained in your risk assessment to help you choose the most appropriate strategy.

5. Put controls in place

If there are actions you can take to reduce, or even remove, the risks, you should consider taking them. Digital solutions, improved policies and procedures, and effective training are all examples of actions that can help mitigate reputational risk.

6. Keep a close eye on your risks

Even after identifying, assessing and treating risks, circumstances can change. Be proactive and continuously monitor stakeholder expectations and your business operations, so that you can respond and adapt quickly to any changes.

7. Consider using technology

Software can make the risk management process less of a bind. The right solution, such as Ideagen Risk Management, can give you greater oversight of your business so that you can make better decisions. It can also improve your awareness of emerging risks throughout the risk management process.

Why is reputational risk management so important?

As our examples show, a tarnished reputation can damage your organisation’s revenue, as well as the positions of company leaders. You could lose the confidence of customers and lose their business too. In some circumstances, companies struggle to recover.

With the stakes so high, you need to be prepared to deal with reputational risk. Following a risk management process such as the one above can help you avoid exposing your organisation to reputational damage. So can a dedicated risk management solution. Discover how to choose the best risk management solution for you in our free guide.