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, worst case scenario, 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 serves as a guide to all things reputational risk. We explain what it is, dive into what can cause it, and take a look at some real-world examples. We also explore how to manage it so that you can safeguard your business.
Let’s get into it.
What is reputational risk?
Reputational risk is the damage that can occur to a business when it fails to meet the expectations of its stakeholders and is thus negatively perceived. 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 disparity? 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 of your CEO – or even a single employee – could lead to your business receiving 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, a mishandling or 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 in different regions and countries. You must be able to understand your stakeholders at all times. It is also important to stay up to date with regulatory and industry expectations, so that you can quickly and effectively adapt 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 take a look at some examples where this was the case for high-profile organisations.
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3 real-life examples of reputation damage
1. A CEO blunder: the case of Gerald Ratner
Ever heard of the phrase ‘Doing a Ratner?’. This 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 – that’s over a billion dollars in today’s money. Now, all Gerald Ratner is remembered for is this blunder - not 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 company reputation damage.
2. Poor quality products and food fraud
Perhaps one of the most well-known scandals within 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 indicates 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 company reputation 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 – and by extension Barclay’s - reputation could have been avoided, if only he adapted to the new expectations of the regulator.
These three company reputation damage examples demonstrate the severity of falling victim to reputational risk. In these instances, poor CEO conduct, inadequate quality of products, 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. Ensure that you 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 various objective sources for an accurate picture.
3. Assess your business operations
To identify any discrepancies between stakeholder expectations and company performance, you will need to evaluate how well you are able to fulfil their expectations. Be objective and realistic so that you can identify any weaknesses and areas that could cause a 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 quickly respond and adapt to any changes.
7. Consider utilising technology
Software solutions can make the risk management process less of a bind. The right solution can provide you with 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 previous examples show, a tarnished reputation can detrimentally impact 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 will need to be prepared to deal with reputational risk. Following a risk management process such as the one detailed above can help you avoid exposing your organisation to reputation damage. So can a dedicated risk management solution. Discover how to choose the best risk management solution for you in our free guide.
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