What is Reputational Risk?

A company’s reputation is a delicate thing. With an unfortunate sequence of mistakes or misconduct, years of customer loyalty and public goodwill can evaporate in moments, and some companies never recover.

Safeguards to protect your corporate reputation should be part of any enterprise risk management plan. Many organizations, however, don’t include reputational risk when performing a risk assessment. What can go wrong from that miscalculation? How can companies protect their reputation? This post will walk through some key points to consider.

Why Is Reputational Risk Important?

Reputational risk is anything that has the potential to damage the public’s perception of your organization. Examples range from a senior executive indicted for insider trading, to a cashier caught on camera refusing service to a customer, to a breach of your customers’ personal data.

A reputational crisis can become the first thing customers see when they search for your company online, and negative SEO or social media results can be difficult to repair. So whatever industry you’re in, reputation is crucial to maintaining your clientele and generating new business leads. So evaluating the risks to corporate reputation is critical.

Crisis management can help to repair the damage after an, ahem, “negative reputational event,” and organizations should be prepared with contingency plans for such scenarios. Still, many reputation issues can be averted by taking preventative steps as your company grows and expands – and prevention is a far better course of action than repair.

What Causes Reputational Risks?

There are several primary causes of reputational risks. They include:

• Unsafe workplace conditions. You’ve most likely seen headlines about a company that employs sweatshop labor or puts employees in physical danger while performing their jobs. The way a workplace treats its staff and its partners has a huge impact on its reputation.
• Poor quality of deliverables. Sending out a product that doesn’t work or delivering a subpar service in the era of Yelp and Google reviews is sometimes as good as certain death. Assuring quality management will help mitigate this type of risk.
• Executive misconduct. Examples abound of CEOs or other senior executives indicted for fraud, caught berating employees, or being arrested for crimes such as domestic violence or drunk driving. Such misconduct can stick in customers’ minds long after the offending executive suffers the consequences for his or her actions.
• Stagnation. Your company must meet trends and expectations as they shift and change or you risk being left behind for other companies that are adapting.

Common Types of Reputational Risks

• Malware attack. Customers receiving phishing emails or other scams from your business after a malware installation will be less likely to continue their relationship with you.
• Data breach. Leaks of customer personal information can damage your company’s reputation as trustworthy and professional, causing you to lose current customers and scaring off new ones.
• Non-compliance with federal standards. Discovering that you were not upholding standards for information safety and security while entrusted with customer information can cause a loss of public trust for your company.
• Poor supplier delivery. Delivering a late service or a broken product can cause reputational damage as the customer may write a low-rated review online, which can scare off other potential customers.

Is Reputational Risk an Operational Risk?

Operational risks are internal failures rather than external. They are risks that arise due to poor decision-making or neglect from within the organization, rather than from outside factors such as power outages or natural disasters. Reputational risks are usually (but not always) operational risks, since the same adverse event can harm both your reputation and your day-to-day operations.

For example, a data breach is an internal risk that has the potential for reputational damage. You may have considered the effects of a data breach on your everyday operations, but it’s difficult to gauge how the same event could also affect others’ perception of your organization. Even if you manage and repair the operational challenges from a breach, the damage to your corporate reputation (and your internet search results) could have lasting repercussions.

An event that is a small inconvenience now can turn into tomorrow’s PR crisis. In your risk assessment, make every effort to consider each risk from all angles and plan your crisis response accordingly.

What Are the Effects of Reputational Damage?

The effects of reputational damage can be immediate, severe, and long-lasting. A change in public opinion can happen in as little time as it takes for a tweet to go viral.

Reputational damage can result in loss of revenue, loss of business partners, employee turnover, and loss of confidence from the board and stakeholders responsible for your corporate governance. These events can also leave your company vulnerable to lawsuits, or force you to provide compensation to those affected.

Benchmarking reputational risk is difficult; so is predicting the effect that a risk event will have on corporate reputation. Since the potential consequences are so unpredictable, that means risk managers must be aware of these risks, so you can minimize them whenever possible.

How Can Third Parties Affect My Company’s Reputation?

Even if you carefully track reputational risk within your company, outside entities can also damage your company’s image. An endorsement or mention from a celebrity or politician could connect your reputation to theirs, with potentially unwelcome results.

Contractors and vendors can harm your company as well. However carefully you might vet these parties at the time the contract is signed, changes in staffing and policy after the business relationship begins can generate unforeseen new risks. It’s important to monitor the conversation around these companies as diligently as you monitor your own.

Competitors can also be a potential source of reputational risk. A rival organization need not engage in outright sabotage to harm the way your company is perceived. If a competitor makes a particularly generous donation or adopts a social responsibility position that is seen as more progressive than yours, it could make your company look like the least appealing option in a crowded field.

Keep an open mind and consider all possible sources of potential risk while creating your risk management program.

How Do You Mitigate Reputational Risk?

Top-down company ethics

Reputation risk management begins with a strong company ethics program. These risks are not limited to top-level employees; any staff member at any level can take actions that hurt your company’s reputation. It’s crucial that you determine what ethical values you want to be associated with your company.

Use these core values as a framework to determine what your ethics program should look like, and allow them to guide your workplace practices and corporate communications.

Continuous brand monitoring

Consistent monitoring of the conversation surrounding your brand (via both social media and more traditional media outlets) can help you understand how you’re viewed by potential customers and give you real-time information on how you compare to your competitors. Online reputation management (ORM) can also help to combat negative mentions and dispel false information surrounding your brand.

Strong marketing and PR departments

Marketing and public relations are also a necessary component of reputational risk management. These functions are responsible for assuring a positive image for your brand and getting ahead of any bad press that may arise. Consistent branding now can go a long way towards ensuring your company’s reputation in the future.

ZenGRC Can Help You Mitigate Risks for Your Business

All companies will face some degree of risk. By streamlining your operations and organizing risk ownership you will increase your ability to weather any issues that come your way. ZenGRC makes it easy to track your compliance efforts and strategic risk management, all from a single easy-to-use platform.

Schedule a demo today and learn how ZenGRC can help your company succeed.