Reputational Risk: Definition, Causes and Assessment

Reputational risk is a threat to an organisation’s standing and image, and this type of risk is a key concern for many organisations. In this article, we delve deep into the realm of reputational risks within the context of Enterprise Risk Management (ERM). We explore the definitions, impacts, sources, and strategies for managing these risks, emphasising their integration into the broader risk management framework.

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Introduction to Reputational Risk

Reputational risks are a category of risk that can damage an organisation’s reputation, brand, and public perception. These risks often stem from negative events, actions, or media and have the potential to affect an organisation’s credibility and trustworthiness. This in turn can affect people’s willingness to buy from, work in, or partner with that organisation.

Impact on Organisations

The consequences of reputational risks are far-reaching. They can lead to decreased customer trust, investor flight, regulatory scrutiny, and even force businesses to close.

Because of this reputational risk is probably the most severe of all the different categories of risk an organisation faces.

• read more about different categories of risk here.

If an organisation has a negative reputation, whether deserved or not, people may not want to engage with its brand or buy its produces because they are:

• unfashionable

• perceived as low quality

• thought of as unethical

• considered unsafe

All of these are very hard to address and can take a lot of time and effort, which could be usefully spent on other things, to put right.

Causes of Reputational Risks

Reputational risks can emerge from various sources, including ethical lapses, product recalls, data breaches, controversies involving key personnel, and adverse publicity. One of the most frequent sources of reputational risk, particularly in a world of reviews and social media, is poor customer service or aggressive sales tactics.

Reputational risks can also come from high profile individuals, particularly if historic social media posts describing unacceptable attitudes come to light. Finally, in the world of corporate social responsibilities a failure to develop sustainable products can also pose risks.

The Role of Social Media

Social media platforms have amplified the impact of reputational risks. Negative information spreads rapidly, making effective crisis management more challenging. This is because people can communicate instantly, across a much wider audience, and what they post is permanent.

As this research shows 62% of customers share a negative event with others. Social media makes these stories go further and last longer.

Reputational Risk Examples: Case Study

There is an organisation in the UK called PPL PRS. It licences copyrighted music for the use in businesses like shops and offices. However, it has such a poor reputation that many consider it to be a scam operation rather than a legitimate business. It has a rating on Trustpilot of 1.2 out of 5 (see here) and the themes arising from these reviews are:

1. aggressive practices toward small business for fee collection

2. aggressive attempts to force small businesses into contracts they don’t need

3. poor customer service, including failing to clearly explain their fee structure or why a licence might be needed.

… among others. How could an organisation like PPL PRS address these matters?

• review their billing and customer service procedures

• produce materials, particularly for small businesses, explaining who PPL PRS are, why a licence for copyrighted material is needed, and explaining their cost structure

• a PR campaign, led by a very senior manager, apologising for their past failings and setting expectations for the future

NB: we have been in touch with PPL PRS to offer our support.

The Interconnected Nature of Reputational Risks

Reputational risks are not isolated; they often intersect with other risk categories such as financial and operational risks. Understanding these interconnections is critical for comprehensive risk management.

For example: due to high inflation a company decides to manage costs by using cheaper, but lower quality components in its product. This results in a reduction in customer satisfaction, and a consequent reduction in sales which eliminates the original cost saving.

As this example shows reputational risks can trigger a chain reaction of negative consequences. An incident that tarnishes an organisation’s image may lead to financial losses and customer attrition.

Reputational Risk Assessment

There are a number of tools and techniques firms can use to explore reputational risk scenarios. Companies will define their own risk approach, based on their appetite for risk, and the sector they operate in. Global businesses in financial services will have a different attitude to negative stories in the local press compared to a small charity supporting a local community.

Internal and External Risk

Some risks, whether reputation risk or not, can come from internal sources while others are external. A useful tool for identifying internal risks

Quantitative vs. Qualitative Approaches

Organisations use both quantitative and qualitative methods to assess and measure reputational risks. While quantitative data provides metrics, qualitative insights capture nuances and public sentiment.

Key performance indicators (KPIs) for reputational risk may include customer satisfaction scores, social media sentiment analysis, and media coverage trends.

Proactive Measures for Risk Prevention

The core of risk management is that it is forward looking and is therefore proactive and not reactive. When thinking about risks and risk management your aim should be to reduce the likelihood and/or consequence of a risk if it becomes and issue.

• learn the difference between risks and issues here.

Proactive strategies include ethical governance, employee training, and crisis preparedness. Preventing reputational risks is always more effective than managing the fallout.

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Effective Risk Management for Reputational Damage Prevention

In the event of a reputational risk incident, organisations must act swiftly and transparently. Effective crisis communication and reputation repair are essential. Careful risk assessment and forward planning will make tackling reputational crises speedier and more effective.

Because of the public or people based nature of reputational risks the most important thing to consider is how best to engage with people and retain their trust.

Communication Plans

Having a well-defined crisis communication plan in place can make the difference between containing a reputational risk incident and allowing it to escalate. Public relations is a key component of many business strategies and the same is true for reputational risks.

Having a communications strategy as part of your recovery management plan is key. Communicating quickly, authoritatively and with the right information will help customers, employees and the public retain their trust in your brand.

An example of how not to do it is the data breach Experian had. The breach itself was the result of poor risk management generally. However, the problems Experian made for itself by communicating the wrong thing and then communication poorly compounded the situation.

You can read more about the Experian data breach here. However the key points arising from the incident are:

• include communications in your recovery plan

• ensure people are able to give timely and accurate information in response to queries

• keep people updated on your progress to resolve issues

And, on top of all of this, test your plan to make sure it will work when it is needed.

Embedding Reputational Risk Management

Risk management frameworks must consider reputational risks as integral components of their risk assessment and risk management approach. This involves identifying, assessing, and mitigating these risks alongside other categories. It may be tempting to concentrate on financial or operational risks but in our experience it is reputational risk that can have the greatest, and longest lasting, effects.

Effective reputational risk management starts at the top. Leadership and governance play a critical role in setting the tone for ethical conduct and risk-aware decision-making.

Different industries face unique reputational risks. Understanding industry-specific nuances is vital for tailoring risk management strategies. Organisations must adapt their risk management approaches to align with their industry, size, and specific risk landscape.

Conclusion: Understanding and Addressing Reputational Risk

In the age of instant communication and heightened public scrutiny, reputational risks are ever-present challenges. For many brands public image can be everything. Building resilience against these risks requires comprehensive risk management that integrates reputational concerns into the broader ERM framework. As organisations navigate the complex terrain of reputational risks, they must remain vigilant, proactive, and committed to safeguarding their most valuable asset: their reputation.

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