What is reputational risk?

Reputational risk is any threat that endangers the good name of your business or entity. When your reputation is at risk, it can hurt your ability to attract top talent, retain loyal customers, and, in dire situations, stay in business. Reputational risk may come about in four ways:

• Directly: As a result of company actions
• Indirectly: As a result of an employee actions
• Tangentially: Through other parties, such as partners or suppliers
• Externally: Through customers or past employees

Four types of reputational risk in more detail

Risks to your company’s reputation can arise from various sources. While some are in your control, most of them aren’t. However, knowing the potential sources of risk can help protect your reputation and minimize potential damage:

Direct risk

Direct risk can occur when your employees negatively affect your brand reputation through company actions. Examples include:

• poor customer service
• errors that harm consumers or other workers
• not complying with industry regulations or federal or local laws
• falling short of customer expectations or consistently failing to meet customer needs
• poor employee working conditions or exploitive working conditions
• legal actions surrounding your business that become known
• internal scandals and unfair layoffs that become known
• poor product quality or services
• purposeful misaction
• data security breaches due to unsafe practices exposing customer and employee information like passwords, social insurance numbers, credit card numbers and addresses
• data leaks, including hacking, phishing, spam and malware

Regardless of whether your company’s actions are intentional or not, direct risk can affect how the public sees your business, weaken consumer trust and potentially cost millions of dollars in corrective actions and litigation fees.

Indirect risk

Indirect risk ties to employees associated with your brand when they’re not actively representing your company. Examples may include:

• employee engaging in dangerous activities outside of work, such as driving recklessly or committing a criminal offence, potentially damaging your company’s reputation once the public learns that you’re their employer
• C-Suite employees engaging in unethical conduct
• individual misconduct toward customers outside of work
• employees poorly representing your brand to others
• negative social media posts about your business being posted by employees or those associated with your company
• business leaders having or developing negative reputations

While it may be difficult for you to see how the actions of employees or company representatives reflect on your company, the public most likely won’t agree. Because your business doesn’t have a personality or a “face,” your representatives fill this role, opening up the potential for reputational risks and liabilities.

Tangential risk

Tangential reputational risk occurs when your brand is associated with individuals, companies or organizations that develop a negative reputation. Partners and suppliers provide crucial support for your business but can also pose serious reputational risks, especially when you have an established relationship. Examples include:

• influencer you work with doing something that damages their reputation, or a charity with poor ethics, hurting your company’s reputation by association
• partnering with a provider whose service is regularly interrupted, critically affecting your business
• partners or suppliers speaking negatively about your business
• partners or suppliers engaging in misconduct that becomes public knowledge

The closer your ties to your partners and suppliers, the greater the risk that their actions might pose to your reputation. The same typically goes for sponsorships, marketing partnerships and advertisers.

External risk

External actions from customers or past employees can significantly impact your company’s reputation, especially if they’ve had a poor experience. Examples include:

• negative reviews from customers on public review sites, especially when based on false experiences
• negative social media posts from customers regarding their experience with your company
• data breaches or computer system attacks
• negative press about working conditions as told by past employees

External risks can carry significant weight with potential customers and the media because they help shape opinions about how businesses treat their employees and how they treat their consumers after services or goods are purchased.

Why reputational risk management can be crucial to success

A tarnished reputation can significantly impact your company’s revenue as well as the positions of business leaders. An organization with a bad reputation can lose consumer trust, confidence and business. In some cases, companies can’t ever recover from it.

With high stakes, organizations ideally learn how to deal with reputational threats to stay successful. Following various risk management processes can help businesses avoid damage to their reputation while keeping employees, customers, partners and all other collaborators happy.

Managing reputational risk

Managing reputational risk involves reducing the impact when a threat occurs. Your biggest asset in reducing damage is usually acknowledging a problem, creating crisis messaging to explain to consumers what is happening and, most importantly, being fully transparent.

While you can’t predict every reputational risk, you can take measures to prepare for worst-case scenarios and prevent them before they happen. Here are some measures to consider when thinking about managing reputational risk:

Identifying and assessing your risks

The first step in risk management is identifying potential risks. Pinpoint any situation that may harm your company’s reputation, then determine how likely these risks are to occur and how devastating the impact could be.

Being present with everyone associated with your business

Reputational risk management involves identifying your internal and external collaborators’ expectations. Knowing what employees, clients and the public expect from your business can help you avoid disappointments and live up to your reputation. Polls, interviews and surveys can help you stay present while determining expectations.

Developing a comprehensive process for handling reputational risks

When issues that can potentially harm your reputation occur, ensure you have procedures to minimize the damage as much as possible. For example, assign someone to respond as quickly as possible when handling customer complaints or negative reviews. Acknowledging the negative press and proactively dealing with issues can quickly halt reputational damage.

Establishing a good reputation

Consumers are generally more forgiving when trusted businesses that have a good reputation make a mistake. For example, a company known for outstanding customer service can easily handle a bad review here and there. Likewise, employers who treat their staff well can better withstand false accusations from former employees, whereas less reputable companies struggle.

Striving to attract and retain top talent keeps customers happy and helps weather any unexpected blows to an otherwise good reputation.

Empowering employees

Be open and honest with your employees regarding any reputational issues that may hit the news. Empowering them with information regarding how your company is working on correcting mistakes or maintaining credibility can be beneficial, as they can spread the good word to their friends and family.

Keeping a close eye on your risks

Remember that circumstances can change once you’ve identified, assessed and treated all potential risks. Stay proactive and consistently review your business operations and collaborators’ expectations so you can ensure damage control by responding quickly and adapting to any changes.

Reputational risk can be a critical threat to business success. By thoroughly understanding its four main sources and adopting proactive strategies, you can help guard your company’s most valuable asset. A strong reputation can foster customer loyalty, attract top talent and drive long-term growth and resilience.