What is Reputational Risk?

 

The term reputational risk refers to the potential harm to corporate reputation, brand image, or public perception caused by negative publicity, events, or actions. These risks have various sources, including product recalls, legal issues, data breaches, ethical violations, or negative media coverage for example. Successful business leaders understand that brand reputation takes years to build, and that anything that threatens this public perception must be carefully managed because hard won customer trust can be lost over a single incident, as the following example demonstrates.

 

Boeing Loses Trust

In 2019, Boeing 737 MAX aircraft were involved in two deadly crashes. Hundreds of lives were lost and the model was grounded globally. The public outcry resulted in intense scrutiny of Boeing's safety procedures, design, and regulatory approval processes, and the company faced criticism from many quarters for its failure to address safety concerns and for prioritising profits over safety.

Boeing's reputation was severely damaged as a result. To regain customer trust, several measures were introduced, including a redesign of aircraft software, additional safety training for pilots, and an advertising campaign to promote their quality standards.

However, despite these efforts, the reputational damage from the incident is still ongoing. The 737 MAX remains under scrutiny from regulators and the public, and some airlines and customers are still hesitant to fly the aircraft. A full rehabilitation of Boeing’s reputation remains some way off.

 

Managing Reputational Risk

As Boeing learned to its cost, reputational risk can have serious consequences, including loss of customers, diminished market value, decreased investor confidence, and recruitment difficulties. This means that effective reputational risk management should be a key priority. By being proactive and introducing measures such as corporate social responsibility initiatives, crisis planning and management, and effective communication strategies, Risk Managers can build a robust framework to minimise any fallout.

 

Ranking Reputational Risk

Reputational risk is clearly significant, but ranking it against other threats depends on several factors, including the industry, size of the organisation, and the extent of operations.

In the financial industry, businesses face significant financial risks in the form of credit risk, market risk, and liquidity risk, which may be more significant than any hit to their reputation. In 2008 for example, the investment bank Lehman Brothers filed for bankruptcy because of its overexposure to subprime mortgages, which in turn sent shockwaves through global markets.

By contrast, technology companies must be vigilant to cybersecurity risks because data breaches or security incidents can damage their reputation. In 2018 for example, trust in Facebook was seriously eroded after it was discovered that the political consultancy, Cambridge Analytica, was harvesting user data without permission. In instances like this one, reputational risk poses a more severe threat.

 

Summary

Even if reputational risk isn’t the biggest threat facing an organisation, it shouldn't be underestimated because the consequences can be severe and far-reaching. No business wants to suffer a loss of customers, loss of trust, and a tarnished brand image. It is essential therefore to take proactive steps to manage and mitigate reputational risks to protect their reputation and maintain customer trust.