Reputational risk directly affects your company's market value. 63% of the executives said their brand’s market value is attributed to the overall reputation of their companies and 49% of consumers need at least a four-star rating before they’re comfortable doing business with a brand.
But how does it work exactly?
We’ll share the stories of three world-famous brands that have suffered from negative reputational impact, the types of reputational risks your company may face, and a seven-step guide to prevent reputational risks from happening.
Table of Contents
What Is A Reputation Risk?
Reputational risk is any threat or hidden danger that can negatively affect the name, image, or standing of your brand on the market. Typically coming unannounced when least expected, reputational risks can result in an avalanche of consequences, including:
- Loss of trust
- Loss of clients
- Loss of business partners
- Falling of stocks
- Fines
- Change of upper management
- Destruction of a company
Unlike reputational risks, which pose a threat but are not yet realized, reputational damage is the materialization of the risks and the imminent effect this materialization of risks has on your brand image.
Types Of Reputational Risks
- Company-Related Reputational Risks
- Employee Or Leader-Related Reputational Risks
- Partner-Related Reputational Risks
- Reputational Risks Related To External Factors
Depending on the factors that might cause the risk, reputational risks can be divided into several categories.
Company-Related Reputational Risks
Company-related reputational risks are the result of your company actions or practices.
Examples include:
- Poor quality products or services
- Failure to meet customer needs and expectations — for example, production of faulty or dangerous products that need to be recalled from the market
- Weak internal coordination — for example, launching a marketing campaign to present a software solution before identifying and eliminating bugs, which can result in a delayed product launch and negative feedback
- Poor or exploitative working conditions, such as discrimination or toxic culture
- Data breaches and danger to personal information due to lack of cybersecurity measures
- Failure to comply with federal, local or industry regulations
- Lawsuits against your brand that become known to the public
- Internal scandals that become known to the public
- Spreading misleading information about your company — for example, falsified financial reports
Employee Or Leader-Related Reputational Risks
Employee or leader-related reputational risks are the result of unacceptable, unethical or unfair behavior by people that represent your business.
Examples include:
- Misconduct of employees that becomes known to the public
- Misconduct of employees towards customers
- Unethical conduct by C-suite employees, such as corruption, embezzlement or antitrust violations
- High-level managers with a negative reputation
- Social media posts by industry leaders that depict your brand in a negative light
Partner-Related Reputational Risks
Partner-related reputational risks are the result of inappropriate behavior by your brand suppliers and partners whose support is directly related to your business operation.
Examples include:
- Negative comments about your business by suppliers and partners
- Interruptions in your business cycle due to poor partner service, such as malfunctioning software
- Misconduct of suppliers and partners that becomes known to the public
Reputational Risks Related To External Factors
Reputational risks related to external factors are the result of a negative interaction with your brand by people who are not part of your company. Such external factors, for example, may include your customers or the media.
Examples include:
- Negative comments about your products or services that are shared by your customers on social media
- Reviews of negative experiences on public review websites, based on false experiences aiming to discredit your brand
- Negative press releases and articles about your products and services
How To Measure Reputational Risk
- Step #1: Identify Key Reputational Risks
- Step #2: Assess Probability and Impact
- Step #3: Monitor Media and Social Media
- Step #4: Conduct Stakeholder Surveys
- Step #5: Track Brand Metrics
- Step #6: Use Sentiment Analysis
- Step #7: Compare to Competitors
- Step #8: Perform Financial Analysis
- Step #9: Establish Mitigation Strategies
Measuring reputational risk is crucial for businesses to understand the potential impacts of negative events on their reputation and brand image.
Here are some steps to measure reputational risk:
Step #1: Identify Key Reputational Risks
Begin by identifying the specific risks that could have the most significant impact on your organization's reputation. These risks could be anything from product recalls, data breaches, unethical behavior, and environmental incidents, to any other events that may negatively affect public perception.
Step #2: Assess Probability and Impact
Evaluate the probability of each identified risk occurring and the potential impact it could have on your organization's reputation. This assessment can be based on historical data, industry trends, expert opinions, and internal risk analysis.
Step #3: Monitor Media and Social Media
Keep a close eye on media coverage and social media platforms to track any mentions or discussions related to your business. There are various media monitoring tools that can help you stay informed about public sentiment and emerging issues, such as Brand24, Pulseway, or BrandMentions.
Step #4: Conduct Stakeholder Surveys
Regularly survey your key stakeholders, including customers, employees, suppliers, investors, and the general public, to gauge their perceptions of your organization's reputation. Feedback from stakeholders can provide valuable insights into your reputation's current standing.
Step #5: Track Brand Metrics
Monitor key brand metrics, such as brand awareness, brand perception, brand loyalty, and brand trust. These metrics can give you an indication of how your reputation is evolving over time.
Step #6: Use Sentiment Analysis
Leverage sentiment analysis tools to gauge public sentiment toward your organization. Sentiment analysis can help you understand whether the overall sentiment is positive, negative, or neutral, and track changes in sentiment over time.
Step #7: Compare to Competitors
Benchmark your business’s reputation against competitors or industry peers. Understanding how your reputation stacks up against others in your field can provide context and highlight areas that may need improvement.
Step #8: Perform Financial Analysis
Although reputational risk is challenging to quantify in financial terms, it's essential to understand the potential financial impact of a reputation-damaging event. Analyze financial data to identify any correlations between reputation and business performance.
Step #9: Establish Mitigation Strategies
Based on the assessment of reputational risks, develop and implement proactive strategies to mitigate those risks. This may involve crisis communication plans, enhanced security measures, improved corporate governance, or other initiatives aimed at protecting your reputation.
How To Manage Reputational Risk?
- Assess Your Business Operations
- Assess Your Reputation
- Identify And Assess Risks
- Know Your Stakeholders
- Prepare A Strategy
- Implement Controls To Mitigate Reputational Risks
- Monitor Your Risks
If you’re unsure how to mitigate reputational risk, these strategies might come in handy:
Assess Your Business Operations
- Define your stakeholders’ expectations of your products and services
- Highlight any areas where you notice weaknesses that pose potential reputational risks
Assess Your Reputation
- Use focus groups, public opinion polls, and media analysis to assess your current reputation
- Collect media clippings to determine how you are presented in the press
- Use media intelligence tools to analyze your standing within the context of all media stories
Identify And Assess Risks
- Identify the situations and scenarios that may harm your company
- Define the likelihood of each risk
- Define the seriousness of the consequences these situations may have on your brand’s reputation
Know Your Stakeholders
- Know the pain points and expectations of your internal and external stakeholders
- Evaluate the knowledge you have at regular intervals for any changes in their perception
- Use polls, interviews, and surveys to stay updated on your stakeholders’ expectations
Prepare A Strategy
- Compile a detailed reputation management strategy
- Identify the people responsible for monitoring potential risks
- Implement different types of public relations programs that can help you cover various areas, including media and community relations, public affairs, crisis communication, internal and strategic communications, and social media communications
- Use online review management to respond to both positive and negative comments
- Partner with professional public relations teams to help you with your online reputation management
- Pro tip: Explore how to write press releases to communicate with your stakeholders using press release SEO — this way, your messages to the media will be visible and rank high on search engines, which is essential in times when your reputation is at risk.
Implement Controls To Mitigate Reputational Risks
- Set measures to avoid or reduce reputational risks, such as policies and procedures or digital solutions. For example, to lower the risk of manufacturing faulty products, you can implement a quality management system.
- Conduct regular training related to potential weaknesses
Monitor Your Risks
- Be proactive in monitoring your business operations
- Keep an eye on the changes in your stakeholders’ expectations
- Monitor all media mentions, including social media
To manage your reputational risks, assess your business operations and your brand reputation, identify and assess risks and implement controls to mitigate threats
Real-Life Reputational Risk Examples
To illustrate better how your reputation may be affected, we’ll share some real-life examples of famous brands.
A Pepsi Ad With Kendall Jenner
In 2017, the soft drink giant Pepsi launched an ad featuring Kendall Jenner joining a protest and alleviating tension by handling a can of Pepsi to a police officer.
Though Pepsi believed the ad passed a message of harmony, peace and understanding, a flood of negative comments followed, by people who believed that the ad trivialized police brutality and the widespread Black Lives Matter movement. Some customers even posted comments about boycotting Pepsi products.
As a result, Pepsi pulled the ad off the air just one day after its official launch.
However, the damage was done — the company suffered the lowest perception levels over ten years.
Gerald Ratner’s Speech
In 1991, London Royal Albert Hall turned into a place where Gerald Ratner’s career abruptly ended.
In 1984, Ratner inherited Ratners Group, a challenging business of struggling jewelry stores with average annual losses of $459,000.
Over a decade, having the courage to position the company products toward the working class, Ratner managed to turn Ratners Group into the most recognizable jewelry brand in the UK with annual sales of $1.57 billion.
However, a night at Royal Albert Hall changed it all. In front of 6,000 dignitaries and representatives of business and media, while trying to add a touch of humor to his speech, Ratner referred to his company’s products as “total crap” and said “a sandwich will probably last longer than the earrings.”
The result?
A £500 million ($1.8 billion today) fall of shares, within days of Ratner’s speech and an 80% decrease of the company stock by the end of 1991.
Uber Harassment Case
In 2017, three Latina engineers filed a lawsuit against Uber, claiming they received lower pay and lower evaluation rankings compared to their Asian and white male colleagues.
56 more women eventually joined in the lawsuit, sharing stories of harassment and discrimination, experienced at Uber.
The lawsuits attracted public and media attention and negatively affected Uber’s reputation.
To settle the claims, Uber agreed to pay $1.9 million, or $33,900 to each person, and promised to re-evaluate the salaries within the company.
Wrapping Up On Reputation Risk
Reputational risk is a potential danger to the way people view your brand. If materialized, risks can result in poor perception of your brand, financial losses, and even cause the downfall of your brand.
To first assess and then manage your reputational risks, follow our detailed guide outlined above. Or, you can always opt to work with a professional reputation management company that can help you properly assess your environment, identify risks and compile a detailed strategy to both avoid and manage reputational risks.
Reputational Risk FAQs
1. What does reputation risk mean in business?
Reputation risk in business refers to the potential for negative events or actions to harm a company's image, trustworthiness, and credibility among stakeholders, leading to adverse financial and non-financial impacts.
2. What is reputational risk management?
Reputational risk management is the process of identifying, assessing, and mitigating potential threats to a company's reputation. It involves proactive strategies and actions to safeguard the organization's image and credibility among stakeholders, ensuring long-term trust and sustainability.
