Reputational Risk

Reputational Risk
Article by Jelena RelićJelena Relić
Last Updated: April 25, 2023

According to a 2020 survey conducted among executives across 22 global markets, 63% of the executives said their brand’s market value is attributed to the overall reputation of their companies.

To put it simply: reputational risk will directly affect your company's market value. 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.

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What Is A Reputation Risk?

Reputation 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
  • Annihilation 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

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

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.

How To Manage Reputational Risk?

We have seen from the above examples how reputational risks can cause you to lose billions of dollars in just seconds.

To help you manage such risks, we have compiled a seven-step detailed guide.

To manage your reputational risk:

Assess Your Business Operations

  • Define your stakeholders’ expectations from 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
  • Colect 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

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 trainings 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

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.

The types of reputational risks can be related to:

  • Your company’s operation and communication
  • Your employees and company managers
  • Your partners and suppliers
  • External factors, including customers and media

To manage your reputational risks, follow the detailed seven-step process outlined above:

  • 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

Working with a professional reputation management company can help you properly assess your environment, identify risks and compile a detailed strategy to both avoid and manage reputational risks.

We’ll find qualified PR agencies for your project, for free.
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