Reputational risk is any threat or hidden danger that can negatively affect your brand name, image, and standing in the market. It directly affects your company's value and how customers view your brand in the long run.
In this guide, our experts outline the types of reputational risks your company may face and a seven-step guide to prevent reputational risks. We’ll also share three negative reputational risk examples of world-famous brands that have suffered adverse effects.
Table of Contents
What Is Reputational Risk?
As we implied, reputational risk is the potential for a business to suffer damage to its reputation, leading to a loss of trust among stakeholders, employees, customers, and the general public. Reputational risk can be challenging to quantify due to intangible elements that lead to it, and it can have far-reaching consequences in terms of brand value.
Almost every business executive — 93% of them, to be precise — agrees that building consumer trust improves the bottom line. Unfortunately, consumer trust has declined across almost all industries. Clearly, there is a lot of work to be done for companies to build positive reputations and take responsibility for reputational risks and issues that may arise.
4 Main 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
- Employee or Leader-Related Reputational Risks
- Partner-Related Reputational Risks
- Reputational Risks Related To External Factors
1. Company-Related Reputational Risks
Company-related reputational risks are the result of your company’s actions or practices.
Examples include:
- Poor quality products or services
- Failure to meet customer needs and expectations (e.g., production of faulty or dangerous products that need to be recalled from the market)
- Weak internal coordination (e.g., 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 company that become known to the public
- Internal scandals that become known to the public
- Spreading misleading information about your company (e.g., falsified financial reports)
2. Employee or Leader-Related Reputational Risks
Employee or leader-related reputational risks result from unethical or unfair behavior by people representing 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
3. Partner-Related Reputational Risks
Partner-related reputational risks result from inappropriate behavior by your brand suppliers and partners whose operations are directly related to your business.
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
4. Reputational Risks Related To External Factors
Reputational risks related to external factors are the result of negative interactions with your brand by people who are not part of your company, such as your customers or the media.
Examples include:
- Negative comments about your products or services posted and 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
8 Main Causes of Reputational Risk
- Product Failure
- Poor Customer Service
- Data Breaches
- Regulatory Issues
- Unethical Behavior
- Financial Mismanagement
- Environmental, Social, Governance Issues
- Third-Party Associations
Reputational risk can stem from many different sources, each of which can severely impact your company’s reputation. Recognizing these sources can help improve reputational risk management and maintain customer trust and loyalty.
1. Product Failure
Defective products can lead to negative reviews, which can escalate to product recalls, legal action, and negative publicity. Failure to deliver on promises to consumers leads to more than just financial losses; it can be difficult to gain back customer trust and loyalty.
2. Poor Customer Service
In the digital age, social media reputation risk is higher than ever. Unresolved customer issues, negative interactions, long wait times, or the lack of response to legitimate concerns can quickly blow up online and severely impact the brand’s reputation.
3. Data Breaches
From November 2023 to April 2024, more than 6.8 billion records were breached in 2,741 publicly disclosed incidents in the United States. With most businesses operating online and consumers completing transactions over apps and websites, the risk of data breaches increases each year. Cybersecurity incidents are incredibly common, with the lack of adequate security measures leading to compromised customer and employee data.
4. Regulatory Issues
Local, federal, and international regulatory bodies outline various industry, environmental, labor, and legal standards that businesses must follow. Failure to do so results in fines, sanctions, and legal issues. Lawsuits can also lead to months of negative publicity.
5. Unethical Behavior
Corporate misconduct by employees, managers, and especially top executives draws a lot of negative attention and can impact brand reputation in the long run. Issues of corruption, embezzlement, insider trading, sexual harassment, and others can be very difficult for companies to come back from.
6. Financial Mismanagement
Bankruptcy, fraud, misreporting, and other financial issues can permanently damage business relationships with investors, creditors, suppliers, and customers, leading to a loss of market value in the long run.
7. Environmental, Social, Governance Issues
Modern consumers have become increasingly conscious of sustainability and ethical issues in the corporate landscape. As such, environmental, social, and governance (ESG) principles are critical in gaining stakeholder trust and maintaining a positive reputation. Issues like pollution, poor labor practices, and lack of transparency will lead to negative publicity.
8. Third-Party Associations
If your close associates (suppliers, contractors, joint ventures, corporate alliances) are experiencing negative publicity for any reason, the effects can spill over to your company.
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 include product recalls, data breaches, unethical behavior, environmental issues, and any other events that may negatively affect public perception.
Step #2: Assess Probability and Impact
Evaluate the probability of each risk occurring and its potential impact 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. You can use various media monitoring tools to 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, and investors, 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, perception, loyalty, and 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 (positive, negative, or neutral) and track changes over time.
Step #7: Compare to Competitors
Benchmark your business’s reputation against competitors and industry peers. Understanding how your reputation stacks up against others 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 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 them. This may involve crisis communication plans, enhanced security measures, improved corporate governance, and other initiatives to protect your reputation.
Why Is Reputational Risk Management Important?
Reputational risk management is critical to avoid the potentially devastating impact of negative publicity on a company’s long-term success and stability. Here are the key reasons why:
- Minimizes losses: Damage to your business reputation can lead to significant revenue loss and declining market capital. Reputation management ensures continued consumer trust and investor confidence.
- Improves stakeholder relationships: Maintaining a good reputation demonstrates the company’s stability and potential longevity. These are positive signals for investors, employees, customers, and even the community at large.
- Increases competitive advantage: Brand image is a critical consideration for consumers, so a positive brand reputation will put your company above the competition.
- Attracts talent: Companies with positive reputations attract top talent and encourage them to stay within a healthy work environment.
- Reduces legal risk: Complying with all laws and regulations relevant to your business ensures a positive reputation and little to no risk of legal action.
How To Manage Reputational Risk?
If you’re unsure how to mitigate reputational risk, these strategies might come in handy:
- 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
1. 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.
2. Assess Your Reputation
- Use focus groups, public opinion polls, and media analysis to assess your current brand reputation.
- Collect media snippets to track how you are presented in the press.
- Use media intelligence tools to analyze your standing within the context of all media stories.
3. Identify and Assess Risks
- Identify the situations and scenarios that may harm your company.
- Determine the likelihood of each risk.
- Define the seriousness of the consequences these situations may have on your brand’s reputation.
4. Know Your Stakeholders
- Understand the pain points and expectations of your internal and external stakeholders.
- Evaluate your data at regular intervals for any changes in their perception.
- Use polls, interviews, and surveys to stay updated on your stakeholders’ expectations.
5. Prepare a Strategy
- Create a detailed reputation management strategy.
- Identify the people responsible for monitoring potential risks.
- Implement different public relations programs to cover media and community relations, public affairs, crisis communication, internal and strategic communications, and social media communications.
- Use online review management to respond to positive and negative comments.
- Partner with professional public relations teams to help manage your online reputation.
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 — essential in times when your reputation is at risk.
6. Implement Controls To Mitigate Reputational Risks
- Set policies, procedures, or digital solutions to avoid or reduce reputational risks. For example, you can implement a quality management system to lower the risk of faulty products being released to the public.
- Conduct regular training related to potential weaknesses in your company.
7. Monitor Your Risks
- Be proactive in monitoring your business operations.
- Keep an eye on the changes in your stakeholders’ expectations.
- Monitor all mentions of your brand online, including social media.
Overall, if implementing all these strategies seems a bit much, the top reputation management companies offer full-stack services and eliminate the guesswork.
3 Real-Life Reputational Risk Examples
To illustrate the importance of brand reputation and how it may be affected, here are examples of negative publicity due to reputational risks:
1. A Pepsi Ad With Kendall Jenner
In 2017, the soft drink giant Pepsi launched an ad featuring Kendall Jenner alleviating tensions during a protest by offering a Pepsi to a police officer. It was intended to spread a message of harmony, peace, and understanding.
However, a flood of negative comments followed from people who believed that the ad trivialized the Black Lives Matter (BLM) movement and issues of police brutality and racism. Some customers posted comments about boycotting Pepsi products.
As a result, Pepsi took the ad down just one day after its official launch. However, the damage was done: the company suffered the lowest perception levels for over ten years.
2. Gerald Ratner’s Speech
In 1984, Ratner inherited Ratners Group, a challenging business of struggling jewelry stores with average annual losses of $459,000. Over the following decade, Ratner positioned the company products toward the working class and turned Ratners Group into the most recognizable jewelry brand in the UK with annual sales of $1.57 billion.
However, a night at the Royal Albert Hall in 1991 changed it all. In front of 6,000 dignitaries and representatives of business and media at the Institute of Directors 1991 Annual Convention, Ratner referred to his company’s products as “total crap.” He also said, “A sandwich will probably last longer than the earrings,” as part of his attempt to add a touch of humor to his speech.
The result? A £500 million ($1.8 billion today) fall in shares within days of Ratner’s speech and an 80% decrease in company stock by the end of 1991.
3. 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. Fifty-six more women eventually joined in the lawsuit, sharing stories of harassment and discrimination they experienced at Uber.
To settle the claims, Uber agreed to pay $1.9 million, or $33,900 to each person and promised to reevaluate the salaries within the company. The lawsuits attracted public and media attention and negatively affected Uber’s reputation, leading to lost customers.
Reputational Risk: Takeaways
Reputational risk is a potential danger to the way customers, investors, business partners, and the general public view your brand. Poor perception can lead to significant financial and consumer trust losses in the long run.
Our detailed guide hopefully equipped you with all the help you’ll need, but if you’d like to learn more, check out these examples of PR done right.
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 effects.
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.
