An unseen threat or danger which may negatively impact the good name and reputation of a company, business, or entity.
How Reputation Risk Works
Reputation risk serves as a means for how people will see a business, and it happens directly, indirectly, or tangentially. Companies can stop reputation risk if they are more responsive to their social and environmental alertness.
When talking about directly, it means that there are some actions which the company has taken within its operation or organization that are bringing negative impressions to its image. When it occurs indirectly, it means the actions of an employee or some of the employees resulted in the threat of the business's profitability and sustainability. Reputation risk can also happen tangentially through external factors or parties such as partners whose business or company has a joint venture or from the supplier(s) of the business.
Examples of Reputation Risk
While compiling their annual financial report, Maxwell Inc. notices a mistake in their accounting documents two years earlier. To solve the problem, they have to make a public statement regarding their errors in accounting practices. This announcement has unfortunately led investors to doubt Maxwell Inc.'s credibility.
In reporting the issue, both investors and consumers are worried about the future results in profit and dividends. It leads investors in a frenzy to sell off their positions in the company, leading to a crash in Maxwell Inc.'s stock value. This type of reputation risk is considered direct because the company is at fault and not an employee or an external factor.
Another example of reputation risk is a small-scale retailer that suffers security issues leading to a leak in clients' confidential information. Because of the data breach, the business goes through regulatory enquires, many customers withdraw from the business, and prospective clients avoid their website by all means. What happened is a threat to the sustainability and the image of the business. This type of reputation risk can be termed tangential because it was not the company or employee that caused the data breach.
Significance of Reputation Risk
Below are some of the implications that reputation risk can bring to a business.
If a company or business allows reputation risk to occur, it can bring other risks that affect company viability or business operations. Companies will learn how to manage their intangible assets and not focus on humans and physical assets alone. With the consciousness of reputation risk, the risk manager and the communication team should work in synergy without allowing any loopholes or information to bring about a threat to the company.
Reputation risk will help the company develop control measures to mitigate any form of eruption that can be a risk. It makes businesses socially responsible and environmentally conscious to curtail or minimize reputation risks that may want to surface.
Crisis management vs. Reputation risk
Crisis management is a means of identifying what serves as a threat to an organization and its stakeholders. Its identification will then enable a company to respond effectively to the threat. The crisis can emanate from internal and external factors. To manage such a crisis begins with an analysis of risk.
Reputation risk is the threat against a business's profitability, and sustainability due to the public's general perception of the threat brought to the company, products, or services. The risk can be from the organization or that which is beyond the organization.