What is Reputational Risk?
Reputational risk is a threat or danger to the good name or standing of a business or entity. Reputational risk can occur in the following ways:
- Directly, as the result of the actions of the company
- Indirectly, due to the actions of an employee or employees
- Tangentially, through other peripheral parties, such as joint venture partners or suppliers
In addition to having good governance practices and transparency, companies need to be socially responsible and environmentally conscious to avoid or minimize reputational risk.
Key Takeaways
- Reputational risk is a hidden threat or danger to the good name or standing of a business or entity and can occur through a variety of ways.
- The biggest problem with reputational risk is that it can erupt out of nowhere and without warning.
- Reputational risk can pose a threat to the survival of the biggest and best-run companies and has the potential to wipe out millions or billions of dollars in market capitalization or potential revenues.
Impact of Reputational Risk
Reputational risk is a hidden danger that can threaten even the most robust and well-managed companies. While outcomes might not be easily quantifiable, they can significantly undermine a company’s profitability and valuation, potentially erasing millions or even billions of dollars in market capitalization or future revenues. In some cases, reputational risk may also lead to changes at the highest management levels.
This type of risk can emerge from the actions of wayward employees, such as widespread fraud or significant trading losses revealed by some of the world’s largest financial institutions. In a globalized business environment, reputational risks can even stem from remote regions far removed from the company’s primary operations.
In some cases, prompt damage control measures can mitigate reputational risk, which is crucial in a world of instantaneous communication and pervasive social media networks. Conversely, some risks are insidious and may persist for years, such as the adversity faced by gas and oil companies targeted by activists due to the environmental impact of their extraction activities.
Monitoring online activity, like negative reviews, which could threaten a company’s reputation, can be time-consuming. Online reputation management (ORM) software helps companies track consumer feedback across review sites, social media, and search engines, often providing a unified dashboard to view and respond to reviews.
Real-World Example of Reputational Risk
Reputational risk came vividly into focus in 2016 when a scandal involving Wells Fargo erupted. The bank faced scrutiny over millions of unauthorized accounts opened by retail bankers under pressure from supervisors. The fallout saw the CEO, John Stumpf, and others forced out. Regulators imposed heavy fines and penalties, and several major clients reduced or ceased their business with the bank, severely tarnishing Wells Fargo’s reputation. The process of rebuilding its reputation and brand is ongoing.
Addressing reputational risk proactively is critical for any company aiming for longevity and success. By fostering good governance, transparency, and a commitment to social and environmental responsibility, businesses can navigate these uncertain waters and maintain consumer trust and market credibility.
Related Terms: brand integrity, corporate governance, online reputation management, social responsibility.
References
- Consumer Financial Protection Bureau. “Wells Fargo Bank, N.A”.
- U.S. Securities and Exchange Commission. “Wells Fargo & Company”.
- Wells Fargo. “Making Things Right for Customers—Customer Redress Review Program”.
