What is Reputation and why should all companies care about it.
Reputation is how a company is perceived in the eyes of its different stakeholders. Always recognized as important, corporate reputation is still seen as nebulous because its business impact is difficult to measure and accountability is often decentralized across the organization. Companies who have a clear grasp of their reputation risk are assessing it in the context of the business environment they are operating in and are evaluating it alongside other business risks.
Why is Reputation Important?
A major gap between expectations of how a company will operate and the perceived reality can impact a business' license to operate. Trust is a finnicky thing and when customers who lose trust, the impact can be catastrophic. Missteps have led to regulatory investigations, reduced revenue, and lost talent. Think of what happens when bank customers become concerned about the safety of their deposits. A bank-run is uncommon but not unheard of and is directly direct to reputation risk.
A positive reputation can lead to increased customer loyalty, government support, and stronger employee retention which all contribute positively to the bottom line.
It should be noted that not all perceived negative reputation events have a corresponding impact on commercial risk. If you look at boycott campaigns as an example, in some cases there can be a large impact on revenue and market share, but this is not always a negative financial impact.
What Reputation Risks Are There?
Reputation risks can be broadly categorized into internal and external risks. Most businesses preoccupied themselves with managing internal reputation risks until fairly recently. The inflection point came with the Covid pandemic and the terrible murder of George Floyd in the US. The convergence of these two events ignited a shift in public perception on the role companies should play in driving social good. Now companies are navigating demands from a very diverse group of stakeholders who are actively pushing businesses for action on a long list of issues. Many companies are struggling
to manage this new type of reputation risk.
Internal Reputational Risks
These are risks that are specific to the conduct of a business through their products, services and operational footprint. It is where risk managers have traditionally focused their efforts to manage reputation risk. These risks tend to be static and are more directly under the control of management.
Ethical lapses or misconduct by employees or management
Product recalls or recurring quality issues
Data breaches or cyberattacks
Poor customer service experiences
Legal or regulatory violations
External Reputational Risks
These risks come from outside the company and are very dynamic. They can evolve quickly and perceptions on how a company should respond can be polarized, depending on the diversity of external stakeholder groups. These reputation risks may have everything or nothing to do with a company's business or conduct, which is why senior managers have struggled to understand their impact.
Geopolitical tensions between countries
Social issues, such as DEI
Climate change and the environment
Human rights and inequality
The Importance of Reputation Risk Management
Every company will face a reputational crisis at some point. Given the potential financial, regulatory, and legal impacts of reputational risks, it is essential for businesses to have a robust reputation risk management strategy. This involves identifying potential risks, developing plans to mitigate them, and continuously monitoring the company’s reputation for gaps between stakeholder expectations and perception.
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