Why Reputational Risk Matters

Reputational risk has become an increasing concern for many companies, particularly large ones with executives and CEOs eager to avoid negative publicity. It is clear that there is a significant potential for massive financial losses associated with a failure to effectively manage reputational risk. Given how quickly information moves across news outlets and social media, proper management of reputational risk is absolutely essential for any company.  

Reputational risk can be understood as the potential for financial losses resulting from damage to a company’s reputation. Such an event can result in lost revenue, increased operating costs, reduced shareholder value, or tarnished reputation. Simply stated, reputational risk is the potential loss of revenue due to public damage to a company’s brand. Reputational risk is not to be overlooked, given that the cost of negligence can include damage to stakeholder support, limitations to market capitalization, deterioration of a positive image, and harm to the overall longevity of the company. The exact financial costs of such damages are difficult to realize, given that they can be widespread depending on the situation. However, it is reasonable to estimate that the cost of mitigating reputational risk is worth the price of preventing damage to the overall brand of a company. 

Losses that occur from damage to reputation can be a result of actions of the company itself or through the actions of an employee. Executives should be especially concerned as those in leadership roles are most likely to be held responsible. Furthermore, damages may occur even if the company is not at fault or if the accusations are untrue. Once the accusations reach the news, the damage is potentially irreversible. In order to minimize reputational risk, companies are required to encourage social responsibility, implement best practices for reputational management, and engage in proactive thinking rather than reactive damage-control. When it comes to reputational risk, the cost of prevention is far less than the potential for lost revenue. Furthermore, reputation is exceedingly difficult and costly to repair once tarnished.  

There are many potential actions to choose from when examining reputational risks. These can include but are not limited to: public statements on social media or other platforms that anger clients or customers, poor customer service, a growing reputation for poor quality of goods or services, accounting errors that show lack of oversight, loss of private information due to cyber attacks, or the exposure of a scandal that includes one or more members of a company.  

The past few years alone have yielded several examples of improper reputational risk management. For example, in November 2018, the US Coast Guard ordered Taylor Energy to clean up an oil spill that had leaked more than one million barrels of oil into the Gulf of Mexico since 2004. Not only were there hefty fines associated with this spill, but this discovery also attracted the attention of environmental groups. Taylor Energy’s oil spill cover-up will undoubtedly hurt their public image as they are now associated with one of the biggest oil spills in US history.  

In March 2018, Wells Fargo suffered a loss to their credibility when the bank was accused of closing accounts instead of properly investigating instances of fraud. A former employee went public with Wells Fargo’s illicit activities, and the company suffered significant damage to its brand. Additionally, in 2017, Wells Fargo’s CEO John Stumpf was required to testify before Congress regarding a lawsuit over fake accounts. Ultimately, this resulted in early retirement for Stumpf and a settlement of $110 million.

In April 2018, Facebook CEO Mark Zuckerberg testified before Congress in order to answer questions regarding how Cambridge Analytica improperly gained access to the personal information of around 87 million Facebook users, as well as allegations of allowing Russian agents to interfere in the 2016 presidential election by creating false narratives on the social media site. After much media attention and a new reputation for allowing such breaches in personal information, Facebook is estimated to have lost around 2.8 million US users under the age of 25 

On May 29, 2018, Starbucks closed an estimated 8,000 of its stores and conducted racial-bias training for 175,000 of its workers. Starbucks CEO Kevin Johnson deemed this training necessary after two African-American men were wrongfully arrested for trespassing in a Starbucks. The arrests resulted in calls to boycott Starbucks and its products. Mr. Johnson also flew to Philadelphia where he apologized to the two men in person. This example highlights the potential loss of revenue caused by one careless act, showing that the cost of closing 8,000 stores for an entire day is still worth the price of repairing the value of a brand.  

These are only a few examples of the incredible costs associated with neglecting reputational risk. Thus, companies should make every effort to uphold the highest ethical standards, safety regulations, information security, and quality of service in order to avoid such damaging outcomes. In particular, special attention must be paid to conduct when using social media platforms like Facebook or Twitter. Public statements from all levels of staff can have resounding negative impacts if mismanaged.  

About the Author

David Hutchins

David Hutchins is a Risk Analyst at Global Risk Intelligence. He earned his MSc in Defence, Development, and Diplomacy from the Durham Global Security Institute at Durham University in the United Kingdom. He maintains 6 years of military experience having served in the United States Marine Corps Forces Reserve. David is currently based in the United States.

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