What Is Reputational Risk?

Dice with risk and risk management: A set of dice representing the concept of risk and risk management
UPDATED August 20, 2022
Written By Merlene Leano

Business reputation is undeniably crucial in today's competitive marketplace. It makes perfect sense, considering how a credible image leads to more customers and higher revenue.

Employees with higher competence for a particular job role are drawn to companies with a solid and favorable stature. An intangible asset and source of competitive advantage is a company's brand image. If they are seen as more dependable, reputable, and trustworthy by their target demographic, it makes them a step ahead of their competitors.

As far as clients are concerned, a strong corporate branding demonstrates integrity, honesty and consistency. Customers are more likely to spend more when doing business with reputable organizations, therefore building a great reputation can benefit your company's ability to acquire new customers.

While mistakes are inevitable and competitors are always on the lookout for lapses in judgment on your part, there are strategies businesses use to keep their good name in the public eye amid fierce competition in the market. Knowing and comprehending the significance of reputational risk and the impact it has on your organization on a first-hand basis is the secret.

Read on to be enlightened on what is reputational risk and why it is important for business stability.

Why is Reputational Risk Important?

Anything that has the potential to adversely affect your company's good name and reputation among customers and your company's overall performance is considered an example of a  reputational risk definition.

Most of the time, these dangers are unforeseeable and unexpected. It could be a direct consequence of a lapse in business operations, or the direct or indirect aftermath of an employee’s actions and the decision-making of other parties (such as joint venture partners or suppliers).

Delving deeper into what is reputational risk in business, it is seen as a secondary consequence rather than a subject of worry in and of itself.

There are several factors that influence a company's success and survival at present, and that includes its overall image in the marketplace. It is also determined by the capacity to attract new customers and generate more money continuously. A tarnished branding significantly leaves adverse effects on your company’s trustworthiness and reliability.

Types of Reputational Risk

A company's reputation is very important, but it is also just as fragile and susceptible to negative consequences. Several hazards and threats might leave a detrimental and long-term impact on a company's reputation in today's society. The following are some of the different types of reputational risk that your business encounters.

1. Operational risks

Internal and external business operations may have a significant influence or effect on your company’s image. For instance, if the company strictly abides by laws and regulations involving customer privacy, then it will reflect positively on the business. Otherwise, breaches in customer confidentiality may cause the business to lose customer trust and tarnish the company’s integrity as a whole.

Similarly, quality control must always be observed, from the manufacturing of the products up to the marketing, selling and even after some customers return their purchases and demand for refunds. The key is to offer goods or services that are on par with what is already in the market, while consistently keeping an eye out for additional features that you can add or tweak to meet buyer expectations.

There must also be a clear hierarchy of responsibilities or job roles within the company. It allows the company to minimize potential errors and overlapping of tasks among the team. A smooth-flowing business operation is key to ensuring that customers receive consistently excellent services, thereby helping to build a positive impression of the brand.

2. Risks in partnerships and affiliations.

There are types of reputational risks that involve your company’s affiliations with other brands, your employees, and even customers, individuals and groups with a first, second, or third degree of separation from your business.

At times, even false claims about a company can bear a heavier weight on its image, provided that there are online trolls who consistently propagate this misleading information. The mere association with a business that has a long history of questionable practices instantly raises the eyebrows and critics and existing patrons.

If employees are constantly engaging in disputes either with their colleagues or with customers, it eventually drives away potential new customers and business partners. After all, who would want to do business with a company that screams chaos and disorder from within?

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3. Risks coupled with the quality of customer service

There needs to be a balance of positive and negative feedback from customers. If the company receives nothing but positive feedback, it may not be as ideal as it is not realistic. There will always be something to improve on, or a specific aspect of the service that customers will not be 100% happy about. In that same regard, a company with mostly negative reviews will find it difficult to assure prospects that they are capable of catering to their demands.

The perfect blend of favorable responses and constructive criticism results from the quality of assistance that people receive from the business’s pool of support representatives. Are queries and complaints professionally and efficiently handled? Whenever escalations are needed, how long does it take for the team to get to the bottom of the customer’s dilemma? What is the fastest response time of agents in responding to a single or multiple queries?

Sometimes, it’s the little details that leave a strong impact on the company’s image. Do customer service agents exhibit empathy as they converse with the client? Do they showcase impeccable knowledge of the product and service in question? Are they able to provide clear and concise instructions to the customers?

Is there anything you can do to secure the safety of your website and visitors?

Any organization that allows users or customers to publish and produce material on its website or platform–whether it be a content platform, social network or app provider–is predisposed to a higher risk of attracting inappropriate and harmful content.

This is where content moderation comes into play.

It is challenging for firms to detect, analyze and manage user-generated content that may bring a considerable level of reputational risks. An expert in moderating online content is necessary if you want a thorough brand reputation risk.

3 Reputational Risk Examples

The tiniest problem may easily snowball into a real-world reputation catastrophe in the digital community. The transfer of news and information is faster online. A single tweet or Instagram story could go viral in a matter of hours. A brand could reach international fame, and it can be for positive or negative reasons.

Fortunately, there are some commendable reputational risk examples that you can use as a reference for how to not cause the downfall of your company’s credibility.

1. McDonald’s

McDonald's isn't the first corporation to utilize hashtags in an attempt to connect with its customers on social media. In January 2012, McDonald's used the hashtag #McDStories to highlight agricultural success stories to help boost the brand.

Unfortunately, things did not turn out as planned after Twitter followers began hijacking the hashtag to express their displeasure over the company's poor food quality and customer service.

Be mindful of possible social media reputation risk whenever you plan on launching a campaign using any social media platform. Unless you have online content moderators in your line of defense, it is impossible to handle and curb an army of angry commenters and follower responses on your own.

The idea is to come up with a countermeasure in advance to prevent it from spreading like wildfire. Research current trends making waves across social media networks. What topics are your target audiences talking about the most? Also, before launching a campaign, it would be best to discuss it thoroughly first with your digital marketing team. Digital marketing strategies tend to be a hit or a miss, and your goal should be to have your brand be the next talk of the town for all the right reasons.

2. Samsung

When it was first released in August 2016, Samsung's Note 7 gadget was positioned as a fierce competitor to Apple's iPhone. However, Samsung was forced to recall around 2.5 million phones in September due to massive customer concerns over their safety in using the gadget. Specifically, there have been multiple reports and instances where the gadget exploded.

The renowned mobile phone manufacturer had to recall Note 7 globally. It was said to be the gravest crisis to ever hit the brand. Following the massive October 2016, retraction of their product in the international market, Samsung suffered a massive 15% drop in sales.

3. Wells Fargo

Wells Fargo, an American financial services firm, came under fire in 2016 for creating millions of bogus accounts without the consumers' consent to satisfy objectives set by the top executives.  However, the company's scandal-related issues did not end there.

According to the bank's findings in mid-2017, employees may have opened as many as 3.5 million accounts, apart from the 2.1 million accounts that were initially disclosed in 2016. The company’s CEO, John Stumpf was forced to resign shortly.

By the end of 2018, the business was even doomed to face further civil and criminal lawsuits totaling $2.7 billion. Presently, Wells Fargo and its former officials have faced legal and financial consequences following their fraudulent activities.

Wells Fargo is an example of how tampering customer trust is one of the worst possible ways to destroy a business’s integrity. Rebuilding trust and reestablishing connections with stakeholders could take years.

Managing the Risk of Reputational Damage

Reputational risk is inherent to any business, irrespective of its size, organizational structure, service type, or years in the industry. A good reputation is one of the most valuable assets that a company could have.

Any content marketing material, as well as any post or remark from followers should be reviewed according to the criteria for brand compliance. Scrutinize what brands post and how target audiences react and find anything that might be considered offensive or negatively suggestive.

If you are producing material for several marketing channels daily or weekly, it will require immense effort on your end. On the bright side, you don’t have to shoulder all the burden on your own. You can always employ additional help and resources to effectively control the danger of damaging your reputation.

Chekkee provides website content moderation services by combining human moderators and advanced AI technology to examine massive quantities of information and find, assess, and flag anything that may be unlawful, inappropriate, or otherwise improper for your online brand. Our skilled moderators work efficiently to ensure that your online reputation, products, and services are protected with the highest efficiency.

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