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What is Reputational Risk?

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    Reputational risk is the potential for damage to the good standing or public perception of a person or business. When it comes to your company, reputational risk can come from both internal and external sources, such as:

    • Company policies and actions,
    • Actions of company representatives,
    • Third parties like suppliers and partners, and even
    • Customer actions.

    To avoid reputational harm, companies should practice responsible governance, social responsibility, excellent customer service, and transparency. At Minc Law, we help brands just like yours protect their online reputations and minimize reputational risk. We also offer content removal and digital risk protection services for businesses whose reputations have already been jeopardized.

    In this article, we explore the causes and types of reputational risk that companies face. We also explore the potential effects of reputational risks, as well as how to manage and mitigate such threats in your own business.

    Types & Causes of Reputational Risk

    Any kind of threat to your business’s reputation is a reputational risk. These vulnerabilities can be difficult to spot, which often means they happen unexpectedly and lead to financial loss, fewer customers, and other personal and professional consequences.

    What is Reputational Risk?

    Reputational risk is any potential damage your business could suffer if the public’s expectations are higher than reality. Whether the risk relates to how the business is run, how managers conduct themselves, or adjacent issues that affect the business’s product or service, reputational risk is anything that could negatively affect how the public perceives you.

    What Type of Risk is Reputational Risk?

    Reputational risk has to do with losing the trust of stakeholders or consumers when they take on a negative perception of the company. This business risk is considered both strategic and financial because if not properly managed, it can have drastic consequences on the organization’s financial status, leadership, and strategy.

    Reputational risk is typically not considered an operational risk since most definitions of operational risk usually exclude events relating to a company’s reputation. This type of risk typically includes errors in business operations, structure, and processes.

    What Are the Causes of Reputational Risk?

    Any situation where the public’s expectations are higher than you can deliver is a threat to your business’s reputation. This discrepancy can come from several directions, depending on your business’s specific vulnerabilities and weak points.

    Some common causes of reputational risk to watch for include:

    • Poor senior management behavior, leading to negative media coverage;
    • Inadequate workplace conditions;
    • A product recall;
    • Customer data breach;
    • Outdated regulatory compliance; and
    • Out-of-touch public statements or social posts.

    All of these examples can be a source of reputational risk because they expose a business to loss of trust, consumer backlash, and a damaged public image.

    What Are the Different Types of Reputational Risk?

    There are four main types of reputational risk, defined by the source of the threat. Businesses can be vulnerable to reputational harm due to company policies or the actions of individuals, including company representatives, third parties, and customers.

    Company Policies & Actions

    These types of reputational risks are caused by the direct actions and practices of your business, such as:

    • Low-quality products or services,
    • Exploitative working conditions,
    • Failure to comply with government or industry regulations,
    • Inadequate data security leading to a data breach,
    • Poor customer service practices, and
    • Unethical corporate behavior.

    Actions of Company Representatives

    Rather than large-scale policies or corporate actions, these kinds of risks stem from individuals who represent the company. Company representatives can be employees, spokespeople, and executives. Common scenarios include:

    • CEO or upper management becoming embroiled in a personal scandal;
    • Employees acting inappropriately towards customers;
    • Staff spreading negative rumors or allegations about your brand; and
    • Negative social media posts from your brand account or representatives’ accounts.

    Third-Party Actions

    The third-party companies associated with your organization—such as suppliers and partners—can also seriously affect your business’s reputation. Several reputational risk examples of this type of risk include:

    • A representative of a partner company speaking negatively about your business;
    • Recalls, supply chain issues, or other problems on a supplier’s end that negatively impact your product or service; and
    • Unethical behavior from partners or suppliers that reflects poorly on your business.

    Customer Actions

    Given the major impact and importance of online reviews, customers have the power to impact your brand’s reputation—for good or ill. Whether it is from negative social media posts, negative or fake online reviews, or even negative news articles, your business’s public image could easily take a hit.
    Business Owner's Guide to Monitoring Online Reputation

    Effects of Reputational Risk

    So far, we have established various sources of reputational risk, both internal and external. But how much do such risks really affect your company if triggered?

    Below, we explain the effects of reputational risk and how to measure and quantify such threats. We then list a few infamous examples of reputational harm prominent companies have faced in recent decades.

    What Are the Effects of Reputational Risk?

    Reputational damage can happen overnight, but its effects can be long-term. Public opinion can be swayed quickly by viral social posts, news articles about a CEO’s misconduct, a data breach, or a product recall.

    Once your business’s reputation has been damaged, the effects can range from lost revenue to employee turnover to legal action against your company.

    How Do You Quantify Reputational Risk?

    It can be difficult to predict the far-reaching effects of a reputational risk before it takes place, which is why it is important to minimize even the smallest risks as much as possible.

    And when developing a reputational risk management strategy, it can still be helpful to find ways to rank and ballpark various threats to your reputation so that you know how to recognize a problem and when to make a change. We explore a few methods below.

    Social Media Listening

    Social listening tools are a great way to keep tabs on your company’s reputation in key demographics and markets. Speaking from both a PR and a customer service perspective, it is also important to catch and reply to negative social posts from customers quickly.

    You can set up filters to watch for things like:

    • Mentions of your brand’s social handles;
    • Positive keywords surrounding your brand, such as individual products/services, “satisfied” or “amazing”; and
    • Negative keywords like “horrible,” “dissatisfied,” or “bad.”

    Many of these tools also allow you to run advanced searches or weigh search results based on the source and repetition of the keyword.

    Track the Reputation of Individual Products & Services

    While it is a good idea to monitor your brand’s overall reputation, you may also want to track public perception of your products and services.

    It can be helpful to your company’s reputation to identify items or services that are garnering more negative attention—and then look for the reasons why. You may decide to alter the product, its marketing, or discontinue it altogether.

    Create Key Risk Indicators

    Your organization likely already has key performance indicators (KPIs) to determine whether you are meeting your goals. Assigning key risk indicators (KRIs) to each KPI is an effective way to identify and prepare for risks that might undermine your strategy.

    For instance, if one of your KPIs is to increase your customer engagement, a related KRI might involve tracking negative social media mentions. Once a threshold is met, you may want to change your strategy.

    Track Stakeholder Confidence

    A positive brand reputation can have a major impact on stakeholder confidence. The better the public’s perception of your company, the more confident your stakeholders will feel about being associated with you—and as a result, their connection with your company will only grow stronger. This higher perceived value can lead to greater goodwill and social capital.

    Since one stakeholder’s perception of your reputation can be different from another’s, you may want to analyze the impact of your reputation based on different groups of stakeholders.

    For further reading, make sure to check out our comprehensive article explaining the importance of brand reputation to stakeholders.

    How Quickly Can Reputational Risk Factors Damage Your Reputation?

    No matter your industry, your company is vulnerable to public mistakes and viral moments. Without an efficient and effective risk mitigation plan, these incidents can do massive damage to your reputation overnight.

    Below, we explain three very public examples from recent decades.

    Kendall Jenner & Pepsi Cola

    In 2017, American influencer Kendall Jenner partnered with Pepsi Cola to release an ad in which she hands a can of Pepsi to a police officer at a protest. The general public was immediately outraged since the ad was released during a time of intense protesting. Many felt that the ad trivialized the Black Lives Matter movement and the fight against police brutality.

    Pepsi pulled the ad and apologized, but the brand’s reputation was severely damaged—with the lowest popularity ratings it had seen in eight years. Jenner’s reputation also suffered long-lasting harm from the controversy.

    McDonald’s & Stella Liebeck

    In one infamous 1992 case, Stella Liebeck bought a McDonald’s cup of coffee. When she spilled the drink on her lap, the hot beverage gave her third-degree burns. Liebeck sued McDonald’s. Though she admitted in court that she knew about the risks posed by the heat of the coffee, many consumers felt that McDonald’s was guilty of some level of negligence.

    Thanks to the extremely public nature of this lawsuit, McDonald’s has attempted to rehabilitate its public perception by adding clear warnings to its hot beverages.

    Gerald Ratner’s Thoughtless Comments

    In another infamous publicity nightmare from the 1990s, CEO Gerald Ratner gave a speech to influential industry stakeholders and the media about his jewelry chain, Ratners Group. Somewhat bafflingly, he decided to make jokes about the quality of his business’s products.

    Almost immediately, the company’s value dropped by £500 million and Ratner was fired as a result.

    We recommend reading our comprehensive guide explaining how a CEO’s reputation can impact the company’s reputation.

    How to Manage & Mitigate Reputational Risk

    Below, we provide five actionable steps you can take to identify your current risk factors and develop a strategy for mitigating them. The best way to manage and mitigate reputational risk is to:

    • Pinpoint risks to your reputation,
    • Understand stakeholder expectations,
    • Evaluate your company performance compared to those expectations,
    • Develop a risk mitigation process, and
    • Monitor your risk levels on an ongoing basis.

    Pinpoint Risks to Your Reputation

    First, identify the most likely risks to your business. What vulnerabilities or scenarios leave you open to reputational harm? Try to determine how impactful those risks could be and what you can do to mitigate them.

    Understand Stakeholder Expectations

    Consider all stakeholders—such as employees and management, customers, investors, shareholders, etc.—and try to identify each of their expectations of your business.

    Use surveys, interviews, and anecdotal evidence to get an accurate idea of how your business is perceived and what factors make up your reputation.

    Evaluate Your Company Performance

    Once you understand what stakeholders expect from you, you can evaluate your company’s performance to see how it matches up. Look for any weak points or vulnerabilities that could cause a discrepancy in public expectations versus reality.

    Develop a Risk Mitigation Process

    Focusing on your weaknesses first, develop risk mitigation strategies to avoid risks where possible—and a crisis management plan for responding effectively if the worst should happen.

    Then, implement your strategy. Work to improve your procedures, policies, and training methods across all levels of your operation.

    You may also want to enlist the help of a professional digital risk protection service to protect your digital footprint. These professionals use multiple techniques to identify and respond to digital threats before they become catastrophes.

    Monitor Your Risk Levels on an Ongoing Basis

    Risk mitigation is not a one-time activity; you should evaluate your public perception regularly and be ready to adapt to changing circumstances. Making sure stakeholder expectations and company performance are aligned is key to maintaining a positive business reputation.

    If you or your business has suffered a blow to its reputation, we recommend reading our comprehensive guide explaining effective reputation repair strategies.

    Why is It Important for Organizations to Manage Their Reputation?

    A business’s online footprint can be very revealing, and it can make or break the decision for consumers to work with them, buy from them, or hire them. Whether it is fair or not, consumers often judge a business based on the first few search results on Google.

    It is impossible to overstate the importance of online reviews. According to a Bright Local consumer review survey, 93% of consumers read online reviews before making a purchase—and only 48% of customers would consider purchasing from a business with fewer than four stars. And beyond reviews, it is estimated that up to 25% of your company’s market value comes from its reputation.

    Your digital reputation matters. And when you are only one viral post or news article away from taking a reputational hit, it is imperative to manage and mitigate reputational risk as much as possible.

    Services to Help Deal With Reputational Risk

    Reputational risks can affect businesses of all sizes and industries, and they should not be taken lightly. If you are concerned about the potential reputational pitfalls in your own organization, you can use the following services and tools to help you monitor and mitigate threats.

    What Services Are Available to Help Deal With Reputational Risk?

    Reputation management services and tools are often worth the investment, especially if your brand is already facing negative press, reviews, or public backlash. There are many helpful tools and services available today, but most fall into one of three categories:

    Explore Online Reputation Management (ORM) Services

    An online reputation management (ORM) service is a holistic approach to managing your reputation. Going beyond simply suppressing or removing negative content about you online, an ORM team uses multiple strategies, tools, and techniques to protect your digital reputation proactively.

    Online reputation management involves crafting your reputation with a combination of public relations, marketing, SEO, and legal strategies. These services often include techniques like:

    • Creating positive online content to help your brand rank higher in search results,
    • Encouraging, responding to, and monitoring online reviews,
    • Removing or suppressing negative content, and
    • Cultivating a positive social media presence.

    Online reputation management costs may be affected by numerous factors, such as the scope and size of your ORM package, your business’s specific industry or niche, whether you need content removed, and the number of negative reviews your business has.

    Use Free & Paid Tools

    While it is impossible to fully automate online reputation management, there are a few free and paid tools to help you monitor your reputation, including:

    • Social media management and “buzz” tools like Hootsuite, Sprout, Mention, and Buffer;
    • Review solicitation tools like Birdeye and ReviewInc;
    • SEO tools like Website Grader, Ahrefs, and Moz;
    • Business review management tools like Podium and Swell;
    • Keyword research tools like Buzzsumo, Exploding Topics, and SEMrush; and
    • Digital risk protection tools like ZeroFOX.

    Work With Internet & Content Removal Attorneys

    An attorney who is experienced in both online content removal and defamation can help you handle negative content about your company on the internet. Depending on the platform(s) where such content is published, it can be difficult for beginners to navigate reporting procedures or identify anonymous perpetrators alone.

    An attorney can also help you take legal action if necessary, monitor the internet for new threats, and help you restore your reputation swiftly.

    What Should You Look For in a Service That Helps Deal With Reputational Risk?

    Beginners can quickly become overwhelmed when trying to navigate the search for a digital reputation management service. Unfortunately, there are some dishonest or even predatory services out there. To be on the safe side, we recommend you choose a service that has:

    • An easily searchable online presence,
    • Professional licensing and ethical regulations to which they must adhere,
    • Plenty of online reviews, and
    • Informational content on their website to help readers learn about reputation management.

    We Can Help Your Organization Manage Reputational Risk

    At Minc Law, we have extensive experience helping businesses and corporations identify and mitigate short-term and long-term risks to their reputations. Through a variety of services, including our Digital Risk Protection Service, we help individuals and businesses monitor, bolster, and protect their reputations from reputational damage and attacks.

    ★★★★★

    “I highly recommend the Minc Law firm. Not only were they knowledgeable, professional and timely in resolving my matter, but they were a pleasure to work with. Dan, Darcy and Melanie thank you for everything! My only regret was not engaging the firm earlier.”

    E
    Oct 4, 2021

    If your business’s reputation is under attack or has been damaged, and you want to explore comprehensive reputation repair strategies, reach out to schedule your initial, no-obligation consultation by calling us at (216) 373-7706, speaking with a Chat representative, or filling out our online contact form.

    Contact Minc Law

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