What is Reputational Risk?
Reputational risk is a threat to a business’s good name or standing. It can arise in several ways:
- Directly, from the company’s own actions.
- Indirectly, through the actions of employees.
- Tangentially, via associated parties like joint venture partners or suppliers.
- To mitigate reputational risk, companies should practise good governance, maintain transparency, and prioritise social and environmental responsibility.
Key points:
- Reputational risk is a hidden threat that can emerge unexpectedly.
- It can endanger even the most successful companies, potentially erasing millions or billions in market value or revenue.
Understanding Reputational Risk
Reputational risk is a hidden danger that can threaten the survival of even the largest and best-run companies. While often resulting in outcomes that are difficult to measure, it can negatively impact a company’s profitability and valuation. This type of risk can erase millions or billions of dollars in market capitalisation or potential revenue and may lead to changes in top management.
Reputational risk can stem from the actions of rogue employees, such as egregious fraud or massive trading losses, as seen in some of the world’s largest financial institutions. In our increasingly globalised environment, reputational risk can also emerge from peripheral regions far from the company’s home base.
Sometimes, reputational risk can be mitigated through prompt damage control measures, which is crucial in the age of instant communication and social media. However, in other cases, the risk can be more insidious and persist for years. For example, gas and oil companies have increasingly been targeted by activists due to the perceived environmental damage caused by their extraction activities.
It can be a time-intensive process to monitor for online activity such as negative reviews that can jeopardise a company’s reputation. Online reputation management (ORM) software can help companies track what consumers say about a brand on review sites, social media, and search engines. Many of these solutions allow you to use one dashboard to look at and respond to reviews.
Why Companies Need to Handle Reputation Risks
Companies facing a reputation risk should face the problem with the following elements in the balance.
Customer Trust and Loyalty
A strong reputation fosters customer trust and loyalty. Customers who find favour with a brand want to remain loyal and pitch it to others. Conversely, a damaged reputation can lead to a loss of customers and revenue.
Competitive Advantage
A positive corporate reputation can differentiate a company from its competitors. It can be a key factor in attracting and retaining top talent, investors, and partners.
Financial Performance
Reputation risk can have a direct impact on a company’s financial performance. Negative publicity can lead to a decline in stock prices, loss of business opportunities, and increased regulatory scrutiny.
Crisis Resilience
Companies with strong reputations are better equipped to withstand crises. They are more likely to receive support from stakeholders and have the trust of the public during challenging times.
Steps to Handle Reputation Risks
1. Identify Potential Risks
The first step in managing reputation risk is identifying potential threats. Companies should conduct a thorough risk assessment to identify areas where they are vulnerable. This includes monitoring social media, news outlets, and industry trends to detect early warning signs of potential reputation issues.
2. Develop a Reputation Management Strategy
A proactive reputation management strategy is essential. This strategy should outline how the company will monitor, assess, and respond to reputation risks. Key components of a reputation management strategy include the following.
Crisis Communication Plan
Develop a clear plan for communicating during a crisis. This should include identifying spokespersons, drafting key messages, and establishing communication channels.
Stakeholder Engagement
Regularly engage with stakeholders, including customers, employees, investors, and the community. They will appreciate the constant interaction and stay by your side.
Brand Monitoring
Use tools and technologies to monitor online conversations, social media mentions, and news articles. This allows companies to respond quickly to potential threats.
3. Foster a Positive Corporate Culture
A strong corporate culture is a cornerstone of reputation management. Companies should promote ethical behaviour, transparency, and accountability at all levels. This can be achieved by:
Setting Clear Values and Standards
Establish and communicate clear values and ethical standards with all employees. The objective is to underline adherence to them while they are still with the company.
Training and Education
Provide regular training on ethical conduct, compliance, and reputation management. Employees should be aware of the potential impact of their actions on the company’s reputation.
Leadership by Example
Leaders should model ethical behaviour and demonstrate a commitment to upholding the company’s values.
4. Engage in Corporate Social Responsibility (CSR)
Corporate social responsibility (CSR) initiatives aim to build a company’s human character with the public. Engaging in activities that benefit the community, environment, and society at large demonstrates a commitment to positive social impact. CSR initiatives can include:
Environmental Sustainability
Implement sustainable practices to reduce the company’s environmental footprint. This can include reducing waste, conserving energy, and supporting green initiatives.
Community Engagement
Support local communities through charitable donations, volunteer programs, and partnerships with non-profit organisations.
Ethical Business Practices
Ensure that business practices align with ethical standards and regulatory requirements. This includes fair treatment of employees, responsible sourcing, and transparent financial reporting.
5. Respond Effectively to Crises
Despite the best efforts to prevent them, crises can still occur and the nature of a company’s reaction will be sorely tested in the process. Key steps for effective crisis response include:
Timely and Transparent Communication
Communicate promptly and transparently with stakeholders. The key is to acknowledge the issue and share details then explain current efforts to address the situation.
Show Empathy and Accountability
Demonstrate empathy for those affected by the crisis and take accountability for any mistakes. This helps rebuild trust and credibility.
Learn and Improve
After the crisis, conduct a thorough review to identify lessons learned and areas for improvement. Use this information to strengthen the company’s reputation management strategy.
Local Example
Although some may think the biggest reputational risk episode around is that of a well-known American insurance company, even Australia is not immune to the danger of attracting reputational risk. Let’s look at one situation.
In April 2024, former Brisbane Lord Mayor Graham Quirk predicted Australia’s credibility as an international host country was at risk because of infrastructure foul ups regarding preparations for the 2032 Olympics in Brisbane. He was referring to a proposal to demolish and rebuild the Gabba as the venue for the opening and closing ceremonies, and the athletics events. The plan attracted concern from International Olympic Committee vice-president John Coates, who suggested scrapping the Gabba project but upgrading it and other facilities in the Brisbane region instead, such as the Queensland Sports and Athletics Centre at Nathan.
Queensland Premier Steven Miles took note of Coates’ recommendation but partially rejected the findings of a special report that he commissioned Quirk to write, which had 27 of 30 recommendations accepted. One of the report’s three rejected recommendations was to build a new stadium at Victoria Park that can host the opening and closing ceremonies. However, Miles said the $3.4 billion price tag for Victoria Park was too much in a time when Queenslanders needed heavy investment in new housing and risked losing public support for the Games, so Suncorp Stadium will be the venue instead.
Quirk said a new venue will still be needed one day as Stadiums Queensland evaluated that the Gabba is at end-of-life by 2030, citing its poor condition and rising maintenance costs.
Conclusion
Managing reputation risk is a continuous and proactive process that requires dedication and vigilance. Companies in Australia must recognise the importance of safeguarding their corporate reputation to maintain customer trust, competitive advantage, and financial performance. In the end, a strong reputation is not just a shield against potential threats but a valuable asset that drives long-term success and sustainability.
DISCLAIMER: This article is for informational purposes only and does not replace official business advice. AVANTE PARTNERS has no relationships with any company or individual mentioned.
