Reputational risk

By definition, reputational risk refers to the potential for negative publicity, public perception, or uncontrollable events to have an adverse impact on a company’s reputation, thereby affecting its revenue. Reputational risk strikes without warning. It shifts your corporate landscape, impacts revenue, and sparks chaos. Even worse, it affects customer opinions and organic traffic by weaving negative content into your search results.

According to Young Reputational risk is the negative exposure of an organization’s business practices and/ or internal controls that may cause a decline in the customer base and/ or a reduction in revenue. Poor service and the inability to deliver products that may damage the organization’s relationship with customers and business partners can also result in reputational risk. Dealing with undesirable counterparties and the negative sentiment of regulators contribute to this risk. According to Soprano, Crielaard, Piacenza, and Ruspantini (2009: 159), reputational risk is the risk of damaging an organization’s trustworthiness in the marketplace. This negative perception can spread from the organization’s own employees to customers, financial markets, investors, shareholders, counterparties, governments, and/ or regulators.

The Basel Committee on Banking Supervision (2009) defines reputational risk as the risk arising from negative perception on the part of customers, counterparties, shareholders, investors, debt-holders, market analysts, their relevant parties, or regulators that can adversely affect a bank’s ability to maintain existing or establish new business relationships and continued access to sources of funding. As a result of the fact that reputational risk refers to perceptions, it is very difficult to measure the actual risk exposure. As such, reputational risk should be assessed in a qualitative way. However, this does not mean this risk type is not important. Chapman (2008: 227) states that one of an organization’s most valuable assets is its reputation. The reputation can be reflected as part of an organization’s brand and successful branding can secure long-term competitive advantages.

According to CIMA Reputation has value even if it cannot be expressed financially. The possibility of this value being reduced represents a business risk. Most organizations do not know enough about the drivers of their reputation to identify or protect against this risk from devaluation.

Any incident that reduces trust among any single stakeholder group has the possibility to create reputation damage. The severity of this damage and the cost will depend on the influence of the stakeholder group and its impact on the organization. Not all stakeholder groups are benign, and some secondary ones are by their nature hostile.

Cima went on A risk to reputation occurs where the organization fails to meet the expectations of a specific stakeholder group. The key to effective reputation risk management is therefore the management of expectations. It has been said that reputation risk lies in the gap between expected and actual behavior. This is why stakeholder mapping is useful to ‘mind the gap’.

Responsibility for stakeholder handling is spread across the board of a corporation and so there is scope for expectation shortfall in many areas. Consider the table in Figure 4 which shows the spread of ownership within a corporation across all the stakeholder groups and also what the most common failures are to satisfy stakeholder expectations.