Reputational risk is a threat or danger to the good name of a company. Executives know that firms with strong reputations build trust and generate value. Their consumer base tends to be more loyal and they are trusted with more products and services. In today’s economy, the majority of market value comes from abstract assets like brand equity and intellectual capital. As such, organizations are very at-risk of reputational damages.
KPMG 2022 CEO Outlook Survey
In a survey conducted at the KPMG 2022 CEO Outlook, over 1300 CEOs were asked about their outlook and strategies for the foreseeable future. Interestingly, the survey noted an “evolving focus toward reputational and technological risks”
A KPMG press release explains the survey results.
“Emerging and disruptive technology has landed as the top risk to business growth over the next 3 years. In addition, CEOs have identified several other areas as top risks to growth: reputation, regulatory and operational issues, and climate change. Reputational risk such as misalignment with customers or public sentiment — is raising more concern among CEOs compared to early 2022 (10 percent in August vs. 3 percent in February). In response to geopolitical challenges, 51 percent of organizations have discontinued working with Russia, and 34 percent plan to do so over the next 6 months. “
Reputational risk examples usually come in the form of internal or external risks.
Examples of Internal Reputational Risks
- Poor product quality
- Bad customer service
- Behaviors and sentiments that don’t align with the consumer base
- Poor social media habits
- Irresponsible data security training and awareness
- Fraud or financial misdemeanors
- Disclosure of cyber incidents due to lack of compliance
Examples of External Reputational Risks
- Data breach of sensitive customer or personal data
- Negative media coverage or smear campaigns
- Competitors’ negative advertising
- Third-party vendors that suffer from reputational damage
- Engaging in business relationships with countries or entities that are hostile to stakeholders
Real Incidents of Reputational Damage
- Former Facebook employee Frances Haugen leaked internal documents to the Wall Street Journal that revealed some negative corporate information. Soon after, CEO Mark Zuckerberg announced that Facebook would be changing its name to Meta to mitigate damage due to the bad reputation that Facebook had gained.
- Wells Fargo Bank’s reputation is in tatters following a notorious scandal still playing out as we write this article. Reports claim that the bank opened at least 3.5 million fraudulent accounts for unwitting customers, according to research done at the Harvard Business School.
It is important to note that the power of social media can destroy or build a company’s reputation in minutes!
In our era of fragile reputations, taking reputational risk analysis seriously can go a long way in building your brand and consumer trust.
