Just like trust, a business’s reputation can take years to build and seconds to break. With high profile incidents more common in the public domain, reputational risk has become an important issue for companies to contend with.

BP’s Deepwater Horizon oil spill happened five years ago in 2010 but the impact it has had on the business’ reputation is still prevalent. At the time the news was impossible to ignore so almost everyone on the planet was aware of the story and the apologies that followed – which have since been praised, mocked and parodied. The effects this incident has had on BP include an $18.7bn legal settlement, an initial 55% loss in shareholder value, and reduced profits.

The Reputation Institute carried out a survey that demonstrates a strong link between reputations and stakeholder support, as well as reputation and consumer recommendations. The report shows that 83% of consumers would buy products from companies with an excellent reputation. Whereas only 9% would buy from a company with a weak reputation.

So what is Reputational Risk?

The Reputation Institute and Airmic have defined it using seven dimensions and if any one of these is affected it can cause a Reputational Risk event:

1. Products/services: an issue here will reduce the confidence consumers have that a business will deliver quality and cost effective goods and services
2. Innovation: an issue here will decrease the trust consumers have that a business will bring new products and services to the market first
3. Workplace: an issue here will affect the faith people have that a company looks after its people
4. Governance: an issue here will impact the belief that a company is open, honest and fair
5. Citizenship: an issue here will lessen the perception that a company cares about the local community and the environment
6. Leadership: an issue here will have a negative effect on the idea that a company is well organised and has a clear long term vision
7. Performance: an issue here will impact the opinion that a company is profitable and will grow

So when a business is affected by an incident it should go through each of these dimensions and see how the event will impact the stakeholders concerned.

What can reputational damage cost a business?

The impact a reputational event can cost the business can’t be measured until it happens, but some of the potential costs include:

• A drop in revenue
• Crisis management costs
• Loss of customers
• Share price decline
• Increased operating, capital and regulatory costs

What can a business do?

An effective Risk Management process is crucial to mitigate the impact of a reputational risk event. In this digital age stories are shared in minutes on social media and there is a greater public sense of corporate social responsibility, so it is vital to react as quickly as possible to control the impact. Firstly a company should embrace social media and ensure it has a solid social media policy.

Risk Management should take into account all of the risks a business is exposed to, it can then decide what it needs to put in place to mitigate the risk should it actually happen. It is then prepared to react in the right way as quickly as possible. If a company does not plan using Risk Management, a reputational risk event could have huge consequences.

Source: Post Magazine

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