What Reputation Risks Are There?

There are a number of different definitions of reputation risk, but at its core, it rests on how the stakeholders you care about perceive you company. Do they think you are doing the right thing or not. Defining "the right thing" is where things get complicated because it will differ across stakeholders.  If you are working across different countries, it becomes even more difficult as values and culture will also influence their perspective.

If you are trying to determine what your companies' reputation risks are, let's start by categorizing them into two buckets - self inflicted reputation risks and external reputation risks.

Reputation risks that are self-inflicted.

This means the company had some semblance of control over what went wrong. Usually, there was a breakdown of an internal process or rule, such as discovering an employee has committed fraud or there is a product recall. When Risk Managers and Lawyers typically talk about reputation risks, these internal risks are what they are thinking of and trying to mitigate. 

In this risk of risks approach, reputation risk ensues if the company does not properly manage and respond to the root risk, such as operational risk, compliance risk or strategic risk. TD Bank's AML breakdown in the US is a great example. Boeing's problems with product quality when a media storm followed doors falling off their planes is another. Silicon Valley Bank is an example of a liquidity risk that led to reputational crisis event which further exacerbated their liquidity risk as it triggered a run on the bank.

 If companies want to be prepared to manage the reputation risk of internal risks, such as liquidity risk, business risk, legal risk, compliance risk, and credit risk, then their communications and risk teams should have a clear plan to respond. A 2020 survey found that only 62% of companies had a crisis communications plan in place. Having a crisis communications plan that is road tested and properly socialized internally is best way to mitigate reputation risks that are self-inflicted. 

Reputation Risks that are External

These types of reputation risks have become more acute with the rise of social media platforms and the activist campaigners who know how to leverage them. With a large percentage of the global population now able to voice their opinion on anything a company does, the opportunity for misperception and misinformation creates a perfect storm of reputation risk for companies.

Examples of external reputation risks are abundant, with geopolitical conflicts, climate change and ESG issues currently at the forefront. What makes these reputation risks unique is the company under scrutiny may have little to no business exposure or expertise on the issue of the day. In these examples, the activists pressuring the company may incorrectly understand its role in the issue or they could be purposing leveraging the company as a proxy to influence a completely different set of stakeholders.

Since the company often has little control over the issue, a reputation mitigation strategy is less straightforward than a public apology and a few process changes. To further complicate the issue, the expectations of stakeholders may differ from market to market, meaning for global companies, there may not be a right answer that will appease everyone. 

A good example of this would be H&M and their use of cotton from Xinjiang in their supply chain. The US market demanded they remove Xinjiang cotton, which H&M complied with. However, this lead to their Chinese customers to boycott the stores. I was living in China at the time and I can attest to the fact that the H&M near my home went from perpetually busy to a ghost town.

In these situations, companies should be cautious about weighing in on every issue. Pre-work should examine what matters to the company from a strategic and operational perspective, as well as what aligns with their mission and values. Issues that fit within their ability to actually enact change or is tied to what they do or directly impacts their employee and customers would make more sense to have a position. Research should also be undertaken to understand how their diverse stakeholders think about the issue and what their expectations are for a company to respond on the issue. Continual monitoring of how these perceptions change is also necessary as reputation is dynamic, not static.

This data should be considered as part of the companies response strategy. Companies should also get comfortable saying nothing when it does not make sense. Too many companies got caught up in the early 2020s making broad and sweeping statements on complex issues they knew nothing about and it came back to haunt them when they did not deliver on those expectations.

Reflect, research and then respond (or not) is the three-step approach you need. With this pre-work in place, your company will be better prepared for what's to come.