Reputational risk or also reputation risk is the risk of loss or damage of a company’s good reputation which is the positive perception of the company by its customers, suppliers and other business partners. It is associated with some sort of negative publicity that represents a danger of loss of trust resulting form disclosure of certain information.
Good reputation plays an important role in company’s success in the market. A good reputation has to be built for a long time before it’s truly established, yet it can be lost very quickly. In some cases the loss of reputation may have a major negative impact on the company’s revenues. The loss of reputation can have several reasons.
First, it can simply be caused by the company’s own activities including bad business decisions, poor quality products, poor after-sales service, inappropriate communication in the media, or incorrect or inappropriate behavior of employees. Poor corporate culture can also have a negative impact on the company’s reputation. Second, the loss of reputation can also be caused by information leakage or even by deliberate misinformation, dishonour or slanderous actions of a competing business.
When and how do we assess the reputation risk?
Reputation risk assessment is part of risk analysis. The reputation risk should be considered in relation with every activity that may potentially have a negative impact on the company’s reputation, such as:
- Launching a new product or service
- Withdrawal of a product or service from the market
- Press release
- Protecting sensitive data, preventing personal information leak in some situations, e.g. while making changes to the website
- Ensuring operation, preventing unavailability of services
Who can get affected by the loss of reputation?
Virtually any group of stakeholders:
- Creditors - loss of reputation may raise the interest rate
- Market analysts - loss of reputation may push the rating down
- Rating agencies