What Is Reputational Risk? Identification of Risk and Mitigation
When a company is preparing for the future, they research potential profit margins, customer demographics, and many other aspects of what they believe will lead them to success. While all of these are vital, there are some risks that are often ignored until it’s too late.
One of the most important is reputational risk. A company’s reputation is tied directly to its success. But what is reputational risk, and what can a company do to keep risk to a minimum?
What is reputational risk?
Your company’s reputation is how the world sees you and is a vital part of doing business. If your reputation suffers, it will send shockwaves through the company and can be difficult to recover from. In the end, it can damage every part of your business, including the bottom line and profits.
We all understand the concept of risk. When you do something, there are varying degrees of danger. If you work hundreds of feet above the ground on the construction of a massive skyscraper, there is a risk of falling. Workers take steps to mitigate that risk by using safety gear and harnesses while executing awareness and caution. These are all parts of making the workplace safer.
When it comes to reputational risk, the same goes for running a company. There is a potential for damage to your reputation; that risk can come from inside or outside the business. The trick is to be ready and prepared and do everything possible to mitigate the potential for harm.
Identifying reputational risk
Reputational risk for you or your company can come from many places, but it can be boiled down to two major areas: risk due to things that come from within your company or how you do business, and from outside the company, which are often things you cannot control but can prepare for.
Risk from within
The more common and preventable way that your company’s reputation can be damaged is from within the very business you are trying to protect. It stems from the choices you make and the way that you and your employees do business.
Some specific areas include:
- Bad workplace practices and conduct– The way your company conducts business is an area where many companies create risk. This can include environmental decisions or bad accounting practices as well as the actions of upper-level management. It could even include poor decisions in media campaigns that offend or present lies to the public.
- Actions of your workforce- The way your employees do their jobs and interact with the public can put your business at extreme risk of harming your reputation. Actions such as how employees interact with customers including mistreatment and actual illegal actions like discrimination or theft can open you up to damage. It can also include the public things employees do that cast a bad light on your business such as social media postings or actions that reflect on the company that employs them.
- Poor quality products and services– Do you lie or misrepresent how your product is made or the green practices you use? Plus, what about your actual product? If you make a physical product, what’s the level of quality? Do you make inferior products? Are there safety issues? Do you use proper labor practices when creating your product? Any of these issues can be seen in a highly negative way by the public and cause irreparable harm to your reputation.
- Vulnerable infrastructure– Business isn’t just the way a company conducts itself, but also the technology and tools that they use. Many companies have found themselves at great risk because they were vulnerable to data breaches and ransomware. Even worse, some companies were aware that they had issues but put their stakeholders at risk by not dealing with the problem. In 2021 alone, there were over 4,100 publicly disclosed data breaches with over 22 billion records exposed. These types of technological problems have become vital issues. While companies can take steps, the skills and tactics of these attackers are always changing and can have devastating effects, especially against unprepared companies.
- Being behind the curve– Is your company not keeping up with societal change and industry expectations? It could be labor practices or environmental concerns, but all too often companies are slow to change and only do so when the court of public opinion has deemed them guilty and the damage to their reputation is done. Then it becomes a game of catch-up to change while working to repair the damage to their reputation.
Risk from outside
There are times when a business suffers from events that are nothing it can control. An individual might have a personal vendetta against a company or product. It could be someone with completely personal issues or a group that believes what they are doing is right because of moral beliefs. There are even cases where companies have had serious damage to their reputation because of mistaken connections to other companies.
Multi-billion dollar companies such as Pepsi or Proctor and Gamble have fallen victim to this with damaging hoaxes that have cost them not only profits but damaged their public reputation. It took them a great deal of time, effort, and money to fix the harm.
Competitors may also seize on weaknesses within your company or how the world sees you in order to succeed themselves. They can do damage to your reputation or take advantage of your missteps and then capitalize, vaulting themselves ahead of you on the ladder of success.
Where can risk lead?
The obvious is that risk can lead to harm from the cracks in your defenses. On top of that, risk can shift and multiply after the initial damage. It’s a domino effect you may not be able to stop if you aren’t prepared.
Once risk turns to damage, it will lead to the destruction of the way people look at your company. Your stakeholders- customers and employees- will lose faith. They may even turn against you.
You risk losing employees and the quality of the workers you are able to hire will suffer. You may even begin to lose investors or board members. If this happens, it could actually lead to the downfall of your company.
“An ounce of prevention is worth a pound of cure.” – Benjamin Franklin
How to avoid reputational risk
While you can never completely take risk out of the equation of doing business, there are many things that you can do to mitigate that risk and be prepared if something happens. By being prepared, you can minimize the damage.
Risk is also something that continues to grow. While you may think that once a crisis occurs the damage is done, the truth is it creates more risk for further issues. It’s a constantly evolving problem and businesses need to be ready every step of the way and work to repair any damage moving forward as strongly and quickly as possible.
Train and prepare
Create response plans in advance. Don’t get caught unaware. Every company will face some sort of reputational or publicity crisis. Be ready. Have a plan and train your employees on how to prepare for a crisis. Brainstorm every possible potential crisis and cause.
Prepare technologically. Make sure you are defending against data breaches and other technological problems. Keep up to date with not only current threats but the tools that you can use to defend your company against them. Make sure your team is also well-trained in safety habits when it comes to IT in order to minimize exposure to hackers, phishers, and other technology threats.
Have good business practices
By being aware of how you do business and whom you work with, you can protect yourself against potential reputational risk. It is also important to consider who you associate with and how it looks to the public. Make sure you vet your partners and vendors. This also goes for executives and members of your board. As the saying goes, if you lie down with dogs, you wake up with fleas.
Be clear about what your company is about and how you approach business. Also, relay this information to the public so they understand what you are all about. Not only does it create transparency, but it will help your customers feel like they have a connection to the brand.
Stay connected to your customers
Keep an open dialogue with your customers. Don’t let little things grow into big things. If a customer has a complaint, make sure that you not only address it quickly but do so in a manner where the customer feels that they have been heard. Interact with them regularly and consider conducting surveys and research to understand their wants and needs.
Stay connected with your employees
Keep your employees happy. Listen to issues and head them off at the pass. Develop an open dialogue about concerns and what is important to your staff. This also not only includes workplace conditions but benefits, hiring practices, and company policies.
Remember that your employees are stakeholders. They are a part of your business. If word starts to get out that you don’t treat workers well, your reputation will suffer and you will have turnover in your workforce. The quality of whom you can hire will drop and eventually it will drag down your entire company.
Also, be honest with employees and potential hires about the job. Uber was trapped in this when they lied to employees about not only what they could expect to make as drivers, but about how the company would help them lease a vehicle. Uber said they could do it for as little as $17 per day when in truth it would cost over $200 a week. In pursuit of profit, the company was caught in its lies and paid over $20 million in fines after they were busted by the FTC.
Be quick
When something happens or starts to rise on the horizon, don’t wait. Be quick and deal with it. If it’s a disgruntled customer or employee, address it. Changing social stances? Understand and move to be in line with societal standings. If it’s a technological issue, admit it and fix it before it becomes a problem.
You may be able to address things before they become major issues if you are proactive enough. While it might cost more in the beginning, businesses can see it as an investment in the future.
Be authentic
From the beginning, be real and open. If something illegal or improper occurs internally, admit to the problem and make changes. Don’t dig in your heels and stonewall. History is full of examples of companies in nearly every industry who knew they were in the wrong but deflected. It doesn’t work and, almost universally, the problems get worse.
In 2017, Equifax was the victim of one of the largest data breaches of all time with over 143 million consumers affected. The cybercrime came from the company not taking the proper steps to protect customer information. Instead of explaining and taking responsibility for the scope of the issue, they lied and covered up. When the truth came out, not only did it cost them over $575 million, Equifax lost the trust of consumers and is still working to gain it back to this day.
It’s also important that your stakeholders believe in you and your way of doing business. If you are real with them and show how you do things, they will be more likely to be on your side, not only if something happens, but will be more supportive as you work to fix it. If they know that you have done everything possible to prevent a data breach and you have shown them over time the steps you took, but unfortunately you were a victim, they will be more likely to stand by you as you work to fix it. Especially if you are honest with them and show how you are acting quickly to resolve the problem.
Keep an eye on the horizon
Look for changes in the public. It could be the way that society likes to do business, or what they find important in products or companies. It might be green efforts or labor practices. A company doesn’t want to get caught in the old adage, “But that’s the way it’s always been.” By keeping your finger on the pulse you can not only avoid risk but rise to the top by being a trendsetting and innovator. Don’t get caught in the past.
Also, be flexible. Remember that risks may grow and change as does the situation or market. The more information you have and are ready to handle problems as they arise, the more protected you will be against growing risk to your reputation.
Don’t be afraid to ask for help
There are companies that specialize in reputational risk. They will take a look at how you conduct your business and audit you from top to bottom, showing you not only the problems but how to fix them. They can show you the potential for damage and if you have already opened yourself up to reputational risk, they can help you not only put a stop to it but reverse the damage.
Conclusion
- Be prepared. Train your employees on how to prevent potential problems in ways that make your business operate more securely. Train them in technology safety and security as well as proper customer service and crisis response.
- Stay on top of things. Pay attention to trends in public opinion as well as potential hazards. Don’t get caught holding on to old ways of doing business that don’t work.
- When something happens, be quick to deal with it. Whether it’s a misstep by a member of the workforce at any level, a bad business decision or even a poorly planned marketing campaign. Get on top of it to stop the problem and mitigate any further risk to the business.
- Be authentic and aware from the get-go. If the public sees that you are authentic, this will show them that you are trustworthy. Also, if something does happen, you will have goodwill and not only may it help with the initial problem, but as you work to repair issues, the public will be more likely to stick with you.
- Be an innovator. Don’t wait to be required to do something by society or even legal standards. By being ahead of the curve, you can not only mitigate risks but set yourself apart.
- Consider getting professional help to do a top-to-bottom look at your business and show how you can mitigate reputational risk.
Tags: Business Reputation Repair.
