The hidden threat: Understanding business reputational risk and how to mitigate it
Wednesday, June 21, 2023
• 8 Minutes reading time
Want to safeguard your company's hard-earned reputation? Uncover the types of reputational risks you should be aware of and learn how to protect yourself now on our blog.
In today's hyper-connected world, a company's reputation can make or break its success. With 70% to 80% of a business's market value stemming from intangible assets like brand equity and goodwill, it is critical for organizations to proactively manage their reputational risk.
However, many companies fall short in this regard, leaving themselves vulnerable to potentially devastating consequences. In this blog post, we'll explore the hidden threat of reputational risk, discussing its various types and real-life examples that highlight its significance.
Moreover, we'll delve into effective strategies for assessing and mitigating such risks to help your business thrive while safeguarding its hard-earned reputation.
- Reputational risk is a crucial threat that can harm a company's market value and integrity.
- There are various types of reputational risks such as gaps between reputation and reality, changing beliefs and expectations, and weak internal coordination.
- Real - life examples such as Kendall Jenner's Pepsi ad or McDonald's hot coffee lawsuit demonstrate how harmful it can be to overlook this type of risk.
- Effective strategies for mitigating reputational risk include honoring core values, implementing internal compliance training programs utilizing social listening tools public relations investments while also fostering a positive company culture through transparent communication with stakeholders.
Understanding Reputational Risk
Reputational risk is the potential for negative publicity, loss of business, and damage to a company's brand and image as a result of its actions or associations.
Definition Of Reputational Risk
Reputational risk refers to the potential for negative publicity, public perception, or controversial actions by a company to adversely impact its brand image and financial standing.
This intangible form of risk can stem from various sources such as social media, traditional media coverage, customer experiences, legal issues, employee misconduct, or corporate governance lapses.
For instance, in the case of McDonald's and Stella Liebeck - where Liebeck won a lawsuit against the fast-food giant due to severe burns from spilled coffee - McDonald's faced significant reputational damage even though their actual wrongdoings were debatable.
In today's interconnected world with heightened scrutiny on corporates' behavior by customers and stakeholders alike; managing reputational risk has become more crucial than ever before.
Why It's Important To Businesses
Reputational risk is crucial for businesses to address because it can significantly impact a company's market value. In fact, 70% to 80% of a business's market value comes from intangible assets such as brand equity, intellectual capital, and goodwill.
A strong reputation builds trust with customers and partners while attracting top talent in the industry. With the rise of social media, public opinion can spread quickly and have considerable influence on an organization's image.
A damaged reputation due to negative publicity or unforeseen events could lead to financial losses resulting from decreased sales, loss of partnerships or sponsorships, costly litigation, and regulatory penalties.
For instance, consider McDonald's case involving Stella Liebeck wherein poor corporate handling of a lawsuit over hot coffee spills resulted in substantial backlash against the fast-food giant.
Additionally, stakeholders are becoming more aware of environmental and social issues surrounding companies they support or invest in; thus addressing reputational risks associated with these factors is essential for long-term success.
Companies that fail to manage these risks appropriately may experience declining customer bases along with increased scrutiny by investors who prioritize ethical business practices when making investment decisions.
Types Of Reputational Risk
Reputational risk can come from a variety of sources including the reputation-reality gap, changing beliefs and expectations, and weak internal coordination - learn more about these types of risks to ensure your business is protected.
The reputation-reality gap refers to the discrepancy between a company's perceived public image and its actual conduct. This disconnect poses a significant reputational risk, as it can cause stakeholders to lose trust in a brand when they discover misaligned values or unethical practices within an organization.
For instance, consider the infamous Kendall Jenner Pepsi advertisement that sparked outrage for appearing to trivialize social justice movements. Despite PepsiCo's history of successful marketing campaigns highlighting social issues, the ad revealed a glaring gap between their projected support of important causes and their genuine understanding of these sensitive topics.
As public outcry escalated, Pepsi was forced to quickly pull the ad and issue an apology.
Changing Beliefs And Expectations
As society and culture evolve, so do the beliefs and expectations of stakeholders towards companies. This can create reputational risk as a company's behavior may not align with changing values.
For example, traditional advertising campaigns that objectify women are no longer acceptable in many societies leading to backlash from consumers. Similarly, companies who ignore environmental concerns or ethical sourcing practices may face negative publicity resulting in loss of customers and revenue.
In today’s digital age where news travels fast, even one small mistake can have serious consequences leading to long-term damage for businesses. Therefore proactive measures must be taken by businesses including monitoring social media activity and staying ahead of changing values through stakeholder engagement such as consumer surveys and focus groups which helps identify shifts in customer expectations before they become significant issues.
Weak Internal Coordination
Weak internal coordination is a major factor in reputational risk for organizations. Different functional groups within organizations play a role in managing reputational risks but often do a poor job of sharing information and coordinating their plans.
This can lead to reputation-reality gaps, where the public perception of the company's character does not match its reality. For example, if an advertising team creates a campaign that goes against the core values of an organization without communicating it properly to other departments such as legal or compliance, there could be serious damage to the company's reputation.
Real Life Examples Of Reputational Risk
From Kendall Jenner and Pepsi to McDonald's and Stella Liebeck, real-life examples show how reputational risk can seriously damage a business.
Kendall Jenner And Pepsi
In 2017, Pepsi released an ad featuring Kendall Jenner that sparked a massive reputational risk for the brand. The ad showed Jenner handing a can of Pepsi to a police officer during a protest, which many consumers felt trivialized the Black Lives Matter movement and protests against police brutality.
As a result, the Internet erupted in backlash, with social media users calling for boycotts and criticizing both Pepsi and Jenner for their insensitivity.
McDonald's And Stella Liebeck
In 1992, the infamous McDonald's and Stella Liebeck case became a textbook example of reputational risk for businesses. Liebeck received third-degree burns after spilling hot coffee on herself, leading to a $2.86 million lawsuit against McDonald's that tarnished its reputation as a family-friendly restaurant chain.
The case attracted widespread media attention and public outrage, with many accusing McDonald's of negligence in serving excessively hot coffee to customers.
Shein And Clothing Suppliers
Shein is a fast-fashion retailer that has faced numerous reputational risks due to its suppliers and manufacturing warehouses. Reports of unsafe working conditions, low wages, and workers' rights violations have brought attention to the company's supply chain practices.
In 2020, Shein was found to be still using cotton from Xinjiang, where Uighur Muslims are known to be used as forced labor. These controversies have led to social media backlash and boycotts from consumers concerned with ethical practices in fashion.
Determinants Of Reputational Risk
Corporate culture, transparency and communication, and crisis management are all critical determinants of reputational risk.
Corporate culture plays a significant role in managing reputational risk. It refers to the collective values, beliefs, and behaviors that shape an organization's identity and influence how its employees act and interact with stakeholders.
One notable example of a company where corporate culture played a role in reputation risk is Barclays Bank UK Group. The bank faced intense public scrutiny after being implicated in the Libor scandal for manipulating interest rates.
In response to the crisis, Barclays' board recognized that their corporate culture had contributed to the problem and implemented changes to improve it. This included adopting new governance practices and a stronger compliance program that prioritized acting with integrity and competence at all times.
Transparency And Communication
Transparency and communication are critical factors in managing reputational risk. Businesses must be transparent with their stakeholders, including customers, investors, and employees, about their actions and decisions.
Effective communication can build trust among stakeholders and help mitigate potential risks to the company's reputation.
In today's digital age where information travels fast on social media platforms such as Twitter or Instagram, businesses need to be even more transparent and communicative when mitigating reputational risk.
Negative social media posts or online reviews can significantly damage a business' reputation if not addressed appropriately through proper communication channels.
Should a business experience damage to its reputation, crisis management involves the strategies implemented to mitigate potential fallout. This involves identifying negative press and perception, responding quickly with a clear message that addresses concerns, and strategically communicating through various mediums.
For example, in 2017 when Pepsi released an advertisement featuring Kendall Jenner handing out Pepsi cans during a protest march it was accused of trivializing social justice issues.
Effective crisis management requires companies to build up goodwill over time so they have reserves of positive sentiment within which constructive responses can be made.
Companies also need strong leadership teams that are capable of unlocking resources at short notice to address reputational risk as effectively as possible.
Strategies For Managing Reputational Risk
To effectively manage reputational risk, businesses must assess their reputation, evaluate reality against perception, close gaps, monitor changing beliefs and expectations, and assign responsibility to a single person.
Assessing a company's reputation is the first step towards managing reputational risk. It involves regular surveys of employees, customers, and stakeholders to identify potential gaps between reputation and reality.
This helps companies understand how they are perceived by different groups and whether their actions align with their core values. For instance, when Kendall Jenner starred in Pepsi's controversial advertisement that appropriated protest movements, it generated significant backlash from consumers who felt the ad was insensitive and trivialized societal issues.
Such negative feedback can create a gap between brand image and consumer perception.
Another key element of assessing reputation is identifying emerging issues early enough to develop an effective response strategy.
Evaluating reality is a crucial step in managing reputational risk. It means examining how the perceptions of your company match up with its actual behavior and performance.
This assessment can be done through a range of methods, such as media analysis, surveys of stakeholders, and periodic surveys of experts in different fields.
For example, McDonald's faced significant reputational damage following the infamous Stella Liebeck case in 1992 when she sued the fast-food giant over hot coffee that burned her thighs while she was sitting inside her car.
Although the incident was entirely accidental, it led to negative public perception about McDonald's quality standards and caused consumers to question whether they were getting what they expected from the brand.
Closing reputation-reality gaps is a crucial step in managing reputational risk. It involves identifying and addressing discrepancies between what the company says it stands for and what stakeholders perceive it to be.
This gap can arise from inconsistent messaging or lack of transparency, leading to mistrust among stakeholders.
For example, McDonald's faced reputational damage when Stella Liebeck filed a lawsuit after spilling hot coffee on herself at one of its restaurants. The public perceived the restaurant chain as insensitive towards customer safety, leading to widespread negative coverage on social media platforms.
Closing reputation-reality gaps is critical because customers today are increasingly demanding authenticity from businesses they engage with.
Monitor Changing Beliefs And Expectations
To effectively manage reputational risk, it is vital to monitor changing beliefs and expectations. This involves keeping track of how the public perceives your brand, as well as what they expect from you in terms of corporate responsibility and ethics.
For instance, a company that fails to address social or environmental issues can quickly become the target of negative publicity. Social media has amplified this effect by giving consumers an immediate platform to air their grievances.
One example of monitoring changing beliefs was seen when McDonald's faced a reputational crisis after Stella Liebeck sued them for serving her coffee that was too hot. The case received widespread media attention and sparked outrage directed towards McDonald's.
In response, the restaurant chain adjusted its policies regarding hot beverages and trained employees on how to safely handle them - a move that helped repair some of the damage done to their reputation.
Assign Responsibility To A Single Person
One of the most effective strategies for managing reputational risk is assigning a single person to be responsible for it. This person should have clear authority and accountability, as well as access to resources and information necessary to manage risks effectively.
For example, when a customer complains on social media about a faulty product or poor service, the designated person can quickly respond with an apology and offer a solution.
Moreover, this person can identify potential reputation tarnishing situations before they escalate into crises by actively conducting periodic stakeholder surveys or media analysis which could assist in identifying any new issues early enough before they get out of hand.
How To Mitigate Reputational Risk
Mitigating reputational risk requires implementing strategies such as honoring core values, utilizing social listening tools, investing in public relations, and developing a crisis management plan; to learn how these steps can protect your business from the hidden threat of reputational risk, keep reading.
Honor Core Values
Companies that honor their core values are more likely to establish a positive reputation and build trust with stakeholders. By consistently demonstrating honesty, integrity, and accountability, businesses can foster an environment of transparency and ethical behavior.
One example of a company that pays close attention to its core values is Patagonia. Known for its commitment to environmental sustainability and ethical manufacturing practices, the outdoor clothing brand has built a loyal customer base by staying true to its mission even in challenging situations.
The company's response following the 2010 Gulf of Mexico oil spill demonstrated this commitment when it took out a full-page ad in The New York Times urging Congress to protect public lands from similar disasters.
Implement Internal Compliance Training
Implementing internal compliance training is an essential strategy to manage reputational risk. It ensures that employees understand the company's values and expectations, as well as regulatory compliance requirements.
For instance, global banks like Barclays Bank UK Group and Scotiabank have comprehensive compliance programs that align with industry standards and codes of conduct. These programs not only mitigate potential legal risks but also enhance their reputation for ethical behavior in the eyes of stakeholders such as customers, investors, regulators, and media organizations.
Social listening tools can be a game-changer in identifying and managing reputational risks for businesses. With the ability to monitor conversations across various platforms, companies can track mentions of their brand, products, or services.
By analyzing these conversations, they may identify potential issues before they turn into full-blown crises.
In addition to crisis prevention, social listening tools also allow companies to engage with customers actively. They offer valuable insights into customer sentiment towards the business that can inform future decision-making processes.
Invest In Public Relations
Investing in public relations is crucial for businesses looking to manage reputational risks. Public relations can help rebuild a company's reputation and regain the trust of stakeholders, including customers, employees, and investors.
One example of effective PR management comes from McDonald's handling of the infamous "hot coffee" incident involving Stella Liebeck. Rather than shifting blame or ignoring the situation, McDonald's responded quickly by creating a video explaining their side of the story and apologizing for any harm caused to Liebeck.
This proactive approach helped mitigate damage to McDonald's reputation and reaffirmed their commitment to customer safety.
Reputational Risk Management Tips
Develop a crisis management plan to address potential threats and ensure your company is prepared to handle them effectively. Foster a positive company culture that prioritizes transparency, communication, and corporate social responsibility.
Communicate effectively and transparently with stakeholders during times of crisis to mitigate damage to your reputation. Utilize social listening tools to stay aware of public perception and respond appropriately.
Develop A Crisis Management Plan
Having a crisis management plan in place is essential for effective reputational risk management. A crisis can strike at any time, and having a well-prepared response plan can help mitigate the potential damage to a company's reputation.
The plan should include clear and concise messaging that addresses the issue openly and transparently, along with specific steps that will be taken to address it. In addition, companies should identify their key stakeholders and develop strategies for communicating with them in the event of a crisis.
- "Mitigating reputational risk involves acknowledging the issue, creating crisis messaging, and being transparent with consumers about the steps being taken to address the problem."
- "Developing a crisis management plan associated with reputational risk management tips can help mitigate the hidden threat of reputational risk and its potential impacts on businesses."
Foster A Positive Company Culture
Fostering a positive company culture is crucial to managing reputational risk. A strong corporate culture that emphasizes integrity, accountability, and ethical conduct can help prevent negative events from occurring in the first place.
Companies with positive cultures also tend to have better employee morale, which can translate into improved customer service and higher levels of customer satisfaction. For example, Barclays PLC has specific departments dedicated to managing reputational risk and maintaining a positive culture across all business operations.
Creating a positive company culture takes time and effort but is well worth it in the long run. In fact, studies show that companies with strong positive cultures outperform their competitors in terms of financial performance and overall reputation.
Organizations should focus on creating an open environment where employees feel comfortable raising concerns or reporting misconduct without fear of retaliation. This includes implementing clear policies around harassment prevention, diversity and inclusion initiatives, training programs on ethics and compliance standards, as well as reward systems for those who embody core values like honesty and transparency.
Communicate Effectively And Transparently
Effective and transparent communication is crucial in managing reputational risk. Companies should be open and honest about their operations, policies, and decisions to build trust with stakeholders.
One example of effective crisis communication was demonstrated by Johnson & Johnson during the Tylenol poisoning scandal in 1982. The company quickly communicated with its customers through media outlets and announced a voluntary recall of all Tylenol products from store shelves.
Moreover, using social media channels like Twitter or Facebook enables companies to share information directly with customers amidst uncertain times—provided they respond quickly in real-time when things go wrong online—to maintain brand loyalty even after a crisis occurs.
Reputational risk is a hidden threat that can seriously damage the value and integrity of businesses. Companies must understand that reputational risk can occur in various forms, such as gaps between reputation and reality, changing beliefs and expectations, and weak internal coordination.
Real-life examples such as Kendall Jenner's controversy with Pepsi or McDonald's infamous hot coffee lawsuit demonstrate how harmful it can be to overlook this type of risk.
To successfully manage reputational risks, companies need to assess their reputation, evaluate reality, close any gaps they find within their organization, monitor changing beliefs and expectations continuously while assigning responsibility to a single person.
Effective strategies for mitigating reputational risk include honoring core values, implementing internal compliance training programs utilizing social listening tools public relations investments.
It is crucial for companies to foster a positive company culture by communicating effectively transparently about situations that arise regularly in business operations so employees feel comfortable speaking up if there are concerns regarding ethical conduct within the organization.
In conclusion: A strong brand reputation offers several benefits to businesses like attracting better people perceiving more quality value from stakeholders charging premiums higher market values lower capital costs increased customer loyalty broader product ranges including range expansions when entering new markets leading ultimately towards increased profitability.