Reputational risks and social and environmental impacts 10 / 10

Reputation risks

Reputation risk is a loss of reputation caused as a result of the adverse consequences of another risk.

The loss of reputation will be usually perceived by external stakeholders, and may have serious consequences, depending on the strength of the organisation's relationship with them.

Unethical behaviour includes:

  • animal testing

  • dealings with oppressive regimes

  • human rights abuses

  • destruction of forests

  • dumping of toxic waste

Poor customer service

This risk is likely to arise because of failure to understand:

  1. why the customers buy from the business

  2. how they view the business

  3. what they expect from the business in terms of product quality, speed of delivery and value for money.

Early indications of potential reputation risks include

  • increasing levels of returns

  • customer complaints

Failure to innovate

A failure to innovate can damage the ability of the organisation to provide customers with what they want.

This could be in terms of products, price, service or other factors. 

The expectations of customers, suppliers, employees, shareholders and other stakeholders are likely to connect to a changing environment and a competitive business environment, so an organisation that does not innovate may well see itself falling behind very soon.

Breaking the law

As well as suffering legal penalties, a business may find that customers, suppliers and other business partners are less willing to deal with it if it breaks the law. 

For example breach of hygiene regulations will be a threat to any business selling food, since customers may fear that their health will be put at risk If they purchase products from the business. 

Breaches of health and safety regulations resulting in employees being put at risk may also do serious damage to reputation, since customers may believe that the business is prioritising profit over employee welfare and stop buying from it as a consequence.

Poor corporate governance

Poor corporate governance may also be a source of reputation risk. 

An example is a lack of board diversity, with the board having an exclusively male membership. 

The most serious consequences of this may be to demotivate employees and alienate customers.

Responding to reputation risk

When risks materialise that threaten an organisation's reputation, the organisation should act in a way that minimises the risk and the potential damage. 

The best course of action will depend upon the individual circumstances, including what it is the organisation has done, the likely impact on the organisation's reputation, the effect a damaged reputation may have on the organisation as a whole and the 'damage limitation' options available.

Increasingly, organisations are realising that ignoring the risk and not responding is unlikely to be effective.
 
By not addressing concerns directly, an organisation is likely to be seen as guilty of the accusations and also of not caring.