What is a Reputation Risk?

Reputation risk is damage to the value of a company’s brand name caused by negative public opinion. It can happen for a number of reasons, and can have a debilitating effect on shareholder value. It can occur as a result of publicized problems at the company or as the result of rumors spread about it. Another source of reputation risk is problems with the company’s products.

Any business enterprise puts a great deal of effort into establishing and maintaining its good name. Large companies together spend hundreds of millions of dollars on “image advertising,” or general advertising aimed at promoting the company’s public image. Oil companies, for example, routinely create broadcast and print ads promoting their environmentally responsible projects and generally presenting themselves as good corporate citizens.

When a company earns a good reputation, it will usually go to great lengths to protect it. This is often beneficial to consumers, because one of the easiest ways a company can suffer reputation risk is by providing poor customer service. There are companies in all industries, for example, which will repair or replace their malfunctioning products for consumers, regardless of cause and no matter how old. Some won’t even require proof of purchase. They do this to underscore the fact that they stand behind their products, and generally secure deep customer loyalty when they make such exchanges or repairs.

Reputation risk can be caused by negative reports about a company’s business practices. For example, Arthur Andersen was one of the world’s five largest accountancy and auditing firms, and in 2001, one of its major clients was Enron, a Texas-based energy company. Enron collapsed late that year due to a number of questionable and illegal financial practices, and Arthur Andersen was subsequently convicted of obstruction of justice for its part in the scandal. The reputation damage to Arthur Andersen was immediate and catastrophic, and its clients fled in droves. It made no difference that the conviction was overturned by the Supreme Court in 2005 — by then, it had lost all its customers. Although never formally dissolved as a partnership, there’s little chance that Arthur Anderson will ever again be a viable business.

Problems with a company’s products is also a reputation risk. A famous case occurred in the United States in the fall of 1982, when seven people in the Chicago area died after taking poisoned capsules of Tylenol, a popular over-the-counter painkiller. The brand was ultimately able to recover, but the company lost well over $100 million US Dollars (USD) in managing the crisis, including recalling more than 31 million bottles of the product from retail locations and hospitals nationwide. More recently, Toyota, the automaker, has suffered severe reputation risk due to several well-publicized safety problems that allegedly caused several fatal accidents. It’s the potential of this risk to their reputational integrity that leads company executives to take any measures necessary to avoid a product recall.

Unfounded rumors are another type of reputation risk that can cause significant damage. These are often caused by people upset over the company’s practices, policies or products — employees, current or former, and customers, for instance. Reputation protection is a growing Internet industry, with Internet security firms promising to monitor a company’s reputation and keep it scrubbed clean; if rumors start to spread about the company on a social network, for example, the reputation defender will step in and stop the rumor, and remove any negative references to the client from web pages.