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What is a Reputation Risk?

By Dale Marshall
Updated: Feb 03, 2024

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.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
By RoyalSpyder — On Nov 06, 2014

I like how the article makes note of rumors being a major cause of significant damage to any company. After all, when you're in the business, word of mouth from customers is as helpful as it is harmful.

Using one example, more than often, if a restaurant has bad service and ends up getting closed down, it's not just because customers weren't satisfied and decided not to come back.

After all, don't forget that by writing reviews and telling their friends all about it, they're eliminating the chance of having any other potential customers coming back.

In fact, all this talk about reputation risk reminds me of when I used to live in Bolingbrook, and there was a place called Bacci's Pizza.

At first, the quality of the pizza was absolutely amazing. Not to mention that the slices were pretty huge, and you could get a free drink. However, overtime, the quality of the pizza went down, and soon enough, the restaurant eventually closed. Not just because of the bad pizza quality, but word also got around that the restaurant had gone down in the last few years.

Overall, not only is this a very interesting article about reputation risk(s), but it also shows what it truly takes to run a company. Perhaps this article would also be some good advice to one who wants to start their own business in the future.

By Euroxati — On Nov 05, 2014

@Viranty - I definitely agree with you there. However, based on my experience, one example of something that can lead to reputation risk, is if a company fails to meet the expected standards of a product.

Obviously, no matter how much people enjoy a product, on the other hand, when it's all said and done, the purpose of a company is to make money. When a product is being sold, it's obvious that they have specific goals in mind, and want to reach a certain profit by a specific amount of time.

If the product doesn't sell that well, or fails to reach a specific goal, not only could the business go down, but their reputation might be damaged.

For example, does anyone remember Vanilla Coke? To put it shortly, it was a brand of coca cola with a hint of vanilla in it. Despite it being quite popular, it eventually went out of stores, because it didn't reach the sales it was supposed to. Reputation risk isn't just about people liking what you're selling, but it's about how well your products sell as well.

By Viranty — On Nov 04, 2014

Based on my experience, reputation risk can happen due to many reasons, especially if it relates to food. More than often, if the manufacturers put in cheap ingredients, then a product might be recalled, and due to all of the bad rep that the company receives, they definitely have a reputation risk on their hands.

For example, a few years ago, I bought a brand of guacamole from the store, and while it appeared to be just like any other brand, I quickly learned that it was nothing more than a rip off. In fact, if you were to look at the ingredients, then you would notice that the guacamole didn't even have any avocados in it.

Apparently, the rumors about this spread real fast, because a few weeks down the road, I heard that the product was recalled. Obviously, this isn't always the case, but poor ingredients in a product can definitely be one of of the many examples of things that eventually lead to a reputation risk.

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