Reputational Risk Definition | Types of Reputational Risk

Reputational Risk Management

Trust is the foundation on which companies build their relationships with all stakeholders, from company workers to consumers. Without this bond of respect, employees will leave their positions, investors will look for other projects to finance and customers will opt for competition. Hence the importance of reputational risks management as a measure to maintain the delicate loyalty of stakeholders.

As Warren Buffett put it, “It takes 20 years to build a good corporate reputation and only five minutes to ruin it.” A fragility that nowadays requires greater protection , because although in the 80s, experts argued that 70% of a company’s value was based on its tangible elements and 30% depended on intangible assets, this time Percentage ratio has been inverted to 30% -70% , taking a leading role corporate reputation .

In fact, according to the Managing Reputation Risk and Reward report, published by Ellen Hexter and Daniel S. Bayer, more than eight in 10 managers say their companies are making a major effort to control reputational risk.

Greater importance has this strategic point in conscious companies and corporate social responsibility, where trust makes more sense: the values, culture and purpose of these organizations represent the added value that differentiates them from the competition and attracts the stakeholders, so damaging this reputation directly affects the relationship with stakeholders.

Concept and Consequences of Reputational Risk

According to the study Corporate Reputation, Introduction to Reputational Risk Management, prepared by the IE Business School and Corporate Reputation Forum, reputational risk is “the impact, favorable or unfavorable, that a particular event or event may cause in the reputation of the company.”

However, other experts focus the concept on adverse effects. Thus, Leslie A. Thompson defines it as ” the risk associated with a negative public opinion or perception, in relation to a loss of confidence or the rupture of a relationship”, while for the Financial Stability Institute “reputational risk Refers to the possibility of a negative public opinion regarding institutional practices, whether true or false, which results in a decrease in the customer base, onerous litigation and / or a drop in income.”

Types of Reputational Risk

The Chartered Institute of Management Consultants (CIMC) classifies reputational risk in the following types:

• Cultural risks: they are those that are derived from the practices and policies of the company, whether legal (such as non-compliance) or ethical (by moving away from company codes of conduct). For example, an unfair dismissal or an ERE in a company.
• Management risks: they are born as a consequence of a bad decision made by the company and its effects can be devastating. One of the most talked about cases of recent months is that of Samsung and its failed terminal Note 7.
• External risks: the origin of the situation is caused by the intervention of factors other than the company: natural disasters, computer viruses, breaking into a new competitor … This are what happened with the attack on privacy in Yahoo’s mail.

Effects of loss of confidence

Regarding the consequences of poor reputational risk management, Marcos Vizcaíno points out in his paper Reputation Risk: theoretical review and approximation to its valuation the following negative effects for the company:

• Loss of trust and loyalty of employees.
• Impossibility to attract and retain the best talent.
• Decreased consumer satisfaction, which translates into a drop in sales.
• Impairment of relationships with investors and suppliers, generating a higher cost of capital.
• Greater difficulty in dealing with crisis situations, which increases the expenses of the company.
• Need to increase investments in campaigns to repair damage.

How to Manage reputational Risk?

In dealing with reputational risk, the most widespread practice in companies is to include this aspect within enterprise risk management (ERM) systems. These are protocols that allow early identification of reputational risks, assess their possible effects and monitor their evolution, so that the company can “ensure that the risks it assumes are within its ‘risk appetite’ and Which in addition, these risks are managed in a holistic way, “according to the report Corporate Reputation: Introduction to the management of reputational risks.

To achieve this, there are several models of MRA focused on reputational risk, such as Eccles et al., Larkin, Villafane & Asociados, Price Waterhouse Coopers, Deloitte, Ernst & Young and CIMA. However, in all of them, the following control parameters are considered:

• Develop adequate risk terminology.
• Specify the current reputation of the company.
• Set the level of risk acceptable to the organization.
• Make a list of possible risks.
• Define risk priorities.
• Designate the person or committee responsible for coordinating the ERM and those repo
• Designate the person or committee responsible for coordinating the ERM and those responsible for monitoring and acting on each type of risk.
• Design protocols for action in each case.
• Ensure that the company has sufficient resources to deal with the risk.