Wikipedia defines reputational risk, often called reputation risk, as a risk of loss resulting from damages to a firm’s reputation, manifesting in lost revenue; increased operating, capital, or regulatory costs; or destruction of shareholder value, consequent to an adverse or potentially criminal event—even if the company is not found guilty.

Adverse events typically associated with reputation risk include ethics, safety, security, sustainability, quality, and innovation. Reputational risk can be a matter of corporate trust.

I believe that reputation risk should be defined in four different ways. Doing this is crucial so that you can decide on what mitigating strategies will be needed to prevent and respond to reputation risk.

Definitions create the lenses through which we look at the world. As the renowned psychologist Abraham Maslow said, “If the only tool you have is a hammer, you tend to treat everything as a nail.”

I start every seminar and presentation with definitions to establish a common framework through which I can work with my audience. Various definitions describe reputation and reputation risk, each serving a slightly different purpose. These need to be further explored so that you can decide on how you will manage reputation.

The classic definition is that reputation is all that is generally believed about your character, respectability, credit, integrity, or notoriety (Latin: reputatio – reckoning). But it is not enough to guide us.

I also use these definitions to give it more meaning:

• Reputation is a state of mind – A set of memories, perceptions, and opinions that reside in your stakeholders’ consciousness.
• Reputation is the net result of interactions – All the experiences, impressions, beliefs, feelings, and knowledge stakeholders have about a company.

What then is reputation management? It is a consulting discipline that recognizes reputation as both an asset and a risk. The definition I work with says that reputation management is the building, sustaining, and protection of an organization’s good name, generating positive feedback from stakeholders and resulting in the attainment of strategic and financial objectives. This definition implies a clear financial link between reputation management efforts and the bottom line.

However, reputation is also the greatest risk that an organization can face. (Think of a run on a bank).

As Warren Buffet has said: “It can take 20 years to build a good reputation, and only five minutes to destroy it.”

We, therefore, have to consider the following definitions as part of our approach to building and protecting reputation:

Definition 1 (Stakeholder Reputation Risk Perspective): Reputation risk emerges when the reasonable expectations of stakeholders about an organization’s performance and behavior are not met. This has been listed in some surveys as the most dangerous reputation risk of all. It involves taking a look at each stakeholder’s needs and expectations, matching the drivers of an organization’s reputation, and minimizing the gaps that exist.

Definition 2 (Asset Perspective): Some studies show that reputation makes up between 55 – 73% of a company’s asset value. In this instance, reputation risk is defined as the loss of earnings that occur in a situation of negative public opinion. It normally results in loss of sales, share value decreases, and breakdown of relationships. Many crises have led to stock price decreases and impacts in other areas of the business.

Definition 3 (Incident Perspective): Reputation risk is the exposure incurred from unexpected incidents or from an unanticipated response to the institution’s initiatives, actions, or day-to-day activities. This definition implies that reputation risk is the risk that an activity, action, or stance performed or taken by a company or its officials will impair its image in the community and/or the long-term trust placed in the organization by its stakeholders, resulting in the loss of business and/or legal action. This is closely linked with the asset perspective.

Definition 4 (Compliance Perspective): Reputation risk can also be defined and viewed as the loss or negative publicity that can arise from failure to meet regulatory or legal obligations.

From the above definitions, it must be clear that essentially all risks and all related components of an organization potentially impact reputation. This implies that reputation needs to be systemically managed if an organization wants to extract maximum value from it.

Takeaway Lessons:

• Tip: It is essential that you define reputation risk in these four ways in your business, as each definition implies a different mitigation strategy and potential danger. My various training seminars explore these strategies in detail.