Four Ways to Define Reputational Risk

Check your Own Definitions

Wikipedia defines Reputational risk, often called reputation risk, as a risk of loss resulting from damages to a firm’s reputation, 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. The renowned psychologist, Abraham Maslow said that if the only thing you have is a hammer, you tend to treat everything as a nail.

I start every seminar and presentation with definitions, so that I can establish a common framework through which I can work with my audience. In particular there are a number of definitions to 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 that give it more meaning:

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

So what then is Reputation Management? It is a consulting discipline that realizes that Reputation is both an asset and a risk. The definition that I therefore like to 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. It implies that there is a definite financial link between the work we do in reputation management 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 have said: ” It can take twenty 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 organisation‘s performance and behaviour are not met. This has been listed in some surveys as the most dangerous reputation risk of all. It essentially involves taking a look at each stakeholders needs and expectations, matching the drivers of an organization 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 a crises have led to stock price decreases and impact in other areas of the business.

Definition 3: (Incident Perspective)

Reputation Risk is the exposure incurred from unexpected incidents, or from 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, and 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 on reputation. This implies that reputation needs to be systemically managed if an organization wants to extract maximum value from it.

Takeway 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 explores these strategies in detail.