Definition of reputational risk

A company’s reputation is perhaps its most valuable asset. Reputational risk is the possible loss of the organisation’s reputational capital.  Imagine that the company has an account similar to a bank account that they are either filling up or depleting.  Every time the company does something good, its reputational capital account goes up; every time the company does something bad, or is accused of doing something bad, the account goes down.

The commercial bank examination, which is a supervisory manual published by the Federal Reserve Board in the US to provide guidance in bank inspections, defines reputational risk as the potential loss in reputational capital based on either real or perceived losses in reputational capital. In fact, the manual states very clearly that a company can lose its reputation whether allegations are true or not.

Some corporations try to understand what the potential risks are to the company’s reputation and either prepare crisis management responses or solutions.

Many of the leading experts in the field of communication and strategy believe that being able to assess and manage a company’s reputational risk is one way to attain a competitive edge, especially in an increasingly negative global business environment as shown in polls describing people's feelings toward business, such as the Edelman Trust Barometer.

Example

The pharmaceutical company, Merck knew that side effects from the drug Vioxx could lead to heart problems in some patients. In fact, after the company faced law suits related to the complications from taking this drug, a memo was discovered showing that executives within the company knew about the side effects and had warned senior managers about the dangers associated with taking Vioxx in some patients.

These warnings were ignored. If the company had understood the risk to its reputation, it would have understood that in the long term, the money it was making selling the drug was not worth the potential loss in reputational capital to the organisation as a whole. [1]

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