Reputational Risk

A strong reputation is valuable. It attracts customers, talented staff and investors, and it can allow a company to charge higher prices. When that reputation is damaged, the financial consequences can be severe.

Reputational damage can arise from many sources, including product failures or safety problems, scandals involving executives or employees, data breaches, poor treatment of customers or workers, environmental damage, unethical business practices and association with controversial people or activities. Social media can spread negative news very quickly.

For example, a bank found to have opened accounts for customers without their permission might suffer lasting damage to its reputation, leading customers to leave, regulators to impose fines and restrictions, and its share price to fall.

Reputational risk is often a consequence of other risks, such as operational, legal or compliance failures. It is difficult to measure but can be managed through strong governance, ethical culture, careful selection of business partners, transparent communication and a prepared plan for responding to crises.