Reputational Risk Management | 2 mins read

The 3 Components of Reputational Risk Management

the 3 components of reputational risk management
Jin Hyun

By Jin Hyun

Understanding Reputational Risk

In a digital world where everyone and anyone can express their opinions in seconds, reputational risk remains a leading concern for businesses. Put simply, reputational risk sums up the potential for bad press or publicity, which can lead to revenue loss. These risks can occur sporadically and have roll-on effects that impact online search results and reviews long term.

While there are various sources of threats to an organization's reputation and consumer perception, the 6 most common causes of reputational risks include the following.

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  • Company Leaders, Staff, and CEOs

The face of the company cannot be separated from the company itself. Therefore, if the CEO isn't well-liked or has a less than desirable public perception, the entire company could be associated with a negative reputation. This could impact shareholder value, investments, and of course, revenue.

Alongside a negatively perceived CEO, employees can just as easily damage business reputation via misconduct or poor customer service. From there, the incident could go viral and lead to widespread backlash.

  • Bad Press

The Internet always remembers and negative media attention due to lawsuits, penalties, or poor treatment of staff can sit in the Google search results for years. This bad press can also emerge from poorly received company decisions, such as acquisitions or the shutting down of factory locations.

  • Social Media

While social media can boost a company's profile, clientele, and exposure when effectively utilized, it can also be a major catalyst for reputational damage. If staff members or CEOs publish problematic posts publicly, the action can affect the entire reputation of the business.

  • Loss or Breach of Data

The mishandling or breach of customer data can not only lead to additional costs, but it can also have a long-lasting reputational impact. With so many customers entrusting companies with their sensitive information (such as bank account details and social security numbers) the management and security of this data are crucial.

  • Changes to Regulations or Policies

As standards change, federal compliance laws may alter existing regulations without warning. Perhaps a new policy has put restrictions on what a company can sell or how they can sell it. Either way, these restriction changes can damage a company's reputation and force clients to take their business elsewhere.

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3 Components of Reputational Risk Management

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Successfully addressing reputational risks boils down to identifying threats and effectively managing them to reduce damage. From there, it's all about constructing a solid enterprise risk management plan to mitigate future issues and improve the company's image.

When it comes to reputational risk management, there are three lines of defense that can be adopted by a company - including strategic, cultural, and operational alignment. Explore the 3 strategies below to discover how to keep this business disruption at bay.

1. Strategic Alignment

The strategic alignment component contains 5 key areas - the first of these starts at the top with effective board oversight. Board oversight is crucial when it comes to policy, execution, strategy, and transparent reporting as this alignment and cohesive leadership is often the first line of defense against reputational damage.

The second phase of strategic alignment incorporates the integration of risk into strategy setting and business planning. Here, it's important for the company to understand that reputational risk is both material and strategic. This means that the risk management strategy needs to be in sync with the organization's crisis management plans, while also being aligned with the company's culture and operations.

Thirdly, it's vital for the board of directors and leadership team to prioritize improving stakeholder experiences, as high-functioning relationships in this sector can help sustain marketplace reputation.

In the next part of strategic alignment, companies must look at how they effectively communicate in terms of their brand and image.

Finally, devising a crisis response strategy ties all elements of reputational risk management together. With the right framework to handle a reputational disruption, key company players can quickly jump into action with clearly pre-assigned processes, roles, and plans.

2. Cultural Alignment

A company's culture can make or break a brand's reputation. This means corporate values and internal controls must be carefully honed and shaped to devise a strong organizational culture from top to bottom.

Additionally, all internal actions should be in compliance with the law and company policies. Compliance violations can wreak havoc on a company's reputation, which means board members must implement and prioritize top-notch internal controls over compliance matters.

3. Operational Alignment

Control breakdowns within the public eye can be embarrassing and equally damaging. Bearing this in mind, an airtight control environment is paramount as it provides a stable foundation to a fortified culture that values integrity and ethics.

Again, it's essentially up to the board to oversee operational alignment. It is also important to note that risk sensing should be a part of the crisis management strategy as this allows a company to quickly identify potential threats through social media outlets and internal data.

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