Reputational risk can be a major threat to a company’s reputation.
But what is the definition of reputational risk, what are some real life examples of how wrong it can go, and what can be done to prevent or mitigate it?
That’s what today’s blog post will be all about – let’s dive in!
In this article
What is reputational risk?
Reputational risk can be defined as a threat that can lead to negative public perception of a company’s business practices, and can be caused by internal practices or by external circumstances. Reputational damage can have dramatic consequences for any company and can lead to regulatory sanctions, lack of trust, public outrage and, in some cases, massive financial losses.
Why is it important to know about reputational risk?
There are several factors that can lead to reputational risk. These can be caused internally or externally:
Internal risk factors
Company practice:
The company’s practices can cause reputational risk. This could be the introduction of a controversial policy, the launch of a faulty product, legal issues, or actions that customers or the public in general perceives as unethical.
Actions by an employee:
Damage to a company’s reputation can also be caused by the actions of teams or individual employees. An example of this could be a wrongly phrased piece of communication that is interpreted the wrong way by recipients. Later in this blog post, we will see a real-life example of how bad that can go.
External risk factors
Actions by partners of the company:
Reputational risk can also be attributed to a third party. If a company has outsourced activities to a partner that acts with misconduct, this can affect the company, even if the third party operates independently.
Other external factors:
Reputational risk is not always predictable or controllable. External factors, such as environmental disasters, data breaches, or similar events that are caused outside of the company’s control can also lead to damage to the company’s reputation.
Reputational risk real life examples: How wrong it can go
History is full of examples of companies that have felt the public’s outrage and the stock markets reaction over mistakes or misconduct. Let’s look at some real life examples of different types of reputational crises – caused by the company, employees, partners or external factors.
Example 1: H&M stock tanks after launch of inappropriate hoodie
In 2018, the Swedish clothing retailer H&M faced backlash on a grand scale when it launched its ‘Coolest monkey in the jungle’ hoodie. The hoodie was worn by a black child model and was criticized for featuring racist slurs. After going viral across the globe, personalities such as pop star The Weeknd stated that they would decline to work with the company in the future.
H&M responded by apologizing, pulling the product from its stores, and created a global head of diversity and inclusivity position to prevent a similar incident from occurring again. The incident not only impacted H&Ms goodwill, but was punished by the market – H&M’sstock dropped to its lowest in 9 years.
Example 2: Adidas employee makes inappropriate email subject line
In 2017, sportswear giant Adidas sent out an email to participants of the Boston Marathon. The subject line read ‘Congrats, you survived the Boston Marathon!’. Whether intentional or not, the sentence was seen as a reference to the 2013 Boston Marathon bombing in which three people died.
Adidas made a statement to TIME in which they apologized for the email. “We are incredibly sorry. Clearly, there was no thought given to the insensitive email subject line we sent Tuesday,”. The reputational impact of the incident is unclear, but it’s probably safe to say that Adidas email marketers received training in how not to write subject lines in the future.
Example 3: Stock plunges after global outage
In July 2024, the American cybersecurity company CrowdStrike suffered a massive IT outage. The outage severely affected several users of the CrowdStrike cybersecurity software, and caused more than 8 million computers to crash, leading to massive infrastructure disruptions in airports, banks, hospitals and other industries across the globe.
CrowdStrike took responsibility for the global outage. However, CrowdStrike’s reputation as a safe cybersecurity provider suffered massively – the company’s share price plunged 40 percent over the next two weeks, wiping out more around $25 billion of market value.
How can reputational risk be mitigated?
As we have learned, reputational risk can be a serious threat to a company’s existence. So how can the risk be mitigated and damage prevented? The answer is reputational risk management which involves both decreasing the risk of reputational damage and the implementation of processes that prepare the company for mitigating the impact in case a backlash is inevitable.
Response strategies to mitigate impact in case of bad publicity
Though less likely if reputational risk management measures are implemented, any organization can become the target of a public backlash. However, the severity of the reputational impact can be influenced by the organization’s response. Here’s some guidelines for how to act in case of crisis:
1. Take responsibility
The public and stakeholders want to see the organization be held accountable. That’s why a statement should be issued in which the organization apologizes and accepts responsibility. Once the blame has been placed, the organization can move forward with explaining what happened and how the problem will be corrected.
2. Communicate transparently
If a company has made a mistake and the damage is done, the best way to mitigate the reputational impact is to communicate to all stakeholders quickly and clearly. This ensures that speculation is kept at a minimum. New information about the impact of the incident should be shared as soon as possible after it is discovered. Optimally, organizations should proactively communicate the mistake before it hits the news to demonstrate transparency and honesty.
3. Make corrective changes
Once responsibility is accepted and all stakeholders are informed about the impact, corrective changes should be made. As in the H&M incident, products are pulled in an instant, demonstrating the company’s willingness to do what they can to fix the mistake.
Preventative measures to protect a company’s reputation
1. Lead ethically
Not all PR crises are due to unethical conduct, but those that are could have been prevented by having cultivated ethical behavior throughout the organization. If the public knows that an organization is led ethically, chances are they will perceive the incident as a standalone mistake – not as a symbol of systematic unethical behavior.
2. Train employees
To ensure that the ethical guidelines put forward by leadership are enforced throughout the organization, employees should receive training in how to adhere to codes of conduct. This can greatly reduce reputational risk. Employees should also be trained in how they should act in case of a crisis. A dedicated crisis response team could be set up that will be prepared to act in a crisis scenario.
3. Assess and monitor risks
By making a reputational risk assessment, companies can learn where they are most likely to find threats to their reputation. For many organizations, social media can be a hotbed for criticism that can ultimately evolve into a PR crisis. Through the implementation of risk monitoring software such as Brandwatch, companies can identify these threats and address them before they spiral out of control.
4. Ensure a high level of brand compliance
In a large organization, it can be difficult to ensure all employees work compliantly. This can lead to errors and mistakes that can ultimately lead to reputational damage if an employee sends out a piece of communication that is interpreted in the wrong way – as in the case with Adidas’ Boston Marathon email.
A tool like Templafy enables companies to automate documents and validate content to make sure communication is compliant and streamlined – something that can drastically increase brand compliance and decrease reputational risk factors.
Protect your brand with Templafy
Reputational risk is everywhere and managing threats is more important than ever. That all starts with having a solid governance structure that ensures clear, compliant communication. Book a demo now and discover how Templafy helps enterprises stay compliant to protect their brand’s reputation.
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