Defining reputation risk

• Reputation risk is one of the categories of risk used in organisations. 
• It was identified as a risk category by Turnbull and a number of events in various parts of the world have highlighted the importance of this risk. 
• Reputation risk concerns any kind of deterioration in the way in which the organisation is perceived, usually, but not exclusively, from the point of view of external stakeholders. 
• The cause of such deterioration may be due to irregular behaviour, compliance failure or similar, but in any event, the effect is an aspect of corporate behaviour below that expected by one or more stakeholder. 
• When the ‘disappointed’ stakeholder has contractual power over the organisation, the cost of the reputation risk may be material.

Effects of poor reputation on financial situation

There are several potential effects of reputation risk on an affected organisation. 

1. When more than one stakeholder group has reason to question the otherwise good reputation of an organisation, the effect can be a downward spiral leading to a general lack of confidence which, in turn, can have unfortunate financial effects. 

2. In particular, however, reputation risk is likely to affect one or more of the organisation’s interactions with resource providers, product buyers, investors or auditors/regulators.

3. Resource provision (linked to resource dependency theory) may affect recruitment, financing or the ability to obtain other inputs such as (in extremis) real estate, stock or intellectual capital. 

4. Within product markets, damage to reputation can reduce confidence among customers leading to reduced sales values and volumes and, in extreme cases, boycotts. 

5. Investor confidence is important in public companies where any reputation risk is likely to be reflected in market value. 

6. Finally, auditors, representing the interests of shareholders, would have reason to exercise increased scrutiny if, say, there are problems with issues of trust in a company. It would be a similar situation if the affected organisation were in an industry subject to high levels of regulation.