Why businesses need to get serious about reputational risk

The success of any business transformation hinges on reputation. While this could be overlooked, some boardrooms are starting to create robust strategies 


Company reputations are in the spotlight like never before. From having a voice on the important issues of the day, such as #MeToo, Black Lives Matter and the environment, to dealing with social media commentary and responding to third-party attacks such as cybercrime, building and preserving a good reputation is key to business success.

But when it comes to business transformation, reputational risk can be forgotten. Why? Some executives are focused on the bottom line, but don’t realise reputation is intrinsically linked to value, while others may think about the risks too late and then it becomes a reactive, rather than proactive, strategy. 

In its 2020 Reputational Risk Management Survey Report, Willis Towers Watson found 68 per cent of clients have no framework in place for reputational risk. And yet 86 per cent are concerned about loss of income and a reduced customer base due to reputational risk.

At its heart, a good reputation means a more healthy organisation. Investors want to feel good about the businesses they are buying and they also know that one with a bad reputation is worth less. Employees are more likely to stay when they are happy with their employer’s actions. And customers will only stay loyal if they enjoy every aspect of a brand.

“All three groups are becoming more conscious of reputation. It’s tough to build a good reputation and easy to lose it,” says Jonathan Armstrong, partner at Cordery Compliance, part of LexisNexis.

Importance of reputational risk

The new media landscape is fast paced and hard to control. More and more young people are getting their news from social media, where a single tweet or post has the potential to cause significant reputational damage to a firm. The danger can come via an influencer or a disgruntled customer. But it can also come from the company itself, perhaps in a social media campaign or the way it responds to customers. 

Burger King’s tweet that “Women belong in the kitchen” on International Women’s Day faced a backlash on social media and was considered a whopper of a blunder. According to Duncan Gallagher, senior director and head of crisis for Europe, Middle East and Africa at Edelman, it also shows that no company is immune from making mistakes. 

“Burger King normally has a great reputation on social media, but this was tone deaf. It could have an impact. On sales? No. But reputation? Yes. And then it’s just this ‘drip, drop, drip’ and you’re on the backfoot. It will mean more focus on Burger King, it could affect future campaigns and there could be more scrutiny on, say, how it treats women in the workplace,” says Gallagher.

An easy way out of the perils of social media could be to not engage and stay silent. But that is also a major risk. The most successful firms must have a voice.

Armstrong notes: “Previously, reputation was often about not doing things. But corporations are now expected to step in, for example on Black Lives Matters, to fill voids left by governments.”

Perils of ignoring reputational risk

Failing to address reputational risk properly during business transformation can have many consequences, the worst being the transformation fails and the company ultimately collapses.

According to Gallagher, the success of any transformation hinges on reputation. “Whether it’s a restructuring or a refocusing, reputational risk needs to be brought in earlier, ideally at the planning stage. Then you can have a coherent team working to mitigate risk. It doesn’t matter if you have amazing products, if you fail to communicate the transformation properly to all stakeholders, your reputation can take a hit.”

He adds that last year reputations were tarnished when firms had to adapt during the pandemic. “In the early days of the COVID crisis, some companies didn’t do a good job at reassuring staff about being furloughed and there were ethical questions about which firms repaid furlough cash. None of them destroyed their reputations, but the ones that looked after their community and their staff are the ones that will benefit over the long term,” he says.

Garret Gaughan, head of the global property and casualty hub at Willis Towers Watson, says firms need to get better at connecting the different teams that look after reputation. “Corporate comms look after the brand, risk management looks after mitigating and transferring risk, and then finance looks at the financial and operational risks. These functions tend to operate in isolation or communicate infrequently around a risk that is dynamic and has real-time velocity,” he explains.

Gaughan believes things are improving, though. Boards are starting to appoint one of their members to specifically look after reputation and some are now linking elements of board-level remuneration to reputational impact.

He points out there are significant rewards for firms that create and communicate a coherent strategy: “Apollo, the private equity house, recently saw an uplift in its share price to the tune of $800 million because it had clearly articulated to the markets its reputational risk management strategy.”

Key reputational risks to watch out for

Key risks to be mindful of in 2021 include climate change, sustainable development, safety standards (in the wake of the Grenfell fire inquiry), China, Brexit, cybersecurity and the future of work after COVID. There is likely to be a big focus on China in the run-up to the G7 summit in June, which is taking place in Cornwall. 

The spotlight is likely to shift to climate change in November, when the United Nations Climate Change Conference, COP26, is held in Glasgow. There may be scrutiny of which organisations have signed up to the net-zero pledge and are actually sticking to it.

Post-COVID there will be multiple decisions for business executives to make. These include whether to allow flexible working and if so how; how to monitor employee productivity and their wellbeing, particularly if they’re working from home; and decisions on foreign business travel.

Armstrong highlights some issues that companies have fallen foul of recently. Google took a hit to its reputation when a black researcher said she was fired after criticising the company’s diversity efforts. There have also been calls to boycott fashion retailer Boohoo over modern slavery allegations regarding its supply chain, while dating app Grindr was fined €10 million by the Norwegian Data Protection Authority in February for sharing highly sensitive information and not complying with the General Data Protection Regulation. 

As a final point, it’s worth reflecting on the knock-on effects of a damaged reputation. It is estimated that Uber spent half a billion dollars trying to restore its reputation after coming under attack due to its tax affairs and treatment of workers, which led to threats or actions to withdraw their licences in some cities, including London. It has just announced a climbdown on the status of drivers in the UK and will now pay them a minimum wage, holiday pay and pensions. It’s a move that will surely cost them millions more.