Understanding the Impact of Reputational Risks on Your Business

Businesses face many types of risks in their daily operations. Companies' stability is directly related to how well they deal with troubles.

There are some risks, however, that are as unpredictable as the weather — and reputational risks are a great example of this. Insignificant stories or feedback on social media can turn into a "PR nightmare" for a company, which is difficult to predict even in the worst-case scenario. As a result, the business receives negative publicity, loses customers, and suffers losses in profits.

But there’s also good news. As with any aspect of business, brand image can be managed and damaging factors for your reputation can be preempted.

In this blog post, we’ll explore which issues require additional attention, and where to expect threats, and we will analyse some real case examples. We will also provide recommendations to protect your business.

What Are the Causes of Reputational Risks?

Before analysing the root causes, let's explain what risk means.

Reputational risks are various threats to the company that can harm its good name or cause a negative public perception. Such threats can arise as a result of various events or circumstances, for example:

1. Inefficient management systems and operational processes that have a "domino effect" on every aspect of a business. A company — especially a large one — must work as a coordinated mechanism, because otherwise it will inevitably make a lot of mistakes and cause dissatisfaction.
2. The negative reputation of top managers and persons representing the company. Behind every organisation and brand, there are decision-makers, and even if directors or business owners are not public figures and do not seek media attention, their actions may harm the company.
3. Poor customer service and inadequate staff training result in a negative client experience.
4. Low quality of services and products, which in turn can arise from many reasons, such as unreliable suppliers, outdated technologies and internal processes, etc. As a result, dissatisfied users refuse the company's services and leave negative feedback on social media.
5. Inability to meet the expectations of clients or business partners. You promised to deliver the package within 2 days, but the customer is waiting 2 weeks? Half of the dishes on your restaurant's menu are unavailable for ordering? Customers can't get through to the bank's call centre, which is supposed to be available 24/7? Such situations can cause dissatisfaction among users, and in the most severe case — a complete loss of trust in the company.
6. Inability to adapt to changes and moods of the audience. The world is changing rapidly, as are the demands on businesses. To stay relevant, it is necessary to update both your company's products and the ideas it releases into the public arena, or else your business will become a historical relic.  
7. Lack of overall risk management culture within the company. It should be understood that all types of risks are interrelated. For example, regulatory risks can cause damage to reputation (the business violated the requirements of the law and received negative coverage in the media).

Of course, this is not an exhaustive list of reasons that may cause reputational problems. Use LIGA UNITED to take into account all the factors that can harm the public image of your company. This reputational risk management system will provide maximum protection for your business so that any negative story in the media will not catch you by surprise.

Real-Life Examples of Reputational Risk

Even well-established businesses can face the devastating effects of reputational damage. The situation is exacerbated when companies ignore criticism or offer ill-conceived answers. Thus, it is crucial for businesses — regardless of their scale — to have reputational risk management strategies in place.  

Below, we discuss several infamous cases that led to significant losses for companies.

Gerald Ratner’s three bad jokes

The actions of a CEO are crucial. A successful public speech may attract new investors, deals, and clients.

But as the following example shows, the opposite is also true. In 1991, Ratners Group CEO Gerald Ratner gave a speech at the Institute of Directors. The event gathered the UK’s most prominent investors and the media. 

In an attempt to “spice up” his speech, Gerald made poor jokes about the quality of his company’s jewellery, referring to it as "total crap”. Such comments were not perceived as planned by clients, who lost interest in buying the products. As a result, Ratners Group lost over a billion US dollars at today’s rates, and Gerald was forced to resign his position as CEO.

Horsemeat scandal

Yet another common reputational risk is the quality of the product, as shown by the horsemeat scandal or “Horsegate”. 

The scandal broke out in Europe at the beginning of 2013 and continues to this day. It turned out that meat producers added horse meat and pork to their products, passing them off as 100% beef. This fact attracted media and public attention on January 15, 2013, when it was announced that horse DNA had been found in frozen beef burgers sold in some supermarkets in the UK and Ireland.

Products containing horse meat were supplied to UK supermarkets Tesco and Iceland, and Irish stores from the Aldi, Lidl and Dunnes Stores chains. Most French supermarkets (including Auchan) have also recalled suspicious products.

The UK became the centre of the scandal, as people in this country historically do not eat horse meat, unlike, for example, France or Belgium, where horse meat is considered a delicacy. The scandal led to the removal of tens of billions of burgers across the EU, and Tesco's market value dropped by €360m.

Up until today, Horsegate is one of the most infamous incidents in the food industry, which has provoked a huge discussion about food safety and the quality of the supply chain. Currently, the European Commission is developing additional rules for labelling meat products.

Dolce & Gabbana “chinese chopsticks” ad

When entering new markets, businesses need to be especially careful with their messages.

For example, in 2018, the Italian fashion brand Dolce & Gabbana was embroiled in a scandal. The company launched the #DGLovesChina ad campaign on social media, which was dedicated to the brand's show in Shanghai. The video, where an Asian model eats Italian dishes with chopsticks, caused outrage among users. They considered this image stereotypical, and the attempt to teach Asians to eat European dishes with chopsticks — as racist.

The videos were removed within a day, but this did not stop the indignation of social media users. As a result, the show was cancelled, and to this day the brand remains "non grata" on the Chinese market.

What Happens if a Business Loses Its Brand Reputation?

With an effective reputational risk management system and prompt response to negative reviews, the company can minimise the negative consequences for itself. However, reputational risks can have long-term and serious impacts on your business, such as:

• A drop in sales and profits.
• An outflow of customers and audience.
• Personnel outflow.
• Difficulties in finding new partners.
• Bankruptcy.

In today's business environment, reputational losses occur even more often and strike even more painfully. This is due to a change in the information habits of customers. Most of the audience now consumes information online.

In the UK, there are 57.6 million active social users as of 2022. 93% of customers look for reviews online before making a purchase and have an extraordinary level of trust in them.

Thus, now the company's reputation can be affected not only by the broadcast media. Now each of your customers has a voice, and an audience of millions can read about their experience.

In addition, online communication is extremely fast — and in a matter of hours, negative feedback can become "viral" and spread around the world. Your company should be ready for such a scenario and regularly monitor social networks. Use LIGA UNITED to never miss any mentions about your business. 

How Can Reputational Risks Be Managed?

Adverse impacts on a company could be greatly reduced with reputational risk management. In particular, the following steps are effective:

1. Identify and analyse the sources of risks

Make a list of all potential circumstances that could negatively affect the public image of your business. Next, analyse the probability of such events occurring. Can they be prevented? If the risk comes true — how harmful is its impact? Which steps would be most effective in this scenario?

2. Research the needs of your Partners, investors and customers

A common risk is that the business is not able to meet the expectations of stakeholders. That is why it is imperative to make every effort to provide exactly the quality of services or goods expected of you. Surveys and analysis of feedback from customers and companies can help with this task.

Set up monitoring in LIGA UNITED so you don't miss any mentions of your business.

3. Evaluate the effectiveness of your operations

Personnel management, internal communications, the quality of supply chains — any weak link in business can become a source of threats. To prevent them, it is necessary to constantly analyse internal and external processes in the company and take timely steps to fix errors.

4. Develop a risk management strategy

Today's business environment is extremely complex, and it is impossible to completely avoid negative impacts. However, if you have an action algorithm at hand, any risk can be minimised, or even used to your advantage. A successful strategy will consist of procedures that must be followed regularly to protect the company, as well as mechanisms for responding to risky situations.

For example, monitoring information about customers and counterparties can protect against toxic business relationships. This tool is available in LIGA UNITED.

5. Constantly improve protection mechanisms

There is no such thing as too much caution in the business world, and if there is any step that can protect a company, it should be implemented today. Staff training, equipment replacement, and additional software are all examples of steps that help protect the brand image.

6. Monitor information

Various risks arise every day and therefore require constant monitoring and proactive actions. In particular, it is worth monitoring the activities of counterparties and clients, the competitive environment, and reviews in the media. The completeness and timeliness of this data will allow you to react and adapt your actions in time.

7. Use automated risk management systems

The amount of information in the world is increasing every day, and it is becoming increasingly difficult to analyse it manually. Fortunately, there are automated systems that keep track of all critical aspects of your business. LIGA UNITED combines three information streams at once — verification of companies within AML/KYC procedures, adverse media screening and court cases. Order demo access to see all the benefits for yourself.