A company’s reputation cannot be seen, touched or assigned a balance sheet value. It is a perception, a feeling that keeps customers coming back and bringing others if the experience is that good. One reputation-damaging event can vaporize this perception, eroding a company’s customer base and calling into question its integrity by all stakeholders. Thus, potential for damage to a company’s reputation is a strategic risk as it adds to the uncertainty of a company’s ability to meet strategic goals and objectives.
Executive Summary"The right thing to do must be explicitly outlined by the one in charge. This goes for company integrity, too," write a trio of risk consultants from Hanover Stone Partners, underscoring the responsibilities of managements and boards to clearly communicate their companies' values. Noting that integrity is the bedrock of a company's reputation, they identify damage to reputation as a strategic risk, outline the bottom-line consequences of good and bad reputations, describe potential reputational hot spots for insurers, and stress the need to preserve a solid reputation as an element of strategic planning.
As reflected in various case studies, failed reputations often stem from a weak or flawed company culture, which ultimately is the result of failed governance. Lack of awareness or concern about integrity and reputation, or taking them for granted, will cause reputation risk to become a systemic problem and a strategic risk. Thus, the company’s strategy must focus on how to foster and maintain a culture that supports how best to interact with stakeholders, earn customers’ allegiance and be appreciated in the marketplace.
Specifically, a company’s ability to do business in an effective way depends in large part on its reputation, or on how the stakeholders view the trustworthiness of the company and the integrity of management and the board of directors. Reputation risk is how the performance of a company is affected by negative publicity and damaged stakeholder opinion.