Reputation risk is the possibility that an organization's brand will be damaged. A firm's reputation can be damaged in a number of ways, including the following:
- By management actions. For example, management decides not to recall a product, which then causes injuries to a number of customers.
- By employee actions. For example, an employee goes on a rant against a customer during a customer service call.
- By the actions of business partners. For example, a supplier is accused of employing children in its factories.
When an organization's reputation is damaged, it can lose massive amounts of customer goodwill, resulting in a steep decline in revenues and market capitalization. Possible outcomes include the wholesale replacement of management, sale of the business, or rebranding under a new corporate name.
It can be quite difficult to guard against reputation risk, since problems can arise from completely unanticipated areas. A business can mitigate the problem by engaging in large amounts of charitable activities, community events, and environmentally friendly activities to build stakeholder goodwill. It can also have a system in place to respond rapidly to any damaging events that may arise.