Reputational risk is the possibility that an organization's brand will be damaged. A firm's reputation can be impaired 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 sales 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 reputational 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. Another possibility is to enhance the governance controls of the organization, to keep objectionable activities from ever occurring in the first place. The firm can also have a system in place to respond rapidly to any damaging events that may arise.