In a time where the Internet and social media are shaping the way we communicate, having a plan to mitigate reputational risk is mandatory for any organization hoping to thrive in the 21st century. Organizations that do not take a proactive approach to protecting their brand from online saboteurs and the various offline threats that may damage their reputation could find themselves facing a reputational crisis that will severely impact their profitability, or possibly put them out of business.

What is Reputational Risk?

Jim DeLoach, Managing Director of global management consulting firm Protiviti, defines reputational risk as “the current and prospective impact on earnings and enterprise value arising from negative stakeholder opinion.” Thus, an organization’s reputation represents the perception of its honesty and integrity. Even a false rumor or inaccurate perception perpetuated by competitors, dissatisfied customers or anyone with an ax to grind can cause irreparable harm to an organization’s brand.

While reputational damage may result from external events, the organization’s own actions – whether intentional or unintentional – that are perceived as dishonest, misleading disrespectful or incompetent can also lead to a reputational or brand crisis of epic proportions. For example:

• An organization uncovers a significant accounting error that causes it to restate its financial results for the previous three years. Investors subsequently lose confidence and begin to doubt the leadership team’s credibility, resulting in a dramatic decrease in the stock price. The negative publicity also creates a substantial decline in revenues.
• As a cost-cutting measure, a company with a solid reputation for producing high-quality products releases a poorly made item that fails to meet the expectations of its loyal customer base. Despite reworking the product to improve the quality, customers continue to perceive it as cheap and unreliable and refuse to purchase it.
• A business fails to provide an adequate response to a customer who is injured by a defective product. The customer contacts the media, which launches an investigation and discovers a slew of similar incidents. The media outlet releases a story that garners negative attention, causing many long-term customers to boycott the company’s products.
• During a televised interview to promote a new line of “plus-size” clothing, the CEO of a fashion company makes an insulting comment about overweight individuals. Despite issuing a public apology, customers avoid buying the items, and the company’s other product lines also experience a decline in sales.
• After landing its first major government contract to install a new computer system for a government agency, an IT company fails to complete the project on time and within budget. The organization is effectively banned from doing further business with the government, and the negative fallout leads to several long-term private sector customers refusing to accept bids for future contracts.

Developing an Effective Strategy for Mitigating Reputational Risk

As the legendary football coach Vince Lombardi once said, “The best defense is a good offense.” When applied to the task of managing reputational risk, the most effective strategies implement a proactive approach and include a carefully crafted crisis response plan. Elements of a solid reputational risk management strategy include:

• Making an investment in your organization’s reputation: Making an ongoing commitment to building your organization’s reputation can mitigate the damage when a crisis occurs. You can achieve this by assessing the current status of your reputation, which entails surveying your most valued stakeholders to determine any deficiencies. You can then address these areas by integrating them into your traditional risk frameworks.
• Establishing the tone at the top: Ensure that your organizational leaders make reputational risk management a high priority. Members of the board of directors and C-suite executives must support the risk management plan and devote adequate resources across all functions, departments and teams. Some organizations have taken the additional step of setting up a special committee under the board of directors to address ethics and compliance-related issues such as reputational risk management and hold the board accountable.
• Conducting a comprehensive reputational risk assessment: You likely already conduct regular assessments to identify areas of vulnerability such as third-party liability, conflicts of interest and corruption. Your evaluation should also include reputational risk. A thorough, well-executed reputational assessment encompasses both internal and external factors; begin by performing an audit of all the potential reputational risks your organization could face. Then, rank the risks to determine the areas where you need to devote the bulk of your available resources.
• Developing a reporting and evaluation system: You will need a reliable monitoring method for your reputational risk management efforts. Implementing a systematic process to obtain regular feedback from your stakeholders can help you assess your current reputational risk “temperature” and modify your program as needed. You should also assign members of your compliance team to monitor all forms of media (especially social media) to identify new areas of concern in the early stages.
• Crafting a crisis management plan: Even if you make every effort to mitigate your risk, there is no guarantee that a reputational crisis will not occur – and when it does, prompt action is imperative to minimize the damage. While it is impossible to anticipate every potential threat, your risk assessment should have placed you in a position where you’re able to respond to the most likely “worst-case scenarios.” The most effective crisis management responses occur when the organization gets out in front of the situation by addressing it promptly and honestly. When executed properly, it might even be possible to gain something positive from a negative event.

A Case Study in Effective Reputational Risk Management: The Tylenol Tampering Incident

Johnson & Johnson set the gold standard for how to respond to a potentially devastating reputational crisis. In the early 1980s, several individuals died after consuming capsules of poisoned Extra-Strength Tylenol, which was then J & J’s biggest seller. The company took the unprecedented step of recalling millions of bottles of Tylenol capsules and offering to replace them for free with a safer tablet form of the product.

Johnson & Johnson subsequently reissued Tylenol capsules in a tamper-proof package, supporting the relaunch with an extensive media campaign that emphasized the company’s commitment to consumer safety. Based on the ongoing success of the Tylenol Extra-Strength capsules, it’s clear that J & J’s proactive response managed to preserve its reputation.