A company’s reputation is not just an abstract concept but an important factor that influences the success or failure of a business. Its value makes companies around the world invest resources into creating and maintaining a positive image. In this article, we discuss the concept of reputational risks, their sources and consequences, and explore the basics of reputation management.
Marina Shabalina CEO of ADVES Agency
Table of Contents
What is a Company’s Reputation?
A company’s reputation is the perception it creates among other market players and people, reflecting the history of its interactions with them. Unlike the image, which embodies how the company should be seen by its target audience, reputation represents a more objective and, therefore, a much more truthful image.
Creating a Company’s Image and Reputation
An image is created after studying the market, analyzing the target audience’s opinion about the brand’s products, and taking into account customer needs. The development of an image includes creating a promotional concept, defining the visual code and style, as well as selecting channels and tools for engaging with the audience. An image can be “rebuilt” within a relatively short period of several months by rebranding and redirecting people to a new perception of the brand.
Reputation, however, is a more constant attribute, which takes much more time to form. Today, this concept is inseparable from the “digital” component—online reputation, which is shaped in the digital environment. It is not just the collection of all the media platforms where a business is present, but the entire array of mentions. Building a reputation involves not only status interviews, news, and reviews on feedback platforms, but also working with negativity and constantly monitoring search engine results. It is a comprehensive set of measures that could be said to “sell in the long run”: potential partners are usually studied, and it’s unlikely anyone would want to start a collaboration with a company that has a lot of negative mentions in search results.
Reputation directly affects key indicators such as the total number of clients, as well as the company’s overall evaluation: most managers believe reputation accounts for more than half of a company’s value. This is most clearly demonstrated by the stock market and venture capital investments, where even a startup’s current value includes expectations based not only on sales performance but also on how the audience and investors perceive it.
Having a positive reputation helps establish strong, long-term relationships with clients and partners, create an attractive investment background, and ensures better opportunities when it comes to recruiting employees. This sounds simple enough, but it doesn’t take into account the flip side—the risks that could ruin even a perfectly designed and implemented business plan.
What Are Reputational Risks?
Reputational risks for a company are the likelihood of a negative shift in public opinion about it. These risks accompany virtually any activity and can have the most significant consequences, from which recovery is sometimes impossible.
Types of Reputational Risks
Reputational risks for an organization can be divided into two types: internal, which are caused by processes occurring within the company, and external, which arise from processes and phenomena outside the specific business. Internal risks include, for example, data leaks, internal political excesses, emergencies at production sites, while external risks include unsuccessful advertising campaigns, employees’ scandalous public behavior, negative employer reviews in the media, and others.
What Actions Can Lead to Reputational Risks?
A good reputation on the market is a company’s main asset. It is built over years, but can be destroyed in just a few days. Reputational risks arise when the actions of the company or its employees provoke a negative reaction from clients, partners, or the public.
Sources of Reputational Risk:
- Low product or service quality: Clients quickly spread negative reviews, especially on social media. E.g., a scandal involving a defective batch of goods that led to widespread complaints.
- Unethical behavior of employees: Even a single incident can harm the company’s image. E.g., a public conflict between an employee and a client that went viral.
- Violation of the law: Fines, lawsuits, or corruption charges undermine trust. E.g., tax evasion or failure to comply with environmental regulations.
- Non-transparent communication: Hiding information or insincerity leads to distrust. E.g., concealing delivery issues that resulted in missed deadlines.
- Crisis situations: Poor crisis management worsens the consequences. E.g., a delayed response to a client data breach.
Example of Reputational Risk
One of the most striking examples of the destructive power of reputational risks is the so-called Dieselgate scandal, involving Volkswagen’s engine manipulations. In 2015, it was revealed in the media that over 11 million diesel cars worldwide were equipped with software that drastically understated harmful emissions. The scale of the fraud cost the company almost 40% of its market capitalization and resulted in fines exceeding €31 billion.
Consequences of Reputational Risks
Sometimes the damage may seem purely reputational, but it can lead to boycotts or even attempts at “cancelling” the brand. Historical examples include the controversial Burger King’s ambiguous slogans and other instances that show the consequences of chasing creativity without thinking about the potential fallout. Sometimes, even simple words can undo years of hard work on building a reputation. Examples include Elon Musk’s ambiguous gestures and accusations against rescuers, Jeff Bezos’ claims about his space flight being “paid for” by his company’s employees, and various statements by politicians, athletes, and celebrities. The list can go on.
Each reputational risk carries a threat that can overturn all the company’s efforts, and in exceptional cases, lead to severe consequences. For example:
- Loss of clients: Negative reviews and scandals turn away existing and potential clients.
- Profit decline: A decrease in sales due to a tarnished image.
- Worsened relations with partners: Partners may refuse to collaborate.
- Stock price drop: Especially critical for public companies.
- Loss of employee trust: Internal scandals reduce employee loyalty.
How to Improve Your Company’s Reputation: Tips
Reputation is something that can and should be worked on. A well-thought-out approach in this area allows you to build strong relationships with clients and the media, mitigate negativity, and effectively communicate information. Reputation management is a set of actions aimed at creating and maintaining a favorable opinion about the company’s personal brand, its products, or services.
The first step is to assess reputational risks. For example, analyzing reviews, monitoring social media, and tracking search engine results can help identify weak points where reputational risks might arise and prevent potential crises.
Reputational and image risks can occur on different levels, from product quality to employee behavior. If actions are not taken in time, the consequences can be severe, and restoring the company’s reputation may require significant resources. Reputational promotion should be carried out in all directions, allowing for the quick identification of risks and addressing existing negativity. One of the key strategies in this work is SERM – Search Engine Reputation Management, which includes monitoring and influencing negative search results through various tools, such as search engine optimization, media relations, and social media management.
ORM (Online Reputation Management) allows you to influence information across the entire web, not just search engines, focusing on creating and enhancing web identities while maximizing positive content. Social media reputation management (SMRM) techniques are used to monitor and develop the company’s reputation within social media, in contrast to Social Media Marketing (SMM), which focuses on increasing sales. Working together, these tools help reduce reputational risk factors, push negativity off the first pages of search results, and establish a strong foundation for media development, whether for a business or a personal brand.
Reputation management and handling reputational risks are of particular importance in maintaining and protecting the company’s or individual’s image. A positive image, supported by real-life interactions with the company and positive mentions in the media, creates a solid foundation for growth and attracting new clients, strengthening the brand, and reducing reputational risks.
It is notable that the online reputation management market is growing, and by 2031, it is projected to reach $700 million. As practice shows, investing in one’s reputation is just as important as increasing competencies or expanding production, making reputation one of the key elements of a company’s development.
Source reference: General Director magazine