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7 Reputational Risk Examples
John Spacey, September 26, 2015 updated on November 13, 2018
Reputational risk is the chance of a loss due to damage or a decline in your reputation. Business reputation can be damaged by actions that are perceived to be dishonest, disrespectful or incompetent. In some cases, a decline in reputation can result in large financial losses stemming from difficulty raising capital, loss of sales and increased costs such as fines or legal fees. The following are a few examples of reputational risks.
1. AccountingA company finds an error in its accounting and need to restate its results for the past 2 years. The stock price crashes and the company loses all credibility with investors. They have difficulty raising capital and their cost of capital rises dramatically. The accounting scandal generates waves of negative publicity that result in a decline in sales.
2. Information TechnologyA retailer experiences a security incident in which an attacker publishes their customer's private information such as name, address and credit card details. They face lawsuits, regulatory inquiries and a severe drop in sales as customers close their accounts or avoid their website.
3. QualityAn electronics company releases a phone that gains a reputation for being easy to break. Sales and the value of the brand decline. The quality of the next model of phone improves but sales falter because the brand is widely viewed as cheap and unreliable.
4. ProjectAn IT company wins a major contract to implement a new pension administration system for a government. The project comes in dramatically late and over budget. As a result, the company is effectively banned from further business with the government as news of the failed project is much talked about amongst the government's senior administrators and leaders. The government also refuses to make final payment for the project resulting in years of legal wrangling and bad publicity.
5. Customer ServiceA customer's wheelchair is damaged in luggage handling by an airline. The airline has an inappropriate response that is recorded by the customer. The customer manages to get the public interested in the story and the airline suffers a loss of reputation. Sales on some of its most competitive routes decline and the airline is forced to further discount its prices.
6. Executive ManagementAn executive of a fashion company says something insulting about overweight customers while giving a television interview resulting in a customer backlash and declining sales.
7. OperationsA bank's systems go down during a stock market crash and its customers can't trade their stocks for several critical hours. The crash gains much publicity and regulators investigate the bank. The outage becomes a key selling point for competitors who claim to have more stable systems. Customers close their accounts and regulators impose fines.
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