Your company’s reputation is one of its greatest assets. But what happens if something tarnishes that reputation? Your food makes a customer sick. Your products cause injury. Your website is hacked, revealing your customers’ personal details. Whether or not it’s your fault, reputational damage can hurt your bottom line.
The Severity of Reputational Damage
Reputation damage can arise from a range of issues, including security, health, safety and ethical failures. After an incident, companies may face litigation. Even if litigation does not occur, a loss of revenue is possible, and the company may have a difficult time regaining public trust.
You’re probably already familiar with several recent cases of reputational damage. After all, these incidents attract public scrutiny – which is exactly what makes them so serious.
- Defective Takata airbags lead to serious safety concerns. The Associated Press reports that a Florida woman is the 21st person to have died due to faulty Takata airbags, which can rupture and release shrapnel during a crash. Bloomberg reports that the recall scandal has caused Takata’s market value to plunge from 400 billion yen in 2007 to around 2 billion yen in 2017. CNBC reports that the recall also had a negative impact on Honda Motor, one of the automakers that used the airbags in its vehicles.
- Chipotle’s problems with food poisoning have made headlines. Gizmodo reports that the restaurant chain saw its total net income drop 44 percent and it sales drop 15 percent after an E. coli outbreak in 2015. This decline is even worse when you take into account the fact that Chipotle had been experiencing growth just one year earlier.
- Equifax suffered a data breach that affected around 145 million individuals. USA Today reports that the hack cost the credit-monitoring firm $87.5 million in the third quarter of 2017. Compared to the same period one year earlier, the company’s net income dropped 27 percent.
- Wells Fargo became embroiled in scandal after people learned that employees were opening unauthorized accounts in customers’ names. The Motley Fool reports that in addition to the $185 million paid in fines, the bank also suffered high legal fees and, compared to three other multitrillion-dollar banks, poor stock performance.
The Role of Social Media
In an increasingly connected world, any negative experience a customer has with your business has the potential to go viral and be seen by thousands, even millions, of people. Your company’s social media presence needs to be constantly monitored, and it helps to have a plan in place to quickly address any criticism or negative customer experiences.
Managing Reputational Risk
As with all types of risk, a risk management plan is needed to control the possible impact of reputational damage.
- Assess potential areas of risks. If you operate a restaurant, for example, food poisoning should be a top concern. If you make any type of consumer product, safety issues should be addressed. Some companies may need to consider environmental impacts. Any company that handles customer data needs to consider cyber risks, and all companies need to address ethical issues.
- Maintain high standards and company values. As the saying goes, your company is only as strong as its weakest link. Make sure that employees at all levels are maintaining standards and values. Also assess suppliers and partners carefully, as anything they do can impact the way customers think about you.
- Respond to incidents in a way that regains trust. When companies try to hide incidents of wrongdoing, outrage increases. Although the initial cost may be steep, the faster the company can make amends and move on from the incident, the better. A company that responds especially well may even be seen in a better light as a result.
- Transfer risk when possible with insurance. Different types of insurance will address different types of reputational risk. Cyber liability insurance, for example, can help companies respond to hacks and data breaches. There are also standalone policies that cover reputational risk.
Are you concerned about reputational risk? Talk to your Higginbotham agent about your potential exposures and the best ways to mitigate them.