Reputation risk is the threat to the profitability or sustainability of a business or other entity that is caused by unfavorable public perception of the organization or its products or services. Reputation risk management is a component of reputation management, which seeks to shape the public perception of an organization or a brand.
Business sustainability relies on the careful management and coordination of environmental, social and financial demands and concerns to ensure responsible, ethical and ongoing success. Anything that impinges upon any of those elements can create reputation risk, especially in these days of social media when experiences and opinions are shared swiftly and widely online.
Reputation risk is strongly correlated with conduct risk, which is threat that results directly from an organization’s actions. Although reputation risk can also result from issues that are beyond the control of the organization, the most important element of reputation management is ensuring scrupulous business practices.
To some extent, reputation risk is an expansion of how an enterprise thinks about its problems and failures, whether actual or potential. Traditionally, for example, the effects of a product recall might be evaluated in terms of the expected profit that had been lost or the cost of repairs or replacements. However, that failure is likely to have broader effects, such as a loss of confidence in the company's products that impacts future sales. Similarly, the effects of a data breach are likely to be far-reaching.