Reputational risk is the potential risk that negative publicity regarding an institution’s business practices, whether true or not, will cause a decline in the customer base, costly litigation, or revenue reductions.
Is reputation everything? In some cases the answer is “YES, IT IS!” Johnson & Johnson very effectively handled a poison scare after a disturbed man began tampering with Tylenol bottles and placing poison in them. Johnson & Johnson ordered a US wide recall and re-introduced the product later. They were widely acclaimed on how they handled the product recall and re-introduction.
Can you imagine an on-line tax preparation firm that has hundreds of thousands of names on its server and the web site is hacked? This business would — or at least should — be gone within minutes.
Can you imagine a rumor spread about a bank that might fail? What happens? There is a run on a bank. In one instance a bank manager reported to the police that a person on the inside had embezzled money and pushed for prosecution. That bank lost 8% of its deposits over the next several days.
How important is reputation to your business? Ask your customers. Use a quality group of customers and proposed “hypothetical” publicly disclosed problems. If what appears to you (the insider) to be relatively minor problems cause an adverse reaction in 5% or more of your customer base, then your reputation is very important.
Have a team assess your weak points; have a group initiate or identify a Public Information Officer (PIO) who is associated with the firm or your advertising agency, if they specialize in this type of “crisis communication” and begin role playing. Use several “what if” scenarios and test them on your customers again. This will help you assess your weak points and take measures to eliminate them. Through trial and error you will get the PIO’s message correct. With professional assistance in crisis communication you will get to the correct answers faster.
Why is this a due diligence issue? Because any case in which you face risk or civil liability for negligence actions is a due diligence issue.
What could be more important than to protect than your reputation? And you protect your reputation through proper exercise of due diligence.