What is 'Reputational Risk'
A threat or danger to the good name or standing of a business or entity. Reputational risk can occur through a number of ways: directly as the result of the actions of the company itself; indirectly due to the actions of an employee or employees; or tangentially through other peripheral parties, such as joint venture partners or suppliers. In addition to having good governance practices and transparency, companies also need to be socially responsible and environmentally conscious to avoid reputational risk.
Also known as "reputation risk."
BREAKING DOWN 'Reputational Risk'
Reputational risk is a hidden danger that can pose a threat to the survival of the biggest and best-run companies. It can often wipe out millions or billions of dollars in market capitalization or lost revenues and can occasionally result in a change at the uppermost levels of management.
The biggest problem with reputational risk is that it can literally erupt out of nowhere. Reputational risk can also arise from the actions of errant employees, such as the massive trading losses disclosed by some of the world's biggest financial institutions from time to time. In an increasingly globalized environment, reputational risk can arise even in a peripheral region.
In some instances, reputational risk can be mitigated through prompt damage control measures, which is essential in this age of instant communication and social media networks. In other instances, this risk can be more insidious and last for years. For example, Canadian energy companies that are extracting oil from the Alberta tar sands have been increasingly targeted by activists because of the perceived damage to the environment caused by their oil-extraction activities.