What is 'Reputational Risk'

Reputational risk is 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 need to be socially responsible and environmentally conscious to avoid or minimize reputational 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 potential 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 egregious fraud or massive trading losses disclosed by some of the world's biggest financial institutions. In an increasingly globalized environment, reputational risk can arise even in a peripheral region far away from home base.
 
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, gas and oil companies have been increasingly targeted by activists because of the perceived damage to the environment caused by their extraction activities.

Brand Damage at Wells Fargo

Reputational risk exploded into full view in 2016 when the scandal involving the opening of millions of unauthorized accounts by retail bankers (and encouraged or coerced by certain supervisors) was exposed at Wells Fargo. The CEO, John Stumpf, and others were forced out or fired; regulators subjected the bank to fines and penalties; and a number of large customers reduced, suspended, or discontinued altogether doing business with the bank. Wells Fargo's reputation was tarnished.

RELATED TERMS
  1. Business Risk

    The possibility that a company will have lower than anticipated ...
  2. Crisis Management Coverage

    Insurance coverage designed to help a business limit the negative ...
  3. Hard Loan

    A foreign loan that must be paid in the currency of a nation ...
  4. Country Risk

    A collection of risks associated with investing in a foreign ...
  5. Market Risk

    Market risk is the possibility of an investor experiencing losses ...
  6. Business Recovery Risk

    A company's exposure to loss as a result of damage to its ability ...
Related Articles
  1. Personal Finance

    Risk Management Framework (RMF): An Overview

    A company must identify the type of risks it is taking, as well as measure, report on, and set systems in place to manage and limit, those risks.
  2. Personal Finance

    7 Best Companies To Have On Your Resume

    Some companies just have that Ivy League shine; that great reputation with which anyone wants to be associated. Here are seven best companies to have on your resume, and where they're hiring. ...
  3. Small Business

    How To Avoid Risk In Your Practice

    Understanding the risks and the potential for losses in your practice keeps you one step ahead.
  4. Insights

    How Wells Fargo Became One Of the The Biggest Banks In America

    How does Wells Fargo make money? They lend it out at a higher rate than they borrow it at. Simple, right? But the real story is how proficient they are at it.
  5. Investing

    Wells Fargo Q4 Earnings, Revenue Miss Amid Scandal

    The bank suffered its fifth straight quarter of declining profits on higher legal fees fueled by the bogus account scandal.
  6. Investing

    10 Risks That Every Stock Faces

    As an investor, the best thing you can do is to know the risks before you buy in. Find out about 10 common stock risks you should look out for.
  7. Managing Wealth

    Top 7 Ways to Manage Business Risks

    Risk management is a form of insurance in itself for small business owners. Here are seven steps to implement a plan.
  8. Investing

    The Risks Associated with Common Investments

    Investing inherently involves some risk. Here are some of the different types of investment risks.
  9. Insights

    Wells Fargo Credit Card Applications Plunge 55%

    After a scandal over aggressive cross-selling, Wells Fargo saw a 55% drop in credit card applications.
  10. Investing

    Buffett Likely to Back Wells Fargo’s Beleaguered Board

    Berkshire Hathaway, Wells Fargo’s largest shareholder, vowed to support the bank’s scandal-ridden board at the company’s shareholder meeting.
RELATED FAQS
  1. What are the primary sources of market risk?

    Learn about market risk and the four primary sources of market risk including equity, interest rate, foreign exchange and ... Read Answer >>
  2. How can companies reduce internal and external business risk?

    Understand the difference between internal business risk and external business risk. Learn how a company can reduce each ... Read Answer >>
  3. What is the difference between risk avoidance and risk reduction?

    Learn what risk avoidance and risk reduction are, what the differences between the two are, and some techniques investors ... Read Answer >>
  4. What safeguards exist to prevent the abuse of power in a market economy?

    Find out why free market theorists believe that natural safeguards prevent power from centralizing in a capitalist system, ... Read Answer >>
Hot Definitions
  1. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  2. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  3. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  4. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  5. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  6. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
Trading Center