Reputation Risk Series – Part 2: Sources and Impacts of Reputation Risk

by Antonius Alijoyo
Chairperson, ERMA

What are the sources of reputation risk?
The vast majority reputation risks stem from what companies produce or provide, how their staff behave, how the company behaves and what its guiding principles are. Some of the sources of reputation risk are included below:

• Product or service faults or shortcomings (sometimes made more prominent by television programmes and newspaper features that invite and publicise consumer grievances);
• Customers selecting alternative products due to an increased focus on buying from ethical suppliers;
  Increased targeting by pressure groups resulting in adverse publicity;
• Failure to meet the higher standards of governance imposed by regulators in the wake of the high-profile market failures of the past decade;
• Failure to meet legal obligations;
• Security breaches, particularly Information Technology related;
• Default by a third party upon which the company depends;
  Loss of sales arising from customers’ buying ‘agility’, exhibited by their readiness and ability to switch suppliers more than ever before;
• Increased willingness of governments to intervene in business on issues of public concern;
• Faster dissemination of ‘bad news’ through global news and media channels;
• Exposure of staff mistakes or misdeeds;
• Detrimental policies, exposure of unethical practices, bad planning or mishandling of a crisis;
• Failure to achieve promised growth targets or declared strategy milestones.

What is the impact of reputation risk?
According to the research made by IPSOS Public Affairs (2008), there is a strong correlation between an organization’s reputation and its ability to successfully market to consumers. By success, it means that an organization’s marketing communications will be more cost-effective, consumers will be more willing to try products marketed under the company’s corporate brand, and the organization will also have a greater ability to charge its customers a premium. Marketing effectiveness is the bridge between corporate reputation and Return on Investment.

Some examples of the impact of reputation risks:

• Coca-Cola’s reputation was seriously tarnished when more than 100 people – including children – fell ill in Belgium in 1999 after drinking its products. The Belgium Health Ministry prohibited the sale of Coca-Cola drinks and 15 million cans and bottles of Coca-Cola drinks were recalled .
• Dell’s reputation was impacted when it was reported that faulty batteries were causing their laptop computers to self-ignite. At the time of the incident, analysts reported that the recall of 4.1m laptops would set the IT hardware company back something in the region of $400m (£211m) .
• China’s reputation was seriously impacted when China milk scandal has alarmed Southeast Asian countries. China is the major trading partner of Southeast Asian nations. Chinese goods are popular and accessible in the region. It is not surprising to learn that Chinese milk products which are contaminated by melamine have already been sold in local markets. How did governments react to the issue? Chinese milk products were scrutinized, strictly regulated and banned. Even the popular white rabbit candy was listed as a dangerous food item. Health agencies have published a list of safe products from China.
• In Indonesia, Bakrie Group’s reputation was impacted when LAPINDO case was unable to be settled immediately. The neverending disputes on LAPINDO case has put Bakrie group exposed to a very wide community, not only in Indonesia but also at regional sphere. The impact gets wider to the rest of Bakrie Group (One of the large conglomerates in Indonesia). As people start questioning their sincerety to solve the problems, people becomes very critical and suspicious to other Bakrie’s corporate actions such as the acquisition attempt of Bumi Resources Tbk.

Contributed by Antonius Alijoyo
Editor’s note:
The Reputation Risk Series is a three series article on reputation risk. For your reading convenience, we have divided the whole topic into several sub-topics that covers a specific area on reputation risk. To obtain a full understanding on the series focus, we strongly suggest that you read all parts of the series.