Reputational risk is a risk of loss resulting from damages to a firm's reputation, in lost revenue; increased operating, capital, or regulatory costs; or destruction of shareholder value, consequent to an adverse or potentially criminal event even if the company is not found guilty".
A company’s reputation is probably its most valuable asset. The loss of its reputation is a risk that is hard to put a quantitative number to or to voice in a business case. There is a great paper on this subject - The Impact of Reputation on Market Value – by Simon Cole – which details the reputational risk issues and also how much some company's reputation affects the market capitalisation of the business. The problem is that is hard to value your current reputation and therefore account for what a bad reputation would do to the business – there are a few surveys out there that estimate that around 75% of a company’s value is from intangibles whilst other surveys estimate that brand and reputation account for 40% of a company’s value.
For some types of companies such as food and beverage companies, this value may well be more than 75% of the company's market value, especially where large-scale product recalls are involved. Examples of reputational risk can be found by looking at the recent problems that one of the world’s leading mobile telephone companies has encountered along with one of Germany’s leading car manufacturers (we won't name names). So, whilst we can’t tell you about an exact value for reputational risk we would urge clients to consider whether a contamination or spoilage issue at your site, product reliability, or adverse publicity (for any reason) could affect: Investors/shareholders investing in the business. Lenders still lending or withdrawing credit lines and the consequential effect on the cost of capital. The loss of key employees. The loss of clients. Make it harder to win new business/clients.
If you answer yes to any of the above, you should probably ask yourself can you or your business afford to take this risk?