Reputation Risk

From Open Risk Manual

Definition

Reputation Risk (also Reputational Risk) is the Risk of immediate financial loss and/or future value loss (Franchise Risk) as a result of changing perceptions towards the firm by its clients and/or other stakeholders

Nature of the risk

Reputation Risk is part of the overall Business Risk category which captures risks that are less tangible than risks associated with firm's Balance Sheet. It is more specifically part of Franchise Risk, that is, risks affecting the perception of a Business as an ongoing franchise

Examples

Reputation risk arises as a secondary effect from a variety of other Risk Event realisations:

  • major market, credit or insurance losses that question the firm's ability to manage risks
  • legal or compliance related fines and losses that question the firm's integrity and values
  • accounting scandals
  • failed strategic initiatives (acquisitions, business strategies) that question the firm's ability to exercise its options
  • key person risks (departure of respected individuals)
  • ESG Risks

Issues and Challenges

  • There are no obvious ways to measure reputation risk
  • Frameworks aiming to manage reputation risk invariably raise the awkward question of a firm's Risk Appetite for reputation loss

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