What is reputational damage?
Reputational damage is the negative impact on an organization’s reputation caused by actions or inactions.
Unethical practices, poor customer service, negative reviews, or online defamation can cause it.
Reputational damage can have severe consequences for a company, including lower customer loyalty and trust, declining sales, and even legal action.
A study by the World Economic Forum estimated that reputation accounts for more than 25% of a company’s market value.
Organizations should take proactive measures to prevent reputational damage to ensure ethical operation and customer satisfaction.
How does reputational damage occur?
Online reputation damage occurs when the negative perception of the audience affects a company’s reputation.
It can be anything from scandal or a lawsuit to poor customer service or unethical business practices.
In today’s digital age, reputational damage can spread quickly and widely, and businesses can’t afford to repair the damage.
Causes of reputational damage
These are some of the reasons that can lead to reputational damage:
- Inappropriate employee behavior, such as offensive comments or discrimination;
- Defective products or poor quality services that do not meet the customer expectations;
- Breaches of contract or promises to clients or suppliers;
- Public relations crisis, e.g., inadequate response to crises or natural disasters;
- Illegitimate or unethical business practices, such as fraud or scams;
- Conflicts with government authorities or breaches of the financial compliance regulations and laws;
- Problems with suppliers and business partners, which affect the company’s ability to fulfill its obligations;
- Financial problems, like not paying suppliers or staff;
- Negative posts or criticism on social media or mass media, which go viral and impact the image of the company.
Companies must comprehend how the damage occurs and take measures to mitigate the reputational risk.
According to the World Economic Forum, 87% of executives rate reputational risk as more critical than other risks faced by the company.
Signs of reputational damage
Various signs can indicate that the company or person has suffered reputational damage:
- Decrease in sales and revenue: if a company has a good reputation, customers trust them. While if reputation is damaged, customers may choose to buy the products or services of competitors;
- Increased complaints and claims: customers may express their frustration via complaints, criticism on social media, or even legal claims;
- Loss of business opportunities: successful companies often get new business opportunities through referrals or recommendations from satisfied clients;
- Impact on the employee’s emotions: the employees may be discouraged or feel lost if the company has a poor reputation or is affected by scandals.
If you see one of these indicators in your business, addressing and repairing the reputational damage is necessary.
Examples of reputational damage
The following headings outline several examples of reputational damage.
Cambridge Analytica
Cambridge Analytica scandal: In 2018, the political consulting company Cambridge Analytica illegally obtained the personal data of more than 50 million Facebook users.
This case led to a drop in the value of Facebook shares, a loss of trust among users, and a government investigation.
The Federal Trade Commission (FTC) fined Facebook $5 billion for bad processing practices of users’ data.
