What Is Reputational Damage, How Does It Occur, and How To Prevent A Crisis?
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.
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 Meta 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.
Boeing 737 Max
Boeing 737 Max crash: In 2019, two Boeing 737 Max aircraft crashed in a couple of months due to technical problems. The crash killed 346 people, and an investigation was conducted into the planes’ safety.
Boeing’s reputation suffered a severe loss of sales and a decrease in its shares’ value.
In late 2022, the Securities and Exchange Commission (SEC) fined the airline and its former CEO $200 million for misleading statements.
Harvey Weinstein
Harvey Weinstein‘s case for sexual harassment: Former film producer serves 39 years in prison for sexual offenses.
The case started in 2017, triggering a series of entertainment sector complaints and making the #MeToo movement go viral.
The hashtag was shared on social media along with allegations of sexual harassment and assault.
Actress Alyssa Milano encouraged Twitter users to share their stories of victims of misogynistic behaviors:
‘If you have been sexually harassed or assaulted, please write ‘me too’ as a reply to this tweet.’
In each case, companies or persons involved suffered severe financial or legal consequences because of their harmful effects on their reputations.
Effects of reputational damage
When a company suffers reputational damage, customers lose trust in the brand, which can cause current customers to leave the company and prevent new customers from coming in.
Consequently, the company acknowledges the loss of sales and revenues.
Reputational damage may also affect the company’s stock price.
The share price may fall if the company’s brand value and/or revenue decreases.
How does reputational damage affect the different stakeholders?
Reputational damage can affect the stakeholders of a company in various ways:
- Customers: loss of trust in the company, also by leaving negative comments online, which affect the corporate reputation;
- Employees: workers may feel demotivated by the adverse effects on the company, which may affect their motivation and commitment.
They may also be concerned about the security of their jobs if the company is experiencing a drop in revenue;
- Investors: drop of confidence in the company and sale of shares, decreasing their price.
They may also worry about the adverse effects on the company’s profitability;
- Suppliers: they may have concerns about the company’s ability to pay the bills and fulfill its obligations.
Thus, trust in the company and the business relationship with it decrease;
- Regulatory authorities: regulators may impose penalties and fines on the company if it does not comply with law and regulation.
That may lead to the loss of trust and reputation of the company with the authorities.
In short, reputational damage can affect the company’s stakeholders in various ways.
Companies must take measures to properly handle any problems that arise and protect reputation to maintain a positive relationship with all stakeholders.
How to prevent reputational damage?
Preventing reputational damage is crucial to maintaining stakeholders’ trust and respect in a business.
Here are some steps that can help prevent reputational damage:
- Establishing corporate values & ethics: a business culture based upon ethical values and clear business principles is essential to maintain a company’s reputation.
Companies need to establish policies that strengthen their commitment to integrity and transparency;
- Crisis management: companies must be prepared to handle crises and proactively approach to address problems that may arise.
It involves a solid crisis plan, effective communication, and swift and effective actions to address the situation;
- Suppliers and partners assessment: companies must thoroughly assess their suppliers and partners to ensure they share the same values and ethical principles;
- Effective communication: transparent and effective communication with customers, employees, investors, and suppliers;
- Carefully handle data processing: protecting customer and employee privacy and securing information is essential.
According to software company Ping Identity, 81% of users would stop engaging with a brand after a data breach.
Preventing damage to digital reputation requires a proactive approach and an ongoing commitment to business ethics and transparency.
