Reputational damage
{{Short description|Type of financial loss}}
{{for|the concept in diplomacy|Reputational damage (diplomacy)}}
{{Financial risk types}}
Reputational damage is the loss to financial capital, social capital and/or market share resulting from damage to an organization's reputation. This is often measured in lost revenue, increased operating, capital or regulatory costs, or destruction of shareholder value.{{Cite journal|last1=Heery|first1=Edmund|last2=Noon|first2=Mike|date=2017|title=A Dictionary of Human Resource Management|journal=Oxford Reference|doi=10.1093/acref/9780191827822.001.0001}} Ethics violations, safety issues, security issues, a lack of sustainability, poor quality, and lack of or unethical innovation can all cause reputational damage if they become known.{{Citation|last=Walter|first=Ingo|chapter=Reputational Risk|date=2011-12-13|pages=103–123|publisher=John Wiley & Sons, Inc.|language=en|doi=10.1002/9781118266298.ch6|isbn=9781118266298|title=Finance Ethics}}
Reputational damage can result from an adverse or potentially criminal event, regardless of whether the company is directly responsible for said event (as was the case of the Chicago Tylenol murders in 1982).{{Citation|last1=Hindson|first1=Alex|title=Managing reputational risk – Case studies|date=2009|url=http://link.springer.com/10.1007/978-3-642-01630-1_10|work=Reputation Capital|pages=143–160|editor-last=Klewes|editor-first=Joachim|place=Berlin, Heidelberg|publisher=Springer Berlin Heidelberg|language=en|doi=10.1007/978-3-642-01630-1_10|isbn=978-3-642-01629-5|access-date=2021-04-05|last2=Louisot|first2=Jean-Paul|editor2-last=Wreschniok|editor2-first=Robert|url-access=subscription}} Extreme cases may lead to large financial losses{{Cite news|date=2007-02-01|title=Reputation and Its Risks|work=Harvard Business Review|url=https://hbr.org/2007/02/reputation-and-its-risks|access-date=2021-04-05|issn=0017-8012}} or bankruptcy, as per the case of Arthur Andersen.{{Cite web|url=https://www.wsj.com/articles/SB1023409436545200|title=Arthur Andersen's Fall From Grace Is a Sad Tale of Greed and Miscues|first1=Ken|last1=Brown|first2=Ianthe Jeanne|last2=DuganStaff|date=2002|website=Wall Street Journal|language=en-US|access-date=2019-04-22}}
Reputation is recorded as an intangible asset in a company's financial records.{{Cite web|url=https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf|title=Intangible assets|last=AASB 138|date=2018|access-date=2019-05-10}} Hence, damage to a firm's reputation has financial repercussions.{{Cite book|title=Rethinking reputational risk : How to manage the risks that can ruin your business, your reputation and you.|last1=Fitzsimmons|first1=Anthony|last2=Atkins|first2=Derek|publisher=Kogan Page, Limited|year=2017|isbn=9780749477363|pages=45}} Minor issues can be amplified by external social processes which lead to even more severe impacts on a firm's position.{{Cite journal|last=Power|first=Michael|date=18 February 2017|title=The risk management of everything|url=http://www.webhelp.co.za/web/fileadmin/user_upload/02._The_risk_management_of_everything.pdf|journal=The Journal of Risk Finance|volume=5|issue=3|pages=58–65|doi=10.1108/eb023001}}
Examples of reputational damage
= Wells Fargo =
Wells Fargo was exposed for opening millions of unauthorized bank accounts in 2016. This was done by the firm's retail bankers, who were encouraged or coerced by some supervisors.Levine, Matt (9 September 2016). [https://www.bloomberg.com/opinion/articles/2016-09-09/wells-fargo-opened-a-couple-million-fake-accounts "Wells Fargo Opened a Couple Million Fake Accounts"]. Bloomberg. Retrieved 6 May 2017.
The CEO (John Stumpf) and other executives were dismissed. Regulators subjected the bank to fines and penalties, and customers reduced, suspended, or discontinued activities with the bank. The company suffered from heavy reputational damage and financial losses.{{Cite web|url=https://www.investopedia.com/terms/r/reputational-risk.asp|title=Why Reputational Risk Matters|last=Kenton|first=Will|website=Investopedia|language=en|access-date=2019-04-21}}
Reputational risk was further worsened in 2019 when new legislation was introduced by the House of Representatives. The new legislation uncovered Wells Fargo's practice of offshoring thousands of American jobs and forcing soon to be unemployed workers to train their foreign replacements.{{Cite web|url=https://www.youtube.com/watch?v=hmQhrzMhDMM |archive-url=https://ghostarchive.org/varchive/youtube/20211215/hmQhrzMhDMM |archive-date=2021-12-15 |url-status=live|title=House debate on offshoring practices of Wells Fargo|website=youtube|language=en}}{{cbignore}}
Wells Fargo reputation was further damaged when an Indian Wells Fargo executive was caught urinating on a fellow passenger on an international flight,{{Cite web |title=Bank Executive Accused of Urinating on a Fellow Airline Passenger |url=https://www.nytimes.com/2023/01/07/world/asia/india-airline-wells-fargo-urination.html |website=NY Times}} and again when an employee died at her desk and no one noticed for over 4 days until a foul smell caused employees to complain.{{Cite web |last=Williams |first=Ashley R. |date=2024-08-31 |title=Wells Fargo employee found dead at her desk days after she last clocked into work, authorities say |url=https://edition.cnn.com/2024/08/31/us/wells-fargo-employee-desk-arizona/index.html |access-date=2024-10-29 |website=CNN |language=en}}
= Toyota =
Toyota recalled 8 million vehicles worldwide and froze the sales of eight models in the U.S. in January 2010 amongst pressure from the public, industry regulators and the media.{{Cite news|url=https://af.reuters.com/article/metalsNews/idAFTKG00664220100209|archive-url=https://web.archive.org/web/20160304075227/http://af.reuters.com/article/metalsNews/idAFTKG00664220100209|url-status=dead|archive-date=March 4, 2016|title=Toyota to recall 436,000 hybrids globally-document|date=2010-02-09|work=Reuters|access-date=2019-04-22|language=en}} By company estimates, Toyota lost approximately US$2 billion due to the recalls and subsequent lost sales.{{Cite news|url=https://www.csmonitor.com/USA/2010/0129/Toyota-recall-update-dealers-face-full-lots-anxious-customers|title=Toyota recall update: dealers face full lots, anxious customers|date=2010-01-29|work=Christian Science Monitor|access-date=2019-04-22|issn=0882-7729}} Additionally, Toyota was fined US$16 million for failing to report the issues promptly and endangering lives.
More tangible financial harm became evident in 2014, when Toyota and the U.S. Justice Department agreed on a settlement of US$1.2 billion and a public admission of guilt from Toyota for neglecting the defects. The reputational aftermath of these events was measured by Rasmussen, who found that despite 59% of Americans finding Toyota at least somewhat "favorable", there was a significant portion (29%) who found Toyota "very unfavorable".
= Boeing =
A Boeing 737 Max jet crashed in 2018 in Indonesia{{cite web | url=https://en.wikipedia.org/wiki/Lion_Air_Flight_610 | title=Lion Air Flight 610 }}{{Circular reference|date=May 2024}} killing 189 people then in 2019 another jet crashed{{cite web | url=https://en.wikipedia.org/wiki/Sriwijaya_Air_Flight_182 | title=Sriwijaya Air Flight 182 }}{{Circular reference|date=May 2024}} killing 157 people. Boeing initially blamed lack of training and pilot error. Later it was discovered the aircraft had a secret pitch adjustment system called MCAS{{cite web | url=https://en.wikipedia.org/wiki/Maneuvering_Characteristics_Augmentation_System | title=Maneuvering Characteristics Augmentation System }}{{Circular reference|date=May 2024}} that would override pilot input. This was never disclosed to the operators or pilots. It was discovered that Boeing had offshored the software development to low pay overseas Indian software programmers with no experience in flight critical code.{{Cite web |last=Robison |first=Peter |date=2019-07-02 |title=Boeing engineers blame cheap Indian software for 737 Max problems |url=https://theprint.in/world/boeing-engineers-blame-cheap-indian-software-for-737-max-problems/256999/ |access-date=2024-01-30 |website=ThePrint |language=en-US}} Boeing, grilled in congress for safety lapses, eventually fired the CEO for putting "profits ahead of safety".{{Cite news |last1=Gelles |first1=David |last2=Kitroeff |first2=Natalie |date=2019-12-23 |title=Boeing Fires C.E.O. Dennis Muilenburg |url=https://www.nytimes.com/2019/12/23/business/Boeing-ceo-muilenburg.html |access-date=2024-01-30 |work=The New York Times |language=en-US |issn=0362-4331}} The planes were grounded for over a year while defects were corrected and airworthiness could be re-certified.{{cite web | url=https://en.wikipedia.org/wiki/Boeing_737_MAX_groundings | title=Boeing 737 MAX groundings }}{{Circular reference|date=May 2024}} He was replaced by then Boeing chairman Dave Calhoun.{{cite web | url=https://en.wikipedia.org/wiki/Dave_Calhoun | title=Dave Calhoun }}{{Circular reference|date=May 2024}} In 2024 a door plug fell off a Max 737 airplane operated by Alaska Airlines.{{cite web | url=https://en.wikipedia.org/wiki/Alaska_Airlines_Flight_1282 | title=Alaska Airlines Flight 1282 }}{{Circular reference|date=May 2024}} United Airlines - one of the major customers of Boeing stated they no longer have confidence in Boeing to meet its contractual obligations.{{Cite web |last=Josephs |first=Leslie |date=2024-01-23 |title=United CEO casts doubt on 737 Max 10 order after Boeing's recent problems |url=https://www.cnbc.com/2024/01/23/united-ceo-casts-doubt-on-boeing-737-max-10-order.html |access-date=2024-01-30 |website=CNBC |language=en}} Southwest Airlines stated they were turning to Airbus - a Boeing competitor - for new airplanes.{{Cite web |last=Josephs |first=Leslie |date=2024-01-25 |title=Southwest Airlines takes Boeing Max 7 out of 2024 plans because of certification delays |url=https://www.cnbc.com/2024/01/25/southwest-airlines-takes-boeing-max-7-out-of-fleet-plan-for-2024.html |access-date=2024-01-30 |website=CNBC |language=en}} The persistent and ongoing quality lapses have tarnished Boeing's reputation.{{Cite web |last=Segal |first=Edward |title=Boeing Faces New Challenges To Image, Reputation And Credibility |url=https://www.forbes.com/sites/edwardsegal/2021/10/15/boeing-faces-new-challenges-to-image-reputation-and-credibility/ |access-date=2024-01-30 |website=Forbes |language=en}}{{cite news | url=https://www.wsj.com/business/airlines/the-737-max-blows-another-hole-in-boeings-reputation-14e8ce0c | title=The 737 MAX Blows Another Hole in Boeing's Reputation | newspaper=WSJ | last1=Sindreu | first1=Jon }}
"The 737 MAX crisis severely damaged Boeing’s reputation and eroded trust among key stakeholders, including airlines, passengers, regulators, and the general public. The accidents and subsequent revelations about the aircraft’s design and certification processes raised questions about Boeing’s commitment to safety and transparency."{{cite web | url=https://changemanagementinsight.com/boeing-crisis-management-case-study-a-detailed-analysis/ | title=Boeing Crisis Management Case Study: A Detailed Analysis }}
Reputational risk management
{{main article|Reputation management}}
Proposed frameworks to manage reputational risk include:
- Systematically tracking evolving stakeholder expectations.{{Cite web|url=https://www2.deloitte.com/content/dam/Deloitte/ro/Documents/about-deloitte/ro-managing-reputation-risk-laura-toni.pdf|title=Managing reputation risk|last=Toni|first=Laura|date=November 28, 2014|website=Deloitte|access-date=April 21, 2019}}
- Identifying stakeholder risk factors as part of a general risk management process.{{Cite book|last=Boatright|first=John R.|date=2010-08-09|title=Finance Ethics|doi=10.1002/9781118266298|isbn=9781118266298}}
- Transforming risk management processes to become more proactive rather than reflexive.
- Regularly auditing the catalysts of corporate reputations using the most recent reputation monitoring technologies and services.{{Citation|chapter=Reputational Risk|date=2012-03-09|pages=268–279|publisher=John Wiley & Sons, Inc.|doi=10.1002/9781118387016.ch16|isbn=9781118387016|title=Essentials of Risk Management in Finance|s2cid=259438031 }}