Reputational damage

Type of financial loss

For the concept in diplomacy, see Reputational damage (diplomacy).

Categories of

Financial risk
Credit risk

* Settlement risk
* Concentration risk
* Sovereign risk
* Default risk

Market risk

* Interest rate risk
* Inflation risk
* Currency risk
* Equity risk
* Commodity risk
* Volatility risk
* Systemic risk

Liquidity risk

* Refinancing risk
* Deposit risk
* Margining risk

Investment risk

* Model risk
* Execution risk
* Valuation risk

Business risk

* Reputational risk
* Operational risk
* Country risk
* Political risk
* Legal risk
* Moral hazard

Profit risk
Non-financial risk

* Stranded asset

* v
* t
* e

Reputational damage is the loss to financial capital, social capital and/or market share resulting from damage to a firm's reputation. This is often measured in lost revenue, increased operating, capital or regulatory costs, or destruction of shareholder value.[1] 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.[2]

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).[3] Extreme cases may lead to large financial losses[4] or bankruptcy, as per the case of Arthur Andersen.[5]

Reputation is recorded as an intangible asset in a company's financial records.[6] Hence, damage to a firm's reputation has financial repercussions.[7] Minor issues can be amplified by external social processes which lead to even more severe impacts on a firm's position.[8]

## Examples of reputational damage

[edit]

### Wells Fargo

[edit]

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.[9]

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.[10]

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.[11]

### Toyota

[edit]

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.[12] By company estimates, Toyota lost approximately US$2 billion due to the recalls and subsequent lost sales.[13] 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

[edit]

A Boeing 737 Max jet crashed in 2018 in Indonesia[14][circular reference] killing 189 people then in 2019 another jet crashed[15][circular reference] 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[16][circular reference] 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.[17] Boeing, grilled in congress for safety lapses, eventually fired the CEO for putting "profits ahead of safety".[18] The planes were grounded for over a year while defects were corrected and airworthiness could be re-certified.[19][circular reference] He was replaced by then Boeing chairman Dave Calhoun.[20][circular reference] In 2024 a door plug fell off a Max 737 airplane operated by Alaska Airlines.[21][circular reference] United Airlines - one of the major customers of Boeing stated they no longer have confidence in Boeing to meet its contractual obligations.[22] Southwest Airlines stated they were turning to Airbus - a Boeing competitor - for new airplanes.[23] The persistent and ongoing quality lapses have tarnished Boeing's reputation.[24][25]

"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."[26]

## Reputational risk management

[edit]

Main article: Reputation management

Proposed frameworks to manage reputational risk include:

* Systematically tracking evolving stakeholder expectations.[27]
* Identifying stakeholder risk factors as part of a general risk management process.[28]
* Transforming risk management processes to become more proactive rather than reflexive.[28]
* Regularly auditing the catalysts of corporate reputations using the most recent reputation monitoring technologies and services.[29]

## See also

[edit]

* Audit
* Center for Audit Quality
* Continuous auditing
* COSO framework, Risk management
* Quality audit
* Reputation management

## References

[edit]

1. ^ Heery, Edmund; Noon, Mike (2017). "A Dictionary of Human Resource Management". Oxford Reference. doi:10.1093/acref/9780191827822.001.0001.
2. ^ Walter, Ingo (2011-12-13), "Reputational Risk", Finance Ethics, John Wiley & Sons, Inc., pp. 103–123, doi:10.1002/9781118266298.ch6, ISBN 9781118266298
3. ^ Hindson, Alex; Louisot, Jean-Paul (2009), Klewes, Joachim; Wreschniok, Robert (eds.), "Managing reputational risk – Case studies", Reputation Capital, Berlin, Heidelberg: Springer Berlin Heidelberg, pp. 143–160, doi:10.1007/978-3-642-01630-1_10, ISBN 978-3-642-01629-5, retrieved 2021-04-05
4. ^ "Reputation and Its Risks". Harvard Business Review. 2007-02-01. ISSN 0017-8012. Retrieved 2021-04-05.
5. ^ Brown, Ken; DuganStaff, Ianthe Jeanne (2002). "Arthur Andersen's Fall From Grace Is a Sad Tale of Greed and Miscues". Wall Street Journal. Retrieved 2019-04-22.
6. ^ AASB 138 (2018). "Intangible assets" (PDF). Retrieved 2019-05-10.`{{cite web}}`: CS1 maint: numeric names: authors list (link)
7. ^ Fitzsimmons, Anthony; Atkins, Derek (2017). Rethinking reputational risk : How to manage the risks that can ruin your business, your reputation and you. Kogan Page, Limited. p. 45\. ISBN 9780749477363.
8. ^ Power, Michael (18 February 2017). "The risk management of everything" (PDF). The Journal of Risk Finance. 5 (3): 58–65. doi:10.1108/eb023001.
9. ^ Levine, Matt (9 September 2016). "Wells Fargo Opened a Couple Million Fake Accounts". Bloomberg. Retrieved 6 May 2017.
10. ^ Kenton, Will. "Why Reputational Risk Matters". Investopedia. Retrieved 2019-04-21.
11. ^ "House debate on offshoring practices of Wells Fargo". youtube. Archived from the original on 2021-12-15.
12. ^ "Toyota to recall 436,000 hybrids globally-document". Reuters. 2010-02-09. Archived from the original on March 4, 2016. Retrieved 2019-04-22.
13. ^ "Toyota recall update: dealers face full lots, anxious customers". Christian Science Monitor. 2010-01-29. ISSN 0882-7729. Retrieved 2019-04-22.
14. ^ "Lion Air Flight 610".
15. ^ "Sriwijaya Air Flight 182".
16. ^ "Maneuvering Characteristics Augmentation System".
17. ^ Robison, Peter (2019-07-02). "Boeing engineers blame cheap Indian software for 737 Max problems". ThePrint. Retrieved 2024-01-30.
18. ^ Gelles, David; Kitroeff, Natalie (2019-12-23). "Boeing Fires C.E.O. Dennis Muilenburg". The New York Times. ISSN 0362-4331. Retrieved 2024-01-30.
19. ^ "Boeing 737 MAX groundings".
20. ^ "Dave Calhoun".
21. ^ "Alaska Airlines Flight 1282".
22. ^ Josephs, Leslie (2024-01-23). "United CEO casts doubt on 737 Max 10 order after Boeing's recent problems". CNBC. Retrieved 2024-01-30.
23. ^ Josephs, Leslie (2024-01-25). "Southwest Airlines takes Boeing Max 7 out of 2024 plans because of certification delays". CNBC. Retrieved 2024-01-30.
24. ^ Segal, Edward. "Boeing Faces New Challenges To Image, Reputation And Credibility". Forbes. Retrieved 2024-01-30.
25. ^ Sindreu, Jon. "The 737 MAX Blows Another Hole in Boeing's Reputation". WSJ.
26. ^ "Boeing Crisis Management Case Study: A Detailed Analysis".
27. ^ Toni, Laura (November 28, 2014). "Managing reputation risk" (PDF). Deloitte. Retrieved April 21, 2019.
28. ^ a b Boatright, John R. (2010-08-09). Finance Ethics. doi:10.1002/9781118266298. ISBN 9781118266298.
29. ^ "Reputational Risk", Essentials of Risk Management in Finance, John Wiley & Sons, Inc., 2012-03-09, pp. 268–279, doi:10.1002/9781118387016.ch16, ISBN 9781118387016, S2CID 259438031

* v
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Financial risk and financial risk management

Categories|

| Credit risk|

* Consumer credit risk
* Sovereign credit risk
* Settlement risk
* Default risk
* Concentration risk
* Credit derivative
* Securitization

|

Market risk|

* Commodity risk (e.g. Volume risk, Basis risk, Shape risk, Holding period risk, Price area risk)
* Equity risk
* Valuation risk
* FX risk
* Margining risk
* Interest rate risk
* Inflation risk
* Volatility risk
* Liquidity risk (e.g. Refinancing risk, Deposit risk)

Operational risk|

* Operational risk management
* Business risk
* Model risk
* Reputational risk
* Country risk
* Political risk
* Legal risk

Other|

* Execution risk
* Profit risk
* Systemic risk
* Non-financial risk

Modeling|

* Arbitrage pricing theory
* Black–Scholes model
* Replicating portfolio
* Cash flow matching
* Conditional Value-at-Risk (CVaR)
* Copula
* Drawdown
* First-hitting-time model
* Interest rate immunization
* Market portfolio
* Modern portfolio theory
* Omega ratio
* RAROC
* Risk-free rate
* Risk parity
* Sharpe ratio
* Sortino ratio
* Survival analysis (Proportional hazards model)
* Tracking error
* Value-at-Risk (VaR) and extensions (Profit at risk, Margin at risk, Liquidity at risk, Cash flow at risk, Earnings at risk)

Basic concepts|

* Asset allocation
* Asset and liability management
* Asset pricing
* Bad debt
* Capital asset
* Capital structure
* Corporate finance
* Cost of capital
* Diversification
* Economic bubble
* Enterprise value
* ESG
* Exchange traded fund
* Expected return
* Financial
* adviser
* analysis
* analyst
* asset
* betting
* crime
* engineering
* law
* risk
* social work
* Fundamental analysis
* Growth investing
* Hazard
* Hedge
* Investment management
* Risk
* Risk pool
* Risk of ruin
* Systematic risk
* Mathematical finance
* Moral hazard
* Risk-return spectrum
* Speculation
* Speculative attack
* Statistical finance
* Strategic financial management
* Stress test (financial)
* Structured finance
* Structured product
* Systemic risk
* Toxic asset

* Financial economics
* Investment management
* Mathematical finance

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