Reputational risk (Ofer Abarbanel online library)

Reputational risk, often called reputation risk, is the potential 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] Reputational risk is consequential of an adverse or potentially criminal event even if the company is not found guilty.

Adverse events typically associated with reputation risk include ethics violations, safety issues, security issues, a lack of sustainability, poor quality, and lack of or unethical innovation.[2] Corporate trust and relations often have an impact on the degree of reputational risk a business will experience.[3]

This type of risk is often informational in nature, and may be difficult to realize financially. However, extreme cases may lead to bankruptcy (as in the case of Arthur Andersen).[4] The reputational risk may not always be the company’s fault, as per the case of the Chicago Tylenol murders after seven people died in 1982.[5]

From an accounting point of view, reputation it is kind of intangible assets;[6] reputational risk turns the concept of materiality upside down. Traditionally but not exclusively thought of in terms of financial magnitude, reputation means that even seemingly small events or losses, such as a minor regulatory fine, can have larger repercussions.[7] The impact of reputational damage can be minor at first, however issues that are amplified by external social processes (including the media and legal systems) can lead to severe impacts on the firm’s position.[8]

Examples of reputational risk

Wells Fargo

Reputational risk was apparent in 2016 when Wells Fargo was exposed for opening millions of unauthorized bank accounts. 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 a number of large customers reduced, suspended, or discontinued altogether their business with the bank. Wells Fargo’s reputation was tarnished, and the company continues to rebuild into 2019 after suffering heavy financial losses as a result of the damages to their reputation.[10]

Wells Fargo suffered further reputational risk when new legislation was introduced and passed in the 2019 house of representatives exposing Wells Fargo’s practice of offshoring thousands of american jobs overseas and forcing soon to be unemployed workers to train their foreign replacements.[11]


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.[14] The reputational aftermath of these events were measured by Rasmussen, who found that despite 59% of Americans finding Toyota at least somewhat “favourable”, there was a significant portion (29%) who found Toyota “very unfavourable”.[15]

Reputational risk management

Many theorists have proposed ways to manage reputational risk effectively. Some of these include:

  • Systematically tracking evolving stakeholder expectations.[16]
  • Identifying stakeholder risk factors as part of a general risk management process.[17]
  • Transforming risk management processes to become more proactive rather than reflexive.[17]
  • Regularly auditing the catalysts of corporate reputations using the most recent reputation monitoring technologies and services.[18]


  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. ^ Archived February 21, 2010, at the Wayback Machine
  4. ^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.
  5. ^,9171,960693,00.html ArchivedDecember 21, 2008, at the Wayback Machine
  6. ^AASB 138 (2018). “Intangible assets” (PDF). Retrieved 2019-05-10.
  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.
  12. ^“Toyota to recall 436,000 hybrids globally-document”. Reuters. 2010-02-09. 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. ^Vlasic, Bill; Apuzzo, Matt (2014-03-19). “Toyota Is Fined $1.2 Billion for Concealing Safety Defects”. The New York Times. ISSN 0362-4331. Retrieved 2019-04-22.
  15. ^“59% Still Hold Favorable View of Toyota – Rasmussen Reports®”. Retrieved 2019-04-22.
  16. ^Toni, Laura (November 28, 2014). “Managing reputation risk” (PDF). Deloitte. Retrieved April 21, 2019.
  17. ^ Jump up to:ab Boatright, John R. (2010-08-09). Finance Ethics. doi:10.1002/9781118266298. ISBN 9781118266298.
  18. ^“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


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