Reputational damage

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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]

Contents

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

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. [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

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

A Boeing 737 Max jet crashed in 2018 in Indonesia [14] killing 189 people then in 2019 another jet crashed [15] 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] 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] He was replaced by then Boeing chairman Dave Calhoun. [20] In 2024 a door plug fell off a Max 737 airplane operated by Alaska Airlines. [21] 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

Proposed frameworks to manage reputational risk include:

See also

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<span class="mw-page-title-main">Boeing 737 MAX groundings</span> March 2019 worldwide grounding of the Boeing 737 MAX following two fatal crashes in five months

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References

  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. 1 2 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
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