# Reputational Risk Explained: Definition, Dangers, and Real-World Example

## What Is Reputational Risk?

Reputational risk poses a significant threat to a business's standing, stemming from direct actions, employee conduct, or associated partners. It can severely impact profitability, market value, and upper management. Learn effective strategies to mitigate these risks in an era of instant communication and globally connected markets.

### Key Takeaways

*   Reputational risk poses a significant threat to the survival of even the largest and best-run businesses.
*   This risk can originate from direct company actions, indirect employee actions, or third parties like joint venture partners.
*   The unpredictable nature of reputational risk means it can emerge suddenly, potentially eliminating large amounts of market capitalization.
*   Effective damage control, especially in the age of instant communication, is essential to mitigate reputational risks.
*   High-profile examples, like the Wells Fargo scandal, demonstrate how reputational damage can lead to leadership changes and financial penalties.  
    

## The Impact of Reputational Risk on Businesses

Reputational risk is a hidden danger that can pose a threat to the survival of the biggest and best-run companies. Often the risk results in outcomes not easily measured; however, it can adversely affect a company's profitability and valuation. It can eliminate millions or billions in market value or revenue and may even lead to changes in top management.

Reputational risk can also arise from the actions of errant employees, such as egregious fraud or massive trading losses disclosed by some of the world's biggest financial institutions. In an increasingly globalized environment, reputational risk can arise even in a peripheral region far away from home base.

In some instances, reputational risk can be mitigated through prompt damage control measures, which is essential in this age of instant communication and [social media](https://www.investopedia.com/terms/s/social-media.asp) networks. In other instances, this risk can be more insidious and last for years. For example, activists target gas and oil companies due to the environmental harm from their extraction activities.  

It can be a time-intensive process to monitor for online activity such as negative reviews that can jeopardize a company's reputation. [ORM software](https://www.investopedia.com/terms/p/prophets-reputation-management-index.asp) helps companies track consumer opinions on review sites, social media, and search engines. Many of these solutions allow you to use one dashboard to look at and respond to reviews.

## Real-World Example: Wells Fargo's Reputational Crisis

Reputational risk exploded into full view in 2016 when the scandal involving the opening of millions of unauthorized accounts by retail bankers (and encouraged or coerced by certain supervisors) was exposed at Wells Fargo.

The [CEO](https://www.investopedia.com/ask/answers/difference-between-president-and-ceo/), John Stumpf, and others were forced out or fired. Regulators subjected the bank to fines and penalties, and a number of large customers reduced, suspended, or discontinued altogether doing business with the bank. Wells Fargo's reputation was tarnished, and the company has had to rebuild its reputation and its brand.

## The Bottom Line

Reputational risk can significantly impact a business, threatening its profitability and market value. It often arises from direct actions by the company, misconduct by employees, or associations with peripheral parties like joint venture partners.

Proactive measures, such as good governance practices, transparency, and socially and environmentally responsible behaviors, are crucial for mitigating these risks.

The 2016 Wells Fargo scandal clearly illustrates how reputational damage can lead to executive changes, regulatory penalties, and a loss of business. Companies must be vigilant and make use of tools like online reputation management software to monitor and manage their public perception effectively in today's rapidly connected world.  

> **Article Sources**
>
> 1.  Consumer Financial Protection Bureau. "[Wells Fargo Bank, N.A](https://www.consumerfinance.gov/enforcement/actions/wells-fargo-bank-2016/)."
>     
> 2.  U.S. Securities and Exchange Commission. "[Wells Fargo & Company](https://www.sec.gov/Archives/edgar/data/72971/000119312517118654/d375947ddefa14a.htm)."
>     
> 3.  Wells Fargo. "[Making Things Right for Customers—Customer Redress Review Program](https://www.wellsfargo.com/help/customer-redress/)."