Reputation Risk Management

Reputation damage is often a serious end result that in many cases could have been prevented by effective due diligence to manage or mitigate increased risk factors.

Business intelligence gained from effective due diligence investigations can help your company avoid or mitigate reputational issues.

Reputational damage can result in:

  • Financial losses and drop in share price
  • Negative media coverage
  • Loss of customer relationships
  • Difficulty forming new customer relationships
  • Litigation costs
  • Regulatory fines, penalties & in some case criminal convictions
  • Negative brand perception
  • Loss of key employees
  • Loss of employee productivity
  • Diminished profitability

Recovering from reputation damage is lengthy and often very costly.

Infortal can help your company to understand hidden risks as well as identify areas of potential risk exposure on key executives, client relationships, business transactions, M&A Deals, and when onboarding new vendors and subcontractors.

In today’s business world, your company’s reputation is everything. Any damage to your reputation could result in losing customers and business partners, which in turn means losing profits. It can also result in current employees leaving and fewer applications for your open positions. As your company spirals, bleeding customers and employees, it becomes harder and harder to get back on track. 

While there are some ways of repairing your company’s reputation over time, the best method of keeping your reputation intact is protecting it via proactive corporate due diligence. That’s the goal of Infortal’s reputation risk management solutions. We provide you with the information you need to weigh the various risks a decision involves and how those risks could impact your reputation. Better knowledge of your key executives, business partners, supply chain partners, and new board members makes a significant difference. With this information on hand, you can make a more informed business decision.

Have additional questions about reputation risk management? Read on below.

What is Reputation Risk Management?

When you hire a new executive or C-suite employee, enter into a new business partnership, or even become a party in a large transaction, you put your company’s reputation at risk. You have already conducted legal and financial due diligence, but what are you doing to protect your hard-won business from criminals and fraudsters that will damage your business from the inside? This is the human intelligence side that needs to be carefully checked as most issues cannot be found during routine background checks.  Background checks find fewer than 1% of serious issues, compared to 20% of serious issues found in due diligence investigations. This risk may potentially lead to a situation that leaves your company skirting laws or on the edge of bankruptcy. Because of this, it is vital that your company leadership fully understands what kind of risk you’re facing and what you could potentially do to mitigate or reduce that risk.

Reputation risk management is about looking at potential outcomes. Say, for example, that your leading CFO candidate was named in an SEC investigation.  If the investigation had to do with potential wrongdoings s/he was directly involved in, your reputation could be hurt simply by hiring this individual. Beyond that, there’s the risk that s/he could continue to disregard SEC regulations or take other actions that lead to your company being investigated.

However, if s/he incurred serious penalties due to a violation of federal regulations or through other activities, it would be difficult to explain to your board, shareholders or regulators why you did not find this information in advance of hiring the CFO.

A situation like this occurred recently at Moderna, widely known recently for its effective Covid vaccines. In mid-2022 Moderna hired a CFO and had to fire him only one day later due to accounting irregularities at his prior employer, at a cost of $700,000 for his salary alone, plus a stock price drop, and serious PR issue, not to mention the cost of having to replace a senior executive. This type of reputation damage was entirely preventable.

 

The risk here is that the person may continue what they were doing at your company or others may feel that you’re bringing on someone who is a liability. This can lead to a number of outcomes that could damage your company and its reputation. At Infortal, we find the information you need to know in order to make a well informed decision to protect your company.

Why Reputation Risk Management is Important

our company’s reputation is essential for attracting customers, potential new employee hires, business partners, vendors, marketing opportunities, and more. With a positive reputation, your business will have better opportunities to grow and expand. With a negative reputation, however, you may find new opportunities are few and far between. A negative reputation may also cause your customer base to shrink and force you to scale back your plans. Even nonprofits and government organizations that aren’t focused on profits can still be damaged by a negative reputation. Losing the general public’s trust can be very damaging to these organizations for many years. Think of a non-profit that has experienced a sexual harassment scandal, embezzlement or fraud by its leadership; would you donate money to them without knowing whether action was taken to remedy the situation? 

When you hire a new executive or enter into a new partnership with another business, you’re joining your reputation to theirs. This is why doing your due diligence and learning about their past is so important. You don’t want to be associated with someone who has a criminal past or is known for producing poor-quality products or damaged services. Doing so can give you a reputation for chasing profits by working with companies known for cheating their customers. Hiring an executive who has charges of harassment can give you a reputation for hiring the wrong people, which will make it harder to retain and hire quality employees and promote having a great corporate culture. 

Statistic from Candice about reputation risk management

Repairing Your Reputation Isn’t Easy

If your reputation does take a hit, repairing it can be incredibly challenging. While you can issue a public apology, make charitable donations, and begin a new marketing campaign, these actions don’t instantly erase the damage done.

The internet makes it extremely difficult to completely erase the damage to your reputation. Before everything was online, old newspaper articles and television exposes were often the only way to research events. While the risk you took and its outcome may have been the subject of multiple articles and may have even made national news, the spotlight was fleeting. Those stories couldn’t easily be dredged up again and shared online with thousands of people.

That’s no longer the case with online archives and social media. Everything from inappropriate tweets to civil or criminal records can be found and shared readily. This means protecting your reputation is even more vital now because any potential stain on your name or your corporation can live online. 

What Can Damage to Your Reputation Lead to?

Damage to your reputation can lead to a number of different outcomes. It’s very rare that a company takes a hit to their reputation and only experiences one negative outcome. Typically, you’ll find yourself struggling with several, if not all, of these different consequences of failing to do your due diligence or taking too big of a risk. Here are some of these consequences that can come from a damaged reputation.

If you no longer appear to be a trustworthy company, customers will seek out one of your competitors who has a better reputation. Just think of the reputation fallout of Wells Fargo’s credit card scandal, or Volkswagens’ emissions scandal. Both lost numerous lifelong customers, cities and state agencies, and numerous other larger clients as a direct result.

You may find even long-term clients who have been with you for decades are now considering their options. In addition to losing current customers, it will become much more difficult to attract new ones. You’re now a tainted brand, at least for the short term, and people won’t want to associate with you. If the damage to your reputation came from a business partner that was defrauding clients or from an executive who cut the quality of your own products, it is likely that you could rapidly lose a large number of customers, in many instances global customers.

If you hired an executive with a history of harassment and your employees find out, you can expect to see a number of resignations come in. No one wants to work for someone who is known for creating a culture of harassment or for intimidating employees. Business partnerships can also send employees running, especially if you partner with a business that goes against your stated company morals or vision statement. For example, if you’ve promoted your business as a green, environmentally friendly company and then partnered with someone who has major oil and gas investments, it may not go over well.

Consider the reputation damage and cultural damage at Blizzard Entertainment as a result of their sexual harassment lawsuits affecting their reputation.  These resulted in employee walkouts, a mass exodus of longstanding executives, and extreme backlash from customers.

Just as employees may not want to stay with a damaged company, job seekers may look for other opportunities. You may find it hard to fill your open positions with qualified candidates. This can lead to putting more stress on the employees you have, leading to more of them leaving for better opportunities. This will ultimately impact your company’s culture for a very long time.

Few other business owners want to associate their company with one that has a poor reputation. If you do something that damages your reputation or if you’re the one bringing a questionable reputation to a partnership, be prepared for any potential partner to walk away once they do their due diligence. Just as you should assess the risks from your prospective business partners, they will be assessing you. If they determine that you pose too much of a risk to their reputation, they will pull out of the partnership or refuse to enter into one.

If you’re a startup or a non-profit that receives funding from investors and other sources, these funders may decide to pull their investments. Like any business partners, investors do their own due diligence investigations and risk assessments. If they believe you’ve become too much of a risk, they may discontinue their funding. This happens more often than most people realize.

Public companies are not immune from this, either. Many publicly traded businesses have found their stock prices fall after an executive’s misconduct came to light or a partnership damaged their reputation. While government agencies may not be subject to investor pull-out or stock sales, damage to their reputation can lead to inquiries and potential criminal charges against those in leadership positions.

Damage to your business reputation may seem like it won’t have any immediate direct costs or penalties. However, that’s not always true. If you partner with a company that later is investigated for illegal activities, they may investigate you as well. Should the other company be found guilty of such activity, it’s possible you will be deemed an accomplice or a partner to their crimes. Even if you knew nothing about what they were doing, if they were using your joint project or product in their activities, it could affect you.  If your new business partners have been involved in money laundering, bribery or fraud, or other criminal activity, this may have a serious impact to your business now or in the future. Even more so if there were violations of the Foreign Corrupt Practices Act (FCPA) involved.

Your company could be fined or otherwise penalized in addition to further damage to your reputation. It’s possible you could also be sued in civil court, which could result in court costs, attorney fees, and other fines.

When your reputation is damaged, repairing it can be costly. You may face losing income from customers leaving, partnerships dissolving, investors pulling out, and stock drops. Then there are potential fees and other regulatory fines. After all of that, you may also need to fund a new marketing campaign, incur a business monitorship reviewing key business decisions for several years (at your expense), invest in new partnerships, and more. The overall cost can be quite steep, and even then, it can still take months or years for your reputation to return to what it was.

If bribery or corruption were involved, your organization will need to demonstrate to federal agencies and the public that they have become good corporate citizens with a robust new compliance program in place to prevent these issues from recurring.

In some cases, you may never fully repair your reputation. Your name may always be associated with something negative. If this damage is severe enough, it can be impossible to recover. In that case, you could end up closing the company.  A recent example of this is Theranos, a billion dollar startup whose CEO and COO have been convicted of fraudulent blood testing equipment.  The company laid off all employees and went into bankruptcy and destroyed hundreds of millions of investments into the company. The executives await sentencing., but many lives were destroyed in the process, not only financially, but people who were sick and relied on the faulty blood tests.

Learn more about our executive due diligence service

How Infortal Can Help Reduce Your Risk

Infortal is here to assist you with corporate due diligence on potential new executive hires, business partners, and any others you will be tying your reputation to. Our due diligence investigations focus on the human side of due diligence in business, our process goes far beyond a background check that many companies think is sufficient due diligence.  It is not sufficient to identify and prevent most of the issues that arise at executive levels. While basic background checks may be fine for regular employees, they are not significant enough for executives and others who will be representing your company. Databases do not reveal the information needed at this level either.  For these individuals, you need to know more. 

Our open-source investigations look into the dark web, deep web and historical web searches. These turn up much more than a standard Google search.  For more information on our approach please see our executive due diligence page.

After completing these searches, we present you with our findings. You can then determine if hiring the individual is worth the risk or not; the decision is yours.  We always give context to the data to help make the decision easier. The more information you have, the better decisions you can make, and we provide you with everything relevant to make a better informed business decision.

We conduct a similar type of comprehensive due diligence checks for potential business partners and in mergers & acquisitions (M&A). We also can perform due diligence investigations on new board of directors, C-suite leaders, and others whose actions could affect your reputation.

Infortal is Here to Help You Protect Your Reputation

More companies today perform proper deep due diligence investigations on executives or potential business partners. With over 37 years of experience, Infortal can help your company to understand hidden risks and identify areas of potential risk exposure on key executives, client relationships, business transactions, M&A deals, and when onboarding new vendors and subcontractors in your corporate supply chain partnerships.

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