What is Reputation Risk? An Explanation of Its Meaning, Examples, and Countermeasures Introduced

1.2 Why is it being highlighted?

One reason reputation risk has gained attention is the development of the internet, which has made it easy for many people to use social media and review sites. This has made it simpler for individuals to share information. As a result, not only positive but also negative reputations of companies can spread instantly. Additionally, once information is disseminated online, it’s difficult to erase. To minimize the impact of such risks on management, measures against reputation risk are now being emphasized.

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2. Causes of Reputation Risk

So, what kinds of situations can lead to reputation risk and potentially damage a company’s reputation? Here, we will explain four main factors:

2.1. Scandals and Whistleblowing

You may have heard of cases where a company’s reputation was damaged due to scandals such as the arrest of executives or inappropriate actions by part-time employees. In some instances, such scandals have led to delisting from stock exchanges, business closures, or bankruptcies. It’s possible for a company’s reputation to plummet due to the actions of a few employees. Therefore, thorough auditing and employee training are crucial.

There have also been scandals where companies misrepresented foreign ingredients as domestic or sold products with falsified expiration dates. In many cases, such problems were exposed through whistleblowing by employees or related parties.

This highlights how corporate scandals, often involving fraud or misconduct, can severely damage a company’s reputation, sometimes resulting in significant financial or operational consequences.

2.2. Reputational Damage (Rumors and Misinformation)

Reputation risk can arise when negative rumors or baseless misinformation about a company spread. Such information is not only disseminated by customers; current or former employees may also share false or damaging information about the company.

2.3. Decline in the Quality of Products or Services

Even if a company has not faced scandals or reputational damage, reputation risk can still occur. One reason for this is a decline in the quality of products or services. Comments such as “The staff’s attitude was terrible” or “Prices went up, but the quality worsened compared to last time” can quickly spread as negative reviews through social media and review sites.

2.4. Deterioration in Competitors’ Performance

Although it may seem unrelated, the decline in competitors’ performance is also a potential reputation risk. When it becomes clear that a competitor is struggling, even if your company is not experiencing a downturn, speculation may spread, such as “This company might be in trouble, too,” or “Maybe the entire industry is at risk.” To avoid this, companies need to actively communicate information.

All of these issues need to be addressed while they are still small to prevent them from escalating.

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3. Introduction to Actual Cases and Incidents of Reputation Risk

Next, we’ll introduce some real-life examples of reputation risk. Here, we’ll discuss three scenarios: “Scandals Caused by Part-Time Workers at Restaurants,” “Large-Scale Information Leaks at Major Corporations,” and “Overwork-Related Death Issues at a Major Advertising Agency.”

3.1. Scandal Caused by Part-Time Workers at a Restaurant

At the conveyor belt sushi chain Kura Sushi, a video went viral on social media showing a part-time employee throwing a piece of fish into a trash can and then jokingly placing it back on the cutting board. In response, Kura Sushi took both criminal and civil legal action against the 19-year-old part-time worker involved in the inappropriate behavior and the person who filmed and posted the video.

3.2. Large-Scale Information Leak at a Major Corporation

In 2014, Benesse Corporation, known for educational services like “Shinken Zemi” and “Kodomo Challenge,” suffered a massive information leak involving over 35 million customer records. An employee at a subcontractor for one of Benesse’s group companies, who was involved in system development, exploited their position to sell customer data to a mailing list broker, intentionally leaking personal information. As a result of this incident, two directors resigned to take responsibility, and the company experienced a significant loss of customers.

3.3. Overwork-Related Death at a Major Advertising Agency

In 2015, at the major advertising agency Dentsu, a tragic incident occurred when an employee took their own life due to overwork. The employee’s parents claimed that their child developed depression due to chronic overwork and workplace harassment, and they sued Dentsu for damages. The company was found to have violated its duty of care for employee safety, and the case was settled for approximately 168 million yen in damages.

4. Countermeasures to Avoid Reputation Risk

So, how can you avoid reputation risk in the first place?

Here, we’ll explain the measures to prevent it.

4.1. Avoiding it Through Reputation Management

To prevent reputation risk, it’s essential to engage in reputation management. This refers to the activities a company undertakes to maintain a high public image or to restore a damaged reputation.

4.2. Types of Reputation Management

There are two types of reputation management:

・Proactive Reputation Management (Offensive): This involves taking steps during normal times to gain new positive reputations.

・Reactive Reputation Management (Defensive): This involves responding during emergencies to restore lost reputation after a problem has occurred.

During normal times, the focus is on risk management to gain new positive reputations. In emergencies, after a problem has occurred, the focus shifts to defensive risk management to restore the lost reputation.

We have summarized the specific actions that should be taken in both cases.