What is reputational risk? Let’s look at the following real life examples as a guide-
1. A bank opened its first branch in Abuja and recruited a new manager that understood the terrain so that the branch could take off and operate ‘seamlessly’. However within a very short time of resuming operations, the branch manager in the guise of going out for ‘marketing’ was found severally to have been patronizing a particular ‘bar’ and drinking heavily to the extent that he was always one of the last ‘customers’ that would leave the bar on daily basis and sometimes he would be dragged into the official car (with logo) by the driver and driven off under the watchful eyes of the other beer drinkers. At a point, his photograph was taken while drunk and the news was spread over the town. Though he was later removed and sacked but it became a serious reputation issue for the bank for a long time. People wondered how a serious bank could have recruited a drunkard as a pioneer manager in a newly established region, the Federal Capital for that matter!!!
2. A debate was conducted in a social setting and the following question was directed to the participants who were mainly university undergraduates in Nigeria –
Q – Supposing you receive an alert on your phone that your account was credited with N5M and you know it is a mistake since you have never deposited more than N5,000 at once in that account, what would you do?
There were several responses but one of them appeared quite interesting as follows:
STUDENT: (She mentioned the names of few banks and concluded as follows): If it is Bank A, B, or C, I will refund the money immediately. But if it is Bank D, I will never return the money.
DEBATE COORDINATOR: Why won’t you refund?
STUDENT: Because the bank (Bank D) where I keep my account is notorious for secretly taking people’s money in form of ‘charges’ even when you do not transact any business with them throughout the month. I kept a sum of money in the account and within 6 months the balance had gone down drastically just because every month, this bank would debit my account with one spurious charge or the other whereas I did not withdraw nor paid in cash throughout the 6 month period. All my friends who have account in that bank have similar experience whereas those who opened their own accounts in a particular other bank (also on the campus) do not have these ugly experience. Their bank usually credit them with some interest at the end of every month. It is rather funny that we have the same type of account in these banks. I made some enquiries and found that this same bank has been reported to the CBN several times by their customers, for over-debiting their accounts (especially the loan customers) and they have been made to refund many of these excess charges to the customers. Why are they always engaged in these fraudulent practices even in these recession period. Are they the only one looking for money? So as I said, if ‘their’ money gets into my account I will withdraw and spend it. That bank is a thief and cannot be trusted.
The takeaway here is that in the ‘eye’ of the public, this bank is known to be grossly involved in sharp practices and this has affected its reputation badly even if the bank did not know. This same situation can occur in manufacturing companies which puts 50kg on their label whereas the content inside the product bag is not more than 40kg. OR a company which has been parading obsolete stocks in their financials as part of their current assets etc OR a distributor that enjoys credit facility from the manufacturers or their bankers but will always make excuses when it is time to pay back. These attitude may eventually consume the institutions or their ‘people’ or both, if they choose not to ‘repent’ of these ‘sharp’ fraudulent practices, especially nowadays when COMPLIANCE and REGULATORY issues can only be taken for granted at the operators ‘peril’.
From the above examples we can therefore deduce that reputational risk is the risk that a company will lose potential business because its character or quality has been called into question.
Wikipedia also defines it as the risk of loss resulting from damages to a firm’s reputation (in lost revenue; increased operating, capital or regulatory costs or destruction of shareholder value), consequent to an adverse or potentially criminal event even if the company is not found guilty.
A company’s reputation is perhaps its most valuable asset. An institution should care to always ask; Who do people think we are?
To be continued….