The Dangers of Reputational Risk

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By Roy Reichold

What is the reputational risk?

Reputational risk is a threat or danger to the good name or standing of a business or entity. It’s the damage that can occur to a business when it fails to meet the expectations of its stakeholders and is thus negatively perceived. It can affect any business, regardless of size or industry. Reputational risk is anything that has the potential to damage the public’s perception of your organization. The biggest problem with reputational risk is that it can erupt out of nowhere and without warning.

Examples range from a senior executive indicted for insider trading to a cashier caught on camera refusing service to a customer, to a breach of your customer’s personal data. Hospitality businesses are especially vulnerable to reputational risk. As consumers leave more detailed social media reviews and travelers search online consumer platforms for these reviews, reputational risk is something all hospitality businesses are acutely aware of and must monitor closely. Reputational risk is important to understand because a company’s reputation can correlate with its overall success. When a negative event affects a company’s public perception, customers may be less likely to choose it over its competitors. This can lead to revenue loss, which can affect the stability of a company.

Impact caused by reputational risk:

It increases liquidity risk, impacting stock prices and cutting market capitalization. It will certainly result in loss of customers and falling sales. It can undermine employee retention, and make it hard to recruit new talent, increasing staffing costs and hitting operating margins.

Social media has made reputational risk scenarios even more dangerous for businesses as consumers can quickly and easily take to their accounts and share bad experiences with global audiences within seconds. It is important to create a culture of risk awareness and to incorporate risk planning into business decisions. The complexity of modern business necessitates that managers in the hospitality sector have greater skill levels than ever before. This research should help hospitality managers to better understand the core risks and link them to strategy.

The growing role of technology along with human connections is shaping the hospitality sector and redefining the travel ecosystem. Future travel experiences are likely to be influenced by a blend of technology and human experiences. Many companies are applying the traditional risk management model in their businesses, while ERM (Enterprise Risk Management) is their future goal. Enterprise Risk Management is a holistic top-down approach that assesses how risks affect a business and devises plans on how to approach different risks.

The evolution from a traditional risk management model to ERM is challenging, so it is important to have an appropriate framework in place for its implementation. It is very important to have an insurance advisor that understands all of your business’s risks and has a process of evaluation.

Hospitality managers need to know how to proactively manage risk management and ERM as the sector is increasingly vulnerable to internal risks. The hospitality industry should aim to manage risks strategically to increase the likelihood that organizational objectives can be achieved.

The hospitality industry has been hit hard with challenges during the COVID pandemic. For a sector that prides itself on customer service and adapting to change, the last few years have been rough.

As a sector, hospitality includes restaurants, bars, and hotel businesses; as well as other types of lodging and travel businesses, such as Airbnb operators, real estate managers, and tour guides.

Under the best of circumstances — and without COVID-19 restrictions to complicate matters — the hospitality industry must take myriad precautions to protect guest information from prying eyes and hackers. Hotels routinely store a wealth of personal information such as addresses, credit card information, and passport numbers, making hoteliers a desirable target for hackers.

For example, Wired magazine recently reported that Marriott International has been hacked twice in recent years. Once in early 2020, compromising the sensitive information of an estimated 5.2 million guests; and a massive breach in 2018 that had exposed the information of 500 million people who had made reservations through one of the hotel giant’s portals. Hoteliers aren’t the only ones with cybersecurity challenges, but let’s start by taking a look at what hotel chains can do to better their risk management.

How do you manage risk in the Hospitality Industry?

Whether we stay in a hotel room for business or pleasure, the goal of hotel management is for customers to have a smooth experience that will entice them to return for another stay and, ideally, to share positive reviews on social media.

  • Safety: Hotel companies are busy environments, every hour of every day. The personal security of guests is a paramount issue. Staff is often at risk of falling, tripping, or straining themselves while lifting luggage. An unsafe work environment can lead to costly healthcare premiums, workers’ compensation claims, or complaints (and even lawsuits) from guests who perceive that they were hurt on the property.
  • Cybersecurity: The hospitality industry collects increasing amounts of customer data, such as tracking guests’ spending habits and choices so the hotel can provide more personalized service. Guest profiles are designed to make rebooking easy, and the profiles often contain a treasure trove of private data, such as credit card numbers, email addresses, and personal preferences. Guests share this detailed data assuming that hotel owners and hotel management will keep it safe, and it is a critical risk area that must be addressed by the hospitality industry.
  • Privacy: Credit card and payment data protection are crucial. The hospitality industry itself does not have a set of privacy rules to protect any data collected. Rather, payment card and credit card management are regulated by the Payment Card Industry (PCI) standards for compliance, which must be followed to best protect the privacy of guests.
  • Payment Apps: Point-of-sale systems that run on wifi are convenient for bar and restaurant staff, but do raise cybersecurity concerns. Some apps are simply not safe to begin with, or they become unsafe because they aren’t properly updated when patches are issued for known cyber risks.

As consumers leave more detailed social media reviews and travelers search online consumer platforms for these reviews, reputational risk is something all hospitality businesses are acutely aware of and must monitor closely.

How do you control reputational risk?

The following are five ways you can help prevent and mitigate reputational risk:
1. Protect your brand against data breaches
2. Be vigilant about customer service mishaps
3. Keep your employees happy to prevent the reputational risk
4. Illustrate your company values
5. Be mindful of ethical conduct

It doesn’t matter which branch of the hospitality industry you work in; a poor online review may hurt your business for a long time. New hotels and restaurants can be especially vulnerable to a harsh review, and it’s super important that hospitality companies dedicate time to monitoring how, when, and where they are mentioned online. Work with a dedicated Risk advisor that is very familiar with your industry and has a process of identifying potential risk hazards.

MEET

Roy Reichold is a Senior Risk Advisor at Lakenan Agency in St. Louis. For 25 Years he has specialized in assessing risk specifically for the hospitality industry across the Midwest

For 20+ years, the MEET family of products have provided regional and national resources that have kept corporate, association, medical, education, independent, and religious meeting and event planners informed about relevant vendors, industry news, tech innovations, and resources that impact and influence how and where they plan their group business.

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