How to Minimize Reputational Risk to Your Small Business

Your company’s reputation may be its most valuable asset

Exhausted business man puts head in his hand while talking on the phone
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Large businesses are more visible to the public—so they’re more prone to bad publicity than small companies. Large businesses are also more likely to have the financial resources to repair a damaged reputation. Unfortunately, small companies may not survive a negative news event, especially in a social media era that so easily fosters the spread of harmful information. That’s why it’s critical to consider potential reputational risks to your company before they occur. Here’s a list of some of the most common problems and what you can do to protect your small business.

What Is Reputational Risk? 

Reputational risk is the possibility that bad publicity could harm a business’s public image and impair its revenue-generating ability. 

A company's reputation is subjective and based on public perception. An opinion of a business may (or may not) be accurate, but in either case, it can drive the behavior of consumers, employees, investors, and regulators. While a negative opinion may deter people from interacting with the company, a good reputation helps a small business obtain new customers, secure financing, and attract qualified employees. It fosters connections with the community, vendors, suppliers, consultants, and others.

A good reputation takes a long time to cultivate and considerable effort to maintain, and then it can be quickly destroyed. Many businesses are connected to customers, suppliers, and other stakeholders via the Internet, and this leaves them vulnerable. Their reputations can be easily attacked with a few taps on a computer keyboard.

Types of Damaging Events

Media scandals that can harm your firm's reputation include:

  • Data breaches: While any data breach can damage your company's reputation, an incident involving sensitive data such as social security numbers or birth dates may cause more harm if data thieves sell it on the black market. Phishing emails to employees, because they are often a direct line into your company’s computer systems, are a leading cause of data breaches, according to the Small Business Administration. 
  • Employee issues: It’s bad enough if you discover your workers (or worse, your company principals) have broken the law. But if that fact goes public, it can seriously harm your company's reputation. 
  • Recalls and defective products: You want your products and services to be top-notch. But if you have to recall a product, or if you receive bad publicity for faulty work, you have to not only fix the problem (and manage potential legal issues) but also repair the damage to your reputation. 
  • Negative social media posts: A customer can post a negative or inaccurate review on a social media site such as Yelp, or an employee may write something embarrassing about your company. 
  • Workplace accidents: Accidents can be particularly damaging if they involve Occupational Safety and Health Administration (OSHA) citations or other evidence of safety issues. For instance, an employee of your construction business could be injured in a trench collapse that could have been prevented with proper shoring.

Protecting Your Company's Reputation

Many business owners don't think about their company's reputation until it’s already been damaged by negative publicity. This is a mistake. The best time to protect your firm's reputation is before a damaging event occurs. Here are some tips:

  • Identify potentially damaging events: You don't need to pinpoint every threat, just the ones most likely to occur. You can use the list outlined above as a starting point.
  • Decide customer issue responses: If you get a negative Yelp review, you can do a number of things: You can ignore the post, ask satisfied customers to post positive reviews, or offer to right any perceived wrongs. If the reviewer has made false statements (for example, the health department’s purported bad grade), you should counteract with facts.
  • Institute a clear social media policy: Specify who can access your firm's social media accounts, who can post content, and what message you want to convey when communicating about your company. Your social media policy should also describe how workers should behave online.
  • Address small problems quickly: Small issues can become big problems if they’re not resolved right away. A few cockroaches in a commercial kitchen can quickly become an infestation. Likewise, a complaint about a defective product could indicate a manufacturing problem that left uncorrected, could eventually trigger a formal recall.
  • Create a cybersecurity plan: The Federal Communications Commission offers an online resource called the Small Biz Cyber Planner to help you create a customized cybersecurity plan, or you can hire an expert to audit your business’s potential risks and exposure. Your plan should include a process for securing sensitive data on your network, website and within your payment systems. It should also address scams, fraud, and employee security, along with a process for responding to incidents. 
  • Seek help from online reputation companies: These companies can monitor for reputation damage, help you suppress bad reviews, news stories, or social media posts, and raise your overall online profile.

Some small businesses have sued negative online reviewers. Others have asked the courts to compel Yelp to remove reviews. In most cases, First Amendment protections have prevailed, according to Yelp, and it’s not clear the ensuing publicity about the disputed review doesn’t do even more harm.

Can Insurance Help? 

You may be wondering if standard insurance policies protect you against reputational damage. Not usually, no. General liability policies cover your business against lawsuits. In other words, when it’s alleged your business has harmed someone else, a liability policy will cover that third party’s damages and your legal fees, but not the effects an incident may have on your business. 

There is such a thing as standalone reputational harm insurance, but it’s not clear how available these are to small businesses. 

Small business owners may be able to cobble together limited protections through other forms of insurance, though many find the cost of special policies prohibitive. For example, a cyber liability policy will cover the fees charged by a public relations firm hired to help minimize negative publicity related to a data breach. But 42% of small businesses surveyed by the Insurance Information Institute and J.D. Power in 2019 said they didn’t get such coverage because it was too expensive.

The Bottom Line

A good reputation is one of your most valuable assets. You can protect it by assessing potential threats, monitoring customer attitudes, developing an effective social media policy, and resolving any problems quickly.

Article Sources

  1. EY. "Leading Insurers Address Reputation and Its Risks." Accessed March 5, 2020.

  2. Small Business Administration. "Small Business Cybersecurity." Accessed March 5, 2020.

  3. SHRM. "Social Media Policy." Accessed March 5, 2020.

  4. Insurance Information Institute. "Cyberrisk: Threat and Opportunity." Accessed March 5, 2020.