Reputational Risk: The Hidden Dangers of Global Supply Chains

In a political, economic, and social climate that features highly aware and conscious consumers, and investors well-versed in a new class of environmental, social, and governance (ESG) risks, what goes on within your supply chain can no longer be out of sight, out of mind.

This article explores the reputational risks associated with complex global supply chains and offers strategies for comprehensive supply chain risk  analysis and mitigation.

What is Reputational Risk, and Why Should Companies Care?

Bad news travels fast in a digitally connected world. Social media platforms tend to amplify corporate misconduct, while simultaneously giving brands less time to prepare their response.

But reputation is everything in a modern business context. Corporate reputation influences market share and sales figures. It affects employee retention and new talent attraction, and, crucially, a company’s borrowing ability. In an increasingly transparent business environment, where detailed disclosures are rapidly becoming mandatory, every supply chain risk factor poses a threat to the bottom line.

“There are so many ways that reputational issues can affect your people, your brand, and your bottom line,” says Cvete Koneska, head of advisory at Dragonfly, a FiscalNote company. “Companies can no longer have a risk management system that ignores reputational risk.”

While direct and indirect reputational risks originate from the actions of the company and its employees, respectively, tangential risks are those that result from the actions of a partner or supplier. Given the relative size of supply chains compared to individual companies, and the limited control organizations have over their suppliers (particularly those further down the stream), tangential risks — that is, those that originate in the supply chain — are the biggest looming threat for most businesses.

“These risks may seem remote,” Koneska explains, “but even those that arise from fourth or fifth-tier suppliers pose a direct financial threat. Brands can no longer claim ignorance for what goes on in their supply chains; they must ensure that what happens upstream complies with both relevant regulations and the values the organization stands for.”

Supply Chain Risk Analysis: Impact on Corporate Reputation

Although supply chain risks such as disruptions and delays can damage a brand’s reputation for reliability, there are certain risks — particularly those that put your consumers, or other communities or environments at risk — that can be particularly damaging to corporate reputation.

Non-Compliance

As supply chains grow increasingly complex and reach all corners of the globe, the risk of non-compliance increases. Different countries’ laws, regulations, and cultural nuances make standardizing compliance and risk management difficult. But the consequences of non-compliance are numerous and include legal action, financial penalties, disruptions to business operations, and reputational damage — particularly as it relates to ethics-related compliance issues.

“Companies being aware of those regulatory developments and then what companies they're working with that are in those markets that are being impacted is going to be critical,” says Joshua Haecker, FiscalNote’s head of product, global intelligence.

Ethical and ESG Risks

Supply chains are a potential minefield for ethical and ESG violations. From social concerns such as forced labor and human rights, and environmental issues like waste management and greenhouse gas emissions, to governance matters such as corruption and bribery, the risks are numerous. Many companies will soon be even more exposed due to new regulations that require Scope 3 (supply chain) disclosures, such as California’s new climate disclosure bills (SB 261 and SB 253) and the European Union’s Corporate Sustainability Reporting Directive.

Consumers, investors, and employees are paying more attention than ever to violations of ESG-related regulations and norms. A single event or story can quickly escalate to the “scandal” level, causing consumers to boycott, share prices to plummet, and leaving a lasting mark on a brand’s reputation.

Cybersecurity and Data Breaches

Supply chains are heavily reliant on data exchanges and technology systems, and significant quantities of sensitive information are regularly passed along the stream. This makes supply chains uniquely vulnerable to cyberattacks such as ransomware, data breaches, and intellectual property theft. Aside from the direct effect these attacks have on the business, when news of security breaches reach mainstream media, brands can spend years building back trust with the public.

Why Complex Supply Chains Make Reputational Risk Management Difficult

Even with comprehensive supply chain mapping, getting proper visibility and transparency from end to end can be difficult. The further down the supply chain, the greater the reputational risks become — visibility declines as does control. When they’re aware of them at all, companies often only have indirect contact with their second-, third-, fourth-, and fifth-tier suppliers.

“Managing these suppliers is more complex precisely because of the distance involved,” says Koneska. “It’s not always within your power to control these risks. Though you may have a contractual relationship with third-party suppliers that gives you some leverage, their suppliers expose your brand to risk that you have very little control over.”

Koneska explains that, until recently, contracts that outlined terms and conditions for lower-tier suppliers were deemed sufficient for risk management purposes. Increasingly, however, this is no longer enough.

Managing Reputational Risks with Supply Chain Risk Analysis

“There is no clear-cut solution for managing lower-tier supply chain risks,” explains Koneska. Instead, there are different techniques used for different scenarios.

“Some companies engage in selective due diligence when onboarding new suppliers,” Koneska says, “looking at their track record and their suppliers.” Others will select a ‘sample’ of third-, fourth-, and fifth-tier suppliers each year to assess, hoping that these samples are representative of the broader supply chain. Still, others will identify high-risk jurisdictions or sectors within their supply chains and conduct additional due diligence in these regions.

But Koneska sees limitations in each of these approaches. “All of these exercises are one-off,” she explains. “They can give you a snapshot of what’s happening right now, but they don’t necessarily give companies a full picture of their supply chain risks and how these may evolve or change.”

Haecker likewise believes that, while companies have methods to identify reputational risks, they often struggle to detect and address the full range of risks that could impact their business. “You'll find technology out there that's really good at identifying cyber risks or data privacy risks or regulatory risks, but most companies can't afford to and haven't had time to investigate solutions to cover the full range of critical risks,” he explains.

Technology Can Help Companies Manage and Pre-Empt Reputational Risk

Risks that can affect a company’s reputation need to be monitored and assessed in real time, a task that is best managed with the help of cutting-edge supply chain risk analysis technology.

FiscalNote Risk Connector scans millions of websites every 15 minutes. It establishes connections across industries, detects emerging risks, monitors their evolution, identifies trends, and tracks their emergence. These proactive solutions track risks that arise or have already occurred within a network of vendor relationships.

“FiscalNote Risk Connector gives a comprehensive view of the entire supply chain,” says Koneska, “extending further into the fourth and fifth tier and beyond.” By mapping the complex relationship between companies and their suppliers, Risk Connector reveals where certain risks lie in your supply chain, as well as the nature, severity, and spread of these risks. Having a detailed and near-real-time map of your supply chain’s risk hotspots puts your brand on the front foot and allows your team to pre-empt potential negative events, swiftly managing crises if and when they occur. When it comes to corporate reputation management, timing is everything — every minute counts.

How Your Brand’s Reputation Depends on Supply Chain Risk Analysis

Ultimately, a supply chain is only as strong as its weakest link — and it only takes a single event with one supplier to cause lasting and widespread reputational damage. In today’s corporate climate, supply chain risk analysis must be a core feature of broader risk management strategies.