Reputational risk is the wonderfully vague term that is being used more and more to justify decisions to terminate a business relationship when an objective reason is unavailable. According to an excellent article in the Georgia Law Review, "Regulating Bank Reputation Risk," the concept of reputational risk really took off in the 1990s when federal regulators were looking for a way to incorporate subjective policy and social considerations when examining financial institutions.
The first phase of using reputational risk as a regulatory tool culminated in Operation Choke Point, which was a joint effort of the Treasury Department and the FDIC to target certain undesirable, but legal, businesses. The exposure of Operation Choke Point ended the direct use of reputational risk by regulators to force behaviors at individual banks, but the concept was so powerful it continued to incubate and expand. Today, large banks and big corporations are using the reputational risk tool to drive social-justice policies.
As pointed out in the Georgia Law Review article, the reputational risk tool heavily relies on the concept of stakeholder capitalism. Initially, the stakeholder in question was the regulator itself, but just as the power of reputational risk was becoming evident, so too was the role of stakeholders. The concept of stakeholder capitalism has continued to grow and now is an important element of the environmental, social, and governance (ESG) movement.
More HERE
