Reputation Damage

Some commentators will tell you that reputation damage is only ever temporary, however at the time of writing over £5bn has been wiped off the value of News Corporation. The value erosion has occurred over 10 days and reflects investor flight in the face of a corporate car-crash with no end in sight. At the same time last year the Deepwater Horizon oil spill in the Gulf of Mexico had been gushing for 3 months and wiped £46bn off the value of BP. Reputation damage is real and it is costly, don’t let anyone tell you it is insignificant

What causes investor flight of this magnitude? There are two key factors. Firstly management is shown to be powerless to stop toxic stories leaking daily. Global corporations with supposedly exemplary governance and leadership have been exposed as weakened by an inability to stop haemorrhaging bad news. Investors back winners not losers. The second factor is the prospect of extended legal action to defend charges of negligence (BP) or corruption (News Corp) in different national jurisdictions. Nothing gives an investor cold feet like an uninsurable liability or unknown legal costs, especially where corporate governance and integrity are in question.

There are other similarities between News Corp and BP, especially with regard to their attitudes to risk and the management of future uncertainty. Both BP and News of the World had a pioneering culture in their respective markets. BP was innovative in Deep Water oil exploration and, being results driven, was prepared to take risks to be the first to extract from a new field. News of the World was innovative in news gathering and was prepared to take risks to be first to break a story. In each case the rewards outweighed the risk.

Each organisation had a relatively high risk appetite, their respective industries reward success and results; risk taking is an inherent part of the formula for success. Pioneers take more risk because the rewards are greater. Risk avoidance and aversion are not on the menu for a business based around pushing boundaries, whether it is primarily in the field of employee safety or public decency. Investors back a winning business model and both BP and News Corp had a track record of success prior to their respective financial crises.

Organisations with a higher than average risk appetite also exhibit and higher than average risk tolerance - that is the loss they are prepared to accept in feeding their appetite. Regulator or government censure and fines are not uncommon bedfellows for any pioneer, both BP and News of the World had previously settled fines which they regarded as operating costs. This approach fuels a cavalier attitude to risk, every decision is reduced to a cost-benefit calculation thus sacrificing the bigger picture of strategic and political risk to the narrow focus of solely financial risk.

Why did investors flee from two previously successful organisations? The answer is simple, the risks they were taking were more than financial: environmental, ethical and political, these were not on the risk radar. As a result the response was slow and the corporations failed to address the three C’s –

Candour – Acknowledging and accepting an error or wrong-doing must be quick and unconditional. Pioneering cultures will be slow to do this as they are traditionally controversial, provocative and challenging by their very nature.

Contrition – There must be a personal apology and some ownership of corporate guilt. This cannot happen without the previous candour. It is easier to blame others than to admit personal error so this is difficult for anyone, especially a corporate leader.

Reputation among investors matters and they want future performance to be without risk of value erosion. They want to believe that the management team can handle any risk they face so naturally get nervous when faced with evidence to the contrary. The reputation of BP was damaged by an oil leak which took 152 days to fix, the law suits begin this year so the full cost is unknown. The reputation of News Corporation has been damaged by the actions of the editors on one of its newspapers, the full cost of this has yet to be determined.