Reputation Risk – Investor Relations

In many plcs the role of the Investor Relations Officer (IRO) is to keep investors informed. To instil shareholder confidence in corporate stewardship and dividend yield. Targets will be met and forecasts delivered, in the words of the IRO mantra, there will be ‘No surprises’. Whether the IRO reports into a Communications or Finance Directorate the focus is on one segment of one stakeholder group: institutional investors.

Risk to corporate reputation can of course come from a failure to meet the expectations of any stakeholder group and most corporations have many of these, both primary and secondary. However risk to corporate value is of keen interest to institutional investors and reputation, an intangible asset, is a driver of this value. Reputation damage results in value erosion.

Most analysts rely on the drop in share price or market capitalisation as an indication of reputation damage. This is not the whole picture but is understandably newsworthy as it often translates into millions of pounds. Reputation with one group, at one time, excludes damage which will show as a future cost: through decline in future customer revenue, employee morale, and shareholder confidence, all of which will impact on subsequent financial reports.

Reputation is a relational construct – you have a reputation with someone for something so the first question is really: reputation with whom and reputation for what? Two key things about stakeholders that get to get forgotten: firstly the group labels are not mutually exclusive eg it is possible to be both a customer and a shareholder, it is not an either or question. Secondly a stakeholder group is defined by an issue not a company, so the relationship matrix is both complex and fluid.

Add in for good measure the law of unintended consequences – which states that for any action, there will always be some consequences that are not intended – and you begin to see how reputation damage can be caused by other parts of the corporation beyond the reach of a communications of finance department. Investors get to hear of problems from other sources as ‘only good news stays local’ thus the IRO has a difficult job managing shareholder expectations.

Take three well know examples: BA, Tesco and Glaxo all of whom are suffering reputational damage to some degree. At BA the operational problems at T5 caused such disruption to passenger and employee stakeholder group relationships it finally reached institutional investors. Fund managers demanded meetings with the Chairman and CEO to explain how best investor confidence could be restored in the light of share value decline.

Tesco is currently taking legal action against journalists in both the UK and Thailand which may or may not result in a financial settlement. Already pilloried in the UK for its enormous influence over the UK retail trade any victory in court is likely to be pyrrhic. Parallels are being drawn with the McLibel case where McDonalds sued individuals and won damages out of all proposition to the reputational damage inflicted on itself through adverse publicity.

Glaxo failed to release prejudicial trial data about its drug Seroxat which although not illegal was deemed to be ‘ethically irresponsible’ by the UK medicines regulator. The delay in releasing information relevant to consumers follows a well trodden path of other global corporations like Cadbury who delayed the recall of certain chocolate products last year pending the analysis of public health laboratories.

What is the common thread? Operational failures indicate that a business is not running smoothly. Passengers, journalists or regulators are all stakeholders with whom a reputation must be nurtured. Managing these relationships to preserve value is not the job of the IRO but repair to damage among them will ultimately become his responsibility when investor confidence is shaken.

Talk of reputation damage makes for emotive headlines but fails to mean much to risk or finance people who want to know the cost of damage. Herein lies the problem, reputation damage is not caused by one event, it is caused by a misalignment of expectation and delivery. If it was caused by a single event then it could be covered by insurance. Sorry to disappoint you but it is almost impossible to put a figure on reputation damage. A reputation is earned and once trust is gone it is almost impossible to recover.