Safeguarding corporate reputation
Transcription
Safeguarding corporate reputation
12 The Lawyer | 27 April 2015 The Lawyer Research Service – Special report Reputation resilience in association with Schillings Safeguarding corporate reputation Schillings’ latest report shows reputation management has a direct bearing on share value General counsel have a lot on their hands these days. From hostile hacks, to cyber-attacks and shaky suppliers, the nexus of risks facing large companies is now more complex than ever. If the job of general counsel wasn’t difficult enough, a new report by Schillings, written in collaboration with The Lawyer Research Service, has identified an emerging trend amongst the investment community that is falling below the radar of most companies – analysis of reputation management. The report, Reputation Resilience: How The People Who Value Companies Value Reputation, for the first time establishes a clear link between a company’s reputation management and share value. According to the report, how a company protects its reputation has a direct bearing on how analysts and investors determine its value and how they treat its stock. About the research This article is an extract of a larger research report on corporate reputation resilience written by Schillings in collaboration with The Lawyer Research Service. The findings are based on qualitative interviews with equity analysts, institutional fund managers and private equity funds conducted between November 2014 and February 2015. TL_270415 12 Reputation has long been important because stakeholders are likely to stay loyal to companies with a good reputation and, conversely, punish companies with a bad reputation. This historically resulted in companies employing PR agencies to shape their image and deal with crises. But with today’s rumour mill turbo-charged by social media, and short selling meaning an adverse reputation event can send share prices into freefall, good reputation management needs to go beyond traditional approaches. “Short selling makes it more important for companies to manage their reputations better, because an adverse reputational event can trigger a massive slump in the share price,” confirms Paul Mumford, senior investment manager at Cavendish Asset Management. Given the importance of reputation, you’d expect companies to dedicate significant resource to demonstrating they are managing their reputations. But they are not; at least according to their latest annual reports. The report found that only 11 per cent of the FTSE 100 companies classify reputation as a separate risk category while, damningly, only 3 per cent say they have a way to check they are managing reputation across the business. The report also identifies a wide discrepancy in how analysts and investors assess reputation and factor it into the valuation equation. Some punish companies with bad reputations by increasing the discount rate, thereby lowering the forecast valuation. For others, rath- “Reputation sits at the heart of our investment principles…we look at every aspect of reputation from the management team through to the product and services that a company offers” Fund manager advising evergreen investors er than providing a tangible number, reputation impacts valuation in a softer way and forms part of the qualitative assessment of valuation. So while reputation is factored into valuation across the investment community, for the astute analysts and investors, it is the resilience of a company’s reputation, and therefore its ability to resist news that rattles the share price, which is just as important a characteristic when assessing a company. Good reputation management therefore requires demonstrating the steps taken to proactively prevent reputational damage, so when blindsided by an adverse event from an unexpected source, the company will be resilient and able to withstand it. “In a world where a company’s ability to succeed is linked to the disposition of its stakeholders, it’s perhaps no surprise that the investment community are quick to embrace the subject as part of the valuation matrix,” explains Chris Scott, partner at Schillings. “With no common evaluation methodology, however, the onus is on businesses to establish practices that inspire the confidence of their stakeholders, including investors and analysts.” Entrepreneurs get cut more slack, which quickly gets taken up under scrutiny Interestingly, the aspects of reputation that analysts and investors value most depend on the size and sector of the company. For smaller 24/04/2015 14:48 The Lawyer | 27 April 2015 13 What the FTSE 100 annual reports tell us: Analysis of the annual reports of every FTSE 100 company has highlighted a clear discrepancy between what analysts and investors want to see when it comes to reputation management and what FTSE 100 businesses are currently doing. The most important are outlined below. VALUING REPUTATION: REPORTING: TRANSPARENCY: RESPONSIBILITY: 13% 11% 1/3 23% of FTSE 100 companies describe reputation as an asset in the chairman’s speech. of FTSE 100 companies classify reputation risk as a separate risk category. of FTSE 100 companies link executive remuneration to reputation. of FTSE 100 companies state that reputation is owned by the board. 18% 8% 4% 3% consider the ways in which their reputation can be impacted negatively from social media to environmental issues. of FTSE 100 companies currently measure reputation risk. of FTSE 100 companies define their reputation risk appetite. of FTSE 100 companies currently have a way of checking they are managing reputation across the business. Source: The Lawyer Research Service & Schillings unlisted companies, the reputation of the management team is forefront in investors and analysts’ overall assessment of value. This is natural given the importance of the management team to driving growth of smaller companies. Often, analysts use the credibility and track record of management as a proxy for reputation. However, some interviewed analysts and investors went further, conducting due-diligence and using open source intelligence tools to assess if anything in management’s past could give rise to an adverse reputational event. “Leaders of mid-cap and smaller businesses should consider using reputation risk management as a way of distinguishing themselves in front of investors,” says David Imison, director of risk consulting at Schillings. “In more commoditised sectors, where companies compete against similar businesses with similar products and similar levels of performance, reputation risk planning can prove the difference in marking a probable acquisition target from a raft of possibles.” The report found that analysts and investors set the bar higher when assessing the reputation of large publicly-listed companies. When valuing FTSE 100 companies, it is not just the perceived reputation of companies that matters to analysts and investors, but their resilience to adverse reputational events. The investment community accepts that adverse reputational events will happen, TL_270415 13 so instead the emphasis is on assessing how adequately companies are equipped to respond to reputational events. In addition, bigger companies have less of an excuse for not having the processes in place to deal with a reputational issue given the resources at their disposal. “The most important thing to understand is what they are doing structurally to deal with reputational events when they arise,” says Neil Shah, director of research at Edison Investment Research. “It is good to know what contingency plans are in place: who is responsible for what, how things are going to be communicated to the media and the investment community, generally demonstrating that some thought has been given to reputational risk.” What ends in value starts with values Analysts and investors identified a range of reputation management policies that, if in place, may contribute to a higher valuation. First, analysts and investors repeatedly cited the company’s culture and management philosophy as key in determining reputation resilience. They need to see evidence of that philosophy and demonstration of processes put in place to be convinced that reputation resilience is taken seriously. Importantly, this should not just be conveyed in the small print of annual reports, but be front and centre of the senior management team’s “The most important thing to understand is what they are doing structurally to deal with reputational events when they arise” Neil Shah, director of research at Edison Investment Research communication with the investment community. “Analysts are looking to the company’s leadership to discuss the subject of reputation more fluently,” says Scott. “Unlike CSR which is often an addendum to the CEO’s perspective of company performance, CEOs and the wider leadership need to put reputation at the centre of the business so that it is more centrally aligned and becomes a subject of natural discourse.” Second, the investment community values transparency and the swift dissemination of vital information that might impact reputation. This not only applies to transparency between companies and investors, but also within the company itself. Analysts want to see evidence that information flows freely across the business. If a reputational event happens, they are looking for assurance that the issue will be escalated quickly and dealt with effectively right at the top of the company. “Companies need to better showcase their plans for handling a reputation issue to the investment community, either through general reporting or by proactively updating analysts during quarterly meetings,” says Imison. “During a reputational crisis, companies need to communicate effectively to the investment community. Analysts and investors don’t want to learn about what’s happening to the companies they are covering via the media or other third parties.” 24/04/2015 14:48 14 The Lawyer | 27 April 2015 The Lawyer Research Service – Special report Reputation resilience in association with Schillings Schillings’ view: Six reputation management must-dos 1 2 3 Evidence leadership’s involvement Analysts and investors are looking to a company’s leadership to take responsibility for reputation risk management. To illustrate how leadership are taking this seriously, companies should: evidence the leadership’s involvement and interest in company communications; allocate responsibility for reputation management to an existing committee or establish a separate sub-committee reporting directly to the board and chaired by a board member; and assign accountability to a non-executive director. Ensure the reputations of the leadership team are beyond reproach With the eyes of the investment community firmly focused on the management team, the reputations of board members are becoming inextricably linked to the reputation of the business. With cost-effective tools available, companies should ensure they are conducting digital due diligence on all board members current and new. There should also be specific privacy and cyber risk programmes in place to protect current board members. Create a reputation management system Alongside crisis management systems – that help speed the recovery of a business after a crisis – implement a reputation management system to ensure there is a process for identifying and managing reputation risks. The system should include a plan to handle how the company’s ability to protect itself is perceived by external stakeholders. Third, investors and analysts take comfort when companies define who is responsible for managing reputation. But while there is unanimity that someone should take full responsibility, there is no consensus on who should adopt this role. Some expressed a preference for reputation to be championed by an outsider to the company – a reputable non-executive director to keep management on their toes and ensure the subject was consistently addressed throughout the business – while others prefer a C-level executive to be ultimately responsible. Many of those interviewed also expressed a desire for reputation management to form part of companies’ investor relations function, rather than just their public relations department. The good news however is that analysts’ desire to look to the future means they are prepared to put past reputational crises behind them, so long as companies prove their ability to learn from it. Indeed, some respondents went so far as to suggest that those that had been forced to confront a reputational crisis in the past were more likely to have well-rehearsed plans to handle a recurrence. TL_270415 14 Analysts and investors take a different view on reputation While all analysts and investors interviewed for the research factor reputation into investment decisions, different classes of analysts and investors adopt different approaches for doing so. The most obvious differences exist between private equity funds, which typically invest in rapidly growing privately-held companies, and institutional fund managers, which typically invest in larger publicly-listed companies. The research found that private equity funds are primarily concerned with company reputation because their own business will be impacted if an adverse reputational event occurs in one of their investee companies. Since private equity funds are often the sole investors in their companies, negative publicity impacts the fund’s reputation. This is important because a bad reputation can significantly impact funds’ chances of raising capital in the future. In contrast, institutional fund managers are much less concerned about the knock-on impact of an adverse reputational event to one of their investee companies because they typically hold much smaller stakes than private equity funds, so 4 Employ a reputation risk manager With reputation risk management requiring action from several different parts of the business there is a rising need for a dedicated role to take responsibility for the subject and corral the contributing departments together. Nominating or employing a person in this role is fast becoming a necessity rather than a nice to have. 5 Speak up before being asked With analysts and investors actively looking for evidence of reputation management, businesses can help themselves by making sure information on the subject is more frequently and more obviously available. Nothing will compare to leadership talking about reputation in direct discussions with the investment community and other stakeholder groups, so ensure CEOs and board members are provided with reputation management briefings ahead of discussions with analysts and investment managers. 6 Prove that you understand the consequences of reputation damage Analysts and investors want to understand how business decisions have been correlated to reputation risk. Companies need to conduct reputation impact assessments in parallel with business case development. In doing so, product and service innovations or other strategic actions will be more likely to land in the media in the right way and be resilient to attacks from pressure groups. are therefore less associated with their investments. Instead, institutional fund managers are more concerned about reputation because of its potential negative impact on a company’s valuation. These two classes of investors therefore prioritise different aspects of reputation. Because private equity funds typically invest in privately-held, high-growth companies, the reputation of the senior management team is paramount. This is because the ability of the management team is central to the company’s growth prospects. In parallel, private equity funds often exclude entire sectors for reputational reasons, such as ammunition, firearms and healthcare. Institutional fund managers have a much wider view of reputation and consider a broad set of factors beyond the management team. They look at how companies are set up to avoid reputational events taking place in the first place and also the procedures in place to deal with events when they inevitably arise. Top of the agenda for institutional fund managers is whether companies have a plan in place to deal with adverse reputational events and how adverse reputational events are communicated. 24/04/2015 14:48 The Lawyer | 27 April 2015 Schillings’ view: Chris Scott, partner The last decade provided countless examples of reputation harm impairing the long-term value of businesses. It should therefore come as no surprise that shareholders, as a matter of course, are now looking to the company’s leadership to identify threats and protect their investments. This brings further pressure on leaders: they not only have to report more precisely on the potential damage stemming from any number of future scenarios, but are also tasked with instilling confidence in the measures being put in place to ensure the reputation resilience of the business if one of those scenarios were to occur. Most successful companies face a business environment in which reputation risk is unavoidable, all the more so when the upside of taking commercial risks carries with it a higher level of reputation risk, such as operating in emerging markets or controversial and highly regulated sectors. As this research makes strikingly clear, if a company is unable to demonstrate its processes and competency for identifying and managing a reputation issue, the value of the company may be impacted. One of the insights we found particularly interesting in this research was just how many analysts referenced the financial services sector as a case in point for reputation risk management. In the past analysts and boards viewed reputation damage as a temporary issue that a good company could readily bounce back from. But now analysts consider even the most established businesses to be susceptible to long-term taint when they cannot convince shareholders of their ability to withstand and recover from reputation attack. Despite the worldwide economy turning a corner, and the financial services sector now leading the way in their efforts to manage reputation risk, a deficit of trust still remains. As a result, analysts’ views confirm reputation risk is no longer an issue that can be ignored in the good times; it requires constant attention. The credible steps that a company takes to protect its reputation are a crucial element of the steps they take to build it. Modern business shows us there are no end of detractors who recognise the advantage of using a business’ reputation as a lever for their own gain. With corporate activity and investment increasing, now is the time for all businesses to take the steps investors are asking for to provide the reassurance that they are equipped for any reputational issues that may arise. The reward for those who take the challenge is reputation resilience. TL_270415 15 15 “It basically comes down to the company’s management and board of directors always being in tune with the market…if the company sends out the right signals in practice, then I would be inclined to value it more favourably” Head of equity research, European financial services company Conclusion Analysts understand that adverse reputation events will happen. So what matters most to them is businesses proving they are capable of handling them. Schillings’ report establishes that there is now not only no excuse for company boards not to take reputation management seriously, but a serious benefit to their shareholders if they do. Equity analysts factor reputation management into stock price forecasts, while investors examine reputation when evaluating investment opportunities. It’s important to not just pay lip service to reputation management. The report finds that companies that identify what is important to all stakeholders, including investors, suppliers, customers and employees – and then build a reputation management system on that basis – are valued more favourably by the investor community. Put simply, it’s not just about managing the media. As the report sets out, good reputation resilience starts with leadership, but is underpinned by specific structures, processes and disclosures. The incentive for getting the right people and processes in place are not just a matter of reputation protection but of a stronger valuation in the eyes of the investment community. To receive an exclusive print copy of Reputation Resilience: How the People Who Value Companies Value Reputation, visit: www.reputationresilience.com About Schillings Schillings assists prominent individuals and businesses wherever they are in the world; whatever their reputation and privacy issues. From black swan incidents to friends in the wrong places, successful individuals and businesses face a huge variety of threats with the potential to negatively affect their reputations. Whether it’s identifying threats, defending reputation or protecting privacy, Schillings safeguards client reputations – whatever the threat. in association with: 24/04/2015 14:48