1. business and industrial

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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.
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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,
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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.”
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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.
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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.
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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.
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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:
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