“There was worlds of reputation in it, but no money,” wrote Mark Twain in ‘A Yankee at the Court of King Arthur’. According to Reputation & Value - the case of corporate catastrophes, firms with strong reputation equity can outperform the market by over 100%. And should a major corporate problem hit the headlines, it does not necessarily spell the end of reputation. Indeed, careful crisis management can enhance both reputation equity and value.
‘The pursuit of shareholder value represents a long-term and comprehensive approach to maximising claims for all stakeholders in the firm, and to attracting capital for future value creation,’ says the report. Most of the companies analysed have considerable reputation equity, beyond that generated by the corporate brand.
Catastrophes provide a unique opportunity to evaluate the response of financial markets to events that carry implications for a firm’s reputation. The report focuses on 25 major corporate catastrophes and traces their impact on stock returns. The results are interesting. As might be expected, in all cases the catastrophes initially had a significant negative impact, of 7% of value on average. Yet, also on average, there was an apparent full recovery to market expectations in 100 trading days. This suggests that the net long-term impact on stock returns is not significantly worrying. Companies’ ability to recover the lost shareholder value over the long-term did, however, vary considerably.
The companies that recovered particularly well were those that had strong reputations. But the companies that proved worst at recovering were also those with strong reputations. The reason for this apparent anomaly seems to lie in the fact that a catastrophe allows the stock market to re-evaluate the company’s management. This re-evaluation takes place at an early stage. The initial loss of stock value varied from an average of 3% for companies that eventually recovered to 12% for those that did not.
A catastrophe may represent the most immediate kind of challenge to corporate management, but there are many other challenges that companies have to deal with. The implication of the report’s findings is that poor crisis management raises question marks about management’s abilities in other areas. And this is a far more significant factor in terms of eventual recovery than whether the company concerned had catastrophe insurance.
The report also demonstrates that companies with strong reputation equity should not rely on this goodwill in times of crisis. If such a company does not manage a crisis well, its reputation simply has further to fall.
Further, however successful a company may be in preventing a catastrophe in-house, its crisis management skills may still be tested if a strategic stakeholder meets with disaster. With an increasing amount of business conducted through strategic alliances, this is a problem which can only get bigger. It is estimated that the alliance activities of the largest 1,000 US firms will account for 35% of their total revenue by 2002 - up from 21% in 1997 and less than 2% in 1980.
The report says that the impact of a corporate catastrophe on reputation equity is seldom limited to the company directly suffering the crisis. In many cases, there is a strategic stakeholder - a key supplier or key customer, a strategic ally or partner - whose business is affected as a direct consequence of the crisis. Reputation loss travels.
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Sue Copeman is editor, StrategicRisk
Reputation & Value - the case of corporate catastrophes - is written by Rory F Knight and Deborah J Pretty and is available from Oxford Metrica.
Email: deborahpretty@oxfordmetrica.com
COVERING COSTS
Some insurers are responding to the need to safeguard reputation. Deborah Pretty says: “AIG has been the first company to offer practical assistance for reputation to insureds. They embed cover for expert consultants into a wide range of their insurance policies, in order to mitigate the potential damage to a company’s reputation”.
KEY QUESTIONS ON REPUTATION EQUITY AND VALUE
POLICY IMPLICATIONS
