Consider the conflicting interests of regulators, shareholders, management, corporate directors and employees on the matter of incentive pay clawbacks. According to Bloomberg (15 May, Marcinek, Griffin, and Kopecki), the company “can cancel stock awards or demand they be repaid if an employee ‘engages in conduct that causes material financial or reputational harm,’ JPMorgan said in its annual proxy statement. The company will claw back pay if it’s appropriate...”
‘Appropriate’ is a squishy word. Stakeholders want to know what formula will be used to convert the magnitude of the alleged damage into the magnitude of clawbacks, and at what time after the alleged damage was precipitated will the magnitude of the damage be assessed. Remember that $millions of compensation and bonus pay are at risk. Bloomberg reported that “New York City Comptroller John Liu said that JPMorgan should tell shareholders it will ‘aggressively claw back every single dollar possible from the executives responsible for the $2 billion loss.’” Employees subject to the clawback will probably have other opinions.
JP Morgan Chase’s corporate directors, caught between regulators on one hand and litigators – employees and investors tend to speak through litigators -- on the other, will find little comfort in subjective measures of reputation. Which means that the company’s D&O insurance carriers are no doubt wishing that the Directors would turn to objective measures and establish standards before they effect a clawback. More generally, every corporate board of directors that has identified reputation to be material to their business –there were 3414 public companies as of December 2011 that disclosed this in their proxy statements – should be seeking a solution to their need for objective reputation metrics if only to preempt future issues.
Fund managers and financial advisers would probably like objective measures, too, given the prevalence of concern about reputation risk. Auditors would no doubt appreciate objective measures, not only in the context of controls, but because reputation has also now been identified as a driver of liquidity. Last, communications professionals would likely find better ways to shape the stories surrounding JP Morgan Chase – and every other publicly traded client company -- if they had objective measures of reputation.
There are two different families of instruments stakeholders could turn to today to address their needs for objective measures of reputation. The best known family are survey-based instruments such as the Reputation Institute’s RepuTrak. The Reptrak 150 for 2011, the most recent publicly disclosed survey, reports that JP Morgan Chase’s ranking was 127 out of 150, and that its score was 59.89 up from 55.78 in 2010. The annual rankings had Morgan Stanley at 123 with a score of 60.51 up from 52.48 in 2010, and Goldman Sachs ranked at 147 with a score of 37.14 down from 46.75 in 2010.
There are arguably limitations to the value of these annual rankings. Survey-based measures provide a degree of reputational resolution that is both too late and blurry for time-sensitive issues such as compensation, equity, and tax. In addition to being mostly backward looking, the Economist newspaper noted that there are issues with the mix of underlying factors underpinning these survey-based metrics.
An alternative family to surveys comprises observational instruments, Steel City Re's system, for example, infers reputation in quantitative terms from the economically relevant activity of stakeholders. The formulation of these metrics is algorithmic and follows the philosophical dictum of Steel magnate Andrew Carnegie who dismissed surveys in favor of observation. “I used to listen to what people say, now that I am older I just watch what they do.”
Taking a long view of JP Morgan Chase, it can be seen that the company's Steel City Re reputational value metric, a non-financial measure of value, has been volatile for the past three years. The reputational value metric of 0.55 GU on May 17, after a fall from a high of 59.7 GU, was nevertheless higher than the lowest value over the trailing twelve months – 0.54 GU on November 4th.
One benefit of metrics of this type is that they foster process controls, and they help to flag extraordinary deviations -- events that could be identified with bona fide reputational damage. In this context, one should note that JP Morgan Chase’s reputational volatility has been so great that the lower boundary of the two-year 2.25 standard deviation of the mean reputational value metric, 0.438 GU (Loss Gate 1), has not yet been breached by the current activity. On the basis of JP Morgan Chase's historical reputational value metrics, and in the context of the three-year long view, this current event could be viewed as just one more bump in a long and volatile history of bumps.
On the other hand, on the basis of its Steel City Re corporate reputational ranking, a relative measure of reputational standing, and in comparison with a peer group comprising all 7400 publicly traded companies tracked by Steel City Re, JP Morgan Chase's current drop from the 79th percentile on May 10 to the 51st percentile May 17 would appear to be material. Is this not incontrovertible evidence of a reputational crisis? Sadly, no. Even this striking piece of evidence is confounded by the fact that the reputation of the banking sector as a whole has been damaged by risks emanating from Athens.
Looking at metrics more familiar to followers of this blog, the bar graph below top right confirms the potential for confounding data. The chart shows that because of the Euro-area crisis, the entire banking sector as of 17 May comprising 216 companies -- one of many possible custom peer groups -- has had awful trailing twelve month (TTM) equity returns. The group's median return was -17.3%. JP Morgan Chase's return, after the mid-May fall, was -23.4% placing it in the 42nd percentile among its banking sector peer group. Over this same time period, the S&P500 lost only 1.6%.
Yet the JP Morgan Chase economic return is superior to two potential bell weather peers first mentioned in the RepTrak data. Morgan Stanley, which was friended by Facebook to be the lead May 18 IPO underwriter from a field of 33, reported a TTM return on equity in the 40th percentile while Goldman Sachs, an icon in its field, reported embarrassing returns earning it a ranking at the 33rd percentile.
Not surprisingly, then, JP Morgan Chase's reputation as of 17 May is still higher than Morgan Stanley. It's corporate reputation ranking relative to the banking sector peer group is at the 44th percentile while Morgan Stanley is ranking at the 30th percentile. More suprising, perhaps, is that Goldman Sachs, notwithstanding poorer economic returns, is still dominating the other two with a ranking at the 83rd percentile. Among the explanations for the patterns seen are the volatility profiles of the reputation rankings. JP Morgan Chase jumped from the 16th percentile for the past year to the 62nd percentile for the past quarter, Morgan Stanley has been in the low 70's consistently, and Goldman Sachs has dropped from a one year volatility ranking in the 77th percentile to a past quarter ranking in 38th percentile.
There are still a few more ways to extract information from the quantitative Steel City Re reputational metrics and gain further insight into the current crisis. The top left chart below illustrates the magnitude of the JP Morgan Chase reputational ranking movement and economic returns between 10 May and 17 May relative to the peer group of 216 companies in the banking sector. It is striking. The charts at right illustrate the relative positions of Morgan Stanley, JP Morgan Chase, and Goldman Sachs on 17 May. Last, the time series chart at bottom left illustrates the trailing twelve months and emphasizes the point that reputation is a dynamic variable impacted by the impressions of many different stakeholders: customers, vendors, employees, investors, creditors, and regulators. That means than any objective measures established by a board of directors to clawback rewards, or to grant awards as UBS and BP reported recently, need to be defined both by magnitude and time.
Reputational metrics today are essential managerial and oversight tools. They objectify what would otherwise be subjective decisions at risk for being second guessed. Moreover, they inform various stakeholders of the status of an asset increasingly felt to be a vital part of a company's value.
Of course, Corporate Directors would not be the first to use reputational metrics to inform their actions. The RepTrak metrics, for example, have informed marketing executives seeking to improve their communication strategies. The Steel City Re metrics have informed equity investors seeking value opportunities. One visible example is the RepuStars Variety Composite Equity Index calculated by Dow Jones Indexes which is reported on this blog each Monday. Hedge funds have also found the Steel City Re metrics useful in screening equity opportunities and insurers have found the volatility measures of the Steel City Re metrics helpful in screening for increased D&O litigation risk.
Many different stakeholders today need quantitative reputational metrics for a wide range of core business activities. Since companies have already disclosed the materiality of reputational risks, they have opened the door to reputational management. In our culture, we tend to manage that which we can measure. As the JP Morgan Chase clawback issue shows, the need to adopt quantitative measures of reputation is a time-sensitive matter for many stakeholders.
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