In its final financial report for 2010, Massey said it suffered a net loss of $166.6 million last year. That's down from a $104.4 million profit in 2009, despite higher revenues in 2010. Close to 70 percent of last year's loss, or $115 million, were the result of costs associated with the Upper Big Branch disaster that killed 29 coal miners. The April explosion focused attention on the company's record of safety violations and drew intense scrutiny from federal mine safety regulators. Massey has cited the increased oversight, an ongoing mine disaster investigation and resulting production declines as reasons for its losses. The company also blamed its lower productivity on difficulty in finding enough mine workers.
In short, the reputational consequences of the catastrophic safety event have been costly -- in the last quarter of 2010 alone, the company's losses totaled $70.1 million. This is why. While firms with superior reputations outperform their peers, firms with damaged or poor reputations command lower prices and market share, have higher operating costs, pay more for credit, and have inferior vendor terms. And in heavily regulated industries, they have higher regulatory burdens.
The Steel City Re Corporate Reputation Index shows the precipitous fall in reputation ranking in April, a moderate rebound, and then a final collapse by the fall of 2010. The exponentially weighted moving average (EWMA) of reputation volatility peaked at 80% in October. And the equity value, reflecting the effects of the costs of the safety event, is giving investors an return on equity over the trailing twelve months that is underperforming the median of its peers by 14%.
The story continues. On 2 February, Massey Energy held a conference call with industry analysts. Among the key reputational message points were the comments by COO Chris Adkins that "voluntary quits" were up 12% in the 4th quarter over the same period last year; and from an operational perspective, Massey's labor shortage and increased federal regulation in response to the Upper Big Branch explosion account for a quarterly production shortfall of 300,000 tons.
And then there's the litigation related to reputation and its drivers: ethics, innovation, quality, safety, security and sustainability. In June 2010, a securities class action complaint charged the company with issuing false and misleading financial information to investors. The complaint alleges that Massey Energy claimed to be one of the safest coal mine operators in the industry, but in fact, safety at Massey Energy’s coal mines was allegedly sacrificed so that production goals could be met, and Massey had received undisclosed citations arising from uncorrected safety and other regulatory violations.
There's more. Shortly after the agreement was announced, a prominent plaintiff's law firm announced an investigation as to whether the 21% premium offered over the prior day's close, and accepted by the board, was consistent with the Board of Directors' duty to maximize value for Massey Energy investors.
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