John R. Lund, then the senior vice president of Disney Parks Supply Chain Management for Disney Destinations LLC, told Supply Chain Quarterly, “The reputation of a company is fundamentally affected by the choices you make in running a supply chain.” Some of the details of Disney's approch to managing its reputation through supply chain controls are detailed in the 2012 publication, Reputation, Stock Price, and You: Why the market rewards some companies and punishes others.

Yesterday, Business Insurance magazine weighed in to the debate with an article prompted by the recent tragic collapse of a building in Bangladesh housing many clothing suppliers. There are a number of proposed strategies in the alternative reflecting the diversity of understandings of what comprise reputational risk. The most expensive, which seem to be addressing after-the-fact-liabilities, will probably not yield the best reputational results. The most efficient, however, require the paradigm shift advocated by firms such as Steel City Re and Consensiv; and by a growing number of risk advisers.

When the book, Reputation, Stock Price and You: Why the market rewards some companies and punishes others (Apress, 2012), was in development last spring, the pitch to publishers was, "The #1 concern of 71% of corporate directors surveyed." It still is.

Eisner Amper, the accountancy, just released their 2013 board survey. "Other than financial risk, respondents were asked to identify risks of most concern. Seventy-three percent identified reputational risk as a primary concern of their boards – a 19% increase in the number of board members who identify this as their greatest concern since the initial Survey, four years ago. The top three reputational risks cited were: Product quality, liability and customer satisfaction; Public perception and brand Integrity, fraud, ethics; and the Foreign Corrupt Practices Act (FCPA)."

"They’ve found horse meat in Tesco burgers? It’s an unbridled disaster." Through internet-wide humor, at the very least, Tesco is being reminded that supply chains can be a major source of quality risk. As the FT reports:

Having inquired into the provenance of beefburgers that contained horsemeat, it has dumped Silvercrest, its supplier of frozen burgers, essentially for deviating from the list of Tesco-approved meat suppliers. “The breach of trust is simply too great,” said Tim Smith, the UK retailer’s technical director, in a statement. (The owner and founder of Silvercrest’s parent told the FT earlier this month it had been “let down” by its own suppliers.)

Humor aside, stakeholders do not appear to be materially shaken by this turn of events -- a supply chain quality control (operational) failure -- with respect to Tesco's reputational value.

The Steel City Re Reputational Value Metrics, explained in greater detail in the 2012 book, Reputation, Stock Price and You, show no difference in RVM volatility between historic and current periods. RVM is a non-financial measure of reputational value and is holding steady in the 70th percentile. The company's CRR, a measure of reputational ranking, is at the 26th percentile. Its economic returns are median, and its reputational forecast suggest slightly below median stability with directionality indicators being positive.

The data suggest that stakeholders, having already ranked the company at the lowest quartile, were less shocked by Tesco's discovery of horse meat than they were pleasantly surprised by the company's swift response. First, severe action against a supplier to punish it for its failure and second, a commitment to  test the DNA of meat going forward to mitigate future potential problems. These comprise textbook reputational value crisis management practices. [A textbook response, it should be noted, is not PR; but rather substantive operational fixes. Pass the hint to Boeing.]

For supply-chain watchers, note the references to "trust" and "being let down." Supply chains can not operate effectively absent trust nor can they operate only on the basis of trust. Tools that help companies verify that which is the basis for trust will become increasingly important. Stay tuned.

It bears repeating: Reputational value is how the markets reward or punish a company in ways that are either joyfully or painfully transparent on corporate financials.

Reputation is an expectation, some say confidence, in an outcome. Because of the outsized influence CEOs have on a company's direction, stakeholders often (reasonably) confuse a CEO's personal reputation with a company's reputation.

Risk, a threat to a desired outcome, is equally influenced by a CEO's action. Today's Bloomberg Businessweek reports that five-year credit-default swaps on the Chesapeake Energy Corp.’s (CHK) debt dropped 72.5 basis points to 391.9 basis points (15% reduction) as of 7:30 a.m. in New York after the company announced yesterday that Chief Executive Officer Aubrey McClendon would retire. In other words, the chances of the firm defaulting on its debt is expected by investors to decrease with McClendon's retirement. All things being equal, that should translate into lower costs the next time Chesapeake rolls over its debt.

To understand how the expectations by other stakeholders -- customers, employees, vendors, equity investors, creditors, and regulators -- create or reduce value through behaviors that are equally transparent on corporate financials, read the new book, Reputation, Stock Price and You: Why the market rewards some companies and punishes others.

Guest comment by Dr. Michael Greenberg.

We're once again heading into a new year. It’s the season of resolutions, of reflecting and taking stock, of setting new goals and getting back into shape. Most of us tend to think of this kind of New Year’s activity as a personal process, but it applies just as readily to corporations and their executives. Most avenues of human endeavor can benefit from periodic self-assessment, re-evaluation, and course correction. This is no less true of corporations, and of our collective economic behavior, than it is of individuals in their personal lives. For corporations, of course, the process of making New Year’s resolutions will tend to focus less on dieting, physical fitness, and personal improvement. Rather, the focus for corporate self-assessment typically starts with a few basic questions. Does our strategy and mission continue to make sense in the current operating environment? Are we doing what we need to do, in order to meet our performance goals and achieve success? And what can we do better as an organization, to improve our performance on key metrics?

A related issue that frequently comes up when I talk with executives involves governance. One striking thing I’ve noticed is that even though lots of senior executives express concerns about governance, they often use the word “governance” in very different ways, such that two people superficially using the same language are often actually talking about very different things.

Sometimes governance comes up in the context of a very pragmatic, corporate plumbing-type question: How do we set ourselves up in order to be more effective in accomplishing whatever it is that we’re trying to do? The embedded assumption is that governance is tied to management structure and control, power sharing, and information feedback within the organization. Good governance, in this sense, is synonymous with effective management – where an organization is optimized to carry out its function, then its governance is superior.

A very different view of governance comes up when you talk to corporate lawyers and directors. These folks often think of “governance” as being defined by “all the stuff that boards do.” Put another way, this is the kind of governance that involves board oversight of senior management, exercised on behalf of shareholders. For directors, this perspective on governance invites a bunch of performance assessment questions pertaining to management. And for shareholders, it invites a bunch of performance assessment questions pertaining to the board itself. The lawyers, meanwhile, often focus on the mechanics of how boards carry out their responsibility, and what the law requires them to do. Frequently overlooked by all is the fact that a board is ultimately just a group of people, who may be more or less interpersonally and technically competent, in working together to carry out a common purpose. Again, governance can be more or less capable and effective, on any of these dimensions.

Still another perspective on governance emphasizes the strategic and operational element. When a large group of people come together to execute a common purpose, who contributes to deciding what that purpose is going to be, and what the best way is to achieve it? How often are those basic decisions reviewed and revisited? How does senior management reach out to the rest of the organization, in order to mobilize everyone around a common vision? These are questions that go to the heart of what the organization actually does, and whether its form and function make sense over time.
And then, of course, there is a cynical perspective on governance, which I sometimes hear expressed by top executives. This is the view that “governance” reduces to a set of administrative hurdles that are set up to impede efficient management. A variation of this view is expressed by the CEO who says that the appropriate role of the board is “to hire the CEO, and then to stay out of my way.” Without commenting on the merits of this perspective, it both captures the way that some executives feel about governance, and also the reality that formal corporate controls and oversight are frequently set up to serve ends other than maximizing efficiency or corporate productivity.

All of which takes us back to the new year, and to New Year’s resolutions. Governance within a corporation most fundamentally is about the asking of critical questions, and periodically looking into a mirror, in order to make sure that what you’re doing still makes sense, and that where you’re going is where you really want to go. The act of asking and seeking answers helps to refine the organization and its course, and drives outward into operations, downward into organizational structure, as well as forward into mission and strategy. To engage in organizational self-assessment is to engage in an act of good governance, regardless of the fact that different people think about this exercise in widely varied ways. For corporations as well as people, the fact that the new year prompts us to look in the mirror is surely a good thing.

Michael Greenberg is a member of the Society’s Reputation Leadership Council and holds the Governance Portfolio. The views expressed here are solely those of the author.

As the saying goes, there are only two types of companies: those that have had operational failures, and those that will. On 18 October, RR Donnelley & Sons, the printing-services firm, released the 8K quarterly earnings report for Google, the internet services company, 4 hours earlier than expected. The markets closed with the S&P500 down 0.24%, RR Donnelley down 0.88%, and Google down 8.00%.

This is how the Wall Street Journal’s MarketBeat blog reported the story, excerpted. First, Google’s take on the matter:

Earlier this morning RR Donnelley, the financial printer, informed us that they had filed our draft 8K earnings statement without authorization. We have ceased trading on Nasdaq while we work to finalize the document. Once it’s finalized we will release our earnings, resume trading on NASDAQ and hold our earnings call as normal at 1:30 PM PT.

Now, Donnelly’s take:

We are fully engaged in an investigation to determine how this event took place and are pursuing our first obligation – which is to serve our valued customer.

The value of that service is now being questioned. As reported in the New York Times blog, Dealbook:

An executive at Webfilings, a company based in Ames, Iowa, that sells an application that allows companies to self-file, used last week’s events as a marketing opportunity, reminding customers that “this unnecessary mistake reinforces the need for public companies to completely control the release of their financial data,” as Mike Sellberg wrote on the Webfilings blog.

The reputational risk for Donnelley is security--one of the six pillars of reputational value. As Chuck Malloy from Intel told Dealbook, “We own the liability and the risk, and this allows us to maintain the integrity of the reporting process. If there’s a problem, it’s our problem.”

The reputational value metrics from Steel City Re do not indicate that the operational failure has matured into a reputational crisis (7% drop in market cap, massive media attention, regulatory approbrium, etc.), but the event is nevertheless impacting Donnelley's reputation adversely. Looking first at the Vital Signs, (Column 2 Row 2 below), the current RVM volatility is only slightly higher than the historic volatility, both below the median at the 17th to 19th percentile. The company’s reputational rank is the 33rd percentile, ROE at the 13th percentile, and forecast stability is below the median. Basically, the quick view is that baseline expectations among stakeholders are low.

Indications that stakeholders as a group do not expect the incident to be critical, but recognize that no good will come out of it, are reflected in the three volatility measures (Column 1 Rows 2-4, and Column 2 Row 4). All show low levels of volatility for both CRR, a measure of reputation rank, and RVM, a non-financial measure of reputational value. The volatility, which is indifferent to overall market risk (VIX), is leading to a further loss in  both reputational value and reputation ranking relative to peers. Add to that the company's drop in  equity value, and you have near-universal concurrence among stakeholders: thumbs down.

It was only 11 months ago, on 25 August 2011, that Berkshire Hathaway Inc., Warren Buffett's investment company, agreed to sink $5 billion into Bank of America Corp, the beleaguered financial giant. The deal helped allay fears that America's biggest bank needs a fresh infusion of capital to withstand mortgage losses and another downturn in the economy. The investment was both fresh capital and a market signal -- a reputation thing, if you will.

Last week, Jamie Dimon, CEO of JP Morgan Chase, pulled a Buffet Lite. Dimon, his wife, and a limited-liability company linked to him bought $17.1 million of the bank’s shares after the stock slid amid trading losses. “I expect this is meant as a sign of his confidence in the bank,” John Coffee, a securities-law professor at Columbia University Law School, said in an e-mail to Bloomberg. Like insurances and other financial guarantees, it may be the best PR money can buy.

Value at Risk, or VaR, as helpfully summarized by Wikipedia, is a widely used risk measure of the risk of loss on a specific portfolio of financial assets. For a given portfolio, probability and time horizon, VaR is defined as a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading in the portfolio) is the given probability level. VaR is a mathematical model. Now, it appears, the model is also a source of risk.

Bloomberg (Keoun, 1 June) reports this morning that a string of daily losses exceeding the VaR can be a warning that the formulas are flawed or that markets have turned unusually volatile. Bloomberg notes that the Office of the Comptroller of the Currency advised banks last year to closely scrutinize the possibility that computer models used to calculate VaR might not be properly designed or calibrated. “The use of models invariably presents model risk, which is the potential for adverse consequences from decisions based on incorrect or misused model outputs and reports,” according to an April 4, 2011, document from the OCC, which supervises JPMorgan’s primary banking subsidiary. “Model risk can lead to financial loss, poor business and strategic decision-making or damage to a bank’s reputation.”

While we have often written of the link between reputation, liquidity and credit risk, examples help underscore the point. JPMorgan Chase (JPM) is in the throws of an alleged reputation crisis which by many measures, is not particularly noteworthy. On the other hand, notwithstanding the media blitz, there are potential costs to this event that are consistent with reputational damage, if not a full blown reputational crisis.

From the Financial Times (Cotterill, 11 May), we have reactions from Fitch and S&P the day after the 10 May disclosures:

Fitch Ratings has downgraded JPMorgan Chase & Co.’s (JPM) Long-term Issuer Default Rating (IDR) to ‘A+’ from ‘AA-’ and its Short-term IDR to ‘F1′ from ‘F1+’. Fitch has placed all parent and subsidiary long-term ratings on Rating Watch Negative. Fitch has also downgraded JPM’s viability rating (VR) to ‘a+’ from ‘aa-’ and placed it on Rating Watch Negative. Fitch views the size of loss as manageable. That said, the magnitude of the loss and ongoing nature of these positions implies a lack of liquidity. It also raises questions regarding JPM’s risk appetite, risk management framework, practices and oversight; all key credit factors. Fitch believes the potential reputational risk and risk governance issues raised at JPM are no longer consistent with an ‘AA-’ rating.

Standard & Poor’s Ratings Services revised its outlook on JPMorgan Chase & Co. (JPM) and its banking subsidiaries to negative from stable...We currently view JPM’s risk position as “adequate” and not “strong” (as our criteria define the terms), partially because of the risk on JPM’s balance sheet, which we believe contributes to the need for elaborate hedging strategies. Management’s admission that the hedging strategy was “flawed, complex, poorly reviewed, poorly executed, and poorly monitored” contributes to our negative outlook.

The chairman’s letter in the annual report, signed 6 March 2012, is clear. “The board set three priorities for BP,” wrote Carl-Henric Svanberg. “Safety must be enhanced and embedded. Trust must be regained. Value must be created through a clear strategic plan”

Safety, now a factor in the executive bonus plan, is tangible evidence of the company’s strategic priorities of reinforcing safety and risk management, rebuilding trust and reinforcing value creation of its intangibles. At group level, the safety and risk management component includes targets for recordable injury frequency, loss of primary containment and implementation of change programmes. Rebuilding trust is focused on external reputation as measured by external surveys and internal morale as measured by surveys.

BP’s board considers reputation from two perspectives – the reputational risks to the group and the processes the company has in place to manage these risks. In 2011, the board reviewed external reputation data which looked at BP’s reputation in the UK and US. It also discussed the group’s communications strategy and its reputation management plan.

To assure that stakeholders know that BP is serious about reputation and its risk management, the annual report offers up the term 20 times in the 10k section 1A-Risks. The term also appears liberally throughout the balance of the document for a total of 45 mentions over twenty different pages in the 300 page document.

In what appears to be a growing trend first announced formally at UBS, but clearly preceded by BP, both reputation measurement and reputational risk are major issues at the Board level. This is why: as reported here earlier, firms that have superior reputations newly discovered can pickup an average of 6% of market cap, while firms that experience a reputational crisis can lose an average of 7%. Anything that can precipitate a 13% swing in value is bound to get the attention of a corproate board.

The Steel City Re reputation metrics for BP this week show the following trends: BP’s reputational value metric, a non-financial indicator of reputational value, is stabilizing with a near median volatility relative to its peers, and a long term forecast of stability. The company’s corporate reputation ranking, an indicator of relative standing, places the firm in the 81st percentile. Since the volatility indicators are neutral, the data do not yet indicate a near term boost in equity returns above the median for the peer group. After years of reputational volatility, it appears at this point that equity investors are waiting for further evidence of material risk reduction in RepRisk -- reputation risk. Nevertheless, considering where things were two years ago, BP has come "a long way baby."