It’s hard to demonstrate beyond doubt that the investment you make to help improve reputation will be consistently rewarded.  But there can be no doubt at all that a major hit to reputation will surely damage shareholder value.

That truth was reinforced this month when two high-profile reputational crises took their impact straight to the bottom line.
 

The first was headline news across the country alleging bribery and corruption at the highest level at the international construction giant Leighton Holdings to gain contracts in Iraq, Malaysia, Indonesia and elsewhere.  The result was $700 million, or more than 10%, wiped off the share value in a single day.

While some analysts claimed it was “an overreaction to allegations first aired more than a year ago,” there were further losses the following day before the market stabilised.   As BRW columnist Leo D'Angelo  Fisher commented:  “As spectacular front-page headlines go, when it comes to media coverage of Australian business, this may prove to be the one to beat for 2013, and for some time thereafter.”

There were instant denials and angry letters from lawyers, and there is a long way to run before the truth will be established.  But within a week three senior executives resigned and Leighton’s reputation has been hard hit.

The same happened to California “green car” maker Tesla when one of their electric cars ran over debris on the road and a fire began in the battery-pack. Unfortunately, a passerby recorded the blaze and the video went viral, with investors slashing $US2.5 billion, or about 6%, off the company’s value.  Once again it was a media-driven reputational crisis, but the video rekindled concerns about the safety of lithium-ion batteries and that concern translated directly into a costly loss of confidence.

Public Affairs Council President Doug Pinkham recently wrote: “Reputation management is an inexact science because running a business is not a controlled experiment. The variables are always changing, and the markets often reward a company one day and punish it the next.”

However one unchanging reality is the link between reputation and shareholder value. According to the Weber Shandwick “Safeguarding Reputation” report, a survey of 950 business executives in eleven countries worldwide estimated that 63% of a company’s market value is attributed to reputation.

Nothing destroys reputation faster than a crisis or an issue mismanaged, and reputational damage is acknowledged as one of the greatest corporate risks. According to an Economist Intelligence Unit study, reputation risk is nearly three times greater than the risk of terrorism or natural disasters, and far surpasses regulatory, human capital, IT Network and market risks.

As the new “Safeguarding Reputation” report concluded: “Because reputation is so widely recognised as the critical factor in how companies are valued today, the consequences of a damaged reputation run far and deep.”  It's a timely reminder to make sure you have a plan in place. Need help? Email Tony Jaques.