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Good news for BP shareholders?

June 1, 2010

Let’s not take this to extremes, but a recent study offers the counter-intuitive notion that companies with great reputations don’t generally provide great returns for investors – and a decline in corporate reputation can presage better returns.

In the Spring 2010 issue of the Journal of Portfolio Management, economist Deniz Anginer and finance prof Meir Statman look at Fortune magazine’s “Most Admired Companies” rankings from the start of that survey in 1983 up through 2007.

The annual “Most Admired” survey reflects opinions of executives, directors and analysts on companies in their own industries.  You might expect the stocks of firms with the best reputations to perform best in the market, but it just isn’t so.

The authors compare portfolios of higher-reputation companies vs. lower-rated firms, looking at 12-month returns following publication of the “admired” ratings:

We find that stocks of spurned companies, or those with relatively low Fortune ratings, beat the stocks of admired companies, or those with relatively high ratings.

… we also find that stocks of companies that moved up the reputation scale lagged stocks of companies that moved down the scale.

This study looks at a relatively short-term trade, a 12-month adjustment after a reputational change takes hold. It doesn’t consider multi-year differences in returns or valuation between respected and disrespected firms.

The authors also don’t explore causes of their counter-intuitive finding. But I believe a key factor is that reputation surveys are lagging indicators:

  • A company is recognized for rising reputation after peers in its industry see it deliver strong results, an increasing stock price, high-profile successes. And then? Well, high-flying companies and stocks tend to revert to the mean.
  • When bad things happen to a company, peers and analysts are quick to cast blame – the stock drops, company reputation sags. And then recovery begins.

The JPM article confirms what many value investors practice: Out-of-favor stocks may yield more opportunities than “admired” companies riding the wave, for the simple reason that less-popular companies are cheaper than glamour issues. And at least some of the high-multiple stocks are going to hit bumps in the road.

Of course, it isn’t much of an investor relations story to say “Our reputation is in the tank, so things can’t help but get better.” And IR people, as champions of our companies’ reputations, all want rising earnings, strategic accomplishments, recognition in places like Fortune … the good news that creates solid reputations.

But when times are tough, we may find some comfort in the reversion to the mean.

© 2010 Johnson Strategic Communications Inc.

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I-bankers & God’s work

March 18, 2010

A little commentary tucked into today’s Wall Street Journal (p.C4) riffs on Lloyd Blankfein’s statement last fall about investment bankers “doing God’s work” – and may hold a lesson, too, for investor relations professionals and our companies.

John Terrill, who heads the Center for Integrity in Business at Seattle Pacific University, shares his thoughts on i-bankers doing good through their work:

Investment banking, if it meets its objective of capital matchmaking, can move, ought to move, capital around in ways that allow communities to flourish.

Terrill says benefiting society in business is about aligning what you do with broader purposes, realizing, “Hey, my work has a purpose beyond the paycheck.”

Asked how to measure whether investment bankers are contributing to the common good, Terrill focuses on integrity – a oneness between purpose and action. This test also applies to corporations and their messaging for investors.

Terrill says integrity consists of three layers:

The first two layers are associated with damage control – compliance with the law and acting appropriately when there is no law. But, as others have pointed out … there is a third layer that is focused on mission control. Mission control is pursuing the good, aligning the mission of the organization and the good of society.

Disclosure focusing on corporate social responsibility is a growing concern for investor relations staffs – amid regulatory pressures (such as the recent SEC guidance on  climate change disclosure) and interest from institutional investors.

Terrill’s three “layers” suggest a useful framework for reporting on corporate interactions with society:

  1. Compliance with the law,
  2. Standards of conduct that go beyond the law, and
  3. The company’s broad mission in serving customers and providing products or services to society.

Disclosure to investors would tie any specific issues in with business performance – near and longer term – which would include regulatory threats, costs of compliance and effects on customer relationships.

The Terrill essay referenced by the WSJ article, “The Moral Imperative of Investment Banking,” offers additional comments.

© 2010 Johnson Strategic Communications Inc.

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Toyota crisis should teach us

February 4, 2010

Poor Toyota. The crisis Toyota Motor Corp. faces over the safety of its cars is of epic importance – and they are struggling to get ahead of the reputational meltdown.

Investor relations professionals and corporate communicators should be taking notes on this story as it unfolds – and learning from Toyota’s woes – because sooner or later a crisis like this may strike your company.

A “Squawk Box” discussion on CNBC today highlights the reputational crisis Toyota faces – and the direct hit that the change in public perception will have on sales and profits going forward.

Particularly interesting to me are comments by Jeffrey Sonnenfeld, professor at the Yale School of Management, who grades Toyota’s response as “C-minus and falling” and adds, “They’ve lost the leadership moment.”

Asked what he would advise if he were in Toyota’s crisis management “war room,” Sonnenfeld says these actions would be his top priorities:

  • Put CEO Akio Toyoda front-and-center in the public responses to the crisis. “He should get out there like Jim Burke of Johnson & Johnson, Bob Eckert at Mattel more recently and David Neeleman at JetBlue. These guys controlled the story – with facts,” the prof says. “He’s new on the job. Well, this is trial by fire. He’s got to learn to articulate and reassure the public with facts.” I might add this is a time to communicate the right values – and facts.
  • Respond in the blogosphere and social media. It’s a tsunami of talk, and Toyota needs to be answering, giving its viewpoint, correcting errors, responding to rumors, expressing a caring approach. The “Recall Information” link on the Toyota homepage is hardly adequate. Toyota ought to speak out in words and on video – and it should be very proactive online. Of course, you have to learn to engage in social media before the crushing wave rolls over you.
  • Embrace the critics rather than hiding. Hard as it may be, Toyota management should be side-by-side with the regulators and opinion leaders (in Washington or elsewhere) to demonstrate its concern and active response, keep the facts in line, and be a part of the dialogue. “Rather than disparage them, let’s embrace them as part of the flow of communications,” Sonnenfeld says.
  • Share with competitors what’s going on as the crisis unfolds. Counter-intuitive, but Sonnenfeld points out other automakers aren’t above safety problems or recalls, and some may even share suppliers with Toyota. Good time to reach out and enlist competitors’ sympathy and perhaps help – because in the long run the automakers all face similar issues.

This isn’t just a product or branding issue – the crisis is a major financial and capital markets setback for Toyota. The stock has tanked 20 bucks or 22% (looking at the ADS) since the mid-January peak before the recall. When the core value of your only product becomes a target of late-night comedians, it’s trouble.

Of course, Washington is dealing out public floggings daily – and these will continue and increase. Given the prevailing populism, which thrives on attacking big business, companies need to get much sharper at reputation management. When someone like the Obama Administration’s secretary of transportation tells Americans who own Toyotas to stop driving them – he later “clarified” that he meant something else – it’s ugly. (Does the US government in 2010 have a conflict of interest as the majority shareholder of GM, Toyota’s biggest competitor?)

Out in the blogosphere, people are equally carried away. One post by a public relations guy who writes anonymously under his Twitter handle @PRdude asks: “Should Toyota change its name?” And suggesting a name change may be the nicest thing a blogger is saying about Toyota.

Unlike the Yale prof or the anonymous “dude,” I don’t have solutions to offer Toyota today. But my advice to all of us at other companies is to watch this one – and learn.

Any thoughts? Please share your comments below.

© 2010 Johnson Strategic Communications Inc.

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A little paranoia …

January 7, 2010

A little paranoia is a good thing. For companies, paranoia can be helpful – if it means aggressively keeping confidential information, well, confidential.

The growing scandal over illegal trading on inside information (browse the latest SEC cases here) tells us two things:

  1. People are out to get us - at least, a few people are out to get our material nonpublic information and rob the market by taking illicit advantage of that info.
  2. Leaks are damaging - to the companies named in investigations, cheated shareholders, busted “tippers” and traders, and everyone’s confidence in the markets.

As guardians of the company’s reputation, investor relations professionals ought to be advocates for vigilance. Working with Legal, we should be on this case  - paranoid about information flow and zealous about preventive practices.

Not that any level of protection can completely guard against deliberate corruption of individuals like that alleged in the Galleon Group and other recent cases. It’s like any other kind of stealing: Doors, locks and alarms only protect us to a point. But we do have doors, locks and alarms. Our information flow should, too.

I’ve been watching the news stories for the roles of corporate and agency IR people – for better or worse. One IR consultant was tagged early on as an alleged leaker, and one company apparently used surveillance to catch an employee sending out secrets on a fax machine. Executives, lawyers, hangers-on and traders have been charged so far. At some point as the scandal continues to unfold, we may get a broad look at the role of security measures (or lack of them) in these leaks.

Meanwhile, well-known corporations whose M&A deals or earnings allegedly were leaked to the scoundrels continue to be in the press. When an employee or outside person hired by a company is charged in a criminal prosecution, make no mistake, it does damage the company’s reputation. The only good solution is prevention.

So what can IR do to protect against leaks and improper trading? A few ideas:

  • Beware of the investor who habitually pushes for an “edge.” Everyone is looking for unique insights, and they may think their mosaic is such an edge. But some callers barrage you with more demanding questions – probing beyond what they know a company should provide. Stand on good disclosure practices – provide the right info, nothing more. Warn executives about pushy individuals. If a caller fails with IR and starts calling other people in the company, set him straight or cut him off. Legitimate investors play by the rules.
  • Be sure everyone in management, including admin assistants, understands that they must know who they’re talking to before answering any question – and all investor calls should be transferred to IR. It’s wrong for a plant manager or R&D scientist to talk to an investor outside the approved IR process.
  • Don’t discuss confidential information with colleagues in a coffee shop, on a plane or over your cell phone in a crowded place. Find a private place.
  • Have a clear policy for all employees’ treatment of confidential information – financial, competitive, or related to the privacy of customers or colleagues. Single out the criminal nature of trading on material nonpublic information.
  • Train new employees (and outside contractors) in that corporate conduct policy, and remind everyone of its key points at least once a year. Consider using the current scandal as an intro to a company-wide email or memo on this topic.
  • Give ongoing counsel to people involved in the earnings process or run-up to any kind of M&A. I’ve been asked to sign in blood on special nondisclosure agreements when helping on some deals – and that’s a good thing. You’re not accusing anyone of bad intentions, just cautioning against inadvertent slips.
  • Try not to feed office gossip. I don’t know if code names for deals or secret off-site meetings really hinder the grapevine – people in Sales will always speculate on whose limo is parked at the front door – but we should make an earnest effort to keep a “door” or “lock” on confidential information.
  • Monitor social media for the company’s name and key brands. Marketing or PR already may be monitoring to measure visibility and customer sentiment; get into the loop. Business data or speculation from employees shouldn’t be showing up on Twitter, FaceBook or good old Yahoo. Chase down anything that appears to be a leak, and enforce the confidentiality policy.
  • Watch the market for unusual trading before an event like earnings or a deal. Bring Legal into the discussion if you have suspicions of improper trading. That would become a complicated legal issue very fast, but the initial alarm could come from your daily observation of the market for your stock.

I like a suggestion from a lawyer that appeared in The New York Times (“Executives Are Wary After Arrests”) a few weeks ago. The story said “switchboards are lighting up” at law firms as tech executives and hedge fund managers ask advice on where the legal lines are drawn. One piece of free advice seems especially pertinent:

Nathan J. Muyskens, a government enforcement lawyer at Shook, Hardy & Bacon, said that clients had been asking him if they should send companywide e-mail messages reminding people not to say anything questionable, even a joke, on the phone. He said he told them they should.

“I’ve heard that there have certainly been memos going out: ‘Think of the phone just as you think of your e-mail these days,’ ” he said. “We always say, ‘Think of that e-mail as being on the front page of The New York Times before you hit the send button,’ and now it’s exactly the same for the phone.”

As I said in an earlier post (“Loose lips sink … IR”), it’s usually a bright line for IR between public information and nonpublic. The alleged leaks at the heart of the Galleon cases have to do with things like companies planning to be acquired or missing their earnings estimates – no brainers in the area of confidentiality.

Everyone loses when people on any side of the capital markets betray the shareholders’ trust for private gain. If you don’t think these insider trading stories are ugly, wait ’til we see the regulatory or legislative reactions in 2010. Congress is on a tear to “do something” in response to scandals – and the “fix” isn’t likely to improve the climate for open and legitimate communication with our investors.

© 2010 Johnson Strategic Communications Inc.

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In crisis, response is critical

December 21, 2009

Sooner or later something blows up for every company, so every investor relations professional ought to consider crisis communication as a critical skill. We should be in training. Two business professors offer a pretty good primer in “Let the Response Fit the Scandal” in the December 2009 issue of Harvard Business Review.

In the article, Alice Tybout of Northwestern University and Michelle Roehm of Wake Forest focus on the response of management – specifically CEOs – to reputational crises. But their guidance also fits corporate staffers and others who offer counsel.

The profs lay out four steps in the response to any crisis:

  1. Assess the incident
  2. Acknowledge the problem
  3. Formulate a response
  4. Implement the response

These are familiar, common sense steps, but the important thing is that a company must execute well on all four stages of crisis response – or risk losing brand loyalty and value for years rather than weeks – say Tybout and Roehm.

The profs have a couple of suggestions specific to communication in a crisis.

Rapid response is the key to establishing credibility early. After assessing the incident’s impact on the company and its customers, go to Step 2:

If management concludes that the company is likely to be affected by a scandal, it should immediately acknowledge the problem, expressing concern for any parties harmed and outlining the steps the firm is taking to investigate and prevent further damage.

Details aren’t appropriate in early communications, the profs say. In Step 2 the company expresses concern and describes initial actions – how it’s investigating the issue and what it’s doing to contain the problem from spreading. This is about management saying we know a problem exists and we’re on top of it.

That quick “acknowledgement” to the public buys a little bit of time for the company to determine the facts and formulate a comprehensive response. At that point, the company communicates more fully what went wrong and how it is responding to correct the problem.

And this is the plan for how the brand will bounce back, and value will be protected or restored for investors – which is what we’re in business to do.

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Don’t be ACORNed

September 28, 2009

Regardless of your politics, it’s clear that what happened to the activist group ACORN this month is an extraordinary case study in Web 2.0 and the rapid loss of reputation. It’s a new media nightmare.

Before answering “What’s this got to do with IR?” here’s a recap of the action:

acornACORN is the Association of Community Organizations for Reform Now. An advocate for the poor, labor and liberal causes, ACORN organizes voter registration drives, demonstrations and efforts to influence government or pressure businesses. While controversial and oft-accused of improprieties, ACORN has won victories against big companies and been an ally of some top Democratic leaders.

Along came two politically motivated social media types, James O’Keefe and Hannah Giles. Like other 20-somethings, O’Keefe has been producing videos for the Web – in his case, needling liberals. Giles, a 20-year-old college sophomore, got in touch with O’Keefe with an idea to go after ACORN with a made-up event.

The two concocted a scenario to test the community organizers’ integrity. O’Keefe would play the role of a pimp and Giles a prostitute. The pair gathered a few props, went on the road with a hidden camera, and set out to entrap ACORN.

Visiting ACORN offices in DC, New York, Baltimore, San Diego and San Bernadino, O’Keefe and Giles told ACORN counselors they needed advice on getting a house for the prostitution biz, hiding income from the IRS, avoiding police detection, and smuggling underage girls into the country to use as prostitutes.

The poseurs got their shocker. Some of the ACORN officials went along, seemingly ignoring the illegality and morally outrageous nature of acts they were discussing. The videos show ACORN people casually giving advice for how best to carry out and conceal the purported illegal enterprise. “Pimp” and “prostitute” seemed to be treated like any other client.

BigGovernment.com, a new conservative website, linked up with O’Keefe and Giles and used their sensationalized attack videos to create momentum for its September launch on the Internet. It’s been a success: The ACORN videos went viral, with links from a host of blogs and tweets; they were huge on YouTube; the slam on ACORN struck a chord with conservative talk hosts; and the controversy crossed over into mainstream media. Within days, Congress members were denouncing ACORN and voting to defund it. Everyone’s investigating.

ACORN has been tripping over itself with denials and counter-attacks. It denounced “indefensible” actions of its people and fired some. Accused the video makers of distortions and filed a lawsuit. Invoked the respected names of its silk-stocking Advisory Council. Posted its own video. Launched an “investigation” of itself. ACORN has tried all the usual reputation-defense tactics. But the damage is done.

This isn’t a small-time hit. BigGovernment is the brainchild of Andrew Breitbart, a conservative Internet entrepreneur who has worked with Drudge Report, a top right-leaning site, and a similar aggregator, Breitbart.com. The sophisticated distribution and marketing of the “news” is worthy of film propagandist Michael Moore or liberal political activists MoveOn.org. These people play hardball.

Well, enough politics. What does the ACORN story have to do with corporations and IR? Investor relations professionals need to envision, for a moment, the potential for a new media nightmare for their corporate reputations.

Build your own scenario. Imagine a couple of 20-somethings bent on doing damage to your company, products or industry. You can’t predict what store, office or plant they may visit. Starting with sophisticated new media skills, they add well-funded distribution – and show no civility or restraint in their attack.

Will the “gotcha” go viral? How much will it damage the company’s reputation?

The anti-business analogy to ACORN’s current organizational torment argues powerfully that companies need to prepare for potential crises created through interactive media channels. Skirmishes already have taken place – but may intensify.

Companies ought to minimize risk by being sure our people are all trained in ethical conduct. If we consistently do what’s right, it’s much less embarrassing. Culture can prevent problems – or not.

IR and other functions must develop robust social media skills, so we’re prepared before a crisis strikes. And we should invest in early warning systems – assuring timely internal communication, as well as monitoring the social and regular Web.

Our crisis communication plans – including IR components – must be up to the challenges of the 21st Century.

Don’t be ACORNed.

© Copyright 2009 Johnson Strategic Communications Inc.

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Posted in IR 2.0 - Web & social media, Reputational capital | 3 Comments »

Quote, unquote – Reputation

September 25, 2009

Suffering the slings and arrows of public distrust for the pharmaceutical industry, Merck & Co. is becoming more accessible to various stakeholders – and changing its business model based on what it hears - CEO Dick Clark says in the Q3 2009 issue of NYSE Magazine. Clark says restoring trust is about doing and saying:

At the end of the day, reputation is grounded in actions, accompanied by candid, timely and transparent communication.

Sounds like a motto for the practice of investor relations.

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IR as a mystery thriller

August 22, 2009

Investor relations as a profession doesn’t often make Page 1, but today’s Wall Street Journal casts IR in a starring role in Deutsche Bank‘s covert maneuvering against a dissident shareholder and courtroom enemy.

“Banker, Gadfly, Lawyer, Spy” is a mystery thriller worthy of a John Grisham novel. For IROs, the story is just that: a good yarn to read on a late-summer weekend. Entertainment, unfortunately at the expense of errant corporate staffers.

The story has everything: a private investigator with two code-named teams, rich and powerful enemies in German corporate suites and a Mediterranean isle, a young lawyer suspected of posing in a job interview to gather intel at a plaintiff’s law firm, even an elusive Brazilian seductress. Too bad it’s not fiction.

Deutsche Bank’s head of investor relations was let go when the corporate snooping and surveillance became a scandal, and there are ongoing investigations – not to mention that litigious shareholder, a target of the bank’s “Magnum PI” efforts.

By the way, Deutsche Bank issued a press release July 22 with its own somewhat dry version of what it has found looking into the company’s snooping activities. The bank said the “incidents originated from mandates initiated to achieve legitimate goals, but, during the course of these mandates, the external service providers retained by the Bank engaged in questionable activities.”

IR people should read today’s WSJ piece, simply because IR doesn’t usually make headline news. You might even be prepared to tell co-workers, “No, we don’t generally spy on shareholders (or anyone else).” There is no practical guidance in this story for doing the actual job of IR – other than an implied warning.

It’s a cautionary tale that says don’t get caught up in a corporate “battle” that later will be viewed as corporate wrongdoing (see last month’s posts, Someone should’ve said no and On the ethics front …). The messy consequences are sad. After all, no one wants to wind up on Page 1 of the Wall Street Journal this way.

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Posted in Ethics in IR, Reputational capital | 1 Comment »

The rising value of trust

August 11, 2009

As the pace of change accelerates – economically, culturally, personally – people are being overwhelmed with too much information to fully process, authors Tom Hayes and Michael Malone opine in a Wall Street Journal commentary on August 10, 2009. And that overload, they say, places a premium on the value of trusted sources:

Without the luxury of time, trust will be the new currency of our times, whether in news sources, economic systems, political figures, even spiritual leaders. As change accelerates, it will remain one true constant.

We should add investment information to the spheres of life where we’re in need of trust. In a time when credibility in the markets has been bruised, we might ponder the question, How can investor relations professionals enhance the quality of disclosure and news flow to create and sustain trust in our companies?

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Posted in Reputational capital | 2 Comments »

On the ethics front …

July 22, 2009

Investor relations professionals need to stand on our own ethically, thinking through and following our convictions on what’s right or wrong. The Wall Street Journal brought a reminder yesterday of the need for personal responsibility with news that the head of investor relations for Deutsche Bank has been dismissed.

You may remember the story earlier (“Someone should’ve said No“) about Deutsche Bank hiring private investigators to spy on members of its management and supervisory boards – and an activist shareholder.

Now the tale unfolds further with news of the firing of two executives: Deutsche Bank’s head of investor relations and head of corporate security in Germany. One of four surreptitious surveillance actions cited in press reports involved a dissident shareholder and a media mogul who was in a legal fight with the bank.

To be clear, I have no first-hand knowledge and wouldn’t attempt to judge what Deutsche Bank or its people did. But the reputational consequences, from a corporate and personal standpoint, are obvious. Yesterday’s WSJ headline said “Deutsche Bank Fires Two in Spying Probe.” The story continues to dribble out, with more details in today’s WSJ. In Germany, where privacy and “big brother” tactics are a sensitive topic, newsmagazine Der Spiegel has aggressively reported this story.

My point on ethics and personal responsibility is this: In the heat of battle, when the company is under attack and the world looks like “Us vs. Them,” be careful. Go back to your core principles: telling the truth, obeying the law, treating others as you would want to be treated, whatever convictions shape your outlook on life. Seek guidance in places like the NIRI Code of Ethics: Although codes won’t offer a specific rule for something like hiring a private eye, they do provide principles.

And consider how any action you take might appear in the harsh light of public disclosure a year or two later. Your responsibility to decide on your actions isn’t erased because you’re part of a larger corporate staff. Taking a stand just might save the company from serious reputational damage. And, down the road, it might keep you out of a headline that says “… Fires Two in (Whatever) Probe.”

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Posted in Ethics in IR, Reputational capital | 3 Comments »

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