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Reputability LLP are pioneers and leaders globally in the field of reputational risk and its root causes, behavioural risk and organisational risk. We help business leaders to find these widespread but hidden risks that regularly cause reputational disasters. We also teach leaders and risk teams about these risks. Here are our thoughts, and the thoughts of our guest bloggers, on some recent stories which have captured our attention. We are always interested to know what you think too.

Wednesday, 22 December 2010

Accountants and lawyers - how much does reputation matter?

It takes years to build a reputation and minutes to lose it. Since it gives a company its 'licence to operate' as a respected citizen of the world, its loss can be devastating. BP is a topical example of an asset rich commercial company that lost a large part of its market capital over a sustained period. Only a proportion of the fall can be attributed to liabilities.

Things are far starker for pure service providers such as lawyers and accountants.  They have few assets beyond human wits and their reputation.  Their ability to attract clients and to borrow depend on it.  It is by far their most valuable and important asset.  The redoubtable Lex now suggests that regulators should attack accountants' reputations.

Paradoxically, the value of reputations rarely appears in balance sheets.  Neither are they given attention or protection in proportion to their value or importance.  The reasons for this are not clear but seem to include both a lack of understanding of how reputations are made and broken and much too narrow a view of what puts a reputation at risk.  This matters.  

The largest accountants still hope they are 'too big to fail', but in reality their future depends on three questions.  Is audit still an essential service for larger companies?  Is it still a valuable service?  And can they still afford to offer audit services given the audit liabilities they bring?  Many wonder whether the answers are increasingly No, No and No.  If this feeling grows, the willingness of regulators to attack accountants will grow and the comfort of being 'too big to fail' will decline.

For a firm that is not 'too big to fail' - which means all law firms and most, perhaps all, accountants, a substantial loss of reputation will be devastating. All should fear the fate that befell Arthur Andersen, including the biggest accountants and their regulators.  The question is what action they should take - and whether they will take it.

Update: See now  "The demise of audit" - the Big Four seem to recognise the extent of their vulnerability

Anthony Fitzsimmons

Tuesday, 21 December 2010

Bonuses: Does size matter?

Would you expect that larger bonuses lead to better or worse performance than smaller bonuses? The results of an experiment carried out by Dan Ariely and collaborators suggests that bigger bonuses may produce worse performance of tasks needing thinking skills.  These counter-intuitive results were discussed on this morning's Today programme. 

This experimental result, if confirmed, will become an important factor in assessing corporate reputations because bonus levels are so easily visible from the outside.  Very high bonus levels for those using cognitive skills may become a predicter of poor performance and thus a poor reputation. 

More work is needed to confirm the experimental result. But as it happens, the world's biggest investment banks are overhauling their pay structures to differentiate between European and other bankers.  This will neatly create, the experimental conditions needed to confirm, refine or debunk Professor Ariely's initial results.  Particularly when it comes to the relationship between base pay and bonuses.

In the meantime the results are food for thought for everyone involved in designing or considering the effects of bonus systems.

Anthony Fitzsimmons

Sunday, 19 December 2010

Extracting bankers from the doghouse

Large bonuses have put banks and bankers into the doghouse despite their economic importance. But are banks paying more than they need for senior bankers? The relatively new field of Identity Economics, identified by Rachel Kranton and developed by her with Nobel laureate George Akerlof, suggests this may well be so.

When bank leaders defend the payment of large bonuses, they explain the need to pay well to retain talent. This suggests their economic model takes little account of the ideas that underlie Identity Economics, a recently identified facet of behavioural economics. As with behavioural economics, identity economics is built on reproducible, almost scientific, psychological experiments and anthropological observations rather than on the dismal, and probably mythical, homo economicus, who knows the price of everything but the value of nothing.

Classical economics reduces this type of decision-making to money. We pay people bonuses to encourage the results we target. Identity economics suggests that an important element is missing – the extent to which employees identify with their employer. This has been shown to be a valuable and influential component in real-life decision-making. And it explains why employees who identify with their organisation will cheerfully work for far less than they could obtain elsewhere.

This is where banks seem to be missing a trick. By treating high-performing individuals as assets to be bought and retained by money, banks make key players outsiders to the firm, in a relationship that is more commercial than emotional. If these people identified strongly with the firm, their loyalty would be a heavy counterweight against countervailing monetary inducements. Such a deep sense of identity is valuable even though it will never appear in the balance sheet. Created thoughtfully, it also brings considerable advantages when it comes to building a good reputation that is sustainable through bad times as well as good.

Arie de Geus, the Shell sage credited with creating the concept of 'the learning organisation', also spotted this. His seminal book 'The Living Company', is based on a 1983 study by Shell of long-lived large companies. Its conclusion was that the average life expectancy of a Fortune 500 company was as little as 40 to 50 years. Why? “...Companies die because their managers focus on the economic activity of producing goods and services, and they forget that their organisation's true nature is that of a community of humans.” His division of companies into 'puddle' and 'river' companies illustrated his point. 'Puddle' companies were 'managed primarily for profit' and, like a puddle, prone to dry up. In contrast, 'river' companies were 'organised around the purpose of perpetuating [themselves] as ongoing communit[ies]' and were far more likely to flow indefinitely into the future. His main differentiator between rivers and puddles centred on identity and the cohesion it brings to long-lived companies.

Identity economics is triply interesting to banks. It shows a route out of a life of constant opprobrium. It can help them to build sustainable shareholder value and a good reputation with solid foundations. And at the national level, it helps explain to hostile governments why it is so unwise to treat banks and bankers as a despised tribe – unless you want them to emigrate.
Anthony Fitzsimmons

Saturday, 18 December 2010

Protests shift their focus to tax avoidance

As this FT article reports, perceptions of tax avoidance are a growing issue for companies.  Exactly what tax avoidance is depends on your standpoint. Christian Aid thinks it means not paying enough tax in poor countries; UK Uncut thinks it means not paying enough tax in the rich UK.  And there are plenty more perspectives.  The only certainty for companies with an international aspect is that there is no universal or clear answer.

That doesn't mean it isn't an issue, particularly for consumer-facing companies.  A company's reputation depends on what its stakeholders perceive - which is their reality.  And each group of stakeholders may have different perceptions.

If a company doesn't like its stakeholders' reality, that is the company's problem.  The issue needs to be fixed before it becomes toxic.  The biggest mistake is to think it is a PR problem.  It isn't.  As a sage said many years ago, spin won't fix it.  You have to fix the fundamentals.

Anthony Fitzsimmons

Tuesday, 14 December 2010

Taxing questions

When does a company's tax strategy damage its reputation? Tax evasion is clearly illegal, but most people willingly grab an opportunity to save tax by legitimate means. People in their millions deliberately avoid tax by using tax-free savings shelters such as the UK's 'Individual Savings Accounts' (“ISAs”) and by sharing assets and income between partners.

But increasingly, there are outcries against large companies (and occasionally wealthy individuals) who exploit tax loopholes sometimes deliberately left for them by governments. This manifestation of tax competition between states can lead to large tax savings.

The problem for companies is that their tax decisions are gaining a moral or ethical dimension. It is no longer just about whether companies are meeting their strict legal obligations. Increasingly there is a question whether tax avoidance, though legally permissible, is morally dubious. 

The question used simply to be: ‘Is it legal?’ Nowadays companies also need to ask: ‘Is it right?'  This is typically about scale, corporate ethos and citizenship, though other factors have a place in the discussion.  

There is no universal answer: it is a question of degree. But as Sir Philip Green, Vodafone and many others know, tax avoidance and mangement have become a significant reputational issue for consumer facing companies.

The question bites hardest where consumers have real choice. Michael Skapinker has argued that consumer boycotts rarely inflict real damage. But is that the right question? Probably not. The real reason for many boycotts is to influence. That tactic sometimes works even for commercial behemoths.  Shell's about turn on sinking the Brent Spar was partly caused by a consumer boycott, as were HSBC's change of policy on charges to graduates and Nestlé's policy change on its use of palm oil. And some will remember Sir Philip Green's 2003 apology to the Irish

Anthony Fitzsimmons

Saturday, 11 December 2010

Kowtow now, risk your reputation

Savvy netizens are bringing cyber-warfare against those they see as complicit in government attempts to censor Wikileaks.  Amazon, Visa, Mastercard and PayPal are among those so far targeted by activists for making Wikileaks' activities more difficult. After initial denials, PayPal has admitted that it acted as a result of US government pressure.  It would not be surprising to find this is a common pattern.

In bowing to demands from powerful stakeholders such as governments, companies are taking the obvious path of least resistance - and taking a substantial risk. Other stakeholders, not least their customers and other internet users, also have opinions and power of a different kind. Anonymous is only one of many.

The internet makes it easy for those with grudges to nurture and grow them. In the early 1990s, before the rise of the internet, the oil industry faced long-term disputes with environmentalists about how to decommission old oil platforms. This unresolved issue exploded when Shell's Brent Spar platform was ready for disposal. Shell had to change course even though its original plan seems to have been technically sound.  More recently, in 2007 HSBC faced a facebook threat of a graduate boycott.  It too changed course. And Nestlé still seems to face an unresolved campaign against them about formula milk that dates back to at least 1977 and probably 1974. It represents a continuing risk.

This matters. Nearly ten years ago, the perceptive Anthony Hilton  observed that technology now allowed the public to mobilise against the Establishment.

How true and how ironic. Governments have encouraged the internet to grow to the point where its continued operation is one of the most critical services for the continuation of life – including government - as industrialised countries now know it.

Yet in doing so, governments have created a scourge with which the public can chastise them more effectively than ever. As current attempts at what many see as censorship by both the US and Chinese governments show, the features that give the internet its resilience against disruption have a corresponding aspect that make it possible for a movement technically to outwit even a government. And it has become far simpler for a loose grouping of aggrieved netizens to start and run campaigns that can strike fear into the Establishment.

That doesn't just mean governments. It includes commercial operations of any size. Especially where individuals have choices. Kowtowing to governments may seem an easy option - and it often is in the short term. But kowtowing now means taking reputational risks. The cowed can find themselves crushed when aggrieved stakeholders get the opportunity for revenge, perhaps years later.

Anthony Fitzsimmons