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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.

Thursday, 28 April 2011

Berkshire Hathaway's Dilemma

It isn't often that a company publicly - and rapidly - reports on a breach of its ethical code.

On 30 March, the FT reported the resignation of David Sokol, hitherto seen as a possible heir to Warren Buffett.  Buffett's response to the resignation seemed mild given that there appeared to be a cloud over Sokol as he left.

The sky has now cleared - with a robust report by Berkshire Hathaway's Audit Committee.  Trenchantly critical of Sokol, the report was published partly to clear the air and partly to illustrate how Berkshire views threats to its reputation.  Sokol has protested his innocence.

Even if the Audit Committee is right, there is no evidence that this was anything more than an isolated breach of Berkshire's ethical principles.  But if there was any other impropriety at Berkshire, they must get on top of it before anyone else discovers it.  The reputational risk is particularly high.

Buffett's bienniel letter to his top managers wisely includes the following (here at page 26)
"If you see anything whose propriety or legality causes you to hesitate, be sure to give me a call. .....[and] let me know promptly if there’s any significant bad news. I can handle bad news but I don’t like to deal with it after it has festered for awhile. "
Buffett has a choice.  He can hope that his staff revisit his letter and voluntarily tell him if they are aware of any possible impropriety; or he can actively make sure that Sokol's act was an isolated one. 

Making sure is a tougher way to go: but were Berkshire pre-emptively to discover and deal with any other impropriety, they could well suffer modest or no reputational damage.  Were such mis-deeds to emerge independently, the damage would be far greater.

Buffett has repeatedly emphasised that Berkshire's appetite for reputational risk is zero.  The active investigation route is the only way in which Berkshire can be reasonably confident of keeping their reputation substantially undamaged.

And that reputation has a distinct value to its shareholders.  It is one of the reasons why Berkshire Hathaway shares trade at a significant premium to their reported asset value.

Anthony Fitzsimmons

Monday, 25 April 2011

PWC appoints Reputation Tsar

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.

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 has suggested that regulators should attack accountants' reputations, and the House of Lords has been critical of the "disconcerting complacen[cy]" of the Big Four in relation to their role in the financial crisis.  

Now PWC is appointing a reputation tsar,  Richard Sexton.  To judge by the Telegraph's report, Richard Sexton's focus will be on reputation management.  If so, PWC is making a common mistake in trying to fix its reputation.

The task PWC needs to address is more profound.  They need to fix the fundamentals.  That means finding - and admitting to and dealing with - more profound problems than how regulators and politicians see you.

The stakes are high, and not just for PWC.

Anthony Fitzsimmons

Tuesday, 19 April 2011

Performance related pay

Here is a thoughtful  FT article by the LSE's Richard Layard on performance related pay.

Once you have read that, you may wish to look at "Limited liability, increased risk", "Does bonus size matter?" and "Extracting bankers from the doghouse", which look at incentives such as bonuses through a variety of lenses.

Happy reading

Anthony Fitzsimmons

Thursday, 7 April 2011

Unknown Knowns

 Berkshire Hathaway is having a surprising spot of bother.  One of its leaders - some say Buffett's preferred successor - has left under what looks like a cloudThe commentariat is pontificating

Warren Buffett clearly understands the principles.  For many years he has published these instructions (see page 26 here) to his CEOs.

"The priority is that all of us continue to zealously guard Berkshire’s reputation. We can’t be perfect but we can try to be. As I’ve said in these memos for more than 25 years: “We can afford to lose money – even a lot of money. But we can’t afford to lose reputation – even a shred of reputation.” We must continue to measure every act against not only what is legal but also what we would be happy to have written about on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter."

Implementation is harder.  It is well nigh impossible for a group to see itself as others see it, and this is as true for leadership groups as for scout troops.  And it is easy for a sense of "this is what is normal around here" to develop.  Buffett foresees that too, in the same letter:

"Sometimes your associates will say “Everybody else is doing it.” This rationale is almost always a bad one if it is the main justification for a business action. It is totally unacceptable when evaluating a moral decision. Whenever somebody offers that phrase as a rationale, in effect they are saying that they can’t come up with a good reason. If anyone gives this explanation, tell them to try using it with a reporter or a judge and see how far it gets them."

Leaders need more than Buffett's principles to guide them.  They lack a means of discovering unknown truths.  Some are things that the organisation can't see.  Others are truths that can't be told to Power.  Some leaders find it hard to listen and others tranlsate what they hear to fit their world view.  But without the knowledge, leaders have no chance to fix the problem before an "unfriendly but intelligent reporter" reports it.

Uncovering these uncomfortable truths is not easy, but success is worthwhile.  What Donald Rumsfeld might have called "Unknown Knowns" (see the first Q&A here) includes potentially catastrophic risks that are often fundamental to the business and its reputation.

The key to finding unknown knowns is to make it safe for people to tell and ensure that those who need to listen do.  This is the aim of  'Resilience Evaluations'.

But as unknown knowns they remain unrecognised and unmanaged by leaders.  When the wrong kind of spark arrives in the wrong place at the wrong time, they will discover another unknown known.  They were sitting on a powder keg primed with a painfully short fuse.

Anthony Fitzsimmons

Friday, 1 April 2011

Reputation and Nuclear Power

The reputation of the nuclear power industry and its regulators has been shaken by the Fukushima nuclear power station crisis in Japan, which brings back memories and concerns that followed the Three Mile Island (1979) and Chernobyl (1986) disasters.  Here are a few thoughts on how the nuclear industry can bring its reputation to that which it deserves.

First, the public needs reliable facts.  The nuclear power industry is notoriously secretive.  The resulting lack of transparency is not likely to encourage good safety practice. To start recovering its reputation, the industry needs to be inspected thoroughly and independently with the conclusions published.  And independently means independently of regulators.  History has too many tales of ineffective and incompetent  regulators, not to mention regulatory capture, for regulators to be universally trusted.

Here are some key questions.
  • What is the physical condition of each nuclear facility
  • How well is it run? 
  • How robust is the system, particularly if something starts to go wrong?
  • How could it go wrong?
  • How well is it prepared for mishaps or worse? 
  • How effective is its regulator?
BP was a highly respected company, but the authoritiative and independent  enquiries into the Texas City and Deepwater Horizon disasters showed unacceptable levels of equipment maintenance and management even if some of it had been inherited.  And Deepwater illustrated regulatory ineffectiveness, capture and worse.  If the nuclear industry is as good as it claims to be, it has nothing to fear from transparency.

Second, there needs to be a thorough, dispassionate assessment of the economic up- and down- sides of nuclear energy at the economic level, including a life-cycle analysis and risk.  Nuclear power reduces dependence on oil and coal, but a nuclear accident can bring huge cost and disruption to an economy.
  • How comparable, economically, is a serious nuclear accident to a major oil shock?  
  • How frequently can we expect one to happen?
  • With what economic consequences? 
  • How should we value the long term benefits and disbenefits?
Nuclear accidents are thankfully of low frequency - three in the last 32 years.  But the nuclear industry may well have been foooled by randomness into thinking that it is safe and well run. If the population of reactors doubles, it is quite possible that a major nuclear energy disaster every 5 years will come to be expected - just as there is a major banking crisis somewhere in the world every ten years

This is a serious task for independent multidisciplinary teams since the assumptions made must be realistic.  Poor modelling on inappropriate assumptions is one of the reasons that so few foresaw the latest banking crisis.  (Regulatory failure and capture were others.)

Third, governments must move beyond prevaricating about the long term storage of nuclear waste to constructing and using long term storage.  Temporary storage of nuclear waste dumps the problem on future generations.  This weighs heavily on how the public views nuclear power because the public is at times surprisingly - perhaps reassuringly - concerned about bequesthing dangerous problems for its grandchildren and beyond.

Fourth, since nuclear radiation does not stay within borders, nuclear regulation must become international.  There needs to be a network of nuclear industry policemen and regulators. They should linked internationally and, ideally, be independent of government and the military.  They need teeth, including the power to shut nuclear power stations if they are not being operated to the required safety standards.

Without information on the first two areas, there can there be no well-informed public debate on the risks and benefits of nuclear power to current and future generations.  Without resolution of all four, the nuclear industry and its regulators are unlikely to be trusted.  And without trust, the industry will face continual opposition from the public.

Whilst politicians can be won over by the industry's lobbying, politicians regularly face re-election. Nearly ten years ago, the perceptive Anthony Hilton observed that technology now allows public to mobilise against the Establishment.  That keeps pressure on politicians between elections.

Anthony Fitzsimmons