Reputational risk

[dpetrescu]

I own shares of GM and in light of the recent recall issue, I was thinking about reputational risk. Bruce Greenwald talked about this in an interview a couple years ago. Can anyone name a few (non fraudulent) companies that suffered long term from reputation risk from big mistakes? I can't. All that is left behind is a forgotten "U" or "V" in their stock charts. Some of the mistakes are small and were great buying opportunities, others mostly are atrocious and it just does not seem right that they're reaching record valuations. Why is it that there is very little reputational risk for companies?

 

1. Dow Chemical in the 80s. Union Carbide is a subsidiary of Dow. A gas leak at a UC India plant resulted in the death of almost 4,000 people. It is criminal they got away with it for just a few hundred million settlement. Value of Dow is today at an all time high 1000% greater than when the incident took place in the 80s. I've personally tried to always avoid specifying their products on construction products.

 

2. AIG - seller of credit protection. It turned out the entire foundation of the company - selling credit protection was flawed. They received 85 billion bailout and a few months later announced more than a billion dollars in bonuses. Today it is valued at 73 billion and still selling insurance like 2008 never happened. Today it is at 30% of its pre crisis market cap (although not all time high, I am still greatly amazed). The stock has tripled since 2009.

 

3. Moody's - Not only was this company's business proven to be of no value for its clients. It actually caused extensive damage to the entire economy and it's clients that relied on its ratings. In 2010, Einhorn made a short case that Moody's would suffer reputational damage and no one would rely on their ratings in the future. What a rational and smart, common sense theory. I almost took action on this idea. So what happened? The market cap is up 500% and the stock it at an all time high.

 

4 salad oil scandal. In this case one could say American Express was the victim of fraud - invisible oil backed loans. It's stock dropped 50% in early 1970s. I'm going to run out of zeros if I write how many tens of thousands of percent American Express increased since then.

 

5. Exxon - we all know the damaging spill in the late 80s. 10 to 30 million gallons spilled. After numerous appeals over many decades they have still not paid pay only 500 million in damages (originally a few billion), 500 million is just 10% of a quarter's profits. They paid a few billion in cleanup costs. Are they suffering now financially from reputational damage? Nope. BP spilled half as many or less, a stock chart would indicate they're doing OK.

 

6 News Corp and the phone hacking scandal...what scandal?

 

I could go on...

 

 

[schin]

We can add BP and Toyota... just pay the fine...be quiet for a while and the beat goes on.

[tng]

BAC at the end of 2011 and beginning of 2012. A lot of us are invested in BAC and forget that it was $18+ in 2010. It dropped -70% on the reputation smear from Countrywide related lawsuits, but the solvency of the bank was never really in question.

[Phaceliacapital]

Carnival.

 

I thought Morningstar had calculated that it takes an average of 18 months to wash out reputational blunders.

[SpecOps]

I've got one, Geng Jinping. The company is now bankrupt, and the Execs were executed for their mistakes!

 

http://news.bbc.co.uk/1/hi/8375638.stm

 

Also Dasani, the water by Coca Cola, was launched in the UK a few years ago and a story leaked to the papers that it was just tap water. Then they had to recall them because of contamination. The brand was a complete flop after that and I think they just removed it from sale in the end.

 

http://www.theguardian.com/business/2004/mar/20/medicineandhealth.lifeandhealth

 

 

But in general I would tend to agree, reputational damage, unless very serious, usually blows over