GOVERNANCE : Reputation: a global issue – It’s hard to build but easy to lose

It was only 10 years or so ago, says Neville Bain, that company directors were described as “baubles on Christmas tree” – seemingly interested only in free lunch and card-carrying membership of the old boy network.
Such characterisations are no longer fair or applicable – at least in large part – argues Bain, Dunedin-born graduate of the University of Otago who 18 months ago became chairman of the 55,000-member UK Institute of Directors.
The notion of directors sitting on board simply to “make up the numbers” is also long gone, he says.
Yet so far as business itself is concerned, good deal of blame can be laid at their generic door through financial failure, malfeasance, or being asleep on their watch.
Bain cites some of the “spectacular failures” in reasonably recent years, including the late Robert Maxwell’s plundering of his employees’ pension scheme, Enron, WorldCom, Tyco, HIH in Australia, and Parmalat.
As well as these failures, there have been many more where significant shareholder value has been lost through poorly executed strategy, which itself may have been unclear or flawed.
He highlights study by consulting firm Booz Allen (“Too much SOX can kill you.”) of 1200 firms, each with market capitalisation of US$1 billion or more.
The findings included:
• More shareholder value has been wiped out by mismanagement and poor strategy execution, than the sum of all the worldwide corporate scandals.
• Of the 360 worst firms, 87 percent of the lost value was due to “strategic mishaps”.
• Only 13 percent of lost value was due to regulatory compliance failures or poor board oversight.
Bain says the Sarbanes-Oxley legislation in the United States and the Combined Code of Practice in the United Kingdom have been put in place to reassure the public and stakeholders. Protecting investors is obviously important, but he has some issues with this approach.
“The disappointing thing about this emphasis is that companies are so preoccupied with ticking boxes and legal sign off, to prevent or minimise potential legal suits, that focus on value-building through having the right values, properly practised in the organisation seems to have taken back seat.
“It seems to me that trying to repair damage from breaches in professional standards or failures of integrity through application of code, is bit like repairing the broken hinges on the stable door when the horse has long gone.
“In these cases, trust has been diminished. We all know that it takes time and effort to build trust, but equally that it is lost in the blink of an eye.”
Bain says improved, consistent performance is much more likely to be delivered from an organisation where appropriate values are in place and where reputation is held to be important by individuals and the corporation.
“In my view, reputation is about capability, consistent performance, and living out the values that are held personally and by the employing organisation,” he says.
Back in Dunedin to attend his brother’s 70th birthday and deliver lecture at his alma mater, Bain says directors these days are very aware of responsibilities and liabilities, and are prepared to work hard to maintain those standards.
He is firm believer in reputation being an important driver of value in an organisation, and equally so for an individual.
“It takes time to build and can be so easily lost through carelessness, or lack of focus by the organisation.”
Bain says reputation management is much more than having good public relations, and crisis management pro­cess in-house. “Reputation is also driver of the value of an individual.”
Additionally, company with high reputation has the ability to bring the most able people into the organisation, which in itself delivers further value. Reputation can be magnet for inward investment, or an impediment to trading with them, he says.
Bain’s work has taken him to many countries with differing cultures, from New Zealand to South Africa, the United Kingdom, Europe and the United States, and developing countries in the Far East and in Russia and the former Commonwealth of Independent States.
He has financial interests in India and consults to Russian companies seeking to list on the London Stock Exchange.
Unsurprisingly, he says reputations vary from country to country, with equally differing risks and ethical standards; and those where corruption continues or security of the investment is less secure must offer up higher returns to compensate for the additional risk.
This is reflected in the discount factor applied to the future cash flows from the initial investment.
Business leaders in Russia are committed to raising standards of governance to meet those in Europe, he says – they know they have to repair and improve their reputation, or the companies they float on the London Stock Exchange will slump in value.
China has “real challenge” with “quality fade” because of its increasing tendency to subjugate quality to profit, and the “appalling” abuses of health and safety, of food poisoning, the use of banned chemicals, toxic or unsafe toys and simple product failure due to corner-cutting.
In the Chinese building industry where high-rise buildings rely for support on reinforced aluminium systems, some builders decide to “save costs” and sometimes use just 10 percent of the specified amount of aluminium.
“These may not be widespread, but they are widely reported and damage the reputation of all of China,” Bain says.
Describing himself as “committed supporter” of New Zealand, albeit now bit remote from the detail of the economy, Bain says the country is not exempt from doing more to enhance its reputation and make it more attractive, especially since its geographical isolation is reality that will not change.
He suggests New Zealand can:
• Leverage its green and environmentally friendly image to bring in new talent, retain existing talent, and align products and services to this.
• Ensure business-friendly tax regime that is competitive and simple to understand.
• Allow minimal interference and regulation from government that needs to recognise that “less is better” in terms of its involvement in the economy.
• More effectively leverage the research and talent at universities and commercialise this with joint ventures.
• Identify and focus on specific sectors where there may be comparative advantage.
• Champion innovation through universities and fiscal policy.
Bain says executives of companies and other organisations are well aware of their employer’s reputation. Firms with strong positive reputations attract better people, and there is strong link between having the right people and delivering superior results, he says.
“There is virtuous circle of value as reputation attracts better people, builds trust from the community, and builds confidence with customers and suppliers – all of which drives value for the stakeholders.
“Reputation, like trust, takes time to build but it can be lost in the blinking of an eye.”
Bain says integrity and reputation are the only real assets held by partners in professional services firms; when lost, everything else follows, as Arthur Andersen “fatally discovered” with the recent Enron debacle.
“Every firm must develop plan to prepare for the day its corporate integrity, or that of its professionals, is threatened,” he says, adding that this is especially so when the global pressures to control corporate wrongdoing are intensifying.
“In the current climate, the conduct and competence of professional services firms are increasingly under the microscope.”
There are four things that will influence the extent to which company is exposed to reputational risk, he says. They are:
• The extent to which appropriate values are embedded in the organisation.
• Where the reputation enjoyed exceeds the true character of the company or organisation.
• Where external expecta

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