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risk management in this era of globalisation as there are many issues that are of
practical operational concern and go to the heart of the survival of the organ-
isation. It is also clear that insurance may not be the complete solution.


Useful web links
* A global map of the incidence of H5N1 avian influenza, by country, at
the present time can be found at: http://pandemicflu.gov/
* Awareness and Preparedness for Emergencies at Local Level (APELL) is
a UNEP site on major accidents, emergency prevention and response.
http://www.uneptie.org/pc/apell/home.html
* Emergency Events Database (EMDAT) of over 12,500 mass disasters
http://www.cred.be
* EU Major Accidents Hazard Bureau http://mahbsrv.jrc.it/
* EU site on Chemical Accident Prevention, Preparedness and Response
http://europa.eu.int/comm/enviroment/seveso/
* OECD provides a accident thesaurus, reports and a list of internet links
to national and international sites. http://www.oecd.org/ehs
* US-OSHA Emergency Response Website Guidance
http://www.osha.gov/
* US Chemical Incidents Report Center (CIRC) http://www.csb.gov/circ/
9
Shareholder value and
reputational risk
9 Shareholder value and
reputational risk


Introduction
Risks such as stakeholder pressure, whether it be from the financial community
complaining about executive remuneration or non-governmental organisations
(NGOs) bemoaning the lack of published policies, can impact upon the accu-
mulated ˜goodwill™ or intangible asset value of a company.


The market value of a company is made up of three elements:
Market value tangible assets (less debt) goodwill intangible value
Within a company™s report and accounts the tangible assets are assessed
and audited. The intangible value of a company is partially included in
the balance sheet as ˜goodwill™ or ˜intellectual capital™, of which the corpo-
rate and product brand reputations are a large element. Intangible value is
often regarded as too difficult to measure and break down into its con-
stituent parts, but it constitutes an estimated 71% of market value of the
UK FTSE100.



Intangible value is quite often of higher value than tangible value, according to
Interbrand 2000, who estimated that 96% of the market value of Coca-Cola, 97%
of Kellogg and 84% of American Express is ˜intangible™ (quoted in Business Case
for Corporate Responsibility, Arthur D. Little and Business in the Community
(2003)).
Reputation is the key driver to enhancing or destroying this intangible
value of organisations; whether they are listed or not similar factors apply. It is
not just a company™s overall reputation that is important but how its reputation
is aligned with and meets the expectations of its stakeholders.
There is evidence to show that the public reputation of a listed company and
its share price movement in the future have a strong correlation. This research
was conducted by Mori, the polling company, who found that the ˜favourability™
rating of the analysed companies led to corresponding moves in share perform-
ance, with a lag of between three to 12 months (Financial Times, 22 August 2005).
Chapter 9 “ Shareholder value and reputational risk 201



The company™s reputation, therefore, becomes a key issue in enhancing or
destroying its intangible value; whether it is listed or not the same rules apply.
It is not just a company™s overall reputation which is important but how its
reputation is aligned with, and whether it meets the expectations of, its stake-
holders. If this is achieved then value will be created.
The management of reputation integrity is one of the greatest corporate challenges of the
new millennium. As forces of globalisation continue to gain momentum, society increas-
ingly demands that large multinational corporations improve their performance in the
areas of human rights, the environment, worker health, and other governance issues.
Failure to address these demands has proved damaging to a company™s most important
asset “ its reputation. (Earning Your Reputation: What makes others respect your
company?, Price Waterhouse Coopers (1999))

Respected reputations are built over a long time, as they are a combination of
reliability, credibility, responsibility and trustworthiness, and these reputational
qualities are hard won. In the context of his organisation, Ralph Larsen, the chief
executive officer (CEO) of Johnson & Johnson, has aptly stated:
Our image is that of a caring company. It is shaped not by great acts or great decisions, but
rather the sum total of all behaviours and actions of the company over a period of time.
(Reputation, Charles Fombrun, Harvard Business School Press (1996), p. 69)

A business crisis (see also Chapter 8) that results in the loss of reputational
value, as a result of risk manifesting itself, has been defined as:
Any problem or disruption that triggers negative stakeholder reactions and results in poten-
tially damaging public scrutiny. (Annual Report 2002, The Institute of Crisis Management
(May 2003), from www.crisisexperts.com)

As many case studies have demonstrated reputations can be rapidly damaged
or even lost. In business practice this can occur through inadequate:
Environmental, health and safety and socio-economic risk management,
such as:
The Exxon Valdez oil spill;
Firestone tyres recalls;
Concorde plane crashes;
Product contamination scares; or
Marketing promotions that backfire (see also marketing practices in
Chapter 10).
Compliance with regulations and reporting requirements (considered in pre-
vious chapters), such as the UK financial services with its well-documented
sector problems over:
Endowment mortgages;
Lack of clear customer information;
Insider dealing allegations; and
Individual company difficulties, such as the Equitable Life.
Risk management practices as a standard within an industry, such as the con-
sultancy and accountancy industries;
Part B “ Overview of the Economic Aspects of Business Risks
202



Corporate governance, as demonstrated in international cases including Enron,
WorldCom and Tyco, among others; and
Stakeholder engagement procedures, including investor relations.
This chapter provides a framework for minimising reputational risk whilst max-
imising stakeholder value.


Brand protection
It should be mentioned that any business involved in building its reputation
also has to consider whether it has any intellectual property or brand to protect.
This is true wherever it operates and all the more so in today™s global market-
place. It is also true of other organisations. For example, the UK™s most highly
research-focused universities, as well as a number of NHS IP hubs and Trusts
around the UK, which are undertaking an increasing amount of original research
work into medical devices, biopharma and other unique innovations, must con-
sider protecting their intellectual property or ideas. Indeed, as regards sustain-
able risk management, taking steps to protect the future of key assets should be
a natural process for any business and actually seen as an investment.
Protecting intellectual property (IP) safeguards the growth of a business as
well as protecting it from theft. IP protection can help businesses of all sizes:
Raise finance;
Improve company performance;
Build brand awareness; and
Improve customer loyalty.
However, despite these clear benefits, many do not see this as an important area
of risk management. Indeed, only 26% of UK businesses, and even fewer small
and medium enterprises (SMEs), either recognise or know how to take full
advantage of this growing area of opportunity.
Surprisingly, 98% of worldwide patents are granted for ˜across-the-board™
technology “ for design advances and in everyday fields in the engineering and
computing sectors “ not for the key, breakthrough inventions profiled in the media.


Categories of IP
Intellectual property falls into three broad categories: patents, trade marks and
design protection.
Patents protect inventions by giving the owner of the patent the right to
stop anyone from making or using the invention without the owner™s permis-
sion. This is a legal right, for example, in the UK granted by the Patent Office,
lasting up to 20 years. This right to stop competition is only legal in the coun-
try for which a patent has been granted. Practical steps are:
Keep the details of your invention secret until you have filed a patent appli-
cation. To get a patent, your invention must not have been disclosed publicly
anywhere in the world before you apply “ even by yourself;
Chapter 9 “ Shareholder value and reputational risk 203



Ignorance that you are infringing someone else™s patent is no defence;
Contents of patents are published; they do not remain a secret;
A national patent only gives you rights in that country;
The European single market does not override national patent systems;
You have to police your own patents, or get someone to do it for you; and
Always get professional advice “ it is easy to go wrong.
Trade marks are signs which are used to distinguish the goods or services of
one business from those of another. Most trade marks are words or logos or
combinations of the two, but other forms, such as three-dimensional shapes,
combinations of colours and even sounds, may also be used as trade marks.
Protection lasts initially for 10 years and then, on payment of a fee, it can be
renewed in 10 year blocks for an indefinite period.
Having a registered trade mark gives brand recognition and helps guaran-
tee the origin, quality and consistency of the goods or services. Not only does
this help avoid confusion with others in the same line of business, it also
allows action to be taken against anyone counterfeiting or copying a trade mark
for similar goods or services.
Products sold under a particular trade mark may vary but the trade mark
remains unchanged. Trade marks are an important means of protecting the repu-
tation and goodwill that a business has built up. Trade marks are, for many
businesses, the single most valuable marketing tool that they possess.
Design protection is very important. It is often the reason that a particular
product is chosen or desired. A significant amount of work may be involved in
producing a design, and it is therefore important wherever possible to provide
protection for this design work. Design protection can be very important in pre-
venting competitors from using the same or a very similar design. Design pro-
tection can also be used in licensing a design to third parties and therefore
potentially providing an extra income source.
The EU definition of design is the appearance of the whole or part of a
product resulting from features such as the lines, contours, colours, shape, tex-
ture or materials of the product or its ornamentation. Such products can
include graphic symbols, screen displays, logos, typefaces and packaging.
Accordingly the scope of what is meant by ˜a design™ is very broad, and princi-
pally falls into two categories, whether the design is two or three dimensional.
Three types of protection are potentially available: registered design is
obtained by registration, and can protect the appearance of new two- or three-
dimensional designs. Copyright is a right associated with a particular ˜copyright
work™ and is a right to stop unauthorised copying of the work. Copyright is largely
applicable to two-dimensional designs, but can provide protection for some
three-dimensional designs. Design right is an automatic type of protection that
provides protection for a limited period for most three-dimensional designs.

The pros and cons
In the context of risk management that there are many positive reasons for taking
steps to protect the IP of an organisation from as early a stage as possible. IP can
Part B “ Overview of the Economic Aspects of Business Risks
204



be useful to raise vital finance. Intangible assets, such as registered patents and
trade marks, are increasingly being used as security to borrow cash. They also
provide new revenue streams from licensing and franchising activities. They
may also have a residual value so that even if the company stops trading, the IP
may continue in existence and can be sold on to others. Companies that protect
their intellectual property often undertake a wider range of performance
enhancing activities, such as research, design and development. Trade marks
and patents also enable their owners to command a premium price in the
market that is reflected in their financial performance.
The IP protection process, however, has never been a cheap or straight-
forward journey. Traditionally, the IP profession existed surrounded by an air of
mystique. It involved highly skilled attorneys, sitting in distant offices, cor-
responded by letter to businesses large and small, using unintelligible jargon
and attaching reams of complicated information. They charged significant sums
of money for work that offered no clarity to their client. This led to many start-
up businesses and SMEs making little use of formal methods of protection
requiring registration, such as patents. They preferred informal methods because
they were cheaper and within the control of the company. The principal method
of maintaining confidentiality was through working with customers, suppliers
and employees who could be trusted. They saw the greatest threat to their IP as
loss of key people, far more than the threat of copying by the competition.
However, there have been key developments and advances in the IP sector
of late. In the UK, for example, the volume of IP has grown enormously, and
gets greater and greater still each year. A much larger proportion of technology
patents are being applied on a global scale.
Inventors, and indeed most SMEs, now seek more and more practically
angled advice, especially advice that is tailored around the commercial hopes
of the business, its customers or end-users. In the past, patent agents operated
much like solicitors: the provision of patent law advice, but little more. All that
has now changed dramatically and IP protection is a much more accessible
method of managing risk to the brand. Moreover, what may become the biggest
long-term change is that a much broader range of commercial and corporate
clients are harnessing the IP system, with much of it funded by third parties
such as investors of venture capital firms.



Corporate governance
This issue is covered in Chapters 21“23 but is also embedded in each chapter.
Good corporate governance is one of the foundations of good risk management
practice and is critical to reputational matters. Its importance is embedded in
each chapter. The issue is dealt with in Due Diligence and Corporate Governance
(Dr Linda Spedding, Lexis Nexis (2004)), and within Tolley™s Corporate
Governance Handbook, 2nd Edition (Andrew Chambers (2003)), and A Practical
Approach to Corporate Governance (Dr Saleem Sheikh, Reed Elsevier (2003))
(see also Bibliography).
Chapter 9 “ Shareholder value and reputational risk 205




Corporate governance
A company will have certain issues, such as corporate governance, that are
specific to the company as they are under the company™s control. These
are the issues that, if managed well, will help enhance a company™s repu-
tation, or, if mismanaged, could ultimately destroy its reputation.

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