<<

. 46
( 131 .)



>>

therefore have most impact in reducing the level of residual reputational
risk. This will help the owners identify ˜the greatest bangs available for
their bucks™.
Chapter 9 “ Shareholder value and reputational risk 227



Reputational risk management should be regarded as an opportunity to
improve not only the management of the particular risk or uncertainty in a spe-
cific project but also the business as a whole. The methodology and approach
provided by SERM has been recognised as valid among the investment commu-
nity as well as among stakeholders generally.

Hints and tips: key questions
Ownership
The board, having gained common consensus of the key issues, should
allocate the issues to individual executives to take ownership of their
management and assessment.
Issue
The first step for the owner should be to consider the currency of the issue
by asking:
* How current is the issue and is it of growing relevance/concern to the
stakeholders?
* Is it an old issue that is lying dormant and could suddenly take off?
* Is it a new emerging issue?
Public awareness
Media interest and non-government organisation (NGO) activity work
together to create public awareness. If the issue is very newsworthy and a
major NGO launches a campaign around the issue, it will keep gaining
momentum leading to ever-increasing public awareness.
Media interest
The owner should assess the current and potential news value the issue
could have. For example, they should consider: How sustained could the
coverage be? ˜Does the story have legs?™
Clearly, whereas a negative one-off headline can be fairly damaging, a
long drawn out campaign can severely undermine a company™s reputation,
even if it is only in the local press. The issue could potentially centre on a
major accident, leading to a public enquiry and class action for compensa-
tion. The whole drawn out process will ensure maximum media coverage.
Some journalists centre on certain companies and their continual neg-
ative commentary acts as a magnet for them to be sent additional informa-
tion by whistleblowers and other aggrieved stakeholders. Once a journalist
is in this envious position it is very difficult to shake them off.



Useful web links
* Association of British Insurers™ (ABI) Disclosure Guidelines on Socially
Responsible Investment: http://www.ivis.co.uk/pages/framegu.html
* UN Business Guide to Partnering wilt NGOs: http://www.resourcesaver.
org/file/toolmanager/custom016c45f85703.pdf
This page intentionally left blank
10
Corporate power, business and
marketing risks
10 Corporate power, business
and marketing risks



CHAPTER OVERVIEW
In this chapter we summarise key corporate power risks that in SERM™s
experience impact on the company™s risk profile and sustainability. Case
studies are drawn upon to highlight some of the current international
research. There is a review of the following issues:

* Unrestrained use of corporate power risks;
* Adverse business practices risk; and
* Adverse marketing practices risk.
These business issues can cause an average loss of 1.4% of market value.
The main principles of good corporate governance assist in the man-
agement of these corporate power issues, both internally and externally.
This includes the balance of power between chairman and chief executive,
the executive and non-executive directors, the culture and tone from the
top, the effectiveness and diversity of the board; the effectiveness of the
chief executive and internal controls are also significant in the corporate
success, as mentioned in Chapters 6, 9, 21 and 23.
Risk management
Examples of positive risk management of these issues include the following:
* Policies and management systems, and compliance mechanisms related
to product information and labelling;
* Management and compliance systems for measuring customer satisfaction;
* Respect for the privacy of customers; and
* A policy of adherence to standards and voluntary codes relating to busi-
ness practices, marketing and advertising.




Unrestrained use of corporate power risks
As a result of research, the following results were obtained:
Unrestrained corporate power risk is 0.5% of market value to be put at risk
(the average net risk for the top 500 US and EU listed companies); and
Chapter 10 “ Corporate power, business and marketing risks 231



This risk exposure has been reduced from 0.6% of market value but the man-
agement of these issues is substandard compared to other risk categories.
There are improvements in the management of corporate governance risks
within the UK, however.
The following factors are looked at when considering unrestrained use of cor-
porate power risks:
A statement of company and directors™ duties;
Improved transparency and accountability, with improvements to the qual-
ity, timeliness and accessibility of information available for shareholders and
others; and
More effective machinery for enabling and encouraging shareholders to exer-
cise effective and responsible control.
The legal aspects of social and ethical risk are discussed in Chapters 12“17 and
this includes director and officer personal liabilities (Chapter 16) and issues
with manslaughter and corporate killing legislation (Chapters 6 and 16).
The following graph shows the social and ethical risk (net) from unre-
strained use of corporate power risks by sector.
Use of Corporate Power
1.6%

1.4% PHARMACEUTICALS &
BIOTECH
1.2% STEEL & OTHER METALS
Net (Residual) Risk




TOBACCO
1.0%
AEROSPACE & DEFENCE
0.8%
TRANSPORT
0.6%
OIL & GAS
0.4% SECTORS

FTSE 350 AVERAGE
0.2%

0.0%
0.0% 0.5% 1.0% 1.5% 2.0% 2.5%
Gross (Inherent) Risk


Case studies
Allegations of market manipulation or monopolistic power:
Microsoft: the European Union (EU) has imposed the highest ever penalty on
Microsoft of ‚¬497 million (£334 million, or US$613 million) for alleged abuse
of its Windows monopoly. This is significantly less than the $3 billion fine
the EU could have levied, although it could be followed by further billion
euro settlements with the company. This is the highest ever EU fine, eclips-
ing the ‚¬462 million imposed against Hoffman-La Roche in 2001 (˜EU hits
Microsoft with record fines™, 24 March 2004, www.eweek.com);
Part B “ Overview of the Economic Aspects of Business Risks
232



British Airways shares weakened 0.5% to £323.5 on news that it had been
asked for information from the EU and the US Department of Justice ˜relating
to alleged cartel activity™ involving a number of airlines and cargo operators
(Financial Times, 15 February 2006); and
Vodafone™s (the mobile network operator) share value dropped 4% to 1191„2p
on the news that the European Commission plans to cut ˜excessive™ charges
that are levied on roving calls that customers make with their phones when
abroad. The estimates are that the new laws could cost between £750 million
and £1 billion in turnover (Financial Times, 29 March 2006).
Government and regulators have impacts upon shares prices through their
structuring of market forces:
Tate & Lyle, the UK sugar and sweetener producer, fell 1.1% on 21 June ahead
of the EC™s proposals for sugar price reforms (Financial Times, 22 June 2005);
Shares in Moody™s Corporation, the rating agency, fell 3% after it emerged
that Eliot Spitzer, New York attorney-general for information on how it con-
ducts its reviews of reinsurers (Financial Times, 30 July 2005);
UK retailer WM Morrison fell 0.8% to 1631„2p on fears that the Office of Fair
Trading may be considering a probe into the UK groceries market (Financial
Times, 1 November 2005); and
The UK directory services company Yell Group fell 9.8% to 4223„4p on 5 April
2005 after the Office of Fair Trading announced their interest in the lack of
competition in the classified directories sector and that they were referring it
to the Competition Commission (Financial Times, 6 April 2005).
Membership of pressure groups and lobbying firms: British Telecom was noted
as a member of the European Social Forum which is a lobby group, lobbying for
further liberalisation of services through the renegotiation of the GATTs Treaty
within the WTO. This agreement has been criticised for increasing the power of
corporations to challenge the efforts of national governments to regulate envi-
ronmentally damaging industries and to protect welfare provision.
Political donations of any type are seen as divisive: GlaxoSmithKline plc was
listed on the boycott Bush website as one of the top 30 donors to the US
Republican Party. This is mainly due to the freedoms afforded to staff to con-
tribute to political companies through work collections.
Corporate governance risk issues have risen in importance again during the
2004 voting season in light of failures such as Ahold, Enron, WorldCom and
Vivendi. There is an increased activism among financial investors to ensure
companies are adhering to the Higgs guidelines and the Combined Code of
Practice. There is a growing belief that trustees are not doing their fiduciary duty
unless they engage in issues like accountancy compliance, remuneration, golden
parachutes, etc. The shareholder revolts over pay issues, like GlaxoSmithKline™s
annual general meeting (AGM) in 2003, or the ABI™s (Association of British
Insurers) ˜red top™ warnings on companies like WPP plc™s pay plans are all
examples of this. Reckitt Benckiser is an example as there are concerns over
excessive director remuneration and golden parachutes, as their CEO received
Chapter 10 “ Corporate power, business and marketing risks 233



a £5.1 million pay deal and would attract a payment of 1.5 times his annual
salary if he were fired.
The regulatory regime is set to strengthen even in the otherwise red tape-
free US there are moves to further extend the Sarbanes-Oxley Act. The require-
ments were initially expected only to affect public companies, but nearly two
years after being passed, non-profits and private companies now have to famil-
iarise themselves with the regulations.
The following corporate governance information has been reviewed in
research:
Whether the role of the chairman and chief executive is split;
How long the chairman, chief executive and financial director had been in
place and where they had been recruited;
The executive remuneration package;
The composition and background of the board;
Information about mergers and acquisitions;
Strategy development and implementation; and
The use of complex financial engineering techniques.

Adverse business practices risk
Research results show that:
Adverse business practices risk an average of 0.5% of the market value to be
of the top 500 US and EU listed companies; and
This risk exposure has been reduced from 0.7% of market value by good risk
management techniques (the risk reduction/management factor).
The following graph shows the adverse business practices risk by sector.


Business Practices
1.6%

1.4% PHARMACEUTICALS &
BIOTECH
1.2% STEEL & OTHER METALS
Net (Residual) Risk




AEROSPACE & DEFENCE
1.0%
TRANSPORT
0.8%
OIL & GAS
0.6%
BANKS
0.4% SECTORS

FTSE 350 AVERAGE
0.2%

0.0%
0.0% 0.5% 1.0% 1.5% 2.0% 2.5%
Gross (Inherent) Risk
Part B “ Overview of the Economic Aspects of Business Risks
234



National governments are staring to act in the wake of these scandals
which reflect poorly on their management of the business environment.
International groups like the European Commission have been strengthened in
their pursuit of cartel members and escape prosecution in exchange for infor-
mation on their agreements with other parties.
General business practices also include elements of all the other chapters
by direct and indirect impact as the actions of as business organisation and
their management practices, therefore by default as consequences of their busi-

<<

. 46
( 131 .)



>>