S1E3: Why investors care about reputation
Investors play a major part in the success of plenty of businesses. For some companies the relationship with investors will be direct and personal, others are mediated by the stock market and media. All are impacted by the reputation of the company.
How so? Surely professional investors only care about the hard numbers in the business case? But investment is about far more than just the numbers – Investors need to trust the people running the company and the strategy they have laid out, and they need to believe that others – consumers, regulators and investors – will trust that company too. The ability to trust is based upon reputation. In turn, investor loyalty is a factor in reducing volatility in share price and in reducing the cost of capital.
To tell you more, I'm joined by two excellent guests:
Marte Borhaug, Global Head of Sustainable Outcomes for Aviva Investors
Patrick Thomas, Investment Director, and Head of ESG service at Canaccord Genuity Wealth Management
Together we discuss the links between reputation and the bottom line, what ESG investing is and how it links to reputation, and why reputation is a vital ingredient in any risk profile.
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Daisy Powell-Chandler: [00:00:00] Welcome to Why Everybody Hates You. An audio support group for reputation professionals. If you have any responsibility for how people talk, think, feel about your organization, then you're in the right place. My name is [00:00:30] Daisy Powell-Chandler and today we're talking about why reputation matters to investors.
As a reputation consultant, often I'm brought into a boardroom or a committee where not everyone is on the same page about how much reputation matters. Sometimes even my direct client is interested in [00:01:00] measuring reputation. Not because they see it as a priority, but because their bosses asked for it. I'm one of the most common phrases used by the naysayers is that none of this matters as long as the investors are happy.
So in this episode, we look at the evidence to back that claim and we speak to some of these investors to understand why investors do in fact care about reputation.
Investors play a major part in the success of plenty of [00:01:30] businesses. For some companies, the relationship with investors will be direct and personal. Others are mediated by the stock market and media. All of those are impacted by the reputation of the company. How so surely professional investors only care about the hard numbers in the business case, but investment is about far more than just the numbers.
It is about how the numbers are interpreted and here reputation makes a significant difference. I [00:02:00] spoke to Marte Borhaug, global head of Sustainable Outcomes for Aviva Investors about why it matters.
Marte Borhaug: [00:02:07] So reputation for us as an investor is very much about understanding what a company can be exposed to.
So we're trying to get a sense of, how a company is dealing with all the various issues that they face that can hurt their operations or hurt their employees or hurt their supply chains. And we're trying to get an understanding of. [00:02:30] ultimately how they, how well they're dealing with those issues.
And, if, if they don't deal with it and often a very ends up being a reputational damage. So it ends up, you know, hitting the headlines, becoming a scandal, and that can have a massive impact on the company's bottom line, as well as having immediate impact on the overall value of a company.
Daisy Powell-Chandler: [00:02:50] Reputation affects the reliability of that price over time. One study by German researcher, Sabrina Helm. Found that 12% of [00:03:00] investor loyalty was driven by their assessment of a firm's reputation in turn investor. Loyalty is a factor in reducing volatility in share price and in reducing the cost of capital for companies, investors need to trust the people running the company and the strategy they have laid out, and they need to believe that others, consumers, regulators, and investors will trust that company too.
That ability to trust is based upon reputation. Let us break that down into three [00:03:30] categories, then trust in the management trust in the strategy and the belief that others also trust. Let's start with that question of whether I trust the people I'm investing in when conducting a reputation, audit, it is standard practice to ask stakeholders what they think of an organisation's leadership.
Sometimes it's can feel a bit pointless. Not all CEOs can be or want to be Elon Musk or Steve Jobs. Most are content to remain anonymous and some [00:04:00] pride themselves on doing. So that means that few commentators will have much of an opinion about them. But this part of the reputation audit is important because of the assumptions that the respondent reveals.
I don't see the leadership out and about. An interview he might say, but that's okay because I know they're getting on with the job. Another interpretation of the same situation might wonder with the border up to something shady or to crisis stricken, to be out pressing the flesh. These [00:04:30] differences are crucial to how much you trust an organisation with money from your fund or your pocket.
We know from looking at consumer data - and never forget the investors are consumers too - that the difference between a seller with no track record and one that has a good reputation can command price premiums of 8% or more to put this number in context, 8% is more than the profit margin in many industries and enough of a share price movement to make it into the top 20 most dramatic days on the FTSE 100 or [00:05:00] Dow Jones, the reputation of a management team could therefore make a big.
Deference to the readiness of investors to back your firm. Here's Patrick Thomas investment director, and head of ESG service at Canaccord Genuity wealth management. To explain why that is
Patrick Thomas: [00:05:16] Increasingly these aren't just environmental or social issues, economic issues. So, actually, what they are a company that deals with them very well it is really a sign that it's ran by [00:05:30] people who care and are paying attention. So, and increasingly you're seeing that in share price performance. And the second thing that you're saying, and this is a kind of broader point really is the, the idea of attracting talent into your organization. You're you're seeing it very, very starkly, in the technology space, that talented technology, applicants are going to some companies and some other companies are [00:06:00] struggling to employ them.
And I think you're seeing that kind of across the board. So, these are big issues for financial issues for shareholders to consider.
Daisy Powell-Chandler: [00:06:11] As well as trusting the management investors need to believe that the corporate strategy in place is sound. A big part of this is ensuring that the strategy takes account of the greatest sources of risk, both unlikely risks that could have big impacts and more common or inevitable problems, risks.
For example, like major [00:06:30] lawsuits, think tobacco industry pharmaceuticals Volkswagen. Risks like the regulators capping your prices because of public cries of profiteering. Hello, energy sector. Hello, payday lenders risks like activists targeting your products, cotton buds, straws and coffee cups. Each of these risks can be moderated through reputation.
Governments are more likely to penalise companies and sectors with a poor reputation. It makes election sense [00:07:00] more on that in the next episode, by the way. And shifts in public attitudes on broader issues are often powered by their feelings about a particular company. Often one with a poor reputation, think Starbucks and tax, Amazon and employee conditions splits direct and zero hours contracts.
Patrick Thomas: [00:07:17] The most obvious one. If you look back in corporate history is, a nonfinancial issue happening to a company. so think of something like the Volkswagen debacle, think about Facebook a [00:07:30] couple of years ago and privacy, at, and I'd go back a bit further and think about the oil spill for BP.
Those are all, issues, not really directly impacting corporate profitability, but heavily impacting. reputation, that caused pretty lasting damage, to both share prices and corporate profitability.
Daisy Powell-Chandler: [00:07:57] All of this is to say that investors have to believe that your [00:08:00] organisation has investigated, measured, and prepared for umpteen risks.
Many of those will be reputational in nature, like the bad taste imparted by big bonuses during a series of redundancies. In other cases, your ability to bounce back from an upset will be affected by how strong your reputation was at the start. The public government and activists are far more prepared to forgive a company that slips up once than they are to forgive one with a reputation as an habitual [00:08:30] offender.
So your investors, a good reputation acts as a guarantor that can be drawn against in emergency. Your organization is less likely to swiftly become soil goods. If you've started with the benefit of the doubt as awareness of these reputational risks has risen. Many investor and management teams have tried to quantify and assess their exposure. The most common method for doing so is to implement an ESG [00:09:00] framework.
What is ESG? Here's Patrick, again, to explain
Patrick Thomas: [00:09:07] All that refers to is nonfinancial data. and that data is grouped into three different groups.
So. One of them is environmental. So that's think about a company and its recycling policies or water policies. one of them is social and that's all about really how a company [00:09:30] interacts with the communities that operates in, and how it treats its employees. and governance is probably an area that, people are more familiar with.
That's about, things like board composition, executive pay. And really if social is about, interaction with people, the governance element really is about how well looked off the shareholders are. The term ESG investing is often used synonymously with sustainable [00:10:00] investing, socially responsible investing, mission related, investing, or screening.
But even companies that aren't focused on environmental or social outcomes have started to use ESG ratings as a proxy for measuring risk.
I think that the link between the two, is that increasingly, your brand, Is increasingly focused, almost purely around, not just the kind of product or [00:10:30] service that you, offer.
but the intangible stuff, that is more difficult to measure, but actually ESG is a very, very good way of measuring that actually
Daisy Powell-Chandler: [00:10:44] As a result, companies with the top ESG rankings now trade at a 30% premium to the poorest performers. And the poor ESG record is increasingly seen through the lens of business risk rather than a matter to be considered only in a corporate social responsibility [00:11:00] policy investors last year moved a record $21 billion into socially responsible investment funds in the U S almost quadrupling the rate of inflows in 2018.
And there are now signs that these flows are being accelerated. By existing funds, switching to ESG principles and designations in order to meet demand for ethical and reduced risk products at the start of the covert crisis. Many people worried that we would see a certain amount of backsliding against [00:11:30] environmental and social targets whilst people focused on economic worries.
In fact, the investment world has doubled down.
Marte Borhaug: [00:11:38] So I think a good illustration on the scale that we're seeing flowing into sustainability funds. It's just to take the last couple of months during COVID. So we saw here in the UK. about 4.3 billion going into, ESD funds in those first four months of the year.
And at the same time you saw roughly the same about [00:12:00] 4 billion going out of non ESG funds. So that gives you a sense. It's not, we're no longer talking about a niche, we're talking about a proper mainstreaming of sustainable investment
Daisy Powell-Chandler: [00:12:11] In the latest McKinsey global survey, a C suite executives and investment professionals. 83% say that they expect ESG programs will contribute more shareholder value in five years than today. Respondents also said that they would be willing to pay about a 10% median premium to acquire a [00:12:30] company with a positive record for ESG issues over one with a negative record, perhaps as a result in April, 2020 at the peak of the COVID instability.
The S&P 500 ESG index was outperforming the S&P 500 benchmark ESG funds maintained more of their value during the COVID related volatility and HSBC research, comparing the performance of individual company stocks before and after the covert effect found that the ESG [00:13:00] shares beat others by around 7%.
Marte Borhaug: [00:13:02] And I think people have now realised that actually brands and companies that are trying to do something good for the planet, actually can end up making more money off it. So as an investor, trying to, to spot which companies are, you know, getting ahead of a trend, like, you know, starting to produce renewable energy.
Maybe starting to take care of the human rights and their supply chains. They might actually be the companies they're going to perform well. so it's gone from this fluff fluffy concept or, or maybe sort of a [00:13:30] need that was more ethical to actually becoming pretty mainstream. And we're seeing a lot of academic research and, and research from various investors showing that companies with good ESG performance are actually performing.
Better than the ones who don't. I think the second reason is also just the kind of huge, change that we've seen in the last couple of decades around the visibility of issues. So maybe in the past a company could, you know, act really badly treat their employees badly, you know, [00:14:00] pollute, local areas.
displays people from work from their homes as they were building a new operation and nobody would hear about it, but in today's, you know, social media, things can very quickly be picked up and can then very quickly go viral. And I think companies are realising that now and therefore taking those sustainability issues a lot more seriously
Daisy Powell-Chandler: [00:14:20] As ever, when something becomes important, we care more about measuring it.
And that has been a major gold rush in the ESG analytics space. Just this year, [00:14:30] Morningstar and influential investment research and asset management firm confirmed that it had acquired the $288 million ESG ratings and research house Sustainalytics. At the same time, ratings agencies have increased their interest in the area.
For example, ratings, agency Fitch last year published an ESG heat map to highlight the areas that present the biggest risks for a range of industries and to help users understand how relevant individual ESG topics are to the credit ratings [00:15:00] of different sectors. These kinds of publications, market increasing nuance and acknowledgement that concerns of air quality for example, are a bigger risk for auto manufacturers and for the hotel industry which instead might focus on labour practices and privacy concerns around customer data.
And as the sophistication of ESG frameworks improves it seems likely that their influence will also, but there is a long road ahead.
Patrick Thomas: [00:15:26] One of the issues that we have, is [00:15:30] around definition, and measurement, and I think that's probably the, the bit that's currently missing within ESG.
That is in other aspects of measuring kind of financial performance. It's very, very easy to compare. one advertising agency with another advertising agency and work out. Who's got more, brand reputation. Who's more profitable who has more market share. Those are quite easy things to measure. It's increasingly [00:16:00] difficult, to do the same comparison on the companies, around environmental and social issues because, a lot of the data is voluntarily reported by companies and there isn't really a sort of standardisation for it. So if you have two companies, for example, and. One company, has, very world-leading policies around kind of diversity and inclusion, but quite, more [00:16:30] poor policies around, the environment, and the other.
And if you compare that to a company with the opposite effects, how do you measure that to kind of performances? So that's really what this industry is trying to kind of get to grips with, to try and make data a little bit more formalized. so you can do a kind of apples and apples comparison,
Daisy Powell-Chandler: [00:16:52] And it isn't just about agreeing on a number.
Marte Borhaug: [00:16:55] The emphasis of measurement systems will continue to be, to try and see [00:17:00] beyond the marketing. A really key thing. That we always need to focus on is the difference between reputation and reality. And we often find that, a lot of companies think that they can sort of advertise their way out of a reputation crisis crisis, but, you know, actually.
Building reputation is not about advertising. It's about action. and so the, there are plenty of examples out there where we, in our opinion, as an investor, we are seeing companies that are taking the wrong approach, which is, [00:17:30] you know, throwing a lot of marketing budget to try and remedy a problem in their supply chain.
But actually what we are looking for as an investor is proper action that they've, you know, properly dealt with the issue. and we're not going to hold a company in a sort of, you know, think that a company's a terrible company just because they've had an issue. the real test is how you deal with the issue.
And so if you deal with the issue by, you know, throwing advertising money on it, trying to avoid dealing with it, trying to borrow it, that's a very typical [00:18:00] sign in our view of a company that is not particularly. Good at dealing with it and think that reputation is, is simply something they can maneuver, but actually reputation for us is it's about action.
It's about actually dealing with it. And we will always use our research team, and our people to try and really dig underneath the, sort of the veneer of their reputation to really try and figure out what they're doing on the ground.
Daisy Powell-Chandler: [00:18:25] And that brings us back to the bottom line to the decisions made by [00:18:30] investors.
We know that they are influenced by the reputation of management teams and also the reputation forms, a vital part of risk assessment. A further element implicit within the ESG approach is an investors want to know that other people trust your company. It is not enough to have good policies and risk management investors need to know that the government trusts you enough to give you a license to operate.
That consumers trust your goods and trading practices, and that the media respects your [00:19:00] reputation enough to listen to your side of the story rather than hounding you into the ground. These fights will show up in your sales figures show, but the best way to troubleshoot problems early is to carefully steward your reputation.
And if this still isn't enough to persuade the sceptics in your organisation, that you should be more actively managing your reputation, then perhaps this final thought will help. Marte Borhaug told me that for Aviva, the next step is that fund managers communicate more with consumers and to also [00:19:30] ask for their views about what they should be asking of companies in that portfolio.
Marte Borhaug: [00:19:34] What technology opens up as an, as an opportunity for us to actually have a dialogue with people. So we would tell the end customer. You know, this vote is coming up here is what we're talking to this company about, whether it's plastic, whether it's, you know, racism is a big, big issue. What are we actually talking to the companies about?
And then we can actually get feedback so we can hear from people, what do they want to vote? And it doesn't mean that they all get a say, but at least they can feel [00:20:00] that they can voice their opinion. And. We then have to, and sort of my dream is, is a world where the asset manager actually has to explain what, you know, directly to the customers.
Why did we do what we do? and if we haven't listened to, let's say 90% of our customers said. We want you to vote against something or in favour of something. And if we chose to do something else, we will be held accountable by the customers. So we will have to explain to them that maybe for example, the reason why we voted differently than them is we [00:20:30] actually have, are convinced that the company is doing enough.
And here's our evidence for that, for example, and the pilot was. Fantastic. It really got a lot of excitement. You know, people are very excited about it and they loved having that engagement and that dialogue. And I think that could dramatically transform the asset management industry, which has to date been a very, very one way, one way over communicating where, where we are kind of, you know, sending people an annual report, but that's it.
And we're not gonna really giving people a [00:21:00] say,
Daisy Powell-Chandler: [00:21:00] This points to the very real possibility that fund managers will not only be heavily influenced by the reputation that your firm has amongst consumers, but will also act to influence that reputation themselves by using that own research teams, to find out more about companies and then publicising that openly to their own shareholders.
This could lead to virtual circles in the case of some firms where the research backs, the marketing that they're putting out there about themselves and helps to build a [00:21:30] positive reputation. But for companies that try to market their way out of a reputation crisis, it could instead lead to a downward vicious cycle.
What are our key takeaways from today? Investors need to trust the people running a company, the strategy they have laid out, and they need to believe that others, consumers, regulators, and so on will trust that company too. A healthy reputation contributes to invest a loyalty, which in [00:22:00] turn reduces, share price volatility, and the cost of capital.
A good reputation reduces the risk of investments by acting as a shield from government intervention and a guarantor of your company's ability to bounce back after a problem that makes your company a more attractive proposition. Environmental, social, and governance frameworks are often used as a proxy for reputation in the investment world organisations with better ESG records, show strong share price performance, and are [00:22:30] increasingly popular.
In part because they have viewed as less risky than other investments.
That's everything from us. A big thank you to my guests, multiple Hulk from Aviva and Patrick Thomas from Canaccord Genuity wealth management. I hope we've given you a glimpse into why reputation matters so much to investors and a [00:23:00] bit more ammunition to explain this to the naysayers in your company. I also hope you'll join me in two weeks time when I'll be talking to Mark MacGregor about why all businesses feel like the government hates them.
In the meantime, if you've enjoyed this episode, please do find us about whyeverybodyhatesyou.co.uk. Subscribe, and leave us a review on your favorite podcatcher app. Thank you for listening and remember: [00:23:30] you are not alone.