Forbes: Risk Management What's Reputation Worth? Just Ask Toyota, Goldman And BP

[Omaha Steve]

http://www.forbes.com/2010/06/14/bp-toyota-reputation-markets-goldman-sachs.html?boxes=marketschannelnews

Andy Tannen, 06.14.10, 02:35 PM EDT

Corporate leaders need to identify and mitigate the hard-to-quantify risks to their reputation before they blow up.

If reputational risk wasn't a top issue for CEOs and boards of directors prior to 2010, the watershed events of the first half of this year should make them reconsider their priorities. Of course there's the wrath of the American consumer wrought by BP, thanks to the deadly accident on board the Deepwater Horizon rig and the subsequent Gulf of Mexico oil spill. Before BP, however, two other companies sullied their sterling reputations and are still paying the price.

Between January and April CEOs of two of the world's most admired companies, Toyota Motors and Goldman Sachs ( GS - news - people ), were called before angry congressional committees, on live television and via webcasts, to answer for their companies' perceived transgressions.

Akio Toyoda and Lloyd Blankfein went to Washington for very different reasons: Toyoda to answer for serious quality problems related to sudden acceleration and an alleged failure to report them in a timely fashion; Blankfein to answer for perceived ethical issues related to possible conflicts of interests during the 2007–08 financial crisis. The common lesson emerging from these two cases is that damage to reputation can have a significant impact on a company's financial performance and valuation.

Under pressure from the public, regulators and media, Toyota ( TM - news - people ) recalled 8 million vehicles worldwide and froze sales of eight models in the U.S. for a week in late January. By company estimates, Toyota lost about $2 billion because of the recalls and lost sales. Additionally, Toyota agreed to pay the Transportation Department a $16 million fine for failing to report the acceleration problems promptly--small change for Toyota but a huge public embarrassment. More tangible financial harm came from a subsequent credit rating downgrade by Moody's in April 2010. In a note announcing the action, Tadashi Usui, a senior Moody's analyst, wrote that the quality problems “have created a significant uncertainty over whether it can maintain pricing power it has historically achieved over its rivals.”

The Toyota crisis was a clear-cut case of failing to manage quality problems and the communications explaining them, but the Goldman Sachs example is a more complex reputational crisis. At the center of the Goldman storm is a failure to recognize the American public's painful experience of the financial crisis stemming from the housing bubble. Goldman doesn't sell anything to the public beyond its equity shares, and in theory, didn't need to pay attention to what the public was experiencing during 2008–10.

Goldman's crisis can be traced to the near collapse of the financial system in the fall of 2008, when it became a bank holding company, and received TARP funds, actions that helped stabilize its liquidity and share price. In the eyes of the public and government officials, however, these actions that brought government and taxpayer funds to the firm were never publicly acknowledged by management.

FULL 2 page story at link.