Private equity investors in companies with reputational challenges may see valuations discounted at IPOs or other strategic exits, according to a new white paper published by Steel City Re, which provides insurances and reputation risk governance advice for companies and their executives.
Uber is a notable recent example, says Steel City Re CEO Nir Kossovsky.
“Its S1 filing discloses reputational issues, warning that ‘failure to rehabilitate [Uber’s] brand and reputation will cause [the] business to suffer.” he says. “The performance of its stock since its IPO, should be a wakeup call to private equity investors that what happens pre-IPO, no longer stays pre-IPO.”
“These types of risk present themselves across a broad spectrum of companies,” the white paper warns, “particularly in the kinds of fast-growing, relatively young companies private equity firms often target.” These lurking perils highlight “the need to add reputational risk to investment evaluation criteria, as well as to governance and oversight practices for board members.”
Kossovsky advises investors to assess reputational risk of potential investment targets using the following proven roadmap:
• Understand the nature of the risk. Reputation risk is the peril of economic damage from angry disappointed stakeholders – triggered by a company’s failure to meet expectations for ethics, safety, security, sustainability, quality, and innovation. Negative media coverage is not the cause of reputational damage; it merely amplifies stakeholder anger and disappointment.
• Ensure fund managers have reputation risk governance skills and experience. Evidence of appropriate ongoing processes to protect reputation should be demanded.
• Scrutinize aspirational marketing-related statements. That includes CSR and ESG campaigns, which are inherently perilous. The more stakeholders expect in terms of ethics, innovation, safety, security, sustainability, and quality, the greater the risk and cost of failure. The Business Roundtable’s recent statements about “improving our society” and “serving all Americans” have raised the stakes.
• Identify who within the company is responsible for reputation risk. Is it marketing or risk management? Investors will want the latter. Risk managers are already well versed in all other enterprise-wide risks and understand the value of third-party warranties and the expressive value of underwriting and insurance products. There should also be an ongoing board-level process for defining the company’s stakeholders and their priorities – who they are and what they expect.
