Iago, the main antagonist in Shakespeare's Othello, said it best: “He that filches from me my good name/Robs me of that which not enriches him/And makes me poor indeed.” It’s doubtful whether the immortal bard had corporate reputational damage in mind when he penned those lines, but this is a risk factor that investors ignore at their peril.
Sometimes, the damage wrought by a reputational risk is intangible, but in certain instances, it’s rather more concrete. The public image of BP (BP.) was mangled in the aftermath of the 2010 Deepwater Horizon disaster, and shareholders were eventually lumbered with $61.6bn (£48bn) in remedial settlement costs, equivalent to 59 per cent of the oil major’s current market cap. The risk spreads beyond operational issues and can encompass anything from white-collar crime to data breaches. Companies such as Proctor & Gamble (US:PG) and Anheuser-Busch (US:BUD) have faced the spectre of consumer boycotts because of the way in which they chose to market certain products, suggesting that even the most efficiently run companies face brand risks.
The threat posed by reputational damage has probably become more acute due to the spread of environmental, social and governance policies. As a result, the risk also encompasses the potential removal of institutional support. This explains, at least in part, why supply chains are now under the microscope like never before. Some listed companies have faced investigations by the Competition and Markets Authority over greenwashing claims, while others have fallen foul over their 'scope 2' (indirect) emissions. The range of reputational risks has seemingly multiplied due to the widespread adoption of stakeholder principles.