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.
Recent events remind us that reputational damage can be amplified in companies synonymous with a dominant figurehead. Anyone with shares in Trump Media & Technology (US:DJT) has been on a wild ride since it became a public company in March after merging with Digital World Acquisition, a special purpose acquisition company (Spac). Shares in the group have been highly volatile since its debut, in keeping with the trading patterns of meme stocks in general, although it’s doubtful whether the former US president would agree with that classification. It’s been said that the clamour for meme stocks is analogous to a cult following, but given that their share prices oscillate in response to little more than a collective whim, it is no surprise that they routinely attract the attention of short-sellers.
It's clear that share price volatility is to be expected given that these types of stocks typically owe their popularity to their social media presence, and it’s fair to say that Donald Trump was an early adopter of this score. Unfortunately, they have proved to be a big draw for some retail investors, or at least those willing to favour hype at the expense of fundamental analysis. For Trump Media, it's early days, and in fairness, it can take a while for digital media companies to work out the best way to commercially exploit their online offering. But you probably wouldn’t be swayed by the business's latest quarterly filing to the US Securities and Exchange Commission (SEC). The media group revealed a net asset position of $210mn, revenue amounting to $770,500 and a pre-tax loss of $328mn, about two-thirds of which was attributable to a change in fair value linked to derivative liabilities.
Like its founder, Trump Media is no stranger to controversy. Last month, the company was forced to appoint a new auditor after its previous accounting firm, BF Borgers CPA, was accused of fraud by the SEC. Trump wasn’t alone; the SEC said that more than 500 public companies’ filings were affected by Borgers’ systemic failure to properly audit its clients. If nothing else, it puts our homegrown audit woes into perspective.
But the Borgers issue has obviously been overshadowed by the former president’s conviction for falsifying business records. The verdict, delivered in a Manhattan courtroom, sent the shares on a downward path, although the sell-off probably wasn’t as severe as market watchers had anticipated, perhaps reflecting the ardency of his supporter base. That may not be enough to prop up the share price over the long run, but political opinion in the US is more polarised now than it has been in living memory.
In its initial filing with the SEC prior to going public, Trump Media warned investors about the potential risks associated with the former president's multiple legal wrangles, noting that an adverse outcome could negatively impact the group and its Truth Social platform. It may be that support for Trump could eventually waver as a consequence of reputational damage, although it’s clear that his legal travails are also eliciting sympathy in some quarters. Time will tell.
