Tom Stevenson: Four average investors can protect themselves against the loss of company reputation

"A significant risk for investors, is that companies like BSkyB are not always in control of their own risk" Photo: Reuters

With the news of the world complete editorial staff, investors in the satellite television channel has become innocent victims of a spectacular piece of the mismanagement of crisis - by another company.

They should not have taken to the free, however. Sometimes events come out of the blue but not these. It is act decisively, accept responsibility or in fact one of the things that someone with a life in the newspapers would have understood a minimum five years since the telephone hacking scandal response outbreak, five years during which News International has failed to take control of the story.

As Warren Buffett, it can take to build a reputation for 20 years and only five minutes to ruin it. Reputation risk is one of the greatest threats a company faces and, therefore, one of the most important things for an investor to assess. The problem, however, is that, while it is easy with hindsight to see what damage was done to a reputation, it is much more difficult to measure the extent to which a company is or is not in control of his public image.

There are at least three risks that should take account of the investor. Firstly is the measurement in which customers vote with their feet at the first breath of irregularity. Finally, Rupert Murdoch acted because it has the (correct) judgment that revenues would evaporate - because readers boycott paper and advertisers do not want to be associated with such a tarnished mark.

Arthur Andersen was found to its cost, for a professional, business services, the perception of integrity is the greatest asset of the firm. The accounting firm has grown from four great to annihilation in a blink of eye in 2002 because customers walked. Unfortunately, it is not a mere correlation. At the same time Enron was leaving Andersen history, Shell was shaken by the revelation that it had overestimated its reserves of oil. Today, few would associate Shell with this episode.

Another key for investors risk is that the companies (such as BSkyB) are not always in control of their own risk. Last year, BP has found that when oil ran aground on the beaches, indifferent America if the fault lay with the British company or Transocean, its subcontractor of drilling. BP has paid the price. In the same way Walmart may not have used illegal immigrants as cleaners, or even known about it, but that did not prevent further the Distributor for the forfeiture of its supplier by the Government.

A third risk is political. The Gulf of the Mexico a lot of water and he has recovered from the Deepwater spill with surprising ease. But the political capital to win a reflex ban offshore drilling in America was too tempting for politicians. This meant that the rest of the industry investors spilled BP disaster. This type of collateral damage is common. A striking example of the recent has been the stagnation in all areas of the price of the shares of Chinese companies listed on the U.S. list after a handful of allegations of fraud for large projects such as those launched against Sino Forest, a Chinese lumber company. After all, it is never a rotten Apple is?

Only can do you to protect yourself from this kind of impact reputation? Four things. Firstly and obviously, ensure that you are diverse. A fall 50pc price is a disaster if it is the only one you own. But if the stock is one of the 50 in a portfolio, the damage could hardly be noticed. Second, make sure that you invest in companies which have set the roof while the Sun was shining again. Ten years ago, Coca Cola face banned across Europe after an outbreak of poisoning cases. Less than a year, it is the largest beverage sales in the area again with good will and trust, that he had accumulated over the years. Thirdly, talk to suppliers and customers of the company. The rumours that I wrote about last week can provide an alert vital reputation risks to come.

Finally, walk towards the blow-ups as soon as it is deemed that it is safe to do so. BP has been a great investment for anyone brave enough to look through the crisis.

tomrstevenson@fil.com

Tom Stevenson is a Director of Fidelity International investment. The views expressed are his own.

Twitter: @ tomstevenson63

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