Nir Kossovsky, Peter Gerken, and Denise Williamee look at why a recent announcement by Apollo Global Management, which gave details of developments in the company’s reputation risk management processes, resulted in a surge in equity value.
Responding to concerns over its governance and alleged executive indiscretions, Apollo Global Management (NYSE:APO) surprised stakeholders by publicly disclosing its behind-the-scenes reputation risk management process enhancements. Appreciating insight into management and governance details that are usually hidden, shareholders the next day boosted equity value by 7.2 percent. Equity market momentum over the next two weeks sustained the boost to 11 percent adding a total of $1.1 billion to Apollo’s market capitalization.
Apollo strategically disclosed its reputational risk management upgrades knowing it would be “differentiating in the alternative (investment) industry” and reasonably expecting that in the current era of ESG (environmental, social, and governance) focused investing, improvements in governance would be appreciated and valued. The key success elements of Apollo’s strategy included upgrading reputation risk oversight at the governance level, developing an integrated cross-functional enterprise-wide reputation risk management executive process, authenticating the strategy and its execution by a third party - in this case, by the law firm, WilmerHale - and disclosing the whole of it publicly.
It’s a strategic opportunity too few companies are exploiting.
In a recent survey of reputation risk in 200 global organizations, WillisTowersWatson found that many didn’t even have a risk management framework. Coming shortly after so many companies discovered they lacked an enterprise risk management framework for the COVID-19 pandemic, the glaring risk management gap reflects poorly on firms’ governance. It’s a big gap.
Reputational damage occurs when companies fail to meet the expectations of stakeholders, whose disappointment and anger has tangible impacts, including financial losses, cash flow impairment, civil litigation, regulatory or political scrutiny and, in some cases, even criminal indictments against leadership. Reputation risk is on the rise in direct correlation with the recent surge in corporate pledges to invest in environmental sustainability, social justice, and responsible governance.
These pledges raise stakeholder expectations, often to levels that companies can’t reasonably expect to meet, if they aren’t also built into company operations, culture, and governance. What boards might see as harmless, aspirational marketing and a routine exercise in investor relations, stakeholders see as disclosures of corporate objectives. And therein lies the risk. As companies make pledges and race each other for the highest ESG scores and inclusion in ESG investment funds, stakeholders are taking them seriously. And so are plaintiffs’ lawyers, courts of law, and courts of public opinion whenever there’s a financial setback.
In 2019, almost 200 executives signed the Business Roundtable pledge to elevate stakeholders including communities, employees, and the environment to equal stature with shareholders, and two years later, Senator Elizabeth Warren called it “an empty publicity stunt,” as did a respected Harvard Business School professor, who argued that many signees did so without buy-in from their boards.
And directors are increasingly being held legally accountable for reputational damage. In the year ending June 2020, 39 federal securities lawsuits cited reputation - a nearly 60 percent increase from the year before, according to Agenda, a publication used by public board directors and company executives.
The purview of a director’s duty of loyalty has widened to include reputation and courts increasingly are sustaining pleadings. Take for instance, these cases across various industries: In Re Clovis Oncology Inc. addressed a board’s failure to protect the firm’s reputation for (pharmacologic) innovation; Marchand v. Blue Bell Creameries involved a board’s failure to protect the company’s reputation for (food) safety; and Inter-Marketing Group USA Inc. v. Armstrong addressed a board’s failure to protect the firm’s reputation for (oil pipeline-related) environmental protection.
Another rising trend: criminal prosecutions against senior leadership, not just their firms. Examples in which charges were brought against both companies and their leadership: Blue Bell, Vale, Audi, Miami-Luken Inc., Rochester Drug Co-operative, and Volkswagen.
The cost of reputational damage is clear, but so is the wisdom of Apollo Global Management’s decision to authenticate their effort - and thus ensure it would not be discounted as marketing blather - by engaging a trustworthy third party.
Consultancies and law firms such as WilmerHale, Apollos’s choice, have often been called upon to review and authenticate key business processes. Insurance products and warranties play a similar authentication role, often-times backing representations and warranties made by parties and their respective law firms. The bottom line is that to be appreciated and valued by stakeholders, it is becoming best practice to authenticate and publicize a reputation risk management investment.
Overseen by the Board, companies need to invest in an internal group led by counsel with resources and personnel who understand reputation risk’s true behavioral economic nature and have the authority to gather intelligence about stakeholder expectations from every corporate silo. Counsel’s role would not be unlike the Director of National Intelligence, charged with integrating domestic stakeholder intelligence (operations, human resources) with foreign intelligence (customers, vendors, creditors, investors, regulators, and social license holders). As with any self-improvement journey, companies need to be honest in their self-appraisal. The group would be tasked with determining the costs of missed stakeholder expectations, flagging material risks, and coordinating company-wide resources to both meet and manage expectations – or finance gaps and potential reputation value losses with captives and third-party insurance.
Strong corporate governance and reputation risk management are the kind of authentic, simple to understand story marketers and investment relations professionals need to be telling stakeholders. Not only does it inspire their confidence, it’s compelling to ESG raters, bond raters, and investors; and it shields the personal reputations of individual board members and provides leverage in negotiating D&O liability coverage in a hard insurance market.
A well-managed reputation is a material asset too valuable to ignore, a fact that is perfectly exemplified in the recent case of Apollo Global Management.
Disclosing an authenticated strategic reputation risk management practices, as Apollo did, is key. What could have been a damaging story solely about executive misbehavior and empty corporate platitudes, became one about genuine corporate change. And stakeholders appreciated it to the tune of $1.1 billion.
- Nir Kossovsky is CEO of Steel City Re, the exclusive provider of parametric reputation risk insurances and advisory services using a risk management framework informed by behavioral economics.
- Peter Gerken is Co-founder and Senior Vice President of Steel City Re. He is a seasoned insurance industry professional specializing in captives and intangible asset risk.
- Denise Williamee is Steel City Re’s Vice President of Corporate Services, where she heads client relations and education for integrated reputation groups.