Research Reveals Major Flaw in Public Company Risk Disclosure

Pittsburgh, PA (September 10, 2013)—Companies that disclose reputation risk perform no differently than those that don’t, which means that they possess no reliable way to avoid needlessly losing billions in equity value, according to a white paper released today at a joint event sponsored by the Pittsburgh chapters of the American Marketing Association and Public Relations Society of America. The absence of a common framework for understanding reputation risk, and tools to measure reputation value, also leaves investors ill-prepared to avoid substantial losses from material changes in corporate reputation value.*

The study, conducted in June on a diversity of performance measures for constituent members of the S&P500® Composite Equity Index, sought to find material differences in the financial performance between companies that disclosed reputation risk in Item 1A of their Form 10-K regulatory filings, and those that didn’t. Since 2005, the Securities and Exchange Commission (SEC) has required companies to disclose the “most significant factors that make the company speculative or risky.

The two classes of companies evidenced no differences in equity, dividend, or asset value across almost every industry sector. Further, three commercial sectors showed correlations with financial performance that were either counter-intuitive or contextually-based. Energy sector companies that disclosed reputation risk outperformed their peers and the broad market; information technology sector companies that disclosed reputation risk outperformed their peers, who materially underperformed the market; and consumer sector companies that disclosed reputation risk underperformed both their peers and the market. These anomalies could reflect compliance requirements evidenced in other financial reports, making it even less likely that companies could use current commonly recognized measures of reputation to manage operations, or that investors could use disclosure reporting as a guide to assessing reputational risk.

“The fact that businesses rely on reputation for a significant part of overall valuation is well established,” explained Dr. Nir Kossovsky, CEO of Steel City Re, an insurer of reputational value, and co-author of the study “Less clear is what, if any, quantitative controls they apply to risks to that value, and therefore whether disclosure is anything more than a well-intentioned but meaningless exercise.

“Our study affirms our suspicion that no two businesses share a common definition of reputation, let alone tools to manage it,” added Jonathan Salem Baskin, managing director of Consensiv, a reputational controls firm and co-author of the study. “Companies need better approaches to protect reputational value, signal expected changes to it, and transfer risk if and when needed.

*Oxford Metrica estimates that 80 percent of firms will lose 20 percent of their value once every five years due to reputational issues, which averages to approximately $550 billion per year. 



Research Reveals Major Flaw in Public Company Risk Disclosure.