When Politics And Business Collide

Published in Investing on 24 July 2012

Shareholders pay the cost of reputational damage.

It's open season on big business. On both sides of the Atlantic, FTSE 100 (UKX) executives are being grilled to a kipper by inquisitorial committees.

Some of that may be due to declining corporate standards. But there is more than a whiff of schadenfreude as politicians who are unpopular with the public find somebody else to kick.

It's not just that managers endure public humiliation. Investors suffer when share prices are hit. With Barclays (LSE: BARC) and G4S (LSE: GFS) reeling from their treatment at the hands of UK Parliamentary committees, and HSBC (LSE: HSBA) up before a US Senate hearing, what are the long-term consequences for shareholders?

Lessons

The story of BP (LSE: BP), which is approaching the end of the long road to recovery from its Deepwater Horizon disaster, holds some interesting lessons. Initially, it compounded the crisis with ruinous PR management, exacerbated by a President demonising 'British Petroleum'.

The CEO Tony Hayward rolled up his sleeves and got to work on practical measures, but the sound bite that he would "like his life back" was his downfall. Chairman Carl-Henric Svanberg kept a low profile, and kept his job.

Demonstrable acts of contrition in the form of abject apologies, a couple of resignations and generous compensation eventually saved the day.

Largely under the public's radar, pharmaceutical giant GlaxoSmithKline (LSE: GSK) has admitted to a Senate committee that it engaged in unethical and illegal marketing practices. But since the offences occurred it has cleaned out its US management, improved its public reputation and provided for the $3bn settlement.

Again the remedy consisted of apologies, resignations and recompense. But the long drawn out reckoning enabled GSK to manage the situation with a much lower profile and share price impact.

Stunt

HSBC has surely adopted a similar strategy, with David Bagley resigning as global head of compliance during the course of his testimony to the Senate. But the fact that he will remain employed by HSBC makes it look more a PR stunt than an act of penitence.

The bank has apologised over allegations that lax money-laundering allowed billions of dollars of illicit money into the US. It is expected to face a fine of up to $1bn, but it may be lucky to avoid further resignations.

Embarrassing

In the UK, MPs have been enjoying embarrassing the country's business leaders. The Treasury committee had an easy target with Bob Diamond, an American (revenge for BP) banker (bankers don't have the best of reputations) who had fallen foul of the Governor of the Bank of England (so no friends in high places).

Barclays was slow and grudging in its apologies. Nor were there swift and contrite resignations. That policy backfired, resulting in vacancies for both a permanent chairman and CEO. With no hints of making recompense -- which may be difficult in the circumstances -- Barclays failed to do the three things that served BP and GSK so well. That augurs badly for its share price trajectory.

It was the Home Affairs committee that enjoyed the pleasure of demolishing Nick Buckles, CEO of G4S. Under Mr Buckles G4S has become the number one global player in security and Europe's largest employer, something that ought to be commended. Lacking Bob Diamond's polish he was taken to pieces by professional politicians, few of whom have ever managed anything apart from their expenses.

Blame

That neatly deflected blame from the Home Office and Olympic quango Locog, which had five years to prepare for the Games but increased its requirements for guards from 2,000 to 10,000 just six months before the start. G4S's dilemma was that the customer is always right.

Though Mr Buckles was apologetic and offered some recompense, the company's reputation for delivery has been damaged. Only after the consequences of that have become clear will the share price have any prospect of recovery.

Mr Buckles' departure looks inevitable given the lack of support from the newly arrived chairman. That's a pity, as top shareholders including Invesco Perpetual's Neil Woodford have come out strongly in favour of the CEO staying.

There is one clear lesson for investors from all these episodes. Whatever dark secrets may lurk within a company, they can suddenly spill into the public domain as wealth-sapping scandals. You cannot rely on any one company. Diversification is the key to wealth protection.

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> Tony has shares in GSK and HSBC but no other shares mentioned in this article.

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Comments

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goodlifer 24 Jul 2012 , 11:47am

You're absolutely right

It's a really nasty scandal that public-spirited, innocent entrepreneurs - all whiter than the whitewash on the wall - should be victimised by all this unnecessary criticism.

TRhere 25 Jul 2012 , 12:25pm

Goodlifer,

I cerntainly didn't mean to suggest the UK's business leaders are blameless - though equally I don't think knocking British business does any of us any good, and UK politicians ought to be especially reluctant to do it.

Tony R

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