Damaged reputation, damaged confidence

Anthony Hilton12 April 2012

A VENTURE capitalist told me last week that his firm was reviewing whether to keep using Andersen as reporting accountants to some companies it hopes to take public. At about the same time, Airtours, the travel group, was preparing for trouble at its annual meeting on Thursday when the motion to reappoint Andersen as auditor is likely to be challenged. Other companies which Andersen audits are also reported to be restive about continuing the relationship.

All this has been brought about by the collapse of energy giant Enron, where Andersen was auditor, and together they are a grisly reminder in this modern world of reputational risk.

Companies may lose a few million pounds - even a few hundred million - in the markets and as long as they can afford it they quickly shrug it off. But if they lose their reputation for probity or competence or simply find themselves in the wrong place at the wrong time, clients will desert in droves. If they ignore the problem, it multiplies. If they try to meet it head on, they need much more collective nerve and media savvy than is found in their in-house PR departments.

The brutal fact is that in this age of political correctness and rigid corporate governance it is simply too much hassle for clients and customers to hang around and see if the taint on a firm's reputation is justified. Client directors look down the track and see themselves being called to account for continuing to use the accused firm. It is not worth the risk to their reputation, so they cut loose.

In the City, investment banks and those like them spend tens of millions of pounds a year so that they know second-by-second what their operational, market and credit risks are in a hundred currencies in a hundred markets across equities, debt and derivatives. They show very little understanding, however, of the fact that if anything will sink them in this day and age it is a rogue employee or a rogue transaction.

Yet the causal connection is obvious. A damaged reputation leads to damaged confidence, and that is what sank Enron. Each week it had to renew its credit lines to support its massive pyramid of dealing, but no one would lend to it once confidence was shaken and the pyramid collapsed.

That is uncomfortably similar to how the investment banks behave. Each week they also roll over millions in the short-term markets and use it to support their mountains of own-account trading. There is absolutely no problem and they are doing nothing wrong. But were they too to suffer a collapse of confidence, for whatever reason, it could be quite a different story.

Huge imbalance

CAPITAL is still flowing out of the insurance business faster than it is going in. Today Royal & Sun-Alliance increased massively its provision for asbestos-related claims, wiping out what was left of a year's profits, having brought forward its triennial review of long-tail business because of the way the asbestos market was deteriorating.

Equitas, the Lloyd's re-insurance vehicle, signalled these problems before Christmas. After RSA, the rest of the industry is likely now to take a similar long, hard look.

The World Trade Centre also is a massive drain, possibly $50bn (£35.1bn) - but a much bigger strain comes from the worldwide collapse of stock markets. The loss of value on investments is many times more damaging to capital than the 11 September attacks.

There is therefore a huge supply-demand imbalance, made more acute by an upsurge in business because of the attacks. This imbalance could persist for years, bringing higher premiums and bigger profits for the non-life industry. Companies that can sort out the baggage of their past, be it asbestosis or anything else, are in for a good decade.

Unhealthy

ONE of our leading civil servants mused the other day that people now take economic growth for granted. Voters used to think economic management was the big thing Government had to get right. Now that memories of economic bad times have largely faded, they have begun to focus on other things.

This is potentially disastrous for Government because delivery of services has become its number one preoccupation. Far from managing grand affairs of State, Government has been reduced to the role of service provider. Indeed, Labour's Spring Conference at the weekend seemed to talk of nothing else.

Government is ill-equipped for this work at the best of times because public services such as health, education and transport are simply too large and too complex to be run from the centre like some command and control economy. When the services are also under-resourced, demoralised and seething with resentment, the job becomes virtually impossible. Yet with failure will come more cynicism about Government, its broken promises and its inability to deliver.

Altogether, this is not at all healthy for democracy.

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