Reputation (including Wal-Mart's): Mostly Irrelevant for Investors
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Experience has demonstrated that hits to corporate reputation are mostly irrelevant when it comes to the overall value of the company and, therefore, the long term trend in stock price.
Forever, Wal-Mart (NYSE: WMT) has been cast as a Darth Vader type. It has been vilified as the alleged destroyer of mom-and-pop stores, unfair to women employees ("Dukes v Wal-Mart"), and a source of bribes in Mexico. But it makes a lot of money, including for shareholders. As Reuters reports, there will likely be some shorting because the internal investigation of what allegedly took place at Wal-Mart de Mexico has gone high profile. The media will keep the story going as long as possible. But few expect that the stock will come undone, at least not for long. THE ECONOMIST reinforces this in its current issue. The headline reads “Why companies should worry less about their reputations.” Its advice is that when attacked, companies shouldn’t make the strategic error of working harder to manage the reputation. Instead, “concentrate more on producing the best products and services you can.”
That's old hat to News Corp (NASDAQ: NWS). Despite the broadening and deepening of the alleged hacking and bribing scandals, the stock is at 19.35, with the 52 week range of 13.83 to 20.79. When the charges of hacking at NEWS OF THE WORLD first broke, the stock went down. It went and stayed back up when investors concluded that chief executive officer (CEO) Rupert Murdoch and his newly hired general counsel Gerson Zweifach could manage things.
But this pragmatic investor mindset amidst attacks on a compnany's reputation isn’t in itself recent. One of the oldest examples is the dividend favorite Altria (NYSE: MO). Since the 1964 U.S. Surgeon General’s report on the correlation between cancer and smoking cigarettes, NGOs as well as official government agencies have come down hard on the tobacco industry. When the fictional ad agency on “Mad Men” lost the Lucky Strike account, crafty Don Draper knew to run an ad stating what a moral relief it was to be rid of tobacco. What investors care about is that the company is well run, makes products the global marketplace buys, and strategically approaches litigation. After the mistake of the 1998 Tobacco Master Settlement Agreement, the industry learned to not cave but fight lawsuits to the very last possible appeal.
In the late 1990s, once widely respected Sherwin-Williams (NYSE: SHW) stood accused of “poisoning” children with its former lead paint products. A number of states filed class action lawsuits under the novel theory of creation of a public nuisance instead of traditional product liability. NGOs like ACORN portrayed Sherwin-Williams as harming children out of corporate greed. But the stock only sank in 2006 when a Rhode Island jury found the company guilty of public nuisance. That day the stock lost $1.8 billion in market capitalization. Before that the stock took smaller plunges when there had been negative news about any of the litigation. What kept investors confident was Sherwin-Williams' determination, like that of the tobacoo industry, to keep fighting the lawsuits. However, the confidence was shaken by the RI verdict. Investors feared a domino effect of other convictions in other states, more lawsuits filed, and the company could go bankrupt. The stock recovered and began to grow again in 2008 when the RI Supreme Court tossed the case. Today the stock is at 118.39.
Reputation shouldn’t be of concern to investors as a freestanding matter. To paraphrase the childhood ditty, litigation, more regulation, product boycotts may undermine the value of the company but names in themselves will never hurt it. Essentially, investors have to be wary of two things:
One is if the disclosures or allegations could open the door to actions which hurt the business of the company. That was not the situation in the uproar over alleged working conditions at Foxconn production facility in China which is part of Apple's supply chain. If the situation couldn't be fixed, the company could have searched for other suppliers. And two, what might the scandal or crisis indicate about the governance or even fundamental operations of the company. Take the allegations of lapses in personal conduct which led to CEO Mark Hurd’s resignation at Hewlett-Packard (NYSE: HPQ). In addition to him, two other H-P CEOs – Carly Fiorina and Leo Apotheker – also didn’t work out. No surprise, H-P is a troubled company with a stock price of 24.51, with a 52-week range of 21.50 to 41.74. There has been a similar story of alleged problems with personal conduct by now former CEO Brian Dunn at distressed Best Buy. The stock price at 21.47, with a 52-week range of 21.21 to 32.85, reflects the doubts if this company can turn itself around. In both situations, investors should be wondering about the seeming lack of control.
Well-run companies like McDonald's have the ability to hold the business together no matter what is being attacked or by what constituencies. It is navigating the obesity uproar quite nicely. So, investors would be on the money to conclude that reputation is separate from the operations of the business. In assessing the stock, look at the business. If hedge funds consider shorting Wal-Mart, base that on its weaknesses in ecommerce.
Motley Fool newsletter services recommend Sherwin-Williams, and Wal-Mart Stores. The Motley Fool owns shares of Wal-Mart Stores. janegenova has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
