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You’ve got to do something about your reputation: Why CEOs need to pay attention to reputation management

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Scandals. Scandals in extremely visible corporations fill the media. Enron, WorldCom, Tyco, SNC Lavalin,  Goldman Sachs, BP, News Corporation … The list goes on.

Business decisions, such as fee, pricing and user privacy missteps, have dogged Bank of America and Netflix. Simply put, there have been a lot of examples of how to damage a reputation.

Charles Fombrun says perception creates its own reality. If this is so, every business leader needs to think about the reality his company is portraying.

What does the company look like to assertive stakeholders?

Since a corporation’s reputation affects a lot of stakeholders, what is today’s savvy CEO to make of reputation issues?

Think about it. Before we make a purchase, the reputation of a company or product impacts on us.

What do people say about a product? What have influencers said about the new smartphone we want to buy? What are suppliers’ business practices? How does advertising influence our purchase?

When investing our money, a company’s reputation undoubtedly affects us. We turn to people, as Charles Fombrun, writer of Fame and Fortune says, who have knowledge “better than our own”.

“Clearly,” Fombrun says, corporate “reputations affect the judgments we make”. Consumers and their perceptions have a definite effect on blackening corporate reputations.

Eighteen industries covered in one recent study only improved their reputation scores slightly over last year.  Even worse:

  • 16 per cent of companies ranked “poor” on reputation, down 3 per cent from a year ago
  • None came in with a “leading” ranking, the top score, where 14 per cent did last year

Fombrun makes a strong case for effective reputation management and public relations. In the future, it will be all the more important. Fombrun says reputation “is a key source of distinctiveness”, and that “it differentiates [a company] from its rivals.”

Lars Thoger Christensen adds that transparency is crucial because “the investment policies of pension funds … are regularly scrutinized these days by investors.” Because of pressure groups, business analysts and “other inquisitive stakeholders,” many organizations “feel more vulnerable”.

Transparency, one of the foundations of a reputation, is now necessary. CEOs can’t ignore more assertive stakeholders. Christensen feels corporate communicators must “transform [transparency] from a market condition to a business strategy”.

The Economist writes public relations firms are becoming  “not just service providers, but also purveyors of strategic advice to senior management”. The best firms and practitioners are the ones already providing strategy.

In a world where, as William Briggs of San Jose State University says “79 per cent of Americans take corporate citizenship into account when making purchase decisions,” and 71 per cent consider it “when making investment decisions,” a corporate leader who ignores this fact does so at his or her peril.

Reputation affects the drive to recruit and retain employees. In a study cited by Fombrun, undergraduate students preferred to work for companies regularly in “the 100 best companies to work for.” Interviewed MBA graduates chose “high reputation firms in consulting, investment banking, and high technology”.

Sometimes what glitters is gold, at least for attracting talent.

Institutional investors focus on corporate reputations. Fombrun says these investors control “80 per cent of all U.S. trading activity.” To further bolster reputation, Fombrun says in recent years “a number of institutional investors have flexed their muscles on various corporate governance issues, questioning the reasoning behind executive pay packages,” and that vision and leadership are “at the heart of the crisis in confidence”.

In the wake of the financial crisis especially, investors are tired of corporate smoke and mirrors. In the U.S., 46 per cent of people surveyed said their trust in the financial services sector had decreased.

According to Fombrun, strategic positioning pushes reputation into prominence. Reputation “is a mirror.” When stakeholders like and support the company, “an upward spiral results that attracts more resources to the company.”

But, if people are unhappy with what they see, a downward spiral can lead to a “reputation-damaging criminal indictment”. Think Arthur Andersen, British Petroleum or News Corporation.

Every CEO should remember the above companies and their plunges into corporate limbo.

In a study featuring CEOs’ views on reputation management, CEOs said they didn’t expect or look for return on investment (ROI) alone with respect to public relations expenditures. CEOs use public relations regularly to enhance and protect reputation.

As advertising struggles, businesses now think of public relations and the management of reputation as mission critical. Social media innovators continue to make strides in reputation management.

Interested in exploring:

  • What reputation is worth?
  • How reputation affects a corporation’s stock price and ownership?

Find out more:

Brave new reputation: What CEOs need to know

Related articles:

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Part Three — Market volatility: Why and how to make it work for you

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In Part Two, I left off discussing benchmarks on investment returns.

Easy as ACB revisited

I stressed that such benchmarks only reveal how your investment would have done if you invested all of your funds at the beginning of the period. These benchmarks assume you were inactive during the time period you’re measuring, and you did zero rebalancing during 2008-2009 or other significant market corrections — exactly the periods of time when you should be (or should have been) more active.

While investors should have been rebalancing during 2009, research shows average investors freeze up during these times, or worse, sell.

The worst case scenario is that they sell heavily.

Let’s say you had a large cash position in your portfolio near the bottom in 2008-2009. New cash, profits you’d taken, whatever …

Now, let’s say you used that cash and bought equities around that time, which turned out to be the bottom or near the bottom of the correction. Your return would be considerably different. And this is why rebalancing is so important to the success of your investments, portfolio and retirement plan.

If you’d been following a sound rebalancing strategy, you would have bought during the downturn in 2008-2009 because your asset allocation would have drifted away from your plan.

Let’s use a simple illustration:

• You bought 50 shares (or units of a mutual fund ) at an average cost of $7

• Then you bought 10 shares at $5 (you were brave and when the market dropped 50 per cent in panic selling, you saw opportunity)

• You then continued to deploy your cash while the market was cheap and bought 10 shares at $6 (because of your rebalancing strategy, which you follow automatically. You bought while prices were cheap because your asset allocation had changed.)

• The market rose dramatically after this period and your asset allocation reached your target. You stopped buying.

So, your adjusted cost is:

50 @ 7= 350
10 @ 5 = 50
10 @ 6 = 60

Your total cost was $460. The price now is $7.
7 x 70 = $490

You now have profit of $30, called a capital gain.

In reality, your transactions will be more complicated, and there will be dividend payments in there somewhere. But the simplicity of this example shows us how following asset allocation strategies with your investments will help you lower your Average Cost Base (ACB).

Your equity component would have been, percentage-wise, less than it had been. Your allocation plan would have kicked in, and you would have bought the underperforming equity investments.

Even if you did this more gradually, before, during, and after the correction, it would have lowered your average cost.

One way for Joe and Josephine Average to get a leg up is to take advantage of what’s available to them. Tax-preferred or (deferred) investments and plans, and sound portfolio strategies included.

But research shows they don’t. Volatility spooks them, and sadly, this will cost the average investor over the long-term.

When I was a kid …

An older colleague I used to work with said the following, loosely paraphrased, about his lack of savings and investments in his youth: “When I was a kid, I was convinced I wouldn’t make it to forty.”

Heavy pause.

“I was wrong …”

I had asked him why he didn’t have an RRSP because I wanted to understand how he thought. He later added that he had lost a ton of money in real estate (Canadians seem to have forgotten the real estate crash that happened in 1989-1990 – Americans have had a harsh reminder).

Looking at real estate in this context reinforces my point of view on buying assets when they’re low. While it took residential real estate a long time to recover from ’89-’90, today’s real estate prices (supported by an extended period of low interest rates) prove that buying assets when they’re cheap is rewarding.

Yet nobody wanted residential real estate in ’89-’90, and many developers lost their livelihoods during that time.

Raising awareness, being startegic

Raising awareness about the investing habits of Joe and Josephine Average will help them over the long-term. They need to better educate themselves about market volatility and be more strategic in their approach to it.

While this is easier said than done, it is one of the reasons the Warren Buffetts do better than the Joe and Josephines when it comes to investing and financial planning.

Market volatility, understood properly, is your friend. Reminding yourself of this completely reframes the way you look at the market, your investments and corrections.

Maybe your friend goes a little berserk once in a while. Maybe he’s a little impatient or a little irrational at times, but he’s still your friend.

You know you can count on him when you’re down. Looking at market events this way, despite difficult times, puts you in control.

Just make sure the relationship is a long, diversified one.

Follow @JohnRondina

Market volatility: Why and how to make it work for you

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Freaked out about the markets? You’re not alone.

This year’s market volatility has rattled investors. While nobody loves market volatility, the wealthiest members of society seem to tolerate it better than the average Canadian or American. At least, they don’t seem to cash out of their investments after large market drops, and, according to studies, many investors do.

What separates the wealthy from the average investor? What is it that causes Joe and Josephine Average to be less successful as investors than they could be?

Recent research on young people and financial literacy shows that fin lit is an area where young people need help. Kids aren’t alone. Many adults don’t understand financial markets. In “Kids and money: What kind of financial legacy are we leaving our children?”, you can find some startling information on adults and financial literacy.

Investing (and financial literacy generally) is a major factor separating the poor from the wealthy in Canada and the U.S. While this is obviously not the only factor determining household wealth, it is a large contributor.

The media’s been saturated with stories about the “1 and 99”. Awareness about the 1 per cent and the 99 per cent of society in the U.S., and about why the 1 per cent hold so much more wealth than the 99 per cent is high right now. The Occupy movement has gotten a lot of attention in the media despite criticism that the movement’s message is somewhat muddled.

Some facts about the extremely wealthy in Canada (the richest 1 per cent of Canadians who capture 32 per cent of all income growth, according to StatsCan):

  • They own an enormous proportion of our society’s wealth
  • They are major holders of stock, bonds and real estate
  • They tend to be well-informed when it comes to investing, or they seek out experts to assist them with their financial planning strategies
  • They understand market volatility much better than the average investor does (again, they seek out experts more than the average investor does)

Up down and all around

Market volatility has put terror into more than one heart. Especially that of the novice investor. The danger here is that fear will stop the average investor in his tracks.

But don’t the 1 per cent face market volatility as well?

The volatility during the last five years has been extraordinary. The market has undergone two of its most extreme periods of volatility starting in 2008 and ending in 2009 and then beginning again this year. And, yes, we’re still in the midst of it. We may be closer to the end of the current period of volatility, but that’s difficult to know given the number of variables involved.

In Part Two, I’ll discuss why market volatility is your friend, and how changing the way you look at volatility leads to superior returns.

Kids and money: What kind of financial legacy are we leaving our children?

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When I graduated with a BA in English, the only thing I knew how to do financially was a budget. I loved literature, but financial literacy?

I knew land could be good. I’d learned about budgeting and land from my parents.

During my first year of work, it didn’t take long for me to learn that there were a lot of things I didn’t know a whole lot about.

The stock markets had just crashed. (It was a great time to buy.)

Every day as I rode the TTC, I read about things I couldn’t begin to understand. For a pretty smart guy, I felt stupid. That year, I read everything I could about investing and financial planning and gave myself the expertise I needed to understand the events in the newspapers.

I have never regretted that investment.

It’s been part of my active research ever since.

Financial literacy is on the move this year. The $5 million Task Force on Financial Literacy released a report with a host of recommendations. November is Financial Literacy Month in Canada. Non-profits are collaborating on monthly events.

Why do we need this focus on Financial Literacy?

• Average debt to household income has increased in Canada

And it’s not so-called good debt (where you can write-off the interest payments). Our burgeoning debt alone should prove the need for financial literacy.

The B.C. Securities Commission, in a survey of more than 3,000 17-to-20-year olds, released the following last week:

• They expect to be making $90,000 a year by 30. Three times the national average.

• Three-quarters think they’ll own homes at that age. Government data estimates 42 per cent of 25-to-29-year olds are homeowners.

• Many students graduate with “weak financial skills and little knowledge of the financial realities they will face.”

Those stats should give parents and concerned members of Canadian society great pause. During a time when credit-binging has led to some brutal consequences in the U.S., Canadians have loaded up on debt. Some people have warned of our own inflated housing prices … Low interest rates are making this housing price boom long. Too many people think housing will go up forever.

There are always exceptions, but the statistics are overwhelming. Kids are out-of-touch with financial reality.

The digital universe is changing so fast some can practically feel the wind blowing them back into their chairs. Information has more channels than most can keep up with. Plugged-in like never before, but disconnected from financial reality, kids need help understanding debt, budgets and saving.

Add to this:

• Baby boomers are aging

• Europe and the U.S. are having their issues with taxes, debt and political infighting

• Though Canada’s doing comparatively well, the crisis of 2008-2009 illustrated how global markets and economies are interconnected , and how poor the average person’s understanding of market volatility is

Of Canadians in general:

• One in three is struggling or can’t keep up with their finances

• One in four is weak in key areas of planning and budgeting

• 30 per cent are not preparing for retirement

• Millions of Canadians won’t have sufficient retirement savings and no pension plan other than the CPP/QPP and Old Age Security

• People have very low tolerance for market volatility (and without being able to process market volatility, it’s pretty hard to be an investor. Without becoming an investor, it’s hard to get ahead.)

While there are great agencies doing their part to raise awareness and make lasting and effective changes to our education system, parents need to teach their kids about debt.

The consequences to our economy and economic future of financial illiteracy are immense. Championing long-lasting positive changes in the way schools teach financial literacy is no longer optional.

It’s our future. It’s their future.

Wait a minute. There’s some good news re the markets?

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It’s all bad news, right?

Nope. Surprise, surprise. And it’s on the upside.

Pour this latest data into your glass and see if it looks half-full.

Panic and pessimism may usher in a market rise (It’s happened before. It’ll happen again.)

Contrarians love all the bad news. To them, it means we’re closer to good news as they wait for the point of maximum pessimism. But maybe we’ve already hit that point?

  • Inventory levels in the U.S. are low.
  • Stocks look cheap. Compare U.S. equities to U.S. bond yields. Dividends look great and promise more than bonds currently.
  • In the U.S., the fall in housing prices and low financing costs have created the most affordable housing climate in decades.

When could “mean” be green?

All things revert to a mean, don’t they? Usually, when someone says it’s different this time, it’s exactly the same as last time.

  • Bonds have beat the pants off stocks over the past 10 years. The last time equities were performing like this was the 1970s. Since this is true, bonds have become overvalued relative to stocks.
  • It’d be an understatement to mention that investors are increasingly risk averse. Panic is prevalent — especially in the news. In the face of this: Corporations continue to show financial strength and profitability. U.S. dividend payments continue to rise paying investors to wait.
  • The market went through the roof last week at an agreement to agree to agree in Europe. Looks like a ton of pent-up demand. The will for the markets to go higher is there. But investors who weren’t already in the markets had little chance to get in. Things just moved way too fast. Sitting on the sidelines may leave the average investor sitting on the sidelines.

What will be the impetus for markets to rise?

If governments stimulate again, we could see a big push in equity markets. There’s value in the markets. Stick to your plan.

Filter out the noise. Focus on the facts. Find the candles burning in the doom and gloom.

How many times have you heard someone say: I wish I’d bought shares in XYZ Corp.? Isn’t it funny that when companies are at big discounts, only the few and the brave want to go shopping?

When it comes to the markets, it’s often looked darkest before the dawn. But the facts above may be the lantern to help light your way.

Updates:

Prem Watsa of Fairfax Financial sees value in the market in the guise of RIM and doubles stake

Frank Mersch of Front Street Capital says stock market’s showing value and is cheap

Gold riot

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Warren Buffett’s thoughts on gold or how looking at the return on gold might reduce the glitter

The riot over gold has calmed down a little, however, there is still significant interest in the metal. An interesting perspective on gold comes by way of value investor par excellence, Warren Buffet.

Will all the gold that glitters glitter less?

There is no denying gold has had a great run. What people forget when gold performs spectacularly is that it has often caused investors an enormous amount of pain as well. Gold is volatile. It soars, but it has also come down very hard throughout its history – part of the reason that most recommendations limit gold to about 5 per cent of a portfolio (in order to smooth out volatility).

Gold has performed very well this year and over the last few. The S&P/TSX Global Gold Index has doubled the S&P/TSX 60 this year. But gold’s performance comes with a lot more volatility. The fact that gold is such a big sector within the Canadian stock market has been advantageous this year. Gold often kept the Canadian market buoyant when other stocks turned downward. It acted as kind of a built in hedge. However, should gold turn south in a significant way, it will also hold the Canadian market back because of its large weighting. In fact, by just holding an index fund or ETF tracking the S&P/TSX 60, you have about 20 per cent exposure to the materials sector, and, a large portion of that is in gold. The broad Canadian market has a lot of gold exposure already.

Unfortunately, gold is on everyone’s tongue lately.

But what does Buffett say about gold?

Gold just sits there

Buffet has become wealthy by being a value investor. He believes in goods and services and buying the undervalued companies that deal in them.

If you don’t listen to Warren Buffett at some level, you’re odd. Whether pundits agree with him or not, his opinion is focused on and respected. Buffett says there is no place for gold in his portfolio – intriguing, because, unlike Canadian investors who have seen appreciation in their currency, Americans have been dealing with a declining dollar, resulting in the rush to gold as a hedge against devaluation. Throw in the troubles in the world economy, the devaluation of the Euro, etcetera, etcetera, and the rush to gold isn’t exactly surprising.

Buffett’s logic on the metal is definitely interesting. He thinks gold is useless.

That’s right. Useless.

Buffet on gold:

“(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Ah, the Ziggy Stardust gold analysis …

In Fortune, Buffett recently said:

“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all — not some — all of the farmland in the United States,” Buffett said. “Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”

A very, very interesting illustration …

Buffett has stayed consistent with his messaging on gold.

  • Expensive to store
  • Has no practical use
  • Doesn’t generate income

Of course, some of the large players that mine gold do generate income, but Buffet’s talking more about buying the metal itself.

The S&P/TSX Gold Index has done very well in the last ten years. It has returned about four times the S&P/TSX 60. However, during the dog days of the financial crisis, it collapsed along with everything else, and that collapse wiped out all gains since about 2002. Gold has recovered spectacularly since then though not without some equally spectacular volatility. Without a doubt, placing a big bet on gold increases risk immensely. If you’re looking to steer away from volatility, putting more than 5% of your portfolio into gold could leave you with a nasty surprise.

Gold stocks, because of their leveraged positions with respect to gold perform even better than the metal, generally, yet that outperformance goes the other way in a hurry at times. So, gold stocks can be a great hedge, but they also have some explosive volatility built into them – volatility which can go either way faster than most people can monitor.

The big question is which way will gold go in the near future? And, how much has the risk premium for holding gold increased?

For Canadian investors, this question doesn’t hinge on a declining currency. Our market has a huge piece of gold already. If you own the broad market, you’re already exposed to gold. That can be a good thing or a bad thing. In the last ten years, it’s been a great thing, but all good things come to an end. Are we closer to the end of gold’s aggressive increases or is there still room to shine?

For the average Canadian investor, if you just own the broad market you have exposure to gold and its advantages. At the same time, should gold have a significant correction, you’ll feel it.

Buffett’s comments on holding gold bullion (even though it’s easier to do with ETFs now) bear some thought. Expensive to store. No practical use. No income.

Looking for value makes one a big fan of dividend-paying investments. Canadians already have exposure to gold. Would you take a flyer on gold at these prices? Such an idea may have lost its sheen.

If you are a trader, that’s one thing, but if you are an investor, polishing gold may leave less of a glimmer lately.

Now, if there were a significant correction in gold, that would change things, but right now gold looks like its bumping its head on a ceiling. Whether that will be temporary or longer lasting depends on many different interconnected moving parts within the economy.

The questions it’s prudent to ask yourself with every investment are:

  • Am I likely to get the same return on my investment next year?
  • Will I get even half of that return?
  • Am I using sensible portfolio approaches regarding the construction of my investment portfolio?

A portfolio of gold stocks I was looking at recently has returned over 70 per cent year-over-year. The broad market has returned less than a third of that. Over 50 per cent of that return has come in the last six months. Recently, this portfolio has pulled back 6 per cent – and it is a broad portfolio that has increased over 800 per cent over the last ten years.

Is it cheap? Does a correction of 6 per cent add much value? …

Not exactly a huge pullback.

Every Canadian investor who holds the broad market holds gold. Loading up on gold may not be the best of all portfolio moves. At this point in time, Canadian investors find themselves in a different situation compared to their American counterparts.

The gold rush may not be over but there certainly are a lot of people panning in the stream.

 

For an update on gold stocks, gold bullion and dividend-paying stocks click here.

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