By Tony Samson
IS REPUTATION considered in financial transactions?
In the bank’s credit evaluation for granting loans, aside from Capacity, Capital, Collateral, and recently Conditions which include matters like industry structure, technology change, market distribution, and regulatory factors, there is also “Character.” The fifth “C” focuses on a borrower’s reputation in terms of fiscal behavior. Does he pay the caterer on time? Does he have extravagant and frequent vacations? Do his employees and suppliers complain about him?
Still, character does not always have good metrics to go by. It’s mostly qualitative, behavioral and covers gossip and social media postings. And then the judgment is probably binary — yes for good; or no for “let’s not take a chance.”
The character of the principal behind a company is critical. In the new field of behavioral economics, the value of character in a corporation is becoming part of the soft metric in picking stocks. It is the emotional part of the decision process that sometimes dominates. This includes the aspects of status, revenge, and even shame for winning or losing out on a deal can drive the negotiation dynamics (and possible overpricing) in an acquisition or merger.
Even the element of luck, superstition, and numerology and astral signs can affect a financial transaction, its timing, and how the office should look. Who is his feng shui master?
Is the character of the CEO of a company worth a premium or a discount? Some positives driving premium pricing includes the CEO’s track record of transparency, work ethic and fiscal prudence. A character discount can come from a reputation of fuzzy accounting, weak second-tier management, over-the-top spending habits (how many corporate planes?), and lack of a succession plan.
Characters as stock pickers also affect market sentiment. A market maker like Warren Buffett “betting all-in on the future of the American recovery” with the purchase of railroad stocks, like the Burlington Northern Santa Fe (BNSF) ten years ago, after the financial meltdown of 2008, can make the bears take flight and change market sentiment for certain stocks.
In our small market, character reigns, and reputations are made and lost among a small group of influencers and peer groups. Stocks are identified by their principals and lumped together as a group, under the banner of its CEO or family group. The difficulties that befall one subsidiary inevitably affect even the group’s holdings in unrelated businesses. Rumors of a takeover of a company by a known player are enough to lift a sleepy stock into the stratosphere or make it go on free fall.
Ties with a now-favored region or country identify new movers that can make rival groups shake (in their boots). Political connections certainly affect character valuations, until a term ends, as scheduled.
With corporate reputation now mostly driven by word of mouth and social media with its fake news, the character impact can be overblown. Reports of social events like the hosting of a wedding and the cost of the food and entertainment have a halo effect on the fiscal reputation of the party-giver. The reaction is not always negative, especially when the previously unknown host is catapulted to the billionaire club. Still, such unvetted sources of information are vulnerable to fake news and planted demolition jobs.
The disproportionate role of reputation in determining the true worth of a company has made self-proclaimed crisis managers much sought after and handsomely paid, sometimes to kill the news. They serve as the guardians and protectors of reputations. “Reputational risk” is such an important consideration in assessing the company’s decisions. Non-business events such as social gaffes at a wedding anniversary or murky associations with low life affect perceptions of business value.
Character analysis is not a static science as personalities in charge also change. New names come up and quickly grow into conglomerates. Old names drop out of the picture. New tech companies rise and fall. Still, it is the track record, sometimes a very short one that determines whether character will play a big part in the valuation of the stock.
In a small market like ours only a small number of players needs to be tracked as closely as the ticker tape, they don’t necessarily talk to each other. And when they start a conversation…is it time to buy or sell? Get the feng shui master on the phone.
Tony Samson is Chairman and CEO, TOUCH xda
By Tony Samson