Even before sanctions, firms have been exiting their businesses in Russia. Importers have self-sanctioned and reduced exposures. Banks have stopped financing Russian trade. Some of these actions were under the expectation of sanction, but it also has been an attempt to maintain reputation. Especially in a cancel culture environment, it makes perfect sense to act first before shareholders and customers question or protest you lack of response.
Reputations has real effect on stock prices and risk premia. A declining reputation will cause investor exits and thus needs to be managed. Reputation can come in several forms:
- Marketing - Branding - Better perceived products will command premium pricing.
- Regulatory - fines, penalties, and lawsuits - A more reputation from regulatory issues will be costly.
- Quality - Poor quality and service will destroy firm value.
Notice that choosing who to source for firm inputs and have as customers is not usually thought of as foundational to branding, yet it is now critical. In the case of Russia, this type of branding has been front and center in the news. The size of Russia's raw material exports coupled with their active aggression on another country makes this reputation issue too hard to ignore.
Below we show a simple framework for categorizing at reputational risk. It can take the form of a reputation-reality gap, changing beliefs, and poor internal coordination. A loss of reputation is hard to regain and can have lasting damage. Reputation cannot be seen in the accounting numbers; however, a decline in reputation capital is measurable with share prices as investors cancel those perceived as engaging in questionable practices.
From HBS article "Reputation and Its Risks"
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