SRI Notes

Reputation Update

Another day, another lead paint recall...

Both toy manufacturers that announced recalls this summer - MAT and RCRC - have been down significantly, both in absolute terms and vs. the market (green line is S&P 500, red line RCRC, blue line MAT):

If you are a business student looking for an interesting paper topic, this situation has plenty of material to work with.

A brief but good backgrounder from Forbes.

News today:  China Issues Food, Toy Recall Rules to Tighten Safety, from Bloomberg.

More Reputational Effects

Mattel is announcing today the recall of 9.58 million more toys due to safety issues, following the recall two weeks ago of 1.5 mm.  On Monday an executive for a Chinese manufacturing company working with Mattel committed suicide. 

Mattel stock seems to be holding up reasonably well.  It is down -2.4% today, and has been a weak performer with the Consumer Discretionary sector over the past month, but has actually outperformed the market over the past five days.  So initial impact seems contained - it will be interesting to see what happens on their next earnings release.

(Note - These are just my observations on the market's reactions to recent news...  I don't own MAT, haven't analyzed it, and have no opinion on its investment merits...!)

Putting a Price on Reputation

Steve Miller, former CEO of Waste Management, once commented that "a reputation is an incredible asset, one you can't appreciate it until you lose it." 

There are still plenty of people in the financial profession who are somewhat dismissive of the impact of reputational effects, despite many cautionary examples.  The negative impact is greatest for firms in competitive businesses where the consumer is willing to pay up for quality or safety.  Perrier, once the #1 vendor of bottled water, never fully recovered after having to recall the product due to benzene contamination.

I have not seen a good study of these things recently, but it's not hard to see recent examples in the market.  (Let me pause here to say that I do not own or cover either of the two stocks that I am about to discuss, nor do I have any views on their investment prospects.)

One timely example is Mattel, which is down today after recalling millions of toys that might be contaminated with lead paint. 

This comes on the heels of a similar recall of toys sold by RC2.  The RC2 situation has been going on longer, so we have a little more information on which to make inferences about reputational impact.  The first thing I'd note is that the stock didn't crack down much right away (the original press release is dated June 15), despite the fact that millions of toys would have to be recalled.  The stock's high for the year was $46...it dropped to $40 in the weeks following the announcement.  It fell from $40 to $36 yesterday, and after a weak quarter and guidance cut yesterday, it's $29.

I know there are many factors in play here, but the slowdown in sales and the safety recall may not be entirely unconnected.  Another data point - some outlets are discounting the premium priced 'Thomas' toys, something I haven't seen before.

And, of course, there are lawsuits.

For those interested in studying this situation (I think it would make a great case study), The New York Times has covered the RC2 story aggressively.  A Times reporter was actually detained at the factory where some of the toys were made for nine hours, as described here.  It appears that RC2 has since cut all ties with the vendor - a Times update story is here.

One final comment, a quote from the Book of Buffett.  Warren Buffett has been known to pay close attention to financial matters.  But when he took over Salomon following their bond trading scandal, he didn't emphasize the numbers.  He told employees:  "If you lose dollars for the firm by bad decisions, I will be understanding.  If you lose reputation for the firm, I will be ruthless."