Reputation not just a name to Pittsburgh firm — it's a number
If BP had latched onto the risk-management services like those pioneered by Pittsburgh's Nir Kossovsky, the British oil giant might have blunted some of the financial pain from last week's $4 billion legal settlement of its 2010 Gulf of Mexico rig blowout.
That's the view of Kossovsky, founder and chief executive of Steel City Re LLC, a company that measures the reputation of corporations. It has devised a sophisticated means of assessing risks associated with lines of business, risks of corporate reputations being damaged by unforeseen events and a means of insuring against such damage.
“BP is the poster child of a reputational crisis,” Kossovsky said.
He said the oil giant's culpability in the environmental disaster, which killed 11 workers, tarnished two of the key elements of what comprises a corporation's reputation: safety and sustainability practices.
Other elements are innovation, security, ethical behavior, and quality of goods and services.
Based Downtown, Steel City Re was named for the city Kossovsky adopted and the phrase “reputational resilience.”
He loves to quote famed investor and Berkshire Hathaway CEO Warren Buffett: “We can afford to lose money — even a lot of money. But we can't afford to lose reputation — even a shred of reputation.”
Rolls-Royce knew that well in 2010. One of its aircraft engines on a Qantas flight bound for Sydney blew up over Indonesia, forcing a sudden landing. While no one died, Rolls-Royce's reputation suffered. The company put so much effort into identifying and correcting the problem that, eight weeks later, British Airways placed a sizable order for aircraft engines.
“That's the essence of corporate reputation,” Kossovsky said.
“I'm not aware of any other firms that have quantified reputational risk,” said Carol Fox, director of strategic and enterprise risk at the Risk and Insurance Management Society, New York. “If this was a way for an organization to transfer some of the (reputational) risk they have to an insurance product, it would be of interest,” Fox said.
Apparently, it is. Kossovsky said 14 large companies have expressed interest in buying a reputational risk insurance policy, which he created in July.
“These are usually $100 million policies,” said Kossovsky, noting they are not suitable for companies with a market value of less than $1 billion.
Under an agreement with British insurance giant Kiln Group plc, Steel City Re will assess a corporation's reputational risk and create a policy, then Kiln will underwrite and issue the insurance.
“Reputation is an ever-increasing element of what board rooms have to pay attention to,” said Benjamin Popson, an insurance broker who markets management liability coverage for Aon Risk Solutions Inc., Downtown.
“Corporations are looking to protect their balance sheet, and this is a new way to possibly do that,” Popson said.
Kossovsky laid out his theories and practices in a new book, “Reputation, Stock Price and You,” subtitled “Why the Market Rewards Some Companies and Punishes Others.” It was published last week by Apress.
Reputation is an intangible value in the minds of stakeholders: the public, investors, customers, creditors, vendors and regulators.
“A company brand is just an emotion, a promise,” he said. “Reputation is what stakeholders expect from a company and how that promise is perceived or discounted.”
No mere ivory tower dalliance, Kossovsky's cutting edge system several years ago caught the attention of hedge fund managers, who constantly look for company metrics “that might not be obvious in the stock price,” he said.
Hedge funds are Steel City Re's main clients. Typically secretive, none agreed to comment for this story.
To test his theories, Kossovsky five years ago began tracking 7,400 corporate reputations. (He also wrote algorithms for the software code.) Patterns emerged that validated the theory that corporations with quantifiably superior reputations performed better in the stock market. His hedge fund contacts urged him to “get Dow Jones to publish this.”
Result: Kossovsky assembled the Repustars Variety Corporate Reputation Composite Equity Index. (ticker: REPUVAR). Since November 2011, it has been one of the many stock indices published by S&P/Dow Jones Indices. REPUVAR, which closed at 2,537.33 on Monday, up 55.98, or 2.3 percent, has beaten the S&P 500 Composite Equity Index in seven of the last 11 years.
The index contains up to 57 stocks and measures movements in their combined reputational value. The index contains the local names American Eagle Outfitters and Dick's Sporting Goods, along with such household names as Yahoo, Whirlpool and The Hartford.
Kossovsky, who is a medical doctor, has an extensive background. Born in Tel Aviv, he received a bachelor of philosophy of science degree from the University of Pittsburgh, which eventually led him to delve into financial information.
He received medical training at the University of Chicago, followed by a residency at the Weill Cornell Medical College in New York and a stint as the deputy coroner for Los Angeles County.
Shortly after the birth of a daughter, he and his wife in 2002 returned to Pittsburgh, where they had family. Kossovsky's talent for numbers and fascination with complex systems led him to found Steel City Re in 2007.
“When stakeholders turn on you, it takes a long time to change their minds,” he said. “And in a world of blogs and the Internet, reputations change fast.”
Thomas Olson is a staff writer for Trib Total Media. He can be reached a 412-320-7854 or at email@example.com.