The Fragility and Danger of Good Reputation

Shakespeare gave us one of the all-time nasty guys in Othello, that curious little fellow Iago, who has figured out how the world really works. Who you are and what you’ve done, and what you’re doing at the moment, really doesn’t matter a whole lot. It’s what people think of you, your reputation, that matters. A good reputation gives you some leeway, a chance to make mistakes you can correct – people cut you some slack. Lose your good reputation and you have no room to maneuver. And he sees those around him sense this, so he sets them up to realize their reputations are disintegrating and they must do this and that, even if they don’t want to do it – and all those things get Iago just what he wants, even when that’s just Iago’s gleeful pleasure at seeing others in pain and despair. Samuel Taylor Coleridge called that Iago’s “motiveless malignancy” – Shakespeare anticipating The Joker in the second Batman movie or something. Iago too just wants to see the world burn. And Iago doesn’t give a fig about his own reputation – he’s fine with spooking about in the shadows, generally unnoticed.

But Iago knows all about reputation. In Act 2, Scene 3, he gets Cassio to say this – “O, I have lost my reputation! I have lost the immortal part of myself, and what remains is bestial. My reputation, Iago, my reputation!” And Iago no doubt grins. He’s got Cassio just where he wants him, as a useful tool. Note that Cassio says his reputation is one and the same thing as his very soul – what others think of him is what Cassio is, and in fact is all that he is. Find someone who thinks like that and you can really jerk them around.

But in Act 3, Scene 3, Iago finds Othello, his boss, less of a fool. Othello is not that much interested in what anyone thinks of him and says so, so Iago has to give him a pep talk:

Good name in man and woman, dear my lord,

Is the immediate jewel of their souls.

Who steals my purse steals trash; ’tis something, nothing;

‘Twas mine, ’tis his, and has been slave to thousands;

But he that filches from me my good name

Robs me of that which not enriches him,

And makes me poor indeed.

Iago hammers away that this – your reputation, your good name, is all that matters. And as Iago hammers away at that he eventually either convinces Othello that the only thing that matters in life is what people think of you – or he just wears Othello down and Othello agrees out of frustration, and just to get Iago to shut up. And then befuddled Othello, his head now filled with thoughts of honor and reputation and his good name and all the rest, murders his totally innocent wife, Desdemona, and assorted other really bad things ensue, and things fall apart. And Iago really does have no motive in any of this – absolutely none is given in the play. He just wants to see the world burn, for no particular reason. That makes Iago the only frightening villain in any of the plays.

But the whole concept is scary – your thoughts and words and deeds do not matter, really, as the world runs on assumptions others make about you, and, if you want to survive in this world, that is what you need to work on. Good deeds and hard work are pretty much bullshit. The world runs on reputation, not results – what results you offer don’t matter as much as how people see those results. They can always say you were just lucky. And without a good reputation, failure to get results gets you no sympathy and no pat on the butt and no being told to try again. It’s over.

Let’s say you’re British Petroleum. Since 2001, British Petroleum has presented itself as the most eco-friendly of all energy companies worldwide, paying millions to ad agencies to craft a new image. BP was at the cutting-edge of alternative energy innovation and new resource exploration. The company’s green sun logo and sophisticated commercial ads are pretty cool – “We want you to think of us as BP: Beholden to the People.” Check out their fractal, mirrored, eco-friendly and totally green Helios House on the southeast corner of Robertson and Olympic in West Los Angeles – it’s way cool, even if it is just a gas station, and they hand out little packets of seeds, for free, so you can start a garden of your own. They’d built a reputation.

And then it cracked:

British Petroleum downplayed the possibility of a catastrophic accident at an offshore rig that exploded, causing the worst U.S. spill in decades along the Gulf coast and endangering shoreline habitat.

In the 52-page exploration plan and environmental impact analysis, BP repeatedly suggested it was unlikely, or virtually impossible, for an accident to occur that would lead to a giant crude oil spill and serious damage to beaches, fish, mammals and fisheries.

BP’s plan, filed with the federal Minerals Management Service for the Deepwater Horizon well, dated February 2009, says repeatedly that it was “unlikely that an accidental surface or subsurface oil spill would occur from the proposed activities.”

And while the company conceded that a spill would “cause impacts” to beaches, wildlife refuges and wilderness areas, it argued that “due to the distance to shore (48 miles) and the response capabilities that would be implemented, no significant adverse impacts are expected.”

It seems they misjudged things, or they didn’t know what they were doing, or they were lying:

Robert Wiygul, an Ocean Springs, Miss.-based environmental lawyer and board member for the Gulf Restoration Network, said he doesn’t see anything in the document that suggests BP addressed the kind of technology needed to control a spill at that depth of water. “The point is, if you’re going to be drilling in 5,000 feet of water for oil, you should have the ability to control what you’re doing,” he said.

But BP was relying on another firm of course:

Many of the more than two dozen lawsuits filed in the wake of the explosion claim it was caused when workers for oil services contractor Halliburton Inc. improperly capped the well. Halliburton denied it. According to a 2007 study by the federal Minerals Management Service, which examined the 39 rig blowouts in the Gulf of Mexico between 1992 and 2006, cementing was a contributing factor in 18 of the incidents. In all the cases, gas seepage occurred during or after cementing of the well casing, the MMS said.

So Halliburton – with its reputation already in shreds – was BP’s partner in this.

What was British Petroleum thinking? Now their hundreds of millions of dollars in advertising, and the amazing zero-impact green mirrored gas stations seem like green washing – jerking all of us around. Beholden to the people, indeed – they played us for suckers.

And at whistleblowers.org there’s this:

The Wall Street Journal reports that the well lacked a remote-control shut-off switch that is required by Brazil and Norway, two other major oil-producing nations. The switch, a back-up measure to shut off oil flow, would allow a crew to remotely shut off the well even if a rig was damaged or sunken. BP said it couldn’t explain why its primary shut-off measures did not work.

U.S. regulators considered requiring the mechanism several years ago. They decided against the measure when drilling companies protested, saying the cost was too high, the device was only questionably effective, and that primary shut-off measures were enough to control an oil spill. A 2001 industry report argued against the shut-off device: “Significant doubts remain in regard to the ability of this type of system to provide a reliable emergency back-up control system during an actual well flowing incident.”

However, a spokeswoman for Norway’s Petroleum Safety Authority said the switches have “been seen as the most successful and effective option” in North Sea usage. Several oil producers, including Royal Dutch Shell, sometimes use the switch even when it is not required by country regulations.

What happened? Everyone was concerned with something else:

Experts have said that the remote-control switch may have been able to shut off the Deepwater Horizon well, and critics have said the lack of the remote control is a sign U.S. authorities have been too lax with the industry. A spokesman for Democratic Florida Senator Bill Nelson argued: “What we see, going back two decades, is an oil industry that has had way too much sway with federal regulations. We are seeing our worst nightmare coming true.”

Finally, the Wall Street Journal reported yesterday that BP argued against stricter safety regulations for the oil industry in letters to the Minerals Management Service last year. BP joined with several other oil producers to say that current voluntary safety rules are sufficient.

That Wall Street Journal item is here.

Ah, voluntary rules, developed by the industry itself – that’s the ticket. And you know how that works. It’s all based on reputation – You guys know us, we’re the good guys. Everyone knows that, as that’s our reputation. We’ve got this covered. We can police ourselves and each other, for the good of all the players in the industry. Why would any of us want to cut corners? That would hurt all of us. So back off.

Yes, one thinks of Alan Greenspan – the pure Adam Smith guy and a devotee of Ayn Rand and her notion of the Virtue of Selfishness and all that sort of thing – and his wake-up moment in October 2008:

But on Thursday, almost three years after stepping down as chairman of the Federal Reserve, a humbled Mr. Greenspan admitted that he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending.

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told the House Committee on Oversight and Government Reform.

Oops. And the congressman representing us out here in Hollywood forced him to admit that was pure nonsense:

“You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others,” said Representative Henry A. Waxman of California, chairman of the committee. “Do you feel that your ideology pushed you to make decisions that you wish you had not made?”

Mr. Greenspan conceded: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”

The parallel is clear. Free-markets have a reputation for being self-correcting, even if the overwhelming evidence suggests they are not and never were self-correcting. British Petroleum was riding that reputation – and asking to be cut some slack here, and was given that slack. Yes, your thoughts and words and deeds do not matter, really, as the world runs on assumptions others make about you, and in this case on what people assume about free markets. BP had that covered either way – with America’s fascination, since Reagan, with the notion of elegant beauty and efficiency of an unregulated economy, and then with the mother of all public relations campaigns. The first assumption has already been assimilated into the culture – what everyone simply knows – and the second was purchased. What could go wrong?

Reality could go wrong. Some things are just not so. Iago doesn’t always win.

But there are other assumptions. In this item Kevin Drum says he sent a friend this – “I can’t wait until Rush figures out how this is all actually Obama’s fault.”

Drum didn’t have to wait long, as a few hours later Rush Limbaugh said this:

I want to get back to the timing of the blowing up, the explosion out there in the Gulf of Mexico of this oil rig… Now, lest we forget, ladies and gentlemen, the carbon tax bill, cap and trade that was scheduled to be announced on Earth Day. I remember that. And then it was postponed for a couple of days later after Earth Day, and then of course immigration has now moved in front of it. But this bill, the cap-and-trade bill, was strongly criticized by hardcore environmentalist wackos because it supposedly allowed more offshore drilling and nuclear plants, nuclear plant investment. So, since they’re sending SWAT teams down there, folks, since they’re sending SWAT teams to inspect the other rigs, what better way to head off more oil drilling, nuclear plants, than by blowing up a rig? I’m just noting the timing here.

Drum comments:

Plus there’s this, from the friend I was emailing with: “Maybe not Obama, but the WSJ snuck it in their story yesterday: you know, if the environmentalists didn’t make us drill so deep, so far out from shore, this wouldn’t have happened.” I haven’t seen that story, but I wouldn’t be surprised if this meme picks up steam in the days to come.

But the New York Times’ Paul Krugman had anticipated this the day before:

The only question is what the story will be. …

Will it be claims that liberals and/or scientific conspirators sabotaged the rig, to undermine good Americans who want to drillheredrillnow? (Michael Crichton already wrote that novel).

Will it be that oil workers, demoralized by the march of socialism, fell into despair and let the accident happen?

Will it be claims that since this didn’t happen under Bush, it obviously shows that Obamanomics is responsible?

It may be all of the above. You know Obama’s reputation with Rush and that crowd. And for a giggle read Jamison Foser on the rehabilitation of the reputation of George Bush – both the Associated Press and McClatchy reporting an “apparent shift in public opinion” of Bush. A careful examination of the data they draw on shows Bush loyalists, one after another, claiming a shift is underway – but that’s it. All polling data shows otherwise. It’s kind of like BP’s nine-year-long public relations effort to show everyone they are so very green – without mentioning Halliburton of course. Reputation may be, in essence, merely what others think of you, for whatever reason they do. But saying that people really, really, really think this or that does not make it so. In defense of the Associated Press and McClatchy, however, perhaps they should dutifully report, without comment, that Bush loyalists are saying this sort of thing a lot right now. After all, the Associated Press and McClatchy do have their own reputations to protect, as unbiased new sources. If people are saying that aliens from the planet Clorox II have arrived in the Spaceship Quaalude and have plans to replace key players on the Cleveland Indians with androids who will only bunt from now on, well, you report that too, without comment.

Reputation is an odd thing. You want to protect your reputation if you have one, or, if you’re Goldman Sachs, you want to live it down.

Daniel Gross discussed that in Goldman’s Social License:

It’s been a bad week or two for Goldman Sachs. On April 16, the Securities and Exchange Commission charged the firm with fraud for the way it structured and sold some junky mortgage-related products. Earlier this week, its top executives came off as responsibility-evading jerks when testifying before Congress. And then on Thursday, the Wall Street Journal reported that the SEC had referred Goldman’s case to the Justice Department.

Gross argues Goldman is entering dangerous territory, as they are in danger of losing what may be its most valuable asset. And that would be their social license, which he explains with this:

Social license is a vague term that you see bandied about more and more in the corporate world. It’s something like reputation. Social license describes how a company plays with others and how it responds to problems. If a company has social license, it behaves in such a way that other businesses and institutions want to do business with it, and governments are more likely to give it permission to operate. For example, it looks like British Petroleum, which has followed up a disastrous refinery explosion with a disastrous oil spill in the Gulf of Mexico, is in the process of squandering its social license to operate in the United States. The same holds for Massey Energy.

And here is how that goes:

As a general rule, simply being charged with an offense – or even being convicted of an offense – doesn’t automatically suspend a company’s or an individual’s social license. Time, money, and persistent effort can rehabilitate even the most damaged reputations. Two decades ago, deal-maker Michael Milken was convicted and jailed for insider trading. Since his release, Milken reinvented himself as a philanthropist, policy entrepreneur, and advocate for prostate cancer research.

But of course it is harder for corporations to rehabilitate themselves:

Depending on what line of business a corporation is in, an indictment can be a kind of death sentence for it. Once the accounting firm Arthur Andersen was convicted in June 2002 for its role in the Enron debacle, it was finished. Nobody wants to do business with a public accounting firm that’s been busted for document destruction. Andersen’s conviction was ultimately overturned by the Supreme Court in 2005 – long after the firm went out of business.

And Gross maintains that Goldman CEO Lloyd Blankfein and his merry men just don’t get the whole concept of social license:

Courts of law may ultimately vindicate the firm, but it could be irreparably damaged by evidence and public outrage anyway. During their recent congressional testimony, Goldman executives took pains to note that Goldman wasn’t acting as an adviser when it peddled those crappy CDO’s to the unfortunate German banks. It was simply making a market in securities, finding people who wanted to sell them and people who wanted to buy them. Customers should have no reasonable expectation that Goldman isn’t selling them junk, they argued.

That may technically be true for market-making or trading operations, but that’s not all Goldman does. Goldman makes most of its revenues from trading on its own accounts, but it made its name, and established its brand, in investment banking and asset management, two businesses that depend almost entirely on customers thinking they are getting good advice and treatment.

While investment banking and asset management are now effectively rump businesses, they’re still critical to Goldman’s reputation.

And they’ve screwed that over but good:

On the trading floor, nobody really cares how you dress, whether you use silverware, how much you curse, and how you behave. So long as your trades clear, nobody in the marketplace will shun you. But in these other businesses, you need social license to operate. Endowments, universities, institutions, and governments don’t want to be seen doing business with rogue operators. Goldman’s behavior puts public officials who patronize it in the awkward position of continuing to funnel business to a controversial firm that is also a significant campaign donor. Some states have reaffirmed their support for Goldman in light of the SEC filing. But an indictment and/or conviction might be another story.

But these guys at Goldman are mostly just proprietary traders now, trading hypothetical assets and hypothetical debts and hypothetical obligations about those things, to each other. It’s a world within a world within a world – they’re hardly bankers of any sort – so who really needs a good reputation? Gross says Goldman Sachs actually needs one – so maybe you do need one. Everyone should have a good reputation, or pretend you do. It’s necessary. Iago says so, and British Petroleum bought one.

But they are fragile things.

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About Alan

The editor is a former systems manager for a large California-based HMO, and a former senior systems manager for Northrop, Hughes-Raytheon, Computer Sciences Corporation, Perot Systems and other such organizations. One position was managing the financial and payroll systems for a large hospital chain. And somewhere in there was a two-year stint in Canada running the systems shop at a General Motors locomotive factory - in London, Ontario. That explains Canadian matters scattered through these pages. Otherwise, think large-scale HR, payroll, financial and manufacturing systems. A résumé is available if you wish. The editor has a graduate degree in Eighteenth-Century British Literature from Duke University where he was a National Woodrow Wilson Fellow, and taught English and music in upstate New York in the seventies, and then in the early eighties moved to California and left teaching. The editor currently resides in Hollywood California, a block north of the Sunset Strip.
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One Response to The Fragility and Danger of Good Reputation

  1. Rick says:

    Speaking of reputations, as soon a I heard that oil rig belonged to British Petroleum, I said to myself, “Aha! We should have known!”

    And I’m surprised there hasn’t been more discussion of BP’s past history of accidents and mishaps which came to light after the explosion at BP’s Texas City refinery in March of 2005 that killed 15 workers and injured 170 others. Subsequent studies of the company culture showed it apparently lacked — and still lacks — a proper respect for standards of safety.

    From Wikipedia:

    “On February 4, 2008, U.S. District Judge Lee Rosenthal heard arguments regarding BP’s offer to plead guilty to a federal environmental crime with a US$50 million fine. At the hearing, blast victims and their relatives objected to the plea, calling the proposed fine ‘trivial.’ So far, BP has said it has paid more than US$1.6 billion to compensate victims. The judge gave no timetable on when she would make a final ruling.

    On October 30, 2009 the US Occupational Safety and Health Administration (OSHA) imposed an $87 million fine on the company for failing to correct safety hazards revealed in the 2005 explosion. The fine was the largest in OSHA’s history, and BP announced that it would challenge the fine.”

    How BP escaped its reputation is beyond me. Ever since the revelations following the explosion, I’ve watched those cool BP TV ads with a jaundiced eye.

    Rick

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