Plastics companies have been a popular investment choice for private equity firms—particularly those that are prime candidates for mergers, acquisitions and explosive innovation-driven growth. There was $34 billion in M&A activity in the plastics industry in 2018 and, according to a business-to-business media outlet serving the plastics industry, private equity firms were involved in 46% of those transactions.
As behind-the-scenes producers for consumer-facing products sold by others, some companies may feel they are somewhat insulated from reputational crises. But as a key part of the supply chain for well-known consumer brands, any missteps in their own operations could lead to devastating reputational—and, in turn, economic—impacts. And the potential for that risk is being taken into account more and more frequently by private equity firms that are fueling industry growth and serving as catalysts for acquisitions and consolidations.
Companies in this industry that are positioning themselves for private equity investment need to take note of this increased attention to reputational resilience. According to a new white paper, the Private Equity Roadmap for Assessing Reputational Risk, developed and published by my company Steel City Re, these reputational risks “present themselves across a broad spectrum of companies . . . and highlight the need to add reputational risk to investment evaluation criteria as well as to governance and oversight practices for board members.”
This shift is prompted by the recent disappointing IPOs of well-known, private equity–backed companies—Uber being a notorious example, as well as the pre-IPO value collapse of The We Company, and the post-acquisition disappointment at companies like Kraft Heinz—where the combination was supported by private equity funding.
In the plastics and packaging industry, executives and board members are realizing that private equity investment means more scrutiny by an expanded universe of stakeholders. Those individuals face significant personal risk if they don’t adequately address any looming threats to their reputations. In an age where corporate issues are highly politicized, information—both accurate and inaccurate—is easily accessible. As stakeholder displeasure goes viral and individuals are punished for corporate failures, industry leaders can quickly find themselves targeted by the courts of law and public opinion.
Private equity investors also recognize that the value of their portfolios can be enhanced or diminished by their own reputations. They can’t afford to invest in companies that are reputational liabilities. If one of their assets is besieged by a reputational crisis for governance failings, it calls into question the firm’s expertise and puts its reputation, and its entire portfolio’s valuations, in jeopardy. Softbank, for example, has been tarnished by allegations of serious governance failings at The We Company’s WeWork.
Clearly, any company contemplating private equity investment needs to know what those firms are looking for. Today, more than ever, it’s not merely about the financial statement but includes consideration of intangible factors, such as reputation, that can affect finances. So, what should plastics companies do about their own reputations to make themselves more attractive?
- Show investors your current management team truly understands the nature of reputational risk and how to mitigate it. Managing reputation isn’t about getting positive media coverage—it’s about managing stakeholder expectations. Reputational risk is the gap between stakeholder expectations and actual performance. It should be treated like every other enterprise-wide risk—handled by risk managers, who already work across silos, pool company resources and provide the appropriate governance to address operational issues that pose risks. Reputational risk should be no different. While marketing and media management strategies like corporate social responsibility campaigns and environmental, social and governance scores serve an important purpose, they don’t address the underlying, fundamental governance and operational issues that create reputational risk.
- Develop ongoing processes that assess stakeholder groups and their changing expectations and be prepared to deliver on an operational level to protect reputational value. Societal rules are ever evolving in our fast-moving culture, and the plastics industry isn’t immune to the changing winds. Hot button issues—like the effects of plastic on the environment—can arise at any time and become reputational tornadoes capable of decimating reputations. That’s why it’s paramount to have an ongoing practice of assessing disparate stakeholder priorities and sensitivities and building systems that protect reputational value and mitigate, or prevent, reputational crises altogether.
- Have response protocols already in place for reputational events. If a potential reputational crisis does hit, you don’t want to be scrambling to coordinate a response. Investors want to know that companies will welcome honest self-assessment and are open to engaging objective, third-party experts to help its leadership develop and execute reputational risk management strategies. A clear and compelling narrative, backed by third-party warranties, demonstrates both good governance and effective enterprise reputation risk management planning that deters and mitigates reputational attacks.
Private equity firms have learned the hard way that it is in their own self-interest to ensure the companies they invest in are reputationally resilient and can weather a storm of stakeholder scrutiny. To put investors at ease, companies in this industry not only need strong reputations to attract investment, they need proof that they understand their reputational risks and have an effective, ongoing plan to manage them.
Image: Monster ZtudioAdobe Stock
About the author
Nir Kossovsky is CEO of Steel City Re, a leader in corporate reputation measurement, risk management and risk transfer based in Pittsburgh, PA.