Friday, September 12, 2014

Forgive or Forget? How people react to firm misbehavior

Last week I wrote about the surprising news that asset management unit Skandia had made a decision that annoyed its customers (Once Bitten Twice Shy? How Reputation Problems hit Mutual Fund Manager Skandia Again). The news are surprising because Skandia is familiar with customer reactions to reputation problems, as it is just over 10 years ago that it was hit by asset withdrawals as a result of a scandal in similar-name (but different management) firm Skandia Insurance. Part of what it learned is that customers leave and don't come back soon; we estimated that a typical fund would take three years to get back to the asset levels it had before the scandal. This would suggest caution, especially because the three years are after a scandal in which the mutual fund manager is actually innocent. It just happens to have the same name as its owner, an insurance firm with a scandal. Another mutual fund management company also owned by Skandia but differently named avoided this damage.

In addition to our research on how the scandal spread to many firms other than Skandia, Takako Fujiwara-Greve, Stefan Jonsson, and I also looked carefully at how customers withdrew and came back to Skandia during and after the scandal. The results will be published in International Economic Review, and are available here in longer form. We found that each mention of the scandal caused customers to withdraw money from the firm. So, either more scandal mentions meant that more people knew about it, or more scandal mentions meant that more people lost patience with Skandia. This is natural, but useful to show.

A more interesting part is the return of funds to Skandia. Here, we might assume that customers forgive – as a period goes without scandal mention, they will come back. Alternatively, we can assume that customers forget – with the meaning of forget being that new customers or customers of different firms than Skandia don’t really pay attention to a Skandia scandal, and may stumble into Skandia funds after a scandal. The idea of forgiveness appeals to us morally, and would be useful for a large firm that could have many potential forgiving customers after a scandal. The idea of forgetfulness is less appealing, and it means that large firms suffer more after a scandal than small firms would. So which is true?

First, it is clear that a model of forgiveness would have some relation between the people leaving and the people entering afterwards, typically in the form of some proportion of the people having left forgiving and returning. Forgetfulness is even easier to model because it just means that some portion of all customers available will start business with the firm, for example if they start disliking their current firm. And – our model of forgetfulness did in fact describe the return of customers very well. For Skandia, which was a large firm, forgetfulness was bad news because there would be more funds coming if customers were forgiving than if they were just forgetful. For other large firms it is potentially bad news too, because forgetfulness means that there is no loyalty or size advantage when the firm gets involved in a scandal. 

People may forgive other people, but firms they just forget.

Saturday, September 6, 2014

Once Bitten Twice Shy? How Reputation Problems Hit Mutual Fund Manager Skandia Again

Skandia is a an asset management unit owned by the insurance firm Old Mutual, and was in the press September 5 because it had decided to reverse a decision to move a sizable amount of funds (1 billion dollar) from its usual fund manager Invesco to a new company owned by former Invesco manager Neil Woodford. The reason for the reversal was protests by the owners of the funds it was planning to move, who did not think these funds could be just swapped across management companies without their agreement. Skandia’s temptation to move the funds makes some sense given that Mr. Woodford had star status and was thought to be responsible for much of the success of Invesco, the company he then let. The customers’ protests make sense because typically we normally dislike having our properties moved to different management without any say.

Is there any reason Skandia should have been a bit alert to the power of customers? Yes there is. Fund manager Skandia used to be a Swedish company, owned by a Swedish insurance firm also called Skandia. The takeover of Skandia by Old Mutual in 2005 followed soon after a period of customer protests involving significant withdrawals of funds had weakened the company. The reasons for these protests were all associated with a reputation for little attention to others. First, in 2002 a subsidiary firm was sold in a way that appeared to favor the mother company Skandia over other owners of the subsidiary. Second, top management pay received attention in the press because it was seen as unfair. Third, the press discovered that close relatives of the top management were given rental apartments at very low prices, a problem that was fully investigated during 2003. The press started referring to it as the Skandia scandal, and customers started withdrawing money from mutual funds.

In an article in Administrative Science Quarterly, Stefan Jonsson, Takako Fujiwara-Greve, and I have studied how the effect of this scandal spread, with particular attention to one important detail: the mutual fund management company Skandia did nothing wrong. All the three reputation problems were associated with the insurance firm that owned it. In spite of that, customers punished Skandia fund management. In fact, they even punished other fund management companies owned by (innocent) insurance companies, as well as fund management companies with owner companies that resembled Skandia in some way.  

The punishment for behaving in ways that customers disliked spread wide, to with no connection to the scandal. It lasted long, with the investment levels of Skandia taking three years to recover. Skandia is a good example of something we know already. Reputation effects on firms are powerful, and often overlooked. Overlooked so much, in fact, that even a firm that should have known better because it was once bitten, isn’t yet twice shy.  

Cox, Josie. 2014.Skandia U-Turns on Woodford Mandate. Wall Street Journal, 2014 Sept 5.