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.