We’ve had lengthy conversations about risks due to technological change and too much leverage on a company’s balance sheet. We’ve also talked about regulatory risks that face the tobacco companies, as well as the risk associated with owning a company that conducts abnormally dangerous activity (e.g. if Southern Co. has any type of nuclear plant issues, those shareholders are going to be entirely wiped out. That may even be the least of their problems. On the other hand, the scope of legal liability for a firm like Colgate-Palmolive is much more narrow).
There is another type of risk worthy of its own discussion–reputation risk, or the degree to which misconduct can affect the core earnings power of an investment.
Although it is not an essential condition, it is more than a side-perk to own shares in a company that is well insulated from reputational risk. I know I’ve raised some … Read the rest of this article!