You might not think it so but the stock market and investing is strongly driven by emotion. When investors find out that a particular company has been doing something that is against commonly accepted good business practices, badwill can be generated. Although not thought of as a financial issue, the way people feel about a company can profoundly affect the bottom line.
Think about how Enron or BP stock tumbled when it they were found out to have cut corners or engaged in dishonest activities. That was a direct result of badwill. Badwill quickly turns into public relations nightmares, destroying consumer confidence and reducing the number of investors, both new and old.
The current concerns over third world sweatshops have caused a great deal of badwill among shoppers and investors. This hits companies which purchase clothing made in sweatshops doubly hard; they lose consumers and fewer people are willing to invest in them. Unless well managed, this kind of public image can be the end of a successful company which isn’t willing to make changes.
Another industry which took a hit from badwill was the diamond industry. When it came to light that diamond companies were often involved in financing wars and drugs, the term “blood diamonds” was coined and many industry leaders scrambled to prove their diamonds were “conflict free.”
Reputation may not seem like much in the world of high finance, but it is surprisingly important. No one wants to invest with brokers who are connected with rumors of fraud, embezzlement or insider trading. A good name is essential when you want people to trust you with their money.