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Hi Mike,
I have just practised June 2013 exam and looking at the examiners answer to Q1a) I have come to a different conclusion on the correlation between legal and reputation risk for Hoppo if they were to cancel its contract with Red Co.
The examiner has stated that the risks are positively correlated as if the legal risk increases (Red Co taking legal action against Hoppo for loss of contract and future earnings) then the reputation risk would also increase (if issues being raised in the public consciousness and may offend stakeholders etc)
However, as the question states that the journalist has already reported the issues (Red Co operating unfair working conditions etc) to the media this has already damaged the companies reputation and has affected Hoppo’s share price. Therefore, I would think that the risks are negatively correlated (they are moving in opposite directions) as if the legal risk rises then reputation risk will fall as if Hoppo cancel the contract with Red Co then they are seen to be taking action to do the right thing in the minds of their stakeholders and so restoring their reputation etc.
Please can you shed some light on this for me?
Love your lectures by the way 🙂
Thank you,
Hannah
Would like to have a go at this:
In this question it states “Explore”, in a way there are both positive and negative correlated related risks here, so both answers may be right, provided we give the right justification to it,
as for example, the reason you have mentioned was the same that came to my mind, the cancellation of this contract will actually improve the reputation of Hopo in the media as they will no longer associate with Red Co.
I think, the examiners answers gives many points in favor and against just for the reader’s understanding, but while answering we need to justify our answer with what we conclude here.
The other argument here, the fact that Red Co. is located in an undeveloped country with few legal laws, a cancellation by Hopo may leak out some more unethical practices when Red Co. pursue a legal case against them, and Hopo cannot risk any more reputational risk here
Moreover, the loss of about 1,000 jobs at Red Co & the fact that future contracts will be in a way effected due to Hopo’s decision here, if they cancel, companies in future might be reluctant in doing business with Hopo, would justify a Positive-correlation here.
Hope this helped. 🙂
Also I think there was 2 different countries, in one country where Jobs lost there would be positive correlation and in the other country there would be a perception of Hoppo cleaning up its act and therefore negative correlation because it would be ethically favourable to its reputation.
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