Main components of corporate reputation
Corporate reputation is the overall estimation in which an organization is held by its internal and external stakeholders based on the organization’s past actions and probability of its future behavior, according to Dr Charles Fombrun, a leading international authority on corporate reputation.
Professor Tom Watson goes even further and supports a definition based on predictability – corporate reputation is the sum of predictable behaviors, relationships and two-way communication undertaken by an organization, as judged by its stakeholders over time.
(In addition to companies, a corporate reputation is a valid concept for government and semi-government organizations and in particular those agencies that have been corporatized or act as government trading enterprises.)
Many organizations consider their greatest asset to be their good name or reputation. This is especially true in knowledge-based organizations such as universities and professional services firms such as consultancies, legal firms, the medical profession, financial institutions, merchant banks and accounting practices.
Although reputation is an intangible concept, research universally shows that a good reputation demonstrably increases corporate worth and provides sustained competitive advantage.
The international Reputation Institute considers there are 7 broad components of reputation:
Ideal attitudes and behavior that create a good corporate reputation
- Purchase – If I had the opportunity, I would buy and products/services of this organization.
- Recommend – I would recommend this organization to others.
- Crisis proof – If the organization was faced with a product or service problem, I would trust them to do the right thing.
- Verbal support – I would say something positive about the organization.
- Invest – If I had the opportunity, I would invest in this organization.
- Work – If I had the opportunity, I would work for this organization.
How you can build your corporate reputation
Your organization can’t actually control its own reputation – it can only operate in a sound and ethical way, and work to communicate this to stakeholders. Thus the common term ‘reputation management’ is misleading because you can’t directly manage your own reputation; you can only act to strengthen your standing in the areas that you consider important to your reputation.
Stakeholders’ attitudes towards your organization and their relationships with you (and hence your reputation in their eyes) can be influenced by stakeholder relationship management activities, especially when the activities are conducted on a two-way symmetric basis, which involves treating them with respect.
Reputation is also affected by the actions and attitudes of others, for example, a competitor launching breakthrough products or making greater profits, and by comments from industry observers.
Steps to build reputation
Corporate reputation is shaped more by operational practices than by communication practices – “actions speak louder than words.” Nevertheless, a corporate reputation can be significantly influenced by communication activities. Communication programs are valuable for creating awareness of good operational practices and in enhancing the organization’s relationships with stakeholders. Dialogue with stakeholders also can help shape organizational practices.
These six steps can strengthen your corporate reputation through a stakeholder relations program:
- Conduct research to know key stakeholders better.
- Assess stakeholder strengths and weaknesses, and focus on the gap between internal realities and stakeholder perceptions.
- Research the main factors comprising the reputation of your organization and align them with policies, systems and programs in all functional areas. This produces a powerful re-orientation of priorities and behaviors
- Set plans to exceed stakeholder expectations.
- Involve the CEO as the greatest ally or champion of a reputation program.
- Measure regularly against targets and act to improve the results.
How reputations affect economic value
Firstly, please remember that the coronavirus has upended business everywhere in the world. Therefore, some of the conclusions below may well change as the pandemic affects all countries and businesses. I will monitor the changing societal environment so I can add some insights on trends.
Analysis by the Reputation Institute in 2016 found that 40% of a [public] company’s market performance can be attributed to non-financial factors associated with its corporate reputation. These factors included financial analyst recommendations, social performance (doing well on expert ratings of CSR and sustainability), media exposure, and public perceptions. When these intangibles are strong, they boost reputation capital and market value.
Also, according to studies conducted by Corporate Dividend in 2016, corporate reputation comprised one fifth of the market capitalization of the top 500 US public companies in the S&P Index (worth $4 trillion!) and one third of the market capitalization of the top 350 UK public companies in the FTSE Index.
The estimated contribution that public perceptions add to the market value of a company its reputation capital. More favorable perceptions add to reputation capital; less favorable perceptions destroy it.
Reputation capital is worth big money to big companies. The reputation of some top companies is more than half of their market value, including Apple, Disney, Alphabet, ExxonMobil, Unilever and Shell.
In 2016, the top ranked companies by reputation capital were Amazon.com with around $234 billion (65% of its market value) in reputation capital, followed by Apple with $125 billion (representing only 22% of its market value), and J&J with $110 billion (32% of its market value). At the bottom were Comcast and Philip Morris International, with reputation capital of -$64 and -$60 billion respectively (representing about 39% of their market value). Comcast and Philip Morris are examples of reputation-challenged companies whose weak public perceptions suppress their financial value by over a third.
Public companies are important for such calculations because the impact of non-financial factors can be measured by changes in their share price. Financial losses from operational matters can’t totally account for a plunge in share price or business profits in most situations – reputation factors play a big part. For instance:
- US Wells Fargo bank share price effectively reduced by 20% from 2014 to 2016 when the bank was caught up in a prolonged scandal after admitting to creating several million fake customer accounts that led to employees receiving unearned incentive commissions, and 5,300 hourly (casual) employees losing their jobs.
- The share price of the Carnival shipping line dropped by 18% after one of its cruise ships sank when it hit underwater rocks off Tuscany in 2012, with the loss of 33 lives.
- BP’s share price crashed by 53% after the Deepwater Horizon oil production platform caught fire in the Gulf of Mexico in 2010, causing the largest accidental oil spill in history and the loss of 11 lives.
- Volkswagen group’s overall revenue dropped 5% in the first half of 2016, the group’s share price tumbled around 40% from May 2015 to October 2016, its share of the European auto market fell, and it laid off 30,000 employees in the wake of its diesel emissions scandal continued to hit the group after the scandal started in September 2015.
“People’s willingness to buy, recommend, work for and invest in a company is driven 60% by their perceptions of the company, and only 40% by their perceptions of their products”
– Observation by Kasper Ulf Nielsen, Executive Partner, Reputation Institute.
This article was updated in 2020.