How your corporate reputation may be your biggest financial asset
Reputation is worth trillions in the marketplace!
Your organizational reputation may be intangible, but it has vital financial value as an asset.
How can such an intangible concept be vital? Reputation can be the key reason people will support your organization: “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,” according to Kasper Ulf Nielsen, Executive Partner at the Reputation Institute.
In this way, a significant amount of every organization’s financial worth is based on its reputation. Stakeholder perceptions are what it is about.
The estimated contribution that public perceptions add to the market value of a company is its reputation capital. Favorable perceptions add to reputation capital; unfavorable perceptions reduce it.
Sometimes reputation is the biggest single organizational asset, especially with big brands. For instance, the reputation capital of some top companies is more than half of their market value, including Apple, Disney, Alphabet (parent company of Google), 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 lowered their financial value by over a third.
Specialist firms in reputation assessment can measure the value of reputation by analysing the various components that stakeholders consider the most important. The value of each factor can be compared against the relative value all the other significant factors adding up to stakeholder perceptions of the organization.
For instance, the Reputation Institute measures a company’s capacity to meet stakeholder expectations on 7 general dimensions of reputation:
- Products and services
By using these general dimensions for organizations, the consultants can compare corporate reputations of organizations within and between specific industries.
Reputation case study
As Corporate Affairs Manager for the Western Power electricity utility, I established a corporate reputation composite index, using the expertise of a market research firm to develop the index. Western Power is a government-owned trading enterprise, and so it did not have a market value, and therefore its reputational value could not be calculated in the same way as for a public company.
In this project, the first step was to conduct qualitative research among focus groups to determine the factors that household customers considered important to the organization’s corporate reputation.
The 14 factors identified from the qualitative research were categorized into 8 broad areas:
- Emergency management – capability of dealing with emergency situations such as storm damage.
- Safety – ensuring the highest level of public and employee safety at all times.
- Product – providing an excellent service to all customers and offering a reliable and quality power supply.
- Customer focus – valuing customers, understanding their views, listening to their needs.
- Environment – being environmentally responsible.
- Communication and education – providing sufficient information and communicating well with the public.
- Reputation – being well-managed, known for treating employees well and portraying a good public image.
- Social responsibility – caring about the community.
Quantitative research was then conducted by telephone survey of 1,400 people at home who indicated they were the person in their household who most dealt with the utility. The sample size was reliable to 3% within a 95% confidence level.
A composite index was formed by (1) scoring each factor according to its relative importance to the public as indicated in the survey feedback, and (2) scoring their estimate of the utility’s actual performance on each factor. Then the two figures for each factor were multiplied together. These results were calculated for all 8 factors and added together for a possible overall score out of a maximum of 100, with a higher score indicating higher satisfaction.
Corporate reputation index
|Figures||Year 1||Year 2||Year 3||Year 4||Year 5|
Having measured the corporate reputation result in the first year, targets were set for future years. (The target figure set for years 4 and 5 was reduced due to expected changes in community attitudes due to planned organizational restructuring and cost cutting.)
In considering the components of corporate reputation, above, you can see that many of the variables are outside the control of the communication professionals. A senior manager actually tried to make reputation a KPI of the Corporate Affairs function, but I pushed back on the grounds that actions speak louder than words, and therefore actions by field employees were more important in public perceptions than any actions taken by Corporate Affairs.
Analysis by the Reputation Institute in 2016 found that around 40% overall of [public] companies’ market performance can be attributed to the non-financial factors associated with their respective corporate reputation. The general factors nominated by the consultants included weighting of 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.
Measurable share price falls caused by reputation problems
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 problems or crises can’t totally account for a plunge in share price or business profits in most situations – reputational factors play a big part. For instance:
- US Wells Fargo bank share price effectively plunged 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.
What do you think are the key components of your organization’s reputation? How would you go about measuring its reputation? More on this in other articles.