Why a good corporate reputation is vital to your organization
What exactly is a corporate reputation? How important is it? What is it worth? Isn’t it only an intangible, ‘feel-good’ concept?
A good corporate reputation is vital for an organization to perform well. Around 40% of a [public] company’s market performance can be attributed to non-financial factors associated with its corporate reputation, according to analysis by the Reputation Institute in 2016. 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 market value.
Corporate reputation defined
Corporate reputation is the overall estimation in which an organization is held by its internal and external stakeholders based on its past actions and probability of its future behavior, according to leading international expert Charles Fombrun, former research professor of management at the Stern School of Business, New York University, and founder of the Reputation Institute.
Using a slightly different perspective, PR Professor Tom Watson emphasizes predictability of actions, and brings communication into his definition – “corporate reputation is the sum of predictable behaviors, relationships and two-way communication undertaken by an organization, as judged by its stakeholders over time.”
Value of corporate reputation
The value of corporate reputation can be measured especially when a good reputation turns bad for a public company – because the impact can be seen in the plunge in share price and therefore market value. Great examples include:
- 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.
The organization may have a slightly different reputation with each stakeholder according to their experiences in dealing with the organization or in what they have heard about it from others.
Corporate reputation is a ‘soft’ concept. Many organizations put the importance of a good reputation to the back of their minds while they attend to more hard-edged, day-to-day urgencies.
On the other hand, many organizations consider their greatest asset to be their good name or reputation. This is especially true in knowledge-based organizations such as professional services firms in the consulting, legal, medical, and financial sectors and in universities. They work actively to build their good reputation, to build the ‘bank of goodwill’ towards them.
The importance and relevance of corporate reputation are just as vital now, despite the massive technological changes that have changed society. It’s just that people form their views from many different sources now, especially from social media and the web.
The two main sources of a corporate reputation are experience and information – a person’s past dealings with your organization and the extent and nature of their direct and indirect communication with you. A favorable reputation requires more than just an effective communication effort; it requires an admirable identity that can be molded through consistent performance, usually over many years. 1
Fombrun notes that “a reputation develops from a company’s uniqueness and from identity-shaping practices, maintained over time, that lead stakeholders to perceive the company as credible, reliable, responsible and trustworthy…Best regarded companies achieve their reputations by systematically practicing mundane management. They adhere rigorously to practices that consistently and reliably produce decisions that the rest of us approve of and respect. By increasing our faith and confidence in the company’s actions, credibility and reliability create economic value.” 2
Benefits of a good corporate reputation
The main benefits of a good corporate reputation can be found in:
- Customer preference in doing business with you when other companies’ products and services are available at a similar cost and quality;
- Your ability to charge a premium for products and services;
- Stakeholder support for your organization in times of controversy;
- Your organization’s value in the financial marketplace.
Although reputation is an intangible concept, research universally shows that a good reputation demonstrably increases corporate worth and provides sustained competitive advantage. A business can achieve its objectives more easily if it has a good reputation among its stakeholders, especially key stakeholders such as its largest customers, opinion leaders in the business community, suppliers and current and potential employees.
If your organization is well regarded by your main customers, they will prefer to deal with you ahead of others. And these people will influence other potential customers by word of mouth. Suppliers will be more inclined to trust in your organization’s ability to pay and to provide fair trading terms. If any problems occur in their trading relationship with you, your suppliers will be more inclined to give you the benefit of the doubt when you have a reputation for fair dealing.
Likewise, government regulators will trust you more if you have a good reputation, and they will be less inclined to punish you if you trip up along the way. And clearly, a potential employee will be more likely to sign up with you if you have a good reputation for your treatment of staff compared with an employer who may have an equivocal reputation.
A US survey by Burson-Marsteller found 95% of chief executives surveyed believed that corporate reputation plays an important or very important role in the achievement of business objectives. Yet only 19% had a formal system in place to measure the value of their corporate reputation. If corporate reputation is so important, why don’t more organizations measure it? Possible reasons include:
- Reputation is an intangible and complex concept, which takes time to change.
- The dollar value of improvements to a growing reputation is difficult to quantify.
- Senior managers are obliged to deal with more immediate and demanding operational priorities – reputation is a long-term concept.
- Reputation ranges over such a broad area of the organization’s activities that it is difficult to allocate specific responsibility for work on enhancing the corporate reputation to individual functional areas.
- Cost – the typical cost of applying a conceptual model to consumers, individual investors and community leaders in one major US city is about US$150,000. However, a study of companies in one industry might cost as little as $50,000, depending on the size of the industry.
One thing is certain, there is a high cost to pay for losing a good reputation, your good standing with stakeholders. Experience has shown that a badly handled crisis can strip big chunks off a company’s share price, and therefore its market value. And a smaller organization could be devastated by loss of reputation.
Conversely, the skillful handling of a major issue or crisis can maintain a good reputation and cushion the organization’s share price against a drop in market share.
- Gray, Edmund R, and Balmer, John MT. “Managing corporate image and corporate reputation.” Long Range Planning, Vol. 31, No. 5. p. 695.
- Fombrun, Charles J. Reputation: Realising value from the corporate image. Boston, Massachusetts: Harvard Business School Press, 1996, p. 37.