BDO recently held a series of seminars on the value of a company’s reputation that were specifically directed at company directors and management.
Of particular interest to delegates was the relationship between reputation and a company’s value or share price. In fact there remains a tendency for companies to focus on financial performance and management quality as the bedrock of their reputation, which aligns with the attitudes of private equity investors and the City, whereas other stakeholders, be they customers, the general public, local government etc might regard environmental credibility, quality of products and services or social responsibility as key indicators. So when measuring reputation, it is always worth asking “who wants to know?”
A good corporate reputation means that you can:
It is surprising then that something that can impact so dramatically on a company’s value has not yet been accurately measured. Studies are ongoing and Alva Group, leading specialists on reputational analysis and risk assessment, is actively engaged in identifying the relationship between reputation and share price. After high profile calamities that have befallen giants such as BP and Union Carbide, and the comparatively trivial but disproportionately damaging “Ratner moment”, reputation management has become one of the key areas that occupies executives of major companies.
My own view is that the extent of a premium market rating of a company compared to its peers can be measured and the reasons for the differential analysed. Until we have an agreed reputation valuation method, there will be some element of judgement as the differential is apportioned between the various identified contributing factors.
Marks and Spencer in my opinion provides an example of a market adjustment following a collapse in reputation. By 1997/98 M&S was the second most profitable retailer in the world and was in the UK’s top ten companies by market capitalisation and yet at the end of the 1990’s its share price had dropped by almost 75%. Prior to the collapse, M&S’s reputation had been built on:
The seeds of the collapse were sown during the previous ten years when M&S pursued its policy of returning an increase in profits year-on-year at the expense of all of its other reputational building blocks. When it pulled a long term supply contract with William Baird in October 1999, there were demonstrations outside M&S stores and a very public legal case ensued about the nature of a contract. M&S has never fully recovered what it lost and whilst it may be true to say that there were inevitable changes in the UK textile industry as supply switched overseas, communications might have been handled differently.
There is a clear connection between reputation and value and the most successful companies build and protect their reputational capital assiduously. Reputation takes time to build, requires stakeholder trust and can easily be ruined. As Scottish judge, Francis Jeffrey (1773-1850) said, “a good name, like good will, is got by many actions and lost by one.”
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