A key intangible asset
Dr. Nicos Rossides, Group CEO
There is considerable evidence to suggest that a firm’s reputation, along with its brands, is its most important intangible assets. In fact, it can be argued that financial statements are less reliable as a measure of corporate performance and value than the return on intangible assets – such as corporate reputation. Studies have shown that a substantive portion of the average publicly quoted market value is based on non-financial assets – higher in service and technology companies – and that in the unpredictable financial markets that exist today, a positive reputation may be the one factor that differentiates a company from its competitors when a market sector falls.
A corporate reputation has been defined as “the reflection of an organisation over time as seen through the eyes of its stakeholders and expressed through their thoughts and words." The group of stakeholders for a company is very extensive and they can have a dramatic impact on a company, positive or negative. Managing the perceptions of this diverse set of interested groups is integral to managing that intangible corporate asset known as “reputation.
The Definition of Reputation
One issue that has hindered the development of research into reputation has been the multiplicity of definitions and lack of consensus amongst academics as to what is corporate reputation. Often concepts such as corporate identity, corporate image and corporate reputation are used interchangeably with little distinction made between them. When these terms are not used interchangeably, scholars argue for a hierarchy amongst them – for example, image as a subset of reputation.
However, recent research has shown that, despite the widely differing meanings attached to the term reputation, there are broad underlying similarities to many of the definitions, which tend to have three distinct clusters of meaning – reputation as a state of awareness, reputation as an assessment, and reputation as an asset.
Broadly, awareness comprises definitions indicating that stakeholders have an awareness of a company without judging it; assessment signifies that stakeholders are judging or evaluating a firm; whilst asset denotes that reputation is something of value and significance to a firm. Whilst some overlap between these terms may exist, they are relatively distinct in that awareness does not imply an assessment, which in turn does not imply transformation into an asset.
Using these constructs, a tighter and more focused definition of corporate reputation can be constructed, one which untangles the concept from corporate identity and image. Identity, it can be argued, is the underlying “core” or character of a firm, which makes it distinctive from other companies, and which endures whatever the circumstances in which a company may find itself. Corporate image is then the impressions observers, external or internal, have of a firm when they hear its name or see a logo, with the transition from identity to image shaped by factors such as media coverage, government actions, public relations and marketing.
The term corporate reputation, in such instances, is reserved for judgments made by observers about a firm. While such judgments may have their source in perceptions of a company’s identity and image, they often occur as a consequence of a triggering event, which may arise from a firm’s more visible actions and mistakes (e.g. an oil company and a pipeline spill) or external events. As a consequence, it can be argued that corporate reputation then is based on stakeholders’ assessments of the financial, social and environmental impacts attributed to a company over time.
What Constitutes Reputation?
Reputations take years, even decades, to build. Yet they can be lost rapidly, as examples such as Enron and WorldCom have demonstrated. And when reputations are ruined, there can be considerable collateral damage as well. Arthur Andersen, one of the world’s largest auditors with a proud and long heritage and over 100,000 employees worldwide, did not survive its association with Enron.
So, what are the drivers of corporate reputation? Key components include factors such as product quality, management abilities, financial and social performance, and market leadership, as well as softer issues such as emotional appeal, openness, integrity, and environmental awareness. Good reputations go a long way. It has been proven that they provide specific advantages like:
- Customers being prepared to pay more for products and services and recommending an organisation to others;
- Employees being more committed to their company’s success;
- Facilitating the attraction and retention of top talent;
- More favourable treatment by business partners;
- Investors feeling more secure – with a corresponding benefit to the share price;
- Capital markets viewing organisations as less risky – supporting higher credit ratings;
- Communities supporting companies in business endeavours;
- Fair treatment by the media; and
- Most importantly, all stakeholders allowing organisations more latitude to make decisions and take actions in both good and bad times.
The Impact of Reputation
An organisation’s reputation can be tied to its desired outcomes. For example, in one study, 47% of consumers indicated that they would be “much more likely” to buy from a company that is socially responsible, and 88% would be “much or somewhat more likely” to buy from such a company.
This is supported by a number of similar findings which have shown that, for a manufacturing enterprise, the most important driver of reputation is “economic value”. However, in the retail world, “societal value” plays the largest role in reputation. “Societal value” comes from being an ethical, good corporate citizen. And, socially responsible organisations are linked to employees with higher morale, commitment and retention.
A company’s reputation can have a critical effect on the value of its brands as well. This is vital when the value of a company’s brands can represent a third or more of its market value. In essence, the value of a brand represents the sum of stakeholders’ reactions to a product, service or organisation, and is shaped by their individual experiences with it. Strong brands drive price premiums; companies with strong brands can expect higher employee commitment and retention and they can out-perform the market in good times and be cushioned against the worst downsides in weak periods.
One of the first to quantify the economic returns of reputation was Charles Fombrun who argued that by developing strong and consistent images, companies create hidden assets that give them a distinct competitive advantage.
Branding and Reputation
There is increasing confluence between the fields of branding and reputation, even though the constructs are very distinct and should not be confused. Historically “brands” and “brand management” have been regarded as the domain of marketers, with their focus on the consumer and use of marketing techniques. On the other hand, “reputation” and “reputation management” belonged to the communications or PR community, with a focus on broader audiences and use of corporate communication (or PR techniques).
The marketing perspective is based upon the primacy of customer value and the view that the brand is a strategic resource that can be viewed as a framework to guide the business processes that generate brand value. The organisational perspective, in contrast, views reputation as an organisational tool that must be managed to create alignment between the internal culture and external image of an organisation.
A study conducted by researchers from MIT argued that a brand is a "customer centric" concept that focuses on what a product, service or company has promised to its customers and what that commitment means to them. Reputation, on the other hand, is a "company centric" concept that focuses on the credibility and respect that an organisation has among a broad set of stakeholders, including employees, investors, regulators, journalists and local communities, as well as customers. In other words, brand is about relevancy and differentiation (with respect to the customer), and reputation is about legitimacy of the organisation (with respect to a wide range of stakeholder groups, including but not limited to customers).
Arguably, for most companies, even an outstanding reputation almost never comprises any unique characteristics that an organisation can own and for which it can be known. Consequently, reputation is a necessary but not sufficient condition for excellence because companies also need strong brands, which are characterised by high customer loyalty, pricing power and the ability to drive growth. Ultimately what drives customer preference and revenue is the ability of a company to create relevant products, services and brands and communicate and deliver them in a way that customers want to buy. Executives need to, therefore, do more than just keep their company's reputation on track.
Balancing the Corporate Scorecard
Many companies conduct reputation benchmarking and ongoing measurement as part of their “balanced scorecard” systems. This is predicated on the belief that an organisation’s vision can best be achieved when viewed objectively from a number of key perspectives: financial, internal, key stakeholder relationships and the capacity to measure.
However, evidence exists that reputation across stakeholder groups can be inconsistent. This means that the message and energies of a company are not uniformly perceived across constituencies. The organisation must then determine how to better align these perceptions by changing performance, improving communications about performance, or fine timing communication strategies directed at specific stakeholder groups.
Another potential problem is that because reputation is perceptual, stakeholder perceptions may not reflect the reality of a situation. For example, a company’s product as measured by defect rate or other standards may be among the best in the industry, but customers may view its quality as average or weak. This calls for an understanding of the gaps between perception and the objective situation relative to competitors. The problem may be either in communications or the true competitive position. Understanding the problem allows a company to develop both performance and communication strategies to rebuild its reputation and address customer purchasing habits.
A company’s reputation emanates from all of the business activities and communications it intentionally and unintentionally undertakes. As one commentator has recently said, more colloquially, “your company’s reputation isn’t what you say it is. It’s what Google says it is.” And it is no surprise that different stakeholder groups use and focus on different parts of the business and different sources of information.
Of the many available sources of information, companies have the greatest power to control two: advertisements and how their own employees behave. This is one reason companies find it beneficial to link study results between customer and employee stakeholder groups to identify perceptual and product issues.
Most reputation measurement efforts monitor 30 or more different attributes. Whilst most companies cannot change this many attributes simultaneously, they can often be combined into themes or dimensions that highlight commonalities. It then becomes possible to create and monitor changes in a narrower set of reputation dimensions.
Reputation Management is not the same as other aspects of research which focus on one or two key parameters of a company’s operations. In order to understand if stakeholders have effectively perceived the strategies being undertaken by a company, the attributes being measured must represent all business activities and all functional areas. With this type of in-depth research, a company can understand the nature of actions it can take for improvement.
There is substantial evidence to suggest that a company’s reputation, along with its brand(s) is its most important intangible assets. As such, they are assets that need to be nurtured, protected and grown. Reputations can be managed with appropriate strategies, but, before those strategies can be put in place, it is vital to measure the attributes of a company’s reputation and understand what drives stakeholder perceptions of it, both positively and negatively
However, for a company, examining the drivers of reputation can be an uncomfortable experience as it may involve looking at all facets of an organisation’s operations, not just one or two narrow facets. Top management need to buy-in to the process from beginning to end. After all, they are the individuals who will be implementing the resulting changes designed to create improvement.
Charles Fombrun, “Reputation – Realising Value from the Corporate Image”, Harvard Business School Press, 1996
James D. Hutton, “What’s Reputation Got to Do With It? A Heretical Perspective”, CCI Symposium on Reputation Management, 2003
Michael L. Barnett, John M. Jernier, Barbara A. Lafferty, “Corporate Reputation: The Definitional Landscape”, Corporate Reputation Review, Vol. 9, 2006
David Bickerton, “Corporate Reputation versus Corporate Branding: the Realist Debate”, Corporate Communications: An International Journal. March 2000 Volume 55: Issue 1
Martin Roll, “Understanding the Purpose of a Corporate Branding Strategy”, BrandChannel.com, 2004
Richard Ettenson, Jonathan Knowles, “Don’t Confuse Reputation with Brand”, MIT Sloan Management Review, Vol. 49, No.2, 2008, pages 19 -21
Steven F. Walker, Jeffrey W. Marr “Stakeholder Power: A Winning Plan for Building Stakeholder Commitment and Driving Corporate Growth”, Perseus Publishing, 2001