Thursday 4 July 2019 6:25 am

Corporate reputation is too valuable to leave to chance

Neil Bennett is chief executive of Maitland/AMO, a founder member of AMO.

Corporate reputation is a ubiquitous phrase today. Companies spend enormous sums trying to burnish their reputations. 

An army of corporate governance experts, politicians, regulators and, dare I say, journalists queue up to judge those efforts – and often find them wanting.

Shakespeare, as you might expect, has the best lines on the subject. “I have lost my reputation. I have lost the immortal part of myself and what remains is bestial,” wails Cassio in Othello. Or if you prefer, there is Iago’s more sinister retort: “Reputation is an idle and false imposition, oft got without merit and lost without deserving.” 

Paul Polman versus Mike Ashley, perhaps, in Elizabethan tragedy.

As one of the world’s leading corporate communications groups, we at AMO spend a great deal of time promoting and defending corporate reputation. A little while ago, though, we asked ourselves what all this is really worth. Not in any existential way, but really, what value does a company’s reputation actually have, how is that value created, and what can it be attributed to? 

And which equity markets around the globe do best in the corporate reputation stakes?

Your reputation precedes you

To try to find out, we enlisted Reputation Dividend, one of the leading consultancies in the area, who use a range of statistical tools to drill out the value of a company’s reputation in its market capitalisation – the premium it holds over the value it would have if it was judged on financial metrics such as net assets and cash flow alone. 

Over the past nine months, they have done a deep analysis of the financials of more than 1,000 leading companies that comprise the indices of the 15 main equity markets around the globe.

The results are both impressive and fascinating, and were published yesterday in our report “What Price Reputation?”. 

Overall corporate reputation is today worth an astounding $16.77 trillion, amounting to 35.3 per cent of the market capitalisation of the world’s 15 leading indices (which in turn make up the vast majority of the value of all quoted equities worldwide). 

Reassuringly, the value of that reputation is actually rising – up 2.1 per cent in the 12 months to the end of March 2019 – even while overall share prices stagnated.

It is worth noting that when we say reputation, we mean it in the broadest sense – the reputation of a company to deliver profits and earnings long into the future, for example, and its reputation to continue to grow (what many in the City would term “expectations”). These are all part of the intangible essence that makes up corporate reputation.

London leads the way

I am pleased to say that London’s FTSE 100 scored particularly highly in the reputation stakes, coming first of all the 15 indices examined, with reputation being valued at well over 40 per cent of total market cap. Bottom of the pile by contrast was the Russian RTSI index, where reputation was only worth a lowly 14 per cent of the total value of the leading stocks.

Significantly, while most of the companies in the survey had a positive reputation value, 21 per cent actually had a negative one, and that value destruction is worth a total of $436bn. These are companies that need to look at themselves pretty carefully and work out where they are going wrong.

In terms of industry sectors, the data also threw up some wide disparities. Not surprisingly technology was the clear winner, given the high expectations for growth. Here, reputation was worth 43 per cent of total market value, against utilities, the worst performer, at only 25.2 per cent. These are all facts that we perhaps have sensed, but it is interesting that the data is there to confirm our suspicions.

Then Reputation Dividend cut the numbers further, to look at what specific factors drive corporate reputation. They looked at the nine categories used by Fortune Magazine’s “Most Admired Companies” annual survey. 

Reputation and growth

The most valuable factor in reputation was long-term investment value – or growth potential in more simple terms – which was worth a total of $2.2 trillion. Quality of management came second at $2.1 trillion. 

Items that spring to mind more easily when talking about corporate reputation, such as social responsibility, actually scored quite low on the scale, but were still undeniably valuable. The total value of social responsibility came in at $1.65 trillion, which is not to be sniffed at.

So what does all this actually mean? The data gives each company a roadmap on how to enhance the value of their reputation, areas where they are strong, and others where they score less highly. 

Companies that score low in terms of long-term investment value, for example, need to do more to prove the strength of their business model to investors, while others may need to focus on demonstrating the strength of their management.

This report has given us a wealth of data to chart the reputations of our clients and other businesses. 

As Peter Drucker put it: “what gets measured, gets managed”. This survey shows that reputation is too important to not be managed.

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