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From an intangible, academic concept, the importance and understanding of corporate reputation has evolved into a central tenet of business success.
There are competing ideas of how to define a company’s reputation. Debate persists over what process to use and which factors to take into account when trying to evaluate both reputation itself and its value. Among these, the stakeholder-centric view supplies a solid platform. It asserts that reputation is in the eye of the stakeholder, and based on their perceptions over time, it provides a more quantifiable, less fluid model than some other methods.
Once considered a theoretical affair, an intangible asset approached with scepticism that was hard to map and harder to market, in today’s more enlightened times reputation is widely accepted as affecting both a business’ resilience and its financial value. This recognition is pushing corporate reputation up the priority list for corporations in all sectors, and making it a key focus for corporate communications.
‘Corporate reputation’ is a straightforward term for how a company is perceived by others. But since the 1980s, attempts have been made to more formally define it, distinguishing reputation from related constructs such as corporate image, identity, brand equity and status.
In 2005 an effort was made in the Corporate Reputation Review to analyse the varying definitions of corporate reputation and identify a more explicit, narrower statement. The resulting definition: Observers’ collective judgments of a corporation based on assessments of the financial, social, and environmental impacts attributed to the corporation over time.
Since then, it has come to be understood that the success of an entire sector can rest on the reputation of a single business, due to reputation risk contagion; while the ability to build out reputational capital can shore up a company enough to survive a series of potentially catastrophic events.
It is also clearer what real corporate reputation is not. It is not a brand image, and can’t be built from an advertising budget or clever marketing. Reputation is not spin.
No matter how accomplished a communications strategy, if there is no authentic action behind it, it will only serve to diminish reputation by promising then not delivering. Likewise, there is no quick fix to a damaged reputation, and online reputation management (ORM), where negative media is deliberately countered or buried, will not build a strong, long-lasting corporate image.
Although the concept of corporate reputation was once perceived as cumbersome and largely academic, it is now a recognised, known quantity among a company’s assets. It is a key driver of business value, because of an evolution in the ways in which stakeholders interact with businesses.
Recognition of the value of corporate reputation has accelerated in line with developments in communications technology. Interconnectivity is greater than ever before. Stakeholders have real-time access to news of a company’s successes or failures. Hyper transparency makes it harder to cover up disasters, with far greater scrutiny of corporate actions both before and after reputation crises. The rise of social media has resulted in effective media anarchy, where consumers can directly engage with and comment on the actions of corporations, even tagging their criticisms in their own brand communications.
So how can the value of corporate reputation be weighed? Answer: in a number of ways. Financially, it has an impact on share price and market capitalisation. Estimates of the percentage of market value attributable to reputation are wide ranging, and depend on the evaluation process.
When in 2013 the World Economics Journal published an attempt to quantify the impact of reputation on stock market value, it calculated that reputation accounted for close to 26% of the total market capitalisation of the S&P500. Admitting that the market value of reputation varied by company, it showed Apple topping the charts at 58% (and Sears Holdings bottoming out at minus-39%).
Fast forward to 2019, and corporate reputations accounted for 35% of total capitalisation of the world’s top 15 stock market indices, according to research by AMO, while the UK’s FTSE 100 saw reputational factors contribute nearly 50% of overall market capitalisation.
In truth, the value of corporate reputation should be understood at a stakeholder level and be measured accordingly. Reputation with customers needs to be understood through lifetime customer value, new business acquisition, churn rates and so forth. Reputation with existing and potential employees should be assessed via tenure, cost to recruit, employee churn and number of applications per role. While share price is a tempting metric against which to correlate shifts in reputation, this should be viewed at a thematic rather than an aggregate level; understanding what are the initiatives and actions that consistently drive both, rather than seeking an elusive correlation coefficient.
Corporate reputation also has a value when it comes to brand equity. A strong reputation instils customer and investor loyalty. Faced with all the options of an increasingly competitive marketplace, consumers and shareholders prefer to align themselves with businesses that have a positive corporate image. This directly translates into growth of customer base and increased sales and revenue.
Research by Harvard Business School identified reputation as a crucial factor in long-term business survival. A strong corporate reputation can help to buoy up a business during tough times, as many found during the recent pandemic. When resources are stretched, stakeholders lend their support to firms they feel they can rely on.
This credit is equally valuable when a brand is facing an individual crisis. If reputational capital has been built up over time, recovery from events such as cyber breaches, product recalls or employee misdemeanours is likely to be quicker.
Corporate reputation can be likened to an organic compound, upon which many influences are exercised. It might be influenced by a business’s financial performance, but just as easily by employee reviews on social media. The ability of its corporate communications teams to respond quickly and effectively to crisis can have a greater impact than the crisis itself.
The personal reputation of its leadership may be weighed against the value of its products or services. Corporate social responsibility is playing an increasingly important role as consumer want to align themselves with authentic organisations, shareholders focus on environmental, social, and governance (ESG) investing, and employees want a career with purpose.
We now recognise that corporate reputation draws on hundreds of different markers and tracking it requires sophisticated tools to monitor who is saying what about a business, when and where. Consequently, any attempt at reputation management, to improve or rebuild reputation, requires a long-sighted, subtle approach, focused on influencing stakeholders through authentic, sustainable actions.
Corporate reputation is earned over time through the alignment of communication, performance and actions. In short, doing what you say you will, in relation to each and all of your stakeholders.
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