How resilient is your reputation?

The latest Reputation Resilience Report by law firm Schillings, entitled How the people who value companies value reputation, found that just 18 of Britain’s leading listed companies highlighted issues that could negatively impact their reputation, such as environmental factors, and while 11 classify reputation risk as a separate risk category, just eight attempt to measure this via surveys or quantitative analysis.

Yet analysts are now concerned about a company’s ability to withstand attacks to its reputation. While they are adept at measuring the strength of a company’s reputation, using criteria such as customer satisfaction and brand value, they are now looking at ways to quantify its resilience, and therefore its ability to resist news that adversely impacts its share price.

This is particularly important in the current environment where shorting and high frequency trading are commonplace, and traders seek to exploit issues that may damage a company’s reputation by shorting stock in order to profit from a drop in the share price.

This development means that analysts believe that a common framework of evaluation, that could test the resilience of a company’s reputation, would be desirable. How such a framework would be constituted, to produce meaningful information, is less clear. Attributes that analysts look for in evaluating reputation resilience include a company’s culture and management philosophy, but they argue that they also need its leadership to discuss reputation more articulately and explain how it plays a central role in the business.

‘A lot of reputation risk results from employees that have been poorly monitored or poorly trained,’ said Mike Ingram, a market strategist at BGC Partners. ‘But as investors and analysts, we rarely hear from companies on their employee conduct or their internal training programmes.’

Transparency is key to gaining the support of analysts. Reputational damage, they argue, is the price of doing business, but equally a company’s leadership must be clear about any risks apparent on the horizon and provide evidence of how issues are identified early and escalated through the business to be dealt with effectively. Analysts want to see evidence of reputational risk management systems and for companies to communicate more effectively with investors during crises.

‘I start to apply discounts to sector valuation multiples if I think management is being economical with the truth,’ said one equity research analyst. ‘I don’t like to feel that information is being hidden unless there is a very good reason.’

‘The default place that analysts will turn to for evidence of reputation management is the management team themselves,’ says the report. ‘If reputation isn’t represented at board level, it needs to be.’ They are also keen to see an independent non-executive director appointed with responsibility for reputation oversight, and for public relations and investor relations teams to work more closely together so that analysts can understand a company’s news agenda as well as its financial calendar.

While analysts do not discount the valuation of companies operating in sectors with high reputation risks, the report revealed that they wish to see greater evidence of pro-active reputation management in these businesses as opposed to those operating in lower risk sectors.

However, that is not to say that companies in low risk sectors can relax: on the contrary, any reputational incident could shine an intense spotlight onto a business. Similarly, managers of mid-cap and smaller businesses should consider reputation management as a way of standing out from the crowd and distinguishing themselves in front of analysts.

‘Despite the worldwide economy turning a corner, and the financial services sector now leading the way in its efforts to manage reputation risk, a deficit of trust still remains,’ concludes Schillings’ partner Chris Scott. ‘As a result, analysts know only too well that reputation is no longer an issue that can be kicked into the long grass in the good times; it requires constant attention.’