The elusive figure Article icon


After trader Greg Smith resigned by way of an open letter to the New York Times accusing Goldman Sachs of being 'morally bankrupt', more than £1 billion was knocked off the bank's market capitalisation.

This showed the value of reputation, some pundits argued. But what did that value represent in financial terms? After all, Goldman Sachs' share price had virtually recovered within 24 hours. And would the outburst affect  the bank's future profits or its relationship with all the bank's stakeholders? The answer was unclear.

Measuring corporate reputation effectively is the holy grail of corporate communications. And increasingly, corporate affairs teams are finding themselves under a greater expectation to demonstrate the value of corporate reputation to the board. But why is valuing corporate reputation so difficult?

Accountants, who are not known for their flamboyance, have placed a financial value for goodwill on the balance sheet while marketers have been measuring brand value for years. If they are able to attribute valuations to intangible assets like these, then why has it proven so difficult to put an absolute figure on corporate reputation?

Richard Fleming, chief technology officer at reputation analysts Alva, says the difficulties partly arise because goodwill, while intangible, is valued at a point in time.

He explains: 'It is like the difference between a balance sheet and a profit and loss statement. A balance sheet is valued at a point in time whereas a profit and loss statement is measured over a defined period of time.'

Reputation is not goodwill

Reputation is different yet related to goodwill, he argues. Corporate reputation has a bearing on the business performance of other intangible and tangible assets.

'Reputation affects business performance, and an end result of that is a rise or fall in goodwill, not the other way around,' Fleming argues.

But, despite the complexities of characterising corporate reputation, some are claiming to be able to help attribute a clear financial value.

Simon Cole, managing director of Reputation Dividend, has published two research reports on the subject. Reputation Dividend's most recent report calculates that corporate reputation accounts for 33 per cent of the FTSE 100's combined market capitalisation.

It also claims that the growing value of corporate reputation helped preserve the shareholder value of FTSE 100 constituent companies in the recent difficult market conditions. Reputation Dividend calculates the value of corporate reputation using what it calls 'advanced regression analysis'. Regression analysis is a statistical technique which is used to understand which among a set of independent variables are related to the dependent variable.

In this case, researchers at Reputation Dividend sought to see how and if corporate reputation affected share price. Developing the model involved testing 20 different variables, such as earnings before interest, tax, depreciation andamortisation (Ebitda), dividends and return on investment, in an effort to isolate those factors that have a bearing on market cap.

Reputation Dividend used Management Today's Britain's Most Admired Companies study as its measure of corporate reputation. The researchers then tested and removed the variables that did not work until they had whittled the list down to nine key constituents of a company's market capitalisation.

Using these constituents, they calculated the companies that had the most valuable corporate reputations as part of their market capitalisation. What variables impact reputation?

Greg Quine, a partner at consultancy Pendomer Communications and a former debt and equity analyst who helped develop the model, says it can help investors understand why some stocks trade at a premium. 'Regression analysis is a great model for trying to prove relationships between other variables and corporate reputation turned out to be highly statistically relevant,' he explains.

The research concluded that some companies had as much as 56 per cent of their market capitalisation derived from their corporate reputation. Shell topped the Reputation Dividend table with £72 billion of its market capitalisation (or roughly one third) attributable to the oil giant's corporate reputation. 'Investors look at Ebitda and forecast future earnings but they will view that through the company's corporate reputation. The corporate brand underpins confidence amongst the investmentcommunity,' Cole explains. 'If the company has a rubbish reputation. investors won't believe what the company says.'

He points out that measures such as consensus forecast earnings also have a reputational element. The report argues that investors put a premium on different types of reputation at different times. 'Two or three years ago investors put a premium on management with defensive characteristics. Now it's about innovation and marketing,' adds Cole.

While it seems common sense that investors would favour different management characteristics in various investment climates, the research has yet to convince everyone.

Joseph Lampel, professor of strategy and innovation at Cass Business School, remains doubtful about the possibility of ascribing a financial value to corporate reputation in this way.

Scepticism about the science

'I was very interested in the idea of quantifying corporate reputation but I have my doubts about this study. Firstly, I've never heard the term 'advanced regression',' says Lampel.

'And secondly, I don't think you can say a company's reputation is worth £5 million of its market cap; market cap driven by so many things.

'If you have a star in a movie it will probably do better at the box office, but you will never know how much of the takings were down to the star. You can't say that a movie performed 20 per cent better because Tom Cruise starred in it.

'They are looking to extract the X-factor of intangible variables. In the end, you are left with the conclusion that this research is just a useful marketing tool to try and win the company new clients.'

There is also the problem that the measure of corporate reputation used as an input into the model is based on Management Today research, which is identified by peer review. Britain's top companies and their bosses are asked to assess their rivals, so it takes no account of other stakeholders, such as shareholders, the media, employees and suppliers. Therefore, like Fortune and Forbes Magazine rankings of most admired companies, which are peer group surveys, it gives an incomplete view of corporate reputation.

'The multiple dimensions and stakeholder perceptions need to be considered similarly,' Fleming says. 'For example, a customer at Tesco will not care how much their goodwill is worth when they're shopping but an investor will, which yields dramatically differentperceptions of value.'

So could there be other ways companies that can put a numerical or financial value on their reputation?

Multiple valuations

Rupert Younger, founder of the Institute of Reputation Management at Oxford University's Saïd Business School, believes it is possible, as long as reputation is not aggregated into one overall figure.

'Organisations and individuals have different reputations for different things. Big corporations have multiple reputations so there can be no such thing as valuing a single reputation,' he says. 'You might have a reputation for being funny or punctual. Goldman Sachs, for example, might have a good reputation for taking financial MBAs candidates but a bad reputation with regulators.

'If an acquirer has a good reputation for effective deal integration, investors may be willing to pay more.' Moreover, Younger points out, this is the kind of information that advisers could use to help bolster support for the deal. 'Conversely, an acquirer's reputation for slashing costs is more likely to pit the unions against an acquisition,' he says.

Once reputations are broken down among different stakeholder audiences, Younger believes that it is possible to start thinking about ways to measure them in economic terms. 'If you want to measure Goldman's reputation as an employer, you can start to look at the cost of recruitment or staff retention, or the cost of entry salaries, then you can start to value your reputation in that area.'

But, as Alva's Fleming points out, there will be other considerations even within stakeholder groups, such as the environment that the organisation is operating in at the time, the perception gap between stakeholder  groups, and the scale of issue impact over time. 'It also varies dramatically between sectors where the context changes scope of impact considerably. Reputation is not a point-in-time intangible,' he says.

Is it worth the effort?

Given the complexity of the calculations, why should companies bother to measure and understand corporate reputation?

Basil Towers, chief executive at Hesleden Partners, advises companies on how to incorporate reputational considerations into business strategy. He believes corporate affairs practitioners need to find the data in each business function that can help provide the stakeholder intelligence to improve companywide decision-making.

'We aren't trying to put a value on reputation because that won't help companies make better decisions. But corporate affairs is increasingly focusing on stakeholder intelligence to help the board understand reputation and refine business strategy,' he explains.

Clearly as corporate reputation can generate positive relationships with employees, suppliers, government, the media and customers then it follows that corporate reputation must impact the bottom line. Yet those  hoping for an easy way of ascribing a financial value on it as a whole may remain disappointed.

Some stakeholders can be thought of in economic terms, such as supplier prices or the cost of staff recruitment, but other groups will remain resolutely hard to measure. For example, ascribing a financial value to a company's reputation with the media will probably remain an elusive metric.

But there is also the prevailing view, first cited by investment guru Warren Buffett, that reputations take 20 years to build and five minutes to lose.

'Reputations are long lasting. They aren't destroyed in 20 seconds. BP's reputation for competency took a major hit when it misreported the scale of the Deepwater Horizon spill but I would question whether the company stopped having a top reputation with engineers,' Younger says.

Clearly there remains disagreement about the nature of corporate reputation, its longevity and how it can be characterised and valued. But there is a growing body of research, which will help those in corporate affairs in the future. As Towers points out, the profession is still maturing. 'The role still requires practitioners to have great judgment and intuition but it's also about identifying the essential data that will ultimately improve  business processes,' he concludes.