Can you put a price tag on a corporate reputation?
Certainly a bad one can have a high cost. Just look at Volkswagen. Its shares fell more than 20 percent, and its CEO resigned after VW was found to have used special software to cheat on diesel vehicle emissions tests. Between fines and penalties, recall expenses, probable litigation, and reputation damage, VW will take years to recover—if it ever does.
The VW crisis is particularly shocking because it involved a conscious deception rather than a more passive sin of omission. And VW is only one of a long list of companies whose brands have been tarnished by scandal. BP, Ford Motor Company, Toyota, Johnson & Johnson, HP—in nearly every case, financial markets punished the companies, leading to a severe and sustained erosion of their market values.
That’s why enlightened companies look at a strong corporate reputation as money in the “trust” bank. They know it can help protect their brand in case of a crisis, so they invest in risk management and emergency communications plans. They make sure that senior management is prepared for the worst, and they wisely review crisis prep planning every quarter or so.
But fear of a VW-style crisis isn’t the best reason to invest in corporate reputation management. Many companies don’t view a strong and differentiated corporate reputation for its full potential as a business asset. They’re not wrong to invest in risk management or crisis prep, of course. But that’s a defensive strategy at best.
Bad news makes big headlines, of course. But the emphasis on brand crises actually overshadows the other reasons to commit to a strong reputation. These well-publicized disasters beg the question: beyond preparing for a crisis, is there such a thing as a “reputation dividend” or a positive reward for building a strong brand or corporate reputation?
Research suggests that there is. “Low trust” companies apparently experience a negativity bias, meaning that a negative message is calculated to have a greater impact than a positive one—roughly four times more from one study. Even more significantly, the case is reversed in the case of “high trust” companies where a negative message has only half as much impact as a positive one.
It’s even possible to put numbers against the corporate reputation dividend. According to a study by intangible asset specialist aptly named Reputation Dividend, the corporate reputations of companies listed on the New York Stock Exchange’s S&P 500 account for close to $3.7 trillion in value, or 21 percent of total market capitalization. Reputation Dividend asserts that the value of these corporate reputations has more than doubled in five years with 26 percent of America’s market capitalization recovery being directly attributable to the growth in reputation. Its analysis suggests that a 5% improvement in the strength of a company’s reputation would yield a market capitalization growth of 1.5% in an S & P 500 business which translates to a return on investment of roughly $550 million for an average sized company on that list.
Professor Charles Fombrun, research professor of management at the Stern School of Business, New York University and a noted expert on reputation, believes that “a reputation develops from a company’s uniqueness and from “identity-shaping practices, maintained over time…” The bottom line is that the resulting economic value comes from corporate behavior, not PR. But given that the two engines for reputation are experience and information, stakeholders and customers will base perception on the information they get about a given company.
The following chart prepared by Andrea Bonime-Blanc summarizes the potential value of proactive attention to corporate reputation as opposed to mere crisis planning.
These and other recent reputation studies offer a more nuanced understanding of reputation’s value. The reputation “bonus” is about more than just the strength or visibility of a corporate reputation. The more sophisticated PR and reputation experts use proactive reputation management to focus on specific corporate attributes that are informed by the individual company, its industry, competitive set, fiscal environment, and culture. In other words, the practice of ongoing corporate reputation management can move from communicating broad general attributes like quality, stability, and good customer service to embrace characteristics like commitment to innovation, talent development, work ethic, or creativity.
The right reputation is more than a defensive measure or a crisis tool. There’s a strong business case to be made that the intangible asset of a corporate reputation translates into very tangible outcomes.