Return on Reputation

July/August 2007

Clearing the aftermath of a series of high-profile scandals that have irreversibly changed the corporate landscape, we now live in a business world where perception is valued as much as performance and profit. People have seen the giant-killing powers of failures in corporate reputation. The need to establish trust and confidence is more recognized than ever.

However, corporate reputation is a multifaceted concept that constitutes far more than just avoiding scandals. External image has a direct impact on bottom line shareholder value. It is now as much of an opportunity as it was once seen as a threat.

For any company, promoting a positive image to the outside world helps recruit and retain the best staff, increase sales and build successful strategic relationships. But for listed companies reputation has an even more direct impact on performance through the financial community that grades, rates and invests in them.

Return on Reputation, the latest in Hill and Knowlton's series of Corporate Reputation Watch studies, was conducted in association with MORI. It examines the various ways investment analysts assess company performance and shareholder value and identifies the key factors driving investment decisions.

The Tangible Intangible

Reputation may only exist in the mind of the beholder, but it is very clear that its central importance is understood.

Financial analysts, a group who in the past have been accused of having a rather mono-dimensional view of those whom they watch, have a very clear view. Across every region and industry sector there is overwhelming support for the statement that “a company that fails to look after the reputation aspects of performance will ultimately suffer financially too.” Acceptance of this central truth is particularly marked in Continental Europe, North America and the UK, where 61 percent, 57 percent and 54 percent “agree a lot” with the contention. While the precise numbers may vary as to strength of support, there are very few dissenters.

Communications – Adding Financial Value

When financial analysts talk about the non-financial aspects of performance that they consider when assessing a company’s value, three key factors emerge:

• execution of a company strategy (98 percent say this contributes to their assessment)
• transparent disclosure and strong governance (93 percent)
• clear and consistent communications with key stakeholders (93 percent)

This clearly demonstrates the absolute central importance of stakeholder management and communications to the modern company. It shows without equivocation that good communication adds value and poor communication destroys value – in fact nearly eight out of ten say that poor performance in this area had led them to mark down a company. This is further support for the notion that communications must be on the boardroom agenda.

Brand and marketing message (76 percent), corporate culture and working environment (51 percent), employee compensation and career opportunities (49 percent) and social responsibility and community investment (22 percent), all too play a role in company assessment but they have a lesser role.

However, to dismiss their importance would be foolhardy. Looking at employee issues, nearly half of analysts do take them into account, and poor management of employee opportunity has led nearly one in five to make a negative recommendation. Even social responsibility, at the bottom of the pile, remains a factor and nearly one in eight has given a negative recommendation because of corporate failures in that arena. A big shift for something that was only of niche interest a few years ago.

CEO to go?

In previous Corporate Reputation Watch surveys, senior executives have placed significant store on their own reputation as a driver of corporate reputation (with 70 percent identifying it as one of the top three financial factors in the 2004 survey). Return on Reputation confirms the central importance of the senior team, but even more clearly places the CEO front and center.

In unprompted answers, 53 percent of analysts identified the quality of management, aside from financial performance, as the most important factor driving corporate reputation in a way that would influence them. But not all on the management team are considered equal; 87 percent regard the reputation of the CEO as either extremely or very important, compared to 75 percent for the CFO, 40 percent for the company Chairman, and 23 percent for other non-executive directors.

Not surprisingly for analysts, the CEO’s agenda needs to be on the execution of company strategy (89 percent cite it as extremely or very important), focus on profitability (88 percent), attention to customers (80 percent) and ability to lead organizational change (76 percent). Nonetheless, the ability to communicate (66 percent) and motivate employees (60 percent) is also an important factor that perhaps too many senior executives ignore to their detriment. For analysts, industry thought leadership and a focus on issues in society are less important.

With this recognition comes very clear responsibility. Nearly half of analysts believe that a CEO should survive four consecutive bad quarters before he or she is replaced. North American analysts appear to be the most forgiving (39 percent), whereas UK analysts (56 percent) and Continental European analysts (54 percent), or those who follow companies in the technology (51 percent) and pharma/healthcare (53 percent) sectors, seem the least patient.

Analysts do not just hold the CEO accountable for business performance. The contribution to reputation matters too. Eighty-five percent say that if a CEO’s behavior has a major negative impact on a company’s reputation, he or she should go.

Governance Part of the Mainstream

The movement of corporate governance from a narrow interest to a mainstream business issue is confirmed by this survey. Sixty-five percent cite high standards of corporate governance and transparency as either extremely or very important when making an investment recommendation; 88 percent say that "non-transparent disclosure and poor governance" have resulted in them giving a company a negative rating.

However, when analysts look at governance they are most interested in what companies say and do rather than the structure of governance. In this regard 87 percent cite "living up to promises as extremely or very important" and 84 percent cite "Transparency in Reporting," compared to 32 percent for "Board Structure."

Communicating with Analysts

When planning communications to analysts, it is very clear what they want to hear about. For analysts what is most important is the strategic direction, progress against milestones or success against strategy and changes in the senior executive team. These are followed by changes in company structure, new product or service developments, plans for mitigating risk and customer satisfaction data.

One-to-one meetings, quarterly earnings conference calls, company presentations, and annual reports are the top four most important methods of communications. Analysts want regular communications, with most specifying a preference for monthly or quarterly communications.

Reputation Central

Return on Reputation clearly shows the extent to which analysts take reputation into account when rating a business’ potential. The results are compelling.

Clear and consistent communication with key stakeholders and transparent disclosure are crucial non-financial elements contributing to the assessment of a company’s value. The great majority of the analysts interviewed have given negative ratings on account of poor communication with stakeholders.

With this invaluable insight into how analysts use reputation in their assessments, listed companies are now in a position to make sure an accurate and positive external perception works to their advantage. For publicly-traded companies — and even for private companies hoping to go public one day — the takeaway message is that reputation matters now more than ever and that corporate leadership wishing to maximize shareholder value needs to pay attention to its reputation as well as its financial results.

» Download the complete Return on Reputation report.

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