What is a reputation for?

Reputation is a mark of quality in all aspects of business, and it should set off alarm bells when it slips
by Anthony Hilton FCSI(Hon) 

An unsung activity of the Quoted Companies Alliance is to use the polling firm YouGov to chart what small and medium-sized businesses think of the world around them, how confident they feel and what currently receives most attention.

A report published before the election says that 99% of executives believe corporate reputation matters, and 68% believe its importance is growing. Advisers to these companies reckon that virtually a third of stock market capitalisation is thanks to reputation.

This is a big number. A third of the market cap of the FTSE All Share index is roughly £750bn while even on the Alternative Investment Market, reputation’s worth, by this metric, is £20bn. Given the size of these numbers, it is no surprise that most executives confess to worrying about what they would do if they were suddenly hit by a reputational crisis.
Unsurprised marketsBut should they worry? When British Airways was hit by its computer failure over the late May bank holiday weekend, it left over 70,000 passengers with cancelled flights and took the better part of three days to get its services back to normal. It was poor at providing up-to-date passenger information during the crisis, and seems to have been similarly poor after the event in compensating customers promptly for the inconvenience. But in spite of a huge amount of hostile publicity and widespread discussion about how far the airline had fallen from its previously high standards, the share price has barely moved.  

More dramatic was the moment in June when the Serious Fraud Office announced it was charging four former senior Barclays directors with criminal fraud and bringing charges against the bank. Again, the share price barely moved. If reputation is so important, should there have been some reaction?

Well, apparently not. What the market’s calmness shows is that Barclays has already lost its reputation – hence it trades at a massive discount to its peers, and similarly British Airways is no longer thought of as something special. The market cannot know when trouble will hit, but it is not surprised when it does. In contrast, companies like Talk Talk, whose shares were devastated after management mishandled a cyber attack, or BP, which also fell massively after the Deepwater Horizon drilling disaster, were both previously well thought of. They did have something to lose – and lost it.
Quantitative calculationThere is more science behind this than you might imagine. One of the pioneers in this field is Reputation Dividend, which for ten years has been publishing the Reputation dividend report. This assesses how much of a company’s market capitalisation derives from its reputation and whether this has gone up or down over the past year.

For this analysis, the key indicators are the quality of leadership, the ability to attract staff, the talent for innovation, the quality of product, skill in marketing, financial soundness and the overall deployment of assets. It also includes the firm’s impact on the community and environment. 

Simon Cole, the man behind the project, emphasises that the calculation is quantitative. His computer model takes the financial results of companies, the reports produced by analysts and surveys of investor opinion as inputs, crunches the data and produces a score. 
Different prioritiesThe analysis also adjusts for the fact that different things matter in different companies. In some it might be the ability to innovate, in others the ability to attract staff. 

Roughly 30% of reputational value derives from perceptions of financial soundness and being able to survive for the longer term; 27% reflects the quality of leadership and the deployment of assets.

Interestingly, however, his analysis suggests that reputation matters more for bigger companies where it is indeed over the 30% mark but shades to just 16% in the FTSE 250. Again, this is logical – big companies are known to far more people and have a much wider shareholder and customer base. There is therefore more scope for a social media firestorm when something goes wrong. 

So it does matter. Reputation is the public’s perception of quality, the ultimate accolade and something to be cherished. Any sign that it is slipping must set off alarm bells in the boardroom.

Anthony Hilton FCSI(Hon) is the award-winning former City editor of The Times and the London Evening Standard.

This article was originally published in the Q3 2017 print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.
Published: 05 Sep 2017
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