REPUTATION MANAGEMENT: AUDIT YOUR ASSETS - According to the Turnbull Report, companies should report their corporate reputation in the same way as their finances. But how do you measure such an intangible quality?

The Turnbull Report into corporate governance has, for the first

time, put the reporting of a company's reputation on a par with the

reporting of its finances. Although the widespread reporting of

reputation is not expected to commence until 2003 at the earliest,

companies are having to put structures in place now that will enable

them to do so. One of the first things that they have to do is undertake

an audit of their reputation.



But while fixed assets and financial performance can be quantified and

verified in a uniform way - for example, through audits carried out by

chartered accountants - assessing the value of a reputation is far

trickier.



Given that it is an intangible asset, reputation is a more subjective

thing to measure than profits, plant, machinery or cash-flow.

Consequently, many companies do not even bother to try.



Yet the pressure on corporations, indeed on all major organisations, to

understand how they are perceived and what drives their reputation is

mounting. Some estimates go so far as to ascribe up to 70 per cent of a

company's value to its intangible assets, of which brands and corporate

reputation comprise a substantial chunk.



The Turnbull Report, which focused on risk management, made it clear

that listed companies should consider threats to their reputation every

bit as rigorously as financial risks are assessed. The Association of

British Insurers, in the same vein, recently published a report called

Investing in Social Responsibility, which argued that a company's impact

on society can help to build shareholder value, given that intangible

assets and relationships are critical to business success.



While the principle of safeguarding reputation is established, quite how

one benchmarks reputation is more open to question. After all, how can

one audit something that is to a great degree subjective? Hill &

Knowlton's Corporate Reputation Watch 2001, a survey of the attitudes of

more than 1,000 CEOs and senior managers in European and North America,

found that many chief executives fail to measure or manage corporate

reputation adequately, leaving them unable to quantify its value. One

reason for this apparent inertia is uncertainty about how exactly to

begin measuring reputation, as there is not a standard approach to

auditing it.



'There are competing methodologies,' says Professor Keith Macmillan,

Henley Management College director of the Centre for Organisation,

Reputation and Relationships.



'A lot of PR agencies are doing this (offering reputation audits) for

clients but there is a certain amount of cynicism among clients as to

what they get for it,' adds Bell Pottinger Consultants planning director

Kate Watts.



One methodology that is frequently used and sometimes slightly adapted

by PR practitioners is the one established by Fortune magazine to

compile its annual rankings of America's Most Admired and Global Most

Admired Companies. Fortune compiles its rankings by surveying a business

audience on the attributes of companies. Among the attributes

respondents are asked to look at are quality of management, quality of

products/services, 'innovativeness', long-term investment value,

financial soundness, employee talent, social responsibility and use of

corporate assets.



Last year, says Watts, Bell Pottinger worked with econometric agency MMD

to carry out a statistical analysis of Fortune's 500 Most Admired

Companies to see whether it could quantify how much of a company's

market capitalisation is accounted for by reputation. By linking the

Fortune scores to actual market capitalisation, Bell Pottinger found a

'very strong correlation' between reputation and dollar value.



Bell Pottinger then used a model it had developed to run 'what if'

simulations. An example of this involved soft drinks giants Coca-Cola

and PepsiCo. Coke had a higher rating on every aspect of reputation than

PepsiCo under the Fortune system. The simulation reached the conclusion

that if PepsiCo had the same market reputation as Coke, the company

would add a colossal $2bn to its market value.



One of the fundamental problems with reputation audits, however, is that

measuring reputation remains more of an art than a science. 'It's

possible to create a statistical model of what drives perception -

whether quality of management has a stronger effect on reputation than

if the company is a good place to work - but it's hard to be convinced

that this quasi-scientific approach really pins reputation down,' says

Watts.



Nick Bent, director of the corporate social responsibility unit at

Burson-Marsteller, agrees that measuring reputation will always be

subjective to some degree. 'Reputation only exists in people's minds,'

he says. 'It is tied up with products and services, people they have

met, whether the CEO seems informed and sincere or not. There will

always be something intangible about reputation.'



This is not, however, a reason for not trying to audit reputation. After

all, shareholder value in its broadest sense encompasses all of the

drivers of a company's performance, including intangibles. The growing

emphasis placed by investors on brand valuation and the capitalisation

of goodwill - the part of a company's value not accounted for by hard

assets - show this to be true.



Research conducted earlier this year by brand valuation specialist Brand

Finance among a sample of 238 City analysts discovered that 68 per cent

of respondents would like to see companies provide more information on

their intangible assets. Brand Finance chief executive David Haigh says

that his company is increasingly being asked by clients for advice on

what information about their intangible assets they should include in

their annual reports, and on wider CSR issues.



'Reputation is hard to divorce from brand, although it is affected by

more ethical and attitudinal things such as good policies on the

environment or community involvement,' he says.



Haigh believes there will be a move towards more 'standardised metrics'

for reporting on CSR and the value of corporate brand. What is crucial

for corporations to understand, he stresses, is the extent to which

perception of the corporate brand affects a company's business

model.



To elaborate on this point, if corporations are to manage their

intangible assets properly they must acquire a good understanding of

what makes up their reputation. Moreover, reputational research should

ideally reveal not only the drivers for reputation but also help in

formulating a clear agenda for action. No company's reputation is so

good that it cannot be improved.



'Good reputational research allows a company to go into a conversation

with stakeholders with a certain humility and not just to spew messages

at them,' says Bent.



Some clients may have shied away from conducting reputation audits under

the assumption that they are expensive - and that the PR budget could be

better spent on communicating messages than examining perceptions.



But Echo Research director of stakeholder studies Nick Winkfield argues

that it need not be a costly exercise. Often, he maintains, clients

already have a great deal of useful research - it is just a matter of

accumulating it all from various departments and analysing it

thoroughly.



'The audit is what you start with, it does not necessarily mean going

out there and spending a fortune on incredibly expensive research,' says

Winkfield. 'There is often a lot that can already be found

in-house.'



It is important, though, for companies to realise that their reputation

can be affected by the actions and policies of business partners, and

this should be factored into any comprehensive reputation audit. A prime

example of this is how supply chain issues in developing nations have

impacted on corporations such as Nike and The Gap.



In the uncertainty of the post-11 September world, it is as yet unclear

whether firms will invest more in understanding what drives their

reputation or cut back on expenditure that is not directly related to

specific communications goals. Agency opinion is divided, but the

majority view is that companies must understand how they are perceived

by all of their stakeholders.



'Companies have been doing these things since long before the Cadbury

Report on corporate governance in 1992, but there is a greater awareness

now for them to pay attention not just to their shareholders but to all

stakeholders,' says The Maitland Consultancy chairman and CEO Angus

Maitland.



The snowballing influence of NGOs places them among influential

stakeholders for most businesses, who must now assess the reputational

risk inherent in any involvement in socially or environmentally

questionable practices.



Clearly, a comprehensive reputation audit must take such factors into

account.



'We are increasingly turning our attention to the corporate sector,'

says Friends of the Earth senior campaigner (corporates), Matt

Phillips.



'But even the firms that have gone a long way down the CSR route are

very defensive if they get any criticism.'



Phillips cites the differing approaches of two leading banks - ABNAmro

and Barclays - as an example. The former has published a code of

practice governing its investment in companies involved with

rainforests. While FoE sees this document as far from perfect, it

applauds what it considers to be a step in the right direction.

Barclays, on the other hand, has introduced no such policy - and as a

result it is being more actively targeted and criticised by the

charity.



What Phillips would like to see is more verification of statements made

by corporations relating to their social and environmental

activities.



From a corporate standpoint, a reputation audit allows weaknesses that

could damage the company among crucial stakeholders to be addressed.

That surely is of vital importance.



THE REPUTATION INSTITUTE AND THE RQ



Some of the most cutting-edge work on measuring reputation is being

undertaken by the Reputation Institute, a private research and advisory

organisation dedicated to advancing knowledge about the management,

measurement and valuation of reputation.



RI is headed by Charles Fombrun, professor of management at the Stern

School of Business, New York University, and Cees van Riel, professor of

corporate comms, Erasmus University, Rotterdam: two of the world's

leading authorities on the subject.



Among the agencies affiliated with RI are Manning Selvage & Lee, Euro

RSCG (including Biss Lancaster), Weber Shandwick Worldwide and

management consultancy PricewaterhouseCoopers. RI co-ordinates its

activities across 14 countries, using local academics and

practitioners.



RI has pioneered the Reputation Quotient (RQ), developed jointly with

Harris Interactive and launched in the autumn of 1999. The RQ uses an

'integrated suite' of research products to examine reputation.



By undertaking a number of reputational surveys, RI has developed a

database of reputational measures of more than 200 leading firms based

on online and phone interviews with more than 100,000 US consumers.



RI is taking its methodology into Europe with the launch of EuroRQ, a

large-scale research project involving the measurement of corporate

reputation in more than ten European countries: including the UK.



Fombrun's research has shown that people justify their feelings about

companies on one of 20 attributes that can be grouped into six

categories:



- Emotional appeal: how much the firm is liked, admired and

respected



- Products and services: perceptions of the quality, innovation, value

and reliability of the company's products and services



- Financial performance: perceptions of the company's profitability,

prospects and risk



- Vision and leadership: how much the company demonstrates a clear

vision and strong leadership



- Workplace environment: perceptions of how well the company is managed,

how good it is to work for and the quality of its employees



- Social responsibility: perceptions of the company as a good citizen in

its dealings with communities, employees and the environment.



SHELL'S SUSTAINED APPROACH



Shell is arguably the best-known example of a corporation that has set

great store in auditing its reputation.



Following the hits it took to its corporate image in the Nineties due to

the Brent Spar debacle and its activities in Nigeria, Shell invested in

researching its image among key audiences across the world. The result

was the first Shell Report: Profits and Principles: does there have to

be a choice?



That report dealt with controversial (and for Shell potentially

damaging) issues such as trading with countries that have undemocratic

governments, Shell's obligations to the peoples of the areas where it

operates and its position on the climate change debate.



For many corporations, this would have been seen as the culmination of a

reputation management exercise. But Shell saw it as only the beginning,

acknowledging that its reputation must be attended to continuously.



This year Shell published the fourth Shell Report: People, Planet and

Profits. This makes it clear that in order to protect its reputation,

Shell has embraced the principles of sustainable development to such an

extent that they underpin corporate strategy and are being integrated

into everything it does.



In Listening and Responding, a progress report published this year,

Royal Dutch/Shell Group of Companies chairman of the committee of

managing directors Philip Watts writes: 'We have to explain ourselves

better to continue to earn our licence to operate. We therefore

recognise the need for transparency and engagement with all

stakeholders.



- 'We are committed to developing and integrating our reporting of how

Shell fulfils its environmental, social, as well as economic

responsibilities.



'We also work with external organisations to bring independent auditing

and verification to these new areas of reporting. As part of this, we

must integrate issues surrounding sustainable development into all

aspects of our corporate life, including communications,' he adds.



Feedback on Shell's actions (and the impact of those actions on its

reputation) is encouraged by including a reply postcard with each Shell

Report and directing stakeholders to the 'Tell Shell' forum on its

website.



As well as seeking feedback at a global level, Shell has also sought

specific input from local markets such as Malaysia, the Republic of

Ireland, UK, Nigeria, Argentina and South Africa. More than 500 people

attended its recent annual stakeholder workshop.



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