ANALYSIS: Corporate Reputation - Companies seek formula to putstock in reputation

No one doubts the importance of corporate reputation. But how - if at all - can you measure its impact on share price? Julia Hood queries the experts for some thoughts.

No one doubts the importance of corporate reputation. But how - if at all - can you measure its impact on share price? Julia Hood queries the experts for some thoughts.

How much is a company's reputation worth? The answer may depend on when you measure it.

Johnson & Johnson saw its shares plummet this week following news that an employee at a manufacturing facility in Puerto Rico had made allegations that the company had falsified documents, prompting a criminal investigation by the US Food and Drug Administration (FDA). J&J's shares dropped more than 15% as a result.

Just last month, J&J received the highest possible rating for corporate reputation, according to a study on the pharmaceutical sector published by Ratings Research (RRC), The Ratrix Group, and Opinion Research Corporation.

The survey polled industry executives and financial analysts, and incorporated existing consumer data into the mix as well. "We examined the critical intangible assets that are generally not apparent in a financial statement, but can impact future performance, says Dory Gasorek, RRC principal and chair, in a press release.

Last week, CoreBrand revealed its study of the most valuable brands.

The survey gathered data on familiarity and favorability ratings on the top 20% of US corporations (based on revenue) from senior business executives.

The company then measured the impact of the company's brand strength against its stock market valuation. J&J came out fifth in this study, with 17.6% of its overall value tied to its brand.

The results of these surveys on J&J might be different if taken today.

Clearly a high reputation quotient could not prevent J&J's stocks from falling, nor could a powerful brand. But will these assets ultimately help the company's share price recover more quickly? Was the drop less cataclysmic because of the way that J&J has long been perceived?

After all, this is the company that famously navigated one of the most well-executed crisis campaigns of all time - the Tylenol scare. Is stock price drop over an unsubstantiated investigation tantamount to a damaged reputation? J&J's fate remains to be seen, but the recent studies bring up questions about the value of assigning dollar figures to these intangibles.

There is nothing new about the concept of intangible assets. According to a recent article in The New York Times, tangible assets represented 78% of the assets of US corporations about 50 years ago. Now that figure has shrunk to 53%, with intangible assets such as patents, copyrights, and goodwill making up much of the difference.

The article also quotes Jeff Skilling, Enron's former president, saying in 2000 that there is "nothing magic about hard assets, that they don't generate cash, and that the marketplace is increasingly driven by intangibles. But Enron ultimately came to depend on its hard assets for its survival.

Where corporate reputation ranks

Corporate reputation falls into the intangible category, but it is unclear how important companies think it is compared to others assets in that league. "Up to a point, there has been lip service given to that (reputation) measure, but when one starts sorting out where the research dollars are being spent, there is much more in product and marketing and customer relationship surveys, and still less money for the people charged with managing reputation, says Jeffrey Marr, SVP at Walker Information.

Walker is a survey research firm that specializes in proprietary projects, and focuses on stakeholder or constituent research. Marr says that a company's proponents of reputation measurement are often the ones with the least access to the money to make it happen. "Here we are talking more about PR and corporate communications on the enterprise side (as opposed to the agency side). These people recognize the importance of measuring reputation, but just seem to have a hard time getting their hands on budget."

Marr contends that the attitude is changing, and that over time even the models used to assess customer relationships have expanded to include more questions involving brand and reputation. "There is a recognition of the reality that even current buyers have the option to change suppliers, and part of their decision making includes the reputation of the company they are working with."

Walker and other companies have developed methods to measure reputation, and many of the yardsticks are standard. Brand is associated more with buyers or potential buyers, at least for the purposes of evaluation. Reputation components include the customers, but extend beyond that to the community in which a company serves, its prospective and current employee pool, and financial analysts.

To evaluate its reputation, a company would look at factors such as the perception of its market leadership, the perception of its financial performance and the performance of its management team, and of its financial success relative to community involvement. Corporate social responsibility cuts two ways - how a company manages itself as a business, and how a company gives back to "society."

But the problem with measuring this kind of data is that there is no magic formula for calculating its ultimate relevance. "There are a lot of survey instruments that purport to measure reputation, says Harlan Teller, Hill & Knowlton's chief client officer and president of the firm's corporate practice. "But none are considered a standard for judging reputation."

Teller says that investors will increasingly need to understand the level of "reputational risk a company may have in order to make business decisions.

But he points out that the process by which this is occurring is still evolving, and the parties involved in establishing procedures range from corporate communicators to accountants.

H&K works with Ernst & Young. The accounting firm, like many others, has been working on trying to develop standards for intangible asset value, and not just for reputation, but also for patents and other intellectual property. Teller says that any agreement on measurement of reputational values will likely evolve from a partnership between financial and accounting functions and brand guardians, including communicators. "Accounting firms want to be there as well, he maintains. "This is simply related to an increased recognition of the role that intangible assets play in evaluating company success."

The tide can suddenly turn

While a good reputation can take years to build, it may take only seconds to lose. Enron is a prime example of a company enjoying high regard while on top. "It depends on your time frame, says Al Bellenchia, Fleishman-Hillard financial communications chairman. "Anyone can fool all of the people some of the time, but over a longer period, things tend to unravel."

But a company that enjoys a good reputation is not by definition free of problems or controversy. J&J's procedures could not prevent Tylenol from being tampered with, but the company's response to the crisis led an entire industry towards safer standards. A company's ability to respond to a negative situation honestly and constructively surely must form part of its long-term reputation. J&J's behavior over its current problems will be a better litmus test for its ongoing reputation among key stakeholders.

The accounting profession may not buy that argument. Curtis Verschoor, a research professor at DePaul University's school of accountancy, is skeptical of pinning a monetary value on corporate reputation, and points to J&J's recent stock woes and negative coverage as proof of the nebulous value of image. "You couldn't have something that is formalized - to say this is what (reputation) is worth today. Because something could happen tomorrow."

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