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.
