OP-ED: Reputation is now a tangible measure of corporate value

Reaction to corporate scandals has led to new governance rules that demand more transparency - not only about financials, but about corporate behaviors. One result is a continuing change in how corporations are valued.

Reaction to corporate scandals has led to new governance rules that demand more transparency - not only about financials, but about corporate behaviors. One result is a continuing change in how corporations are valued.

While traditional measures of success - revenue growth, earnings per share, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), return on invested capital, and dividends - remain important, non-financial factors such as management quality, governance, brand equity, ethical leadership, corporate citizenship, and responsible marketing have become increasingly vital. These non-financial factors, taken as a whole and blended with business performance, constitute "corporate reputation." Recent research shows these non-financial factors of corporate reputation can account for a significant percentage of a company's value in today's environment. While there is now much wider agreement on how intangibles such as reputation and brand affect the overall value of companies, little thought is given to weighting these factors or how to influence them, except in a general sense. If we are going to improve corporate value, we must fully grasp how to influence and measure both tangible and intangible success. Accountants and lawyers focus on new corporate governance rules that resulted from Sarbanes-Oxley, emphasizing consistency in measuring financial success. We in communications should place emphasis on educating the "marketplace" on the importance of non-financial factors - how to create and measure value by improving reputation. The opportunity to do so gives us a valuable role. Since reputation is the sum of perceptions and feelings relating to a company's stakeholders, we should also consider this a chance to better integrate all elements of communication, including investor relations. All this brings us to what others say about valuing reputation. Recently, much has been said about the impact of non-financial factors on corporate value. An Ernst & Young study on how value affects institutional investors' decision-making, "Metrics that Matter" indicated non-financial factors account for 35% of a company's valuation by institutional investors. The McKinsey Quarterly, Volume 2, 1999, reported, "Strong brands generate, on average, total returns to shareholders that are 2% above the industry average, while weaker brands lag behind the average by 3%." More subjectively, as legend has it, Jack Welch was once asked the value of GE's brand. "It's easy," he said. "I know the book value of our business. I also know our market value." So how do we build value through reputation? For the past two years, APCO has had a team measuring corporate reputation. We examined more than 200 factors. We found there is no pre-defined recipe for measuring corporate reputation and therefore no formulaic response. History, sector, market, product lines, visibility, management, competition, and third parties all play a role in how a corporation is valued. We discovered that understanding reputation requires three key steps. The first is determining the unique elements for each company regarding what influences its value (corporate DNA). Next is assessing the relative importance of each factor for that company in its industry and with its most important stakeholders. Third is measuring performance against each factor to understand the company's strengths and weaknesses. This kind of analysis makes the design and implementation of a comprehensive communications program to enhance corporate reputation and build brand strength much more productive and measurable. By identifying specific areas that are predetermined to be key to stakeholders' perception of a company's reputation, the communications messages and tactics can be directed at the perceived strengths or gaps in each identified area. Furthermore, one can measure success on a periodic basis to see how well the program is working. Not only is this a more effective approach to building reputation, and thereby enhancing company value, it's also cost-effective, since the communications can be very targeted, while supporting the overall program. Successful reputation-building must result from real commitment to the fundamentals of running an open, ethical business. But many who have world-class governance may not get credit for their good work without a commitment to a proactive communications effort that integrates and leverages all of the company's communications. A cohesive approach across internal and external channels, including investor relations, provides a greater chance for success with all stakeholders and maximum benefit for the company. This approach leverages the traditional metrics of financial performance with the intangibles important to a particular company, creating maximum value for the company through a new kind of investor relations. The aftermath of Sarbanes-Oxley has caused a frenzy of activity affecting internal policies. There is a danger, however, that corporate managers will just look to comply with "rules" rather than develop leadership in company governance and other reputational aspects. A new value paradigm has emerged. Corporate reputation will play a central role in determining that value. Understanding the new value drivers and expectations for your company and your industry, and then communicating about them in a direct fashion, will play a critical role in determining that value.
  • Margery Kraus is president and CEO of APCO Worldwide.

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