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(Kit Bingham, eFinancialNews.com, October 31, 2004)
Companies are growing more sophisticated about assessing and managing threats to their reputation. There are examples of companies that have been destroyed by reputational damage - Andersen, the accounting group, or Monsanto, the food biotechnology group that lost its independence after becoming associated with genetically modified "Frankenstein" foods. A recent survey of senior executives by Hill & Knowlton, communications consultants, and the Economist Intelligence Unit, a business information group, found that reputation is widely seen as a significant asset. More than 90% of executives believed that customers see corporate reputation as important, nearly 80% said the same about investors and lenders, and nearly half said reputation was one of the top three factors that attracted employees to join their company.
Harlan Teller, president of Hill & Knowlton's worldwide corporate practice, said: "Corporate reputation is an intangible asset that leads to tangible business results."
However, measuring and managing reputation is not simple. Basil Thomas, chairman of Christow, a corporate reputation consultancy, said: "Everyone accepts that it is difficult to succeed in business without a good reputation. There's an acceptance of the need to recognize reputation as an asset. The question then becomes: how do you value it? That is one of the things the industry is struggling with. It is a challenge to break out reputation from other intangibles."
Craig MacKenzie, head of investor responsibility at Insight Investment Management, the fund management arm of the UK's HBOS banking group, agreed that reputation could be difficult to define. He said: "There are two questions - reputation with whom and reputation for what? There are companies that may be very good at managing customer relations but be poor employers. It's quite common for companies to have a mixed picture when it comes to reputation."
Different constituencies also have different priorities. MacKenzie said: "For shareholders, it's about the board's reputation for being competent. For customers, it might be about value for money. People think of reputation as just one thing but it quickly separates into many different things."
Once companies accept that reputation is made up of different elements, research becomes straightforward. "As soon as you break it out, it becomes quite easy to identify indicators," said MacKenzie. Some indicators, such as loyalty, are relevant to several stakeholder groups.
Thomas said reputation management involved not just surveying stakeholder groups but also aggregating the results. He said: "Until recently, a lot of companies were assessing their reputation in silos - human resources looked at employees, investor relations talked to shareholders, the marketing department researched customer satisfaction. Now, companies are asking: 'How do we look at this holistically so we can manage it better?'"
As reputation climbs up the corporate agenda, so it is becoming the focus for directors and shareholders alike. Thomas said: "Plenty of companies have reputation as a main board item. It's their job to ensure there's a strategy in place and that it's effective. There's a newer breed of non-executive directors that are asking these questions. Also, it is becoming part of fundamental company analysis. Investors are beginning to ask about reputation risk."
If there is general agreement that companies should do more to manage their reputational risk, however, there is little consensus about how they should do it. Thomas said: "People realize that this is an issue they have to addresses, but practice is evolving. Companies are attempting to do this in different ways. I expect that one or two leading companies will develop best practice, which will become shared. I don't envisage a code of standards."
As the quality of reputational risk assessment improves, so will the pressure for greater disclosure. MacKenzie said: "It is quite difficult for investors to get hold of the relevant numbers. It's not information that companies are required to disclose." Even if companies are forthcoming about their reputation research, the information is unlikely to be comparable with other companies and so will be of limited value.
The UK government's proposals for a detailed operating and financial review, which would encourage companies to disclose more information on how intangible factors such as brand value or customer loyalty affects performance, may provide a solution.
Many business groups have criticized the proposals as encouraging bland, defensive reporting, and Thomas said companies will have to be proactive in making the new reporting regime effective. "The Operating and Financial Review can provide a framework and act as a catalyst to action. It will help companies to integrate reputation risk management in a cohesive way. Over time, the review will come to be seen as pragmatic and value-enhancing, though I understand why people are asking what this does for shareholder value," he said.
He added that companies must ensure that their reporting is meaningful, with verifiable targets for improvement and independent assessment of progress. "This is not just a public relations stunt but a matter of good management. If you produce a social responsibility report that doesn't show a commitment to continuous improvement, it will not be taken seriously. Reputation isn't just about communication but good business practice," he said.
MacKenzie said: "There's some prospect that the review, if it doesn't just become boilerplate, will provide a useful framework. The requirements might drive more transparency and comparability of reputation indicators. Once that information is disclosed, it will be easier to begin to have a dialogue with companies on their reputation. Once we can draw comparisons across sectors that will be interesting for analysts." He added: "There are more investors that realize that if they're interested in long-term value, then they are going to need to get better at valuing intangibles, and reputation is a key intangible. Perhaps if they get better at sending signals that they are interested in this information, we'll get better disclosure from companies."
Companies may ultimately have little choice about making their assessment of reputational risk and disclosing the results. Thomas said: "The demand for transparency isn't going to go away, so companies may as well tackle it."