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Brave new reputation: What CEOs need to know

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The new boss sings the stakeholder electric

Reputation is turning into a harder asset in the highly digitized corporate world we find ourselves in. This trend will only increase as technology rockets us forward.

Do you know where your reputation is?

Companies need to think of themselves through their stakeholders. Clients, customers, employees, the general public, shareholders, strategic alliances — just some of the important relationships in a world of informational digital milliseconds.

Just as corporations depend on consumers to buy their products, companies depend on customers to consume their brand.

After they’ve digested that brand, what do they feel, think and say?

In You’ve got to do something about your reputation: Why CEOs need to pay attention to reputation management, I looked at reputation.

Let’s dig deeper.

Fombrun, business leaders and reputation management

What are reputations worth?

Plenty.

Fombrun outlines three ways reputation adds value.

  • First, “reputation affects operating performance” resulting in increased profits
  • Second, “profitability affects market perceptions of the company’s future prospects – and so, increases demand for the company’s shares.”
  • Third, “the company’s operating activities … contribute to building ‘reputational capital’”

The shadow knows

In fact, the shadow consumes. In traditional and digital ways, it contains, or will contain, everything about an organization.

The perception of that information will depend, largely, on how a corporation prioritizes reputation, Corporate Social Responsibility (CSR), sustainability and related issues into its operational activities.

Fombrun says, “reputational capital” is a “shadow asset”, invisible but effective:

Intangible equity that humbly works behind the scenes in a company’s product brands or corporate brands — these days, often in zeroes and ones, expanding into the digital universe.

Bharawadj did a study of 125 manufacturing businesses. The study found “reputation and brand equity of the business … to be the best predictors of variation in business unit performance”.

Another study looked at a group of 435 companies rated in Fortune’s most admired companies. From 1984 to 1995, these organizations were better able “to sustain superior operating performance over time.” They were also better able “to improve operating performance over time.”

Bottom line? There are lessons to be learned from the financial crisis: Companies focused on sustainability outperformed peers by 15 per cent.

Fombrun provides substance for reputation building reputation. In effect, reputation gathers strength from itself.

So, the shadow is its own shadow asset.

Reputation. Stock price. Ownership.

In a study by Gregory on “brand power,” during extreme stock volatility from October 27-28, 1997, the research team discovered while all stocks fell on the 27th, the strongest brands regained almost all losses by the 28th.

A benign shadow supports brand

Less strong brands continued to founder. These brands did not have mighty reputations to deliver them from stock price purgatory.

While accountants feel operational activities like public relations, corporate philanthropy and advertising are best treated as direct business costs, Fombrun makes a thought-provoking point:

… it’s certainly ironic that accountants have been so conservative in their treatment of all reputation-building activities yet so willing to facilitate the capitalization of unearned income that enabled Enron, WorldCom and Xerox to claim inflated returns for so long …

In a post-Enron world, wise public relations practitioners and business leaders might note that brand-building and reputation-building sound concrete compared to the manufacturing of imaginary returns.

There is a difference between the invisible and the imaginary.

The financial value of reputation

Hanging a shadow on a signpost (or shadow valuation)

What if you could hang your company’s name out on a signpost and lease it?

Interbrand did just that. In 2002, at sales of $20 billion, assuming a higher royalty rate of 14 per cent (a royalty rate of 8-14 per cent of projected sales is common), Coca-Cola could realize a potential (royalty) rate on their brand of $2.4 billion.

Over 20 years, the Interbrand research team estimated this value of the Coke brand to be worth $69.9 billion.

Today, Coke is digital, social, focused on sowing reputational seeds in a new world of information.

Deep within its brand is everything stakeholders perceive Coke to be. Coke’s shadow delivers reputational capital.

If $70 billion doesn’t catch a CEO’s attention, what will? The shadow is changing rapidly. Move with the shadow or be outcast.

The figure isn’t perfect, but it reveals reputation has financial value despite its unseen nature.

Catch RQ during bull: The Shadow Quotient

Maybe the most valuable jewel in the cache of information Fombrun reveals is the development of the Reputation Quotient (RQ).

RQ focus groups revealed why people have high regard for some companies. They felt emotional appeal, products and services, financial performance, vision and leadership, workplace environment and social responsibility were the most important qualities affecting RQ.

Fombrun points out:

“Being well regarded is closely associated with a company’s earnings, liquidity, cash flow and growth — it’s operating results. Consumer ratings are therefore tied to familiar indicators that a company is well-managed.”

But being well-regarded pays off more in bull markets when the company’s stock price is on the rise than it does in bear markets when the opposite is true.

Companies gain when their stock price increases.

Spend some time with Fame and Fortune. Extrapolate Fombrun’s ideas to this new, digital paradigm. Demystify the unknown, difficult to measure, world of corporate reputation.

Reputation is in the cyber-ether. It permeates corporate space and the expanding online universe of stakeholder perception.

Any CEO who does not understand how reputation affects the bottom line, will, after reading Fombrun.

Business leaders and their companies will also benefit when they understand how to make exceptional reputations a reality in this brave new digital world.

Keystrokes? Swipes? Maybe simply gestures. Your brand and your repuation’s out there.

What is it saying?

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