Discovering the value of a good reputation

When it comes to measuring and managing reputation, you need to cover both cognitive and emotional dimensions.

 

A look at the market-to-book ratio of Standard & Poor’s 500 companies between 1980 and 2010 reveals that the proportion of intangible assets has climbed from 20 per cent of the market value in the 1980s to about 85 per cent during the peak of the dotcom bubble. The financial crisis has made some adjustments, but by now we are back to more than 50 per cent of a company’s value being represented by intangibles. Clearly, investors put a lot of trust in the stock listed companies – why else would they pay a lot more for a firm than what they get back as tangible goods?

Corporate reputation is the central antecedent of trust and has proven to be a strong driver of shareholder value because of its impact on stakeholder behaviour: a good reputation increases customer retention and allows firms to achieve price premiums and higher purchase rates; companies showing strong reputation have better access to capital markets, thus decreases capital costs, and lower procurement rates; and several studies report better recruiting success and higher employee retention rates among companies with stronger reputations, thus helping a company to win the war for talents. We do not even have to refer to the general advantages in conducting negotiations with stakeholders mentioned frequently in the academic literature to understand why top executives tell us that the company’s most valuable asset is its corporate reputation. But how do we get a valid and reliable measurement?

Manfred Schwaiger

Manfred Schwaiger is a professor at Ludwig Maximilians University in Munich and head of the Institute of Market-based Management. He has consulted many DAX and DowJones companies in terms of reputation management.