Reputation Risk: The Bottom Line
Intangible assets have been the subject of much discussion in recent months. One of the oldest intangible assets, predating today’s technological versions by millennia, is reputation. Many old adages tell us how valuable it is. But can we actually measure it, in dollars?
The extent to which reputation contributes to a company’s value is staggering.
Research points to anywhere between a third and two thirds of a company’s overall value being attributed to its reputation (according to recent reports published by Lloyd’s & KPMG and Weber Shandwick respectively). In a recent research report, Simon Cole and Greg Quine of Reputation Dividend showed that the reputation of icon brands such as Apple and Amazon contribute 57% ($1.248b) and 56% ($950m) respectively of their market capitalization. This varying range seems somewhat broad, which aligns with the underlying intangible nature of reputation. In fact, it is this intangible ambiguity that lies at the heart of the quest to put a price tag on reputation within the corporate setting. Quantifying it might help us understand it a bit better.
Over the last thirty years there has been a considerable amount of academic research on corporate reputation. The research straddles three fundamental constructs regarding the definition of reputation.
The first relates to a construct whereby reputation refers to the expectations that people have about the entity’s behavior, exemplified in the Fortune Magazine’s Fortune Most Admired Companies (FMAC) and the Axios Harris Poll 100 measures of reputation.
The second construct relates to the notion of Corporate (or brand) Personality, which refers to the “personality traits” that people attribute to organizations.
The third construct integrates the concept of trust as a starting point, and takes into account the perception of the entity’s honesty, reliability, and benevolence as the main elements of its reputation. The measuring tool named Corporate Credibility developed by Newell and Goldsmith in 2001 is an example of this approach.
Across the three constructs, the need for companies to establish corporate responsibility in an active way – and the need for a more uniform definition of what “corporate responsibility” means – has made research on brand reputation, as it converges with research related to corporate responsibility, a crucial piece of a company’s strategy these days.
Today, corporate reputation is generally defined as the collective perception of the organization’s past actions, and expectations regarding its future actions in terms of its capabilities and character. Although not completely standardized, the increased uniformity regarding corporate reputation and its constituent driving factors have paved the way for the emergence of the empirical measurement of corporate reputation.
Companies such as RepTrak and Alva are leading the charge in the creation of corporate reputation measurement indices with the former focusing more on the emotional factors attributed by stakeholders to a company’s brands. Alva is a sentiment index created by using AI and NLP to aggregate and analyze digital content.
Beyond these reputation indices, there are a number of financial metrics that are being used to not only measure corporate reputation in terms of economic value, but to correlate it with financial performance. Metrics such as ‘reputation dividend’ and the adaptation of economic value measures such as Tobin’s Q are the forebearers of a more widespread measurement of the economic value of corporate reputation.
Perhaps one of the most telling indicators of the increase in measuring economic valuation of corporate reputation is the emergence of reputation risk insurance policies provided by large insurance underwriters. This trend commenced in 2011 with Zurich Financial Services offering its “Brand Assurance” policy.
Today most of the large insurance companies have some sort of reputation risk policies. The mere fact that these insurance juggernauts have been underwriting reputation risk for almost a decade implies that they have the ability to assess and price this type of risk, although the components and triggers of the policies across the insurers varies. Once again, these variances arise from the intangible and qualitative nature of reputation.
With the increased contribution of reputation to company’s economic value and the move towards empirical measurement and pricing of this intangible asset, executives should integrate reputation risk management into a company’s overall governance policy and decision making.
Whatever the exact value of a reputation is, its undisputed value means that protecting a brand’s reputation is crucial. In this regard, adequate tracking and monitoring of online reputation are only part of the story. Crisis proofing (such as building a strong digital presence and a crisis response protocol) are also key. Reputation risk actually must be addressed in a holistic, cross-functional way, since reputational damage can emerge from any source within a company and its related stakeholders.
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