18 Communication World • November–December 2011 www.iabc.com/cw

THE REAL VALUEOF REPUTATION

It takes just a single incident to shatter a company’s

reputation. To avoid such situations, communicators need

to take a strategic role in shaping public perception

by Charles J. Fombrun and Jonathan Low

Our purchasing decisions are gov-erned by two factors: our per -ceptions of the features of theproducts or services we are inter-

ested in buying, and our perceptions of thecompanies that stand behind them. Market -ers have spent their careers (and virtually all oftheir advertising budgets) trying to influencethe first of these two factors. However, evi-dence is mounting that the second factor maybe even more influential than the first.

Each year Reputation Institute measuresconsumer perceptions of the world’s largestcompanies. The results are scored using theRepTrak model, which aggregates consumerperceptions based on their assessments of acompany’s products/services, innovation, work -place, leadership, governance, citizenship andfinancial perfor mance. Statistical analysis ofthe results in 2011 showed that product per-

ceptions explained only 39 percent of people’spurchase intentions. In contrast, 61 percent oftheir purchase intentions were explained bytheir perceptions of the companies behindthose products. A similar pattern was foundwhen Reputation Institute’s analysts examinedconsumer advocacy—the likelihood theywould recommend a company’s products andservices. Only 42 percent of consumers’ rec-ommendations could be explained by productperceptions, whereas 58 percent could bederived from perceptions of the companiesstanding behind those products.

These findings speak to the growing value ofcorporate reputation as a strategic tool that cancreate tangible economic value for companiesby influencing the degree of support theyreceive, not only from consumers (the productsthey buy), but also from investors (the invest-ments they make) and from other stakeholder

The fact that

most companies

have only a superficial

understanding of the

perceptual components

of their reputations

is a significant

risk.

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20 Communication World • November–December 2011 www.iabc.com/cw

■ C O R P O R A T E R E P U T A T I O N , R E V I S I T E D

groups (the recommendations they give). Consider the pharmaceutical industry. Physi -

cians are a key stakeholder group because they are the ones who prescribe products to patients.Even with these expert stakeholders, confidentialresearch conducted by Reputation Institute invarious countries confirms the fact that per -ceptions of companies drive physician behaviorsignificantly more than their perceptions of theproducts those companies are marketing.

Now consider Procter & Gamble, the veteranproduct marketer. In 2010, the company opted to relaunch its corporate brand at the WinterOlympic Games in Vancouver, British Columbia.It was the first execution of a long-term sponsor-ship contract with the International OlympicCommittee that will feature P&G for the nextfive Olympic Games, through 2020. P&G tracesmore than US$100 million in incremental salesand a 10 percent boost in consumer purchaseintentions to its corporate branding campaign.Clearly P&G, like some premium pharmaceuticalfirms and a few other forward-thinking compa-nies, is among those that have begun to connectthe dots: They are linking consumer perceptionsof the company behind the brands to the tangiblevalue created from having a better public profile.They are building reputation capital.

Accounting for reputation capitalThe value of a company resides in its stock ofphysical and financial capital, as well as in thehuman, organizational, intellectual and brand-

based assets it possesses—what accountantsdescribe as the company’s intangible assets.Economists estimate that intangibles mayaccount for up to 80 percent of a company’s mar-ket value. Institutional investors have reported ina well-cited survey of 575 analysts released byCapgemini Ernst & Young back in 1996 thatmore than 35 percent of their portfolio allocationdecisions were based on intangibles. A Forbesreport on the “25 Most Valuable U.S. CorporateBrands” (a list that included such companies asP&G, Coca-Cola and General Electric) demon-strated that some corporate brands are even morevaluable than their parent companies’ market cap-italization—the total value of the company’sshares traded on the world’s stock exchanges.

Several recent examples illustrate the interrela-tionship between reputation and financial per-formance. On the negative side, News Corp.,Citigroup, BP and Toyota have suffered stockprice, earnings and market-share erosion as aresult of events that have seriously damaged pub-lic perception. On the positive side, Ford, Tata,Apple, Petrobras and LVMH are showcase exam-ples of the financial benefits—and reputationgains—that can be traced to improved public per-ceptions of both their products and companies.

Consider BP, which crafted and promoted themessage that its two initials stood for “beyondpetroleum” and that it represented the respon -sible, forward-thinking face of contemporaryenergy policy. But the April 2010 DeepwaterHorizon explosion and the massive oil spill that

Reputations develop from stakeholder per-ceptions about companies. To build reputa-tional assets, companies are increasinglyinvolved in measuring the strength of thoseperceptions using carefully calibrated andcomparative scorecards. These scorecardscan then be used to benchmark how percep-tions across a company’s stakeholders, mar-kets and divisions compare with selectedrivals. This kind of research is increasinglyrelied upon by the C-suite to examine theunderlying factors that drive the purchase

decisions of consumers, the investment deci-sions of investors and the workplace choicesof employees.

Armed with a precise understanding oftheir target markets, heads of marketing arein a strategic position to develop relevantcommunication platforms and optimize allo-cations to the paid and earned media cover-age they get for their companies and brands.So too are the heads of finance and humanresources: A strategic investor relations pro-gram can be developed to generate favorable

perceptions of the company from currentand potential investors. A strategic employeerelations program can be designed to conveythe attractiveness of the company’s work-place to existing staff and potential recruits.

Overall, a strategic reputation manage-ment program integrates all of these effortsacross the company, and when effectivelyimplemented, is the driving force behind tan-gible economic returns.

—C. J.F. & J.L.

Iconic brands and

exemplary reputations

help companies “trans-

late” their offerings to

new customers, because

the values they embody

provide a shorthand

interpretation of what

they have to offer.

An integrated program can help create a positive corporate image

www.iabc.com/cw Communication World • November–December 2011 21

Although intangible,

reputations are, in fact,

quantifiable, measurable

and manageable. Failure

to properly account for

reputation is very likely

to damage a company’s

results and prospects.

followed for weeks afterward in the Gulf ofMexico belied the company’s claims of height-ened concern for safety and environmental aware-ness. Self-destructive communications from thecompany reinforced impressions of arrogance andevasiveness. A toxic concoction of weak publicrelations and images of befouled wildlife sanctu-aries further damaged BP’s reputation.

The demands of global markets, with theiremphasis on comparability of data, adoption ofstandards and increased transparency, are requir-ing institutions in the private, public and non-profit sectors to provide ever more informationabout their allocations of people and capital. Inthis acutely competitive environment, whereknowledge is capital, perceptions matter morethan ever—and so have become the new battle-fields on which companies and stakeholders arewaging war. Because perceptions are malleable,they are also subject to strategic influence andmanipulation. The fact that most companies haveonly a superficial understanding of the perceptualcomponents of their reputations is a significantrisk. The sustainability of an organization—itsvery license to operate—may depend on howfinancial, reputational and human capital marketscome to perceive and value the decisions andinvestments they make.

In BP’s case, weak answers to questions aboutits handling of mundane operational issues metas-tasized into a figurative indictment of its attitudetoward the environment and its commitment tosafety. This spiraled into a challenge to its compe-tency, its management capability and, ultimately,its corporate culture. Suddenly, the much-dreaded“license to operate” phrasing began to be heard,questioning the legitimacy of the company’s operations not only in the U.S., but around theworld, particularly in Russia, where the com -pany’s joint venture, TNK-BP, was threatened.(Never secure in this partnership, BP’s Russianfinancial partners in the deal sensed the compa-ny’s weakness and moved to exploit it, eventuallynegotiating a deal with government-controlledRosneft, and wresting effective control of thejoint venture from BP.) In due course, BP CEOTony Hayward, who was evidently ill-prepared to deal with all of these reputational exigencies,had to be pulled out.

BP’s annus horribilis is reminiscent of Shell’s

conflict with the activist NGO Greenpeace in1995 over the sinking of the outdated Brent Sparoil rig in the North Sea. It also mirrors the expe-rience of Coca-Cola in 1999, when a small batchof carbon dioxide used in the drink allegedlycaused some Belgian schoolchildren to feel sick.Both Shell and Coca-Cola watched their shareprices fall precipitously as a result of these crises,and had to deal with boycotts of their operations,delays in their implementation of strategic initia-tives and wholesale shifts in their leadership.

Global forces are causing shifts in public per-ceptions of companies that in turn drive changesin regulatory, political and financial structuresaround the world. Companies that enjoy strongand favorable reputations have a competitiveadvantage in these global markets. Iconic brandsand exemplary reputations help companies“translate” their offerings to new customers,because the values they embody provide a short-hand interpretation of what they have to offer.

Corporate communication, therefore, has astrategic role to play in shaping public perception,and thereby indirectly influencing value creation.Since the returns to communication and trans-parency are increasing, investments in reputationbuilding and management are becoming strategiccontributors to the bottom line.

Reputation and brand, however, require con-tinued and costly upkeep if they are to deliverresults. Failure to maintain the connectionbetween corporate action and corporate commu-nication is a risky proposition.

Apple makes a positive case for reputationmanagement. The company tied Google for theNo. 1 spot in the RepTrak 100, a global rating by more than 50,000 consumers across 15 coun-tries that Reputation Institute released in June.Apple has triumphed by continuously exceedingexpectations as an innovator. From the Macintoshto the iPod to the iPhone to the iPad, the com -pany has repeatedly introduced products thatantici pated market needs with well-designed and exceptional technology. With each productintroduction, consumers have paid a premium for the privilege of owning a product that redefined not just the category they were in, butentire industries. The iPod changed the way peo-ple thought about acquiring and playing music.The iPhone reinvented telecommunications by

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blending phones and computers, and the iPad hasredefined the notion of computerized mobility.These strategic coups have eliminated numerouscompetitors and reduced related businesses to therole of supplicants.

As Apple’s reputation for innovation hasgrown, so have its financial results—and thefinancial markets have followed suit. Eye-catchingdesign and exceptional functionality sup portedpremium pricing that created profits. Profit -ability, in turn, enabled accelerated research, moreinnovation, market share expansion and com -petitive dominance, and delivered outsized financial results. On 19 July, Apple announced itssecond-quarter results: an astounding salesgrowth of 83 percent and profit growth of 92 percent. The company exceeded financial analysts’ projections by almost 34 percent, andconveyed the promise of future growth in an as-yet untapped market, China.

Reputation management is strategic managementAs we have described here, reputation can be avital source of intangible value that, if optimized,can contribute significantly to creating tangiblefinancial value. Although intangible, reputationsare, in fact, quantifiable, measurable and manage-able. Failure to properly account for reputation—both literally and figuratively—is very likely todamage a company’s results and prospects.

Reputations are, therefore, a vital component ofstrategic management—and, not surprisingly, top-rated companies have begun to manage them assuch. For these vanguard firms, reputation is a keycomponent of a value-creating cycle: When prop-erly managed, it represents the economic returnsof past investments made to create value and build competitive advantage. Once established, agood reputation acts like a magnet in attractingstakeholder resources and solidifying a company’s competitive strategic position. When damaged,however, a weak reputation drives away customers,repulses investors and mars performance. BP’smultiple stumbles over the past decade demon-strated the dangers of failing to manage reputationstrategically. Apple’s impressive ascendancy show-cases the benefits of actions that have built bothreputation and performance. ●

about the authorsCharles J. Fombrun is chairman

and co-founder of ReputationInstitute and a former professor

of management at both NewYork University’s Stern School of Business and The Wharton

School. He is the author ofnumerous books, includingReputation: Realizing Value from the Corporate Image.

Jonathan Low is partner and co-founder of Predictiv LLC.

His specialty is management performance and organizational

effectiveness, primarily the valuation of intangibles such as

strategy execution, communica-tions, brand, innovation,

reputation and organizational transition. He is co-editor of Enterprise Value in the

Knowledge Economy.

22 Communication World • November–December 2011 www.iabc.com/cw