Question for Corporate America: Does Your Reputation Fall into the Liabilities Column on Your Balance Sheet?

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While a company's reputation has always been important, the increasing number of corporate scandels has made it front-page news. A majority of CEOs surveyed cite loss of reputation as the second most serious threat to an organization’s viability, yet only a fraction have plans for managing this risk. This article offers data quantifying the risk associated with poor reputation and suggests what may prompt CEOs to take action.

According to Harris Interactive, a consulting firm that has conducted annual surveys on corporate reputation for the last seven years, 71 % of adults in the United States think that corporate America’s reputation is either “not good” or “terrible.” In addition, 48% perceived corporate reputation as having declined “a lot.” Only 14% saw stability, and a paltry 7% reported seeing some sort of improvement. When asked to characterize the reputation of corporate America today, less than 1% agreed that "it’s great" and only 19% that "it’s good." To further bolster these dismal findings, the Multinational Monitor reported in its most recent study of The 10 Worst Corporations of 2005 that 7 of the 10 are US-based companies.

With such compelling data on America’s view of corporate reputation, why has it not been a matter of more urgency? Deborah Wallace, Founder and Principal of Wallace Consulting and Board Advisory Services, offers an explanation. “It’s not something that’s audited nor is it subject to compliance; Sarbannes-Oxley has no regulation for it. It is rarely a boardroom subject other than when a crisis has already hit. Because corporate reputation is viewed as a soft asset, it is also viewed as unquantifiable. By default, this puts corporate reputation in the you-can’t-measure-what-you-can’t-see category, which in turn puts it near the bottom of the corporate priorities food chain.”

But how important can corporate reputation be, and what real impact does it have? Again, the data are compelling:

In a survey conducted among 2,000 participants at the 2004 Annual Meeting of the World Economic Forum, more CEOs said that corporate reputation, not profitability, was their most important measure of success. Fortune Magazine calculates that a one-point change on its scale used to rank its most admired companies translates to a difference of $107 million to a company’s market value.

Lord Levene, Chairman of Lloyd’s of London, reported in a 2005 speech at the Philadelphia Club that loss of reputation is now viewed as the second most serious threat to an organization’s viability. (Business interruption is the first.)An Economist Intelligence Unit survey ranked reputational risk as the greatest potential threat to an organization's value. More than 30% of participating CEOs said that reputational risk represents the greatest potential threat to their company's market value. Of this same group of CEOs only 11% said that they had taken any action against the threat.

If these data are not sufficient to jolt companies into action, there is enough compelling data linking corporate reputation to corporate performance that should. Fortune Magazine, which has been publishing the results of its “America’s Most Admired Companies” survey for 20 years, calculates that a change of 1 point on its scale, either positively or negatively, affects a company's market value by an average of $107 million. The results of another study published in 2003 in Management Today, Britain's leading monthly business magazine, demonstrate a clear correlation between corporate reputation and equity return. Using existing data from Fortune’s surveys to construct portfolios of the most and least admired companies, the authors found that for the five years following Fortune’s publication of the results, the portfolios of the most admired companies had cumulative returns of 126% while those of the least admired had cumulative returns of 80%.

“While executives may choose to spend time analyzing these data and poking holes in research methodologies in order to dismiss reputation as a strategic priority,” says Wallace, “the effort would simply provide another diversion from addressing the problem head-on. The fact that corporate America's sullied reputation has lead to such dramatic legislative change in the form of the Sarbannes-Oxley Act, and that it has become routine front-page news, is as telling as any data. No company wants bad press, but it may finally be what convinces American business that, left unmanaged, a company’s reputation can become a terminal liability.”

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Deborah Wallace
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