Numbers game: "corporate reputation accounts for £790 billion of FSTE 350"
The contribution of reputation to company value is clear but has limited impact on public trust in business. Corporate reputation contributed £790 billion of shareholder value at the start of 2016, equivalent to 35% of the market capitalisation of the FTSE 350.
These are the headline numbers from the UK Reputation Dividend Report (opens as a PDF, 1.6MB) launched at an event at the Institute of Directors in London last night.
The so-called reputation contribution is the proportion of a company’s market capitalisation that is directly attributable to the confidence instilled by its reputation.
Unilever, Shell and RB topped the chart of companies whose reputation had the greatest impact on their market capitalisation.
Corporate reputation shored up shareholder value last year amid challenging markets in China and Europe, and turmoil in the commodity markets.
Reputation Dividend reported that corporate reputation accounted for 38% of value of the FTSE 100, up 30% over the previous year. It accounted for 25% of the value of the FTSE 250, up 16% over the previous year.
Without these improved contributions Reputation Dividend said that the lead index could have ended the year as much as 10% lower, and the secondary index could have dropped bu 10%.
Mind the trust gap
There is a marked contradiction between the value of reputation calculated by Reputation Dividend and the lack of public trust in corporations. This is the narrative of the Edelman Trust Barometer, a longitudinal analysis of public trust in organisations around the world.
Management Today editor Matthew Gwythe described the experience of heading to Oxford Street, London, to record vox pops for a BBC In Business programme.
There was a universal mistrust of business, according to Gwythe.
Simon Walker, director general, Institute of Directors said that Talk Talk, Thomas Cook, VW, and most recently Google had failed to meet public expectation in 2015, which inevitably led to a breakdown in trust.
Walker rallied in favour of Google.
“Corporation tax is an outdated inefficient tax design before globalisation and the internet. Taxes need to be simple, straightforward to collect and non-negotiable. Governments need to tackle the issue,” he said.
Factors contributing to reputational value
Reputation Dividend has identified nine factors that contribute to reputational value. The top three factors include financial soundness (21%), ability to attract talent (14%) and the quality of management (13%).
Investors disproportionately reward the impact that these factors have in their contribution to shareholder value according to Reputational Dividend.
Other factors include long term value, quality of goods and services, use of corporate assets, quality of marketing, community responsibility and capacity to innovate.
Reputational analysis is based on the economic impact of corporate reputation. Reputation Dividend says that it supports companies in managing their reputation assets more effectively.
“Winners in the next twelve months characterised by uncertainty as a result of the EU referendum, will be those companies that focus on operational and messaging priorities that support continued confidence,” said Sandra Macleod, director, Reputational Dividend.
Reputation Dividend’s valuation analysis is a two-stage process.
It is based on main factors that influence the investment community. A combination of metrics are calculated, including the gross economic benefit shareholders are deriving from the reputation asset, the location of value across the individual components of the company’s reputation, the extent to which investment in reputation building will produce returns in value growth, and the relative value potential of individual messaging opportunities.
In addition to determining the financial value of a company’s reputation relative to its peers and competitors, the contribution of the individual drivers of reputation value such as perceptions of a company's ability to innovate, the quality of its management, its credential with regard to corporate and social responsibility and so on are also calculated.