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The Bruce Column — Adding value to the market cap is all about reputation

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05 Mar 2015

The latest annual report on how much the value of its reputation adds to a company’s market capitalization shows some startling results. Our resident, regular columnist, Robert Bruce, looks at its lessons.

Ideas take time to become embedded into corporate consciousness. And it often takes far longer than people expect. Something that seems obvious to the few can take years before it is seen as mainstream by the many. 

And this is what has happened with the perception of the value of corporate reputation. Lip-service has always been paid to the virtues of a company having a good reputation. The idea that the value of the perception of the reputation might be quantifiable, let alone significant to a company’s market valuation, has been largely ignored. For many people it is dropped into the same ‘pending’ basket as integrated reporting or environmental issues. 

But time, and gathering evidence, can change minds. The latest annual report from the research and consulting organization Reputation Dividend is its eighth. And the trends, messages, and comparison figures across those eight years are mounting up. They build a straightforward account of assessing the current state of corporate reputation and how that impacts shareholder value. But the real eye-opener is that: ‘At their most effective the corporate reputations of UK companies are contributing one pound in every two of market capitalisation’. In other words the companies that invested the most in their reputation found that almost half of their market capitalization was attributable to those efforts. The report cites the example of Next plc. Its continued attention to its reputation is estimated to contribute over 48% of its value and moved it up 18 places in the rankings to 3rd overall. The openness of the disclosure between investors and the CEO was said to be a contributing factor. 

This sort of finding, and the more detailed work in the report, and the length of time over which it has now been recorded, should be changing attitudes and behaviours. And it should not be hard to assimilate. There is much logic and instinctive understanding behind what makes up successful and valuable reputations. The report says that at the opening of this year the most valuable components of corporate reputations were ‘perceptions of companies’ financial soundness and long-term potential’. Put those two together and they make up 30% of all reputation value. After them came what Reputation Dividend call the ‘softer qualities’ like the perceived quality of leadership and how well companies were deploying their assets. Those two together make up a further 27% of reputation value. At the other end of the chart comes ‘community and environmental’ credentials. These are often ignored as being nice extras rather than compelling objectives. And, true, they are at the bottom of the chart. But the amount this represents rather belies the lowly position. As the report says: ‘These alone contributed a total of £22bn of shareholder value [in the FTSE350] and an answer to the perennial question “what are companies’ CSR programmes actually worth?”’ 

Looking right across the board this report shows that the value of reputation in the FTSE 350 market amounts to some £620bn, representing around 28% of total value. These are large numbers. 

But the leverage figure is even more striking. At the beginning of this year, says the report, the average reputation leverage was 1.4%. Or, to put it another way, a 1% improvement in the underlying strength of a company’s reputation should result in a 1.4% uplift in market capitalisation. The average FTSE100 company looking to grow the strength of its corporate reputation by just that 1% would be expecting a return on that investment of something close to £266m. 

These sorts of figures and proportions are hard to ignore.

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