Business Week is running an interesting story on the intangible asset of reputation — What Price Reputation?
Many savvy companies are starting to realize that a good name can be their most important asset—and actually boost the stock price
More and more are finding that the way in which the outside world expects a company to behave and perform can be its most important asset. Indeed, a company’s reputation for being able to deliver growth, attract top talent, and avoid ethical mishaps can account for much of the 30%-to-70% gap between the book value of most companies and their market capitalizations. Reputation is a big reason Johnson & Johnson (JNJ ) trades at a much higher price-earnings ratio than Pfizer (PFE ), Procter & Gamble (PG ) than Unilever (UN ), and Exxon Mobil (XOM ) than Royal Dutch Shell (RDS ). And while the value of a reputation is vastly less tangible than property, revenue, or cash, more experts are arguing it is possible not only to quantify it but even to predict how image changes in specific areas will harm or hurt the share price.
This isn’t just PR. In fact, as the story warns:
A company’s message must be grounded in reality, and its reputation is built over years. And if there is a negative image based on a poor record of reliability, safety, or labor relations, “please don’t hire a PR company to fix it,” says strategy professor Phil Rosenzweig of Switzerland’s International Institute for Management Development. “Correct the underlying problem first.” The biggest driver of a company’s reputation and stock performance is, after all, its financial results, notes Rosenzweig, author of The Halo Effect, a book that details how quickly reputations can turn.
Here are two examples of how it works:
in late 2005, UTC turned to a tiny consulting firm named Communications Consulting Worldwide, led by sociologist Pamela Cohen and former Ernst & Young strategist Jonathan Low, pioneers in the nascent study of how public perceptions affect a company’s stock price. A CCW team spent months processing a bewildering amount of assorted data UTC had amassed over the years. It included studies tracking consumer perceptions of its brands, employee satisfaction, views of stock analysts and investors, corporate press releases, thousands of newspaper and magazine articles, and two years’ worth of UTC financial information and daily stock movements. After feeding the data into an elaborate computer model, Cohen and Low concluded that 27% of UTC’s stock market value was attributable to intangibles like its reputation.
The duo determined the way to drive up the stock was to make investors more aware of UTC’s environmental responsibility, innovation, and employee training—points the company had not stressed publicly. To make sure investors got the message, UTC plastered the Sikorsky S-92 ads and others like it featuring an Otis elevator, a Pratt & Whitney jet engine, and a hybrid bus with UTC Power fuel cells, on four commuter train stations in Connecticut towns with high concentrations of financiers.
. . .
Southwest also leaves little to chance. The Dallas carrier already enjoys one of the industry’s best reputations, and Wall Street rewards it accordingly. Its $11.4 billion market cap is bigger than the combined value of the two biggest airlines, American (AMR ) and United (UAUA ), a gap that differences in assets like planes and routes don’t begin to explain. Still, when Linda Rutherford, Southwest’s vice-president for public relations and community affairs, heard Low’s pitch at a PR meeting two years ago, she decided to hire CCW to assess whether it was stressing the right points.
After crunching years’ worth of data, Cohen and Low flew to Dallas last August with results that were eye-opening. CCW estimated public relations alone could move Southwest’s stock up or down by 3.5%, equal to $400 million in market value today. The data also indicated Southwest was getting little return by stressing its budget fares—a familiar story. Instead, there was more upside potential for shares if Southwest stressed its extensive routes and schedules. “We had a bit of an ‘Aha!” Rutherford recalls.
So Southwest has begun emphasizing long-haul flights and frequent service between many cities, points that seldom had gotten press. It also plans a third-quarter ad campaign based on CCW’s advice. The effect so far: While airline stocks have fallen more than 15% overall in 2007, Southwest’s shares are down only 5%, to about 14.80.
(In the interest of full disclosure, Jon Low is on the Board of my organization, Athena Alliance).
So — it is not enough to have a good reputation, you have to let Wall Street know about it. This tracks our earlier findings that financial analysts and managers really don’t understand companies’ intangible assets (see Reporting Intangibles). If you don’t measure it or at least track it, it doesn’t get managed and only indirectly and informally valued.
And that is no way to run a railroad.