Does your communications manager also bear responsibility for your company’s most critical risk—and competitive advantage?
What exactly is the key risk and competitive factor for the company mentioned above? Let’s start by asking the world’s largest insurance broker about corporate risks. A few years ago, the British insurance broker AON conducted a global survey on corporate risks. AON asked thousands of decision-makers specializing in corporate risks from over 60 countries to assess various risks. The range of assessed risks was broad. There were over fifty different risk categories. The topics ranged from economic collapse to increased competition and, ultimately, executives’ concern that their own product development might prove completely unsustainable in the market. It turned out, however, that in the view of these professionals in risk assessment, the most terrifying risk for a company is reputational risk.
A good reputation is a key competitive advantage for a company
According to a study published by Richard Hall—a pioneer in the field—a company’s reputation is its most important intangible asset in terms of sustainable competitiveness. Richard Hall of Durham University published a comprehensive study on the subject in 1992 in the prestigious *Strategic Management Journal*. He examined a company’s intangible competitive factors using two different methods in parallel. He tracked the development of six different companies and interviewed the CEOs of 95 large companies on the subject. The CEOs interviewed by Hall considered reputation to be a company’s most important intangible competitive factor, and the data he collected from the case companies supported this interpretation.
And what is the current thinking on this? If reputation is the most important intangible factor in sustainable competitiveness, shouldn’t this then be reflected in the bottom line of reputable companies—and ultimately in the pockets of their owners? Now that’s a practical perspective! If there’s support for this, I’m sure even CFOs will take an interest. And there certainly is.
A striking example is the study published in the early 2000s by Charles Fombrun, the most renowned figure at the Reputation Academy, and Jonathan Low, a consultant on intangible assets, on the development of shareholder value in companies with good and bad reputations. The methodology was quite simple. Take a group of companies with a measuredly good reputation and a corresponding group of companies with a bad reputation, and examine the development of shareholder value in these portfolios over the previous five years. The result was overwhelming. Companies with a good reputation far outperformed the general market index (S&P 500), not to mention those with a bad reputation. On this basis, it can be concluded that intangible reputation generates tangible value for its owners—but how much?
How much of a company’s value is actually attributable to its reputation? That’s the next logical question—and one that’s actually harder to answer. Breaking down a company’s market value into its constituent parts is highly controversial. What percentage of a company’s value is reputation, market position, the steam boiler on the balance sheet, the database, a strong product brand, a soon-to-be-released amazing innovation, Bordeaux futures accidentally purchased by the boss, or merger rumors that have hit the market? Even a blind person knows that a consensus on this won’t be reached right away. Someone, however, always tries.
Reputation Dividend, based in London, quantifies the contribution of corporate reputation to market value. Reputation Dividend claims that corporate reputation accounted for 38 percent of the value of the FTSE 100 and FTSE 250 indices on the London Stock Exchange in 2018. That would amount to over a thousand billion—a hefty trillion (12 zeros). That’s a lot.
Goodwill as a balance sheet item denominated in euros
Determining a company’s value is, by its very nature, always a matter of opinion. In practice, the stock market is simply a vast collection of these opinions. Shareholders have their own views on price, and if someone is willing to pay more, trades are made. There is no right or wrong. Everyone is free to form their own opinion based on whatever criteria they choose. The stock price reflects the price at which trades are currently taking place.
Management should not focus too much on these opinions or on influencing them. The actual creation of value takes place with other stakeholders, and the stock market reacts to it with its own opinions. That is why I consider it more meaningful to focus on understanding the significance of reputation for business than to value it as a euro-denominated balance sheet item.
The buyer, however, would disagree, because corporate acquisitions aren't a game—when a deal goes through, the buyer really has to dig deep into their pockets!
Let’s get back to basics. A company’s reputation is, in itself, the source of its success—but also of its downfall. I am, quite rightly, concerned about the management involved in this. At T-Media, we all too often end up hearing the communications manager’s lamentations about a lone warrior’s solitary reputation battle, a mere pin on a leather belt: “Top management isn’t interested… We don’t have any resources allocated… I’ve been handling this on my own… I’ve brought it up many times…”
Listening to these stories always makes me want to curse out loud—sometimes even scream. What these cases have in common is that the communications professional understands deep down how important the issue is, but can do virtually nothing about it on their own. It’s tragic for the individual and tragic for the company. Top management has thus placed both the company’s greatest risk and its most critical competitive factor on the shoulders of the communications director, with virtually no resources and often even less influence. The stress can be immense. You probably realize that something has gone terribly wrong here. If
reputation management isn’t communications and public relations, then what is it? It is the systematic creation of competitiveness at the very heart of a company’s pursuit of success. In short: executive-level stuff that every business leader needs to be involved in.
I have noticed that the people in charge of corporate communications are often highly skilled professionals who are capable of coordinating these activities, but they are simply the wrong people to bear overall responsibility for competitiveness.
Riku Ruokolahti is the Head of Development at T-Media and is responsible for Reputation&Trust business. Riku coaches senior leadership and management teams on comprehensive reputation management.
Riku has written a handbook on corporate reputation and its management. The article published here , “The Billion-Pound Paradox: Does Your Head of Communications Also Bear Responsibility for Your Company’s Most Critical Risk—and Competitive Advantage? ”, is the book’s opening chapter on the subject.
Illustration: Harri Haarala
