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, for example, 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 risks assessed 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 marketplace. It turned out, however, that in the view of these professionals in the field of 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—even back in the early days—a company’s reputation is its most important intangible asset in terms of sustainable competitiveness. Richard Hall of the University of Durham 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 indeed 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 blood-curdling example is the study published in the early part of the previous decade 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 evolution of shareholder value for these two groups 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. Based on this, anseende be concluded that intangible anseende 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 natural question—and one that’s actually harder to answer. Breaking down a company’s market value into its components is highly controversial. What percentage of a company’s value comes from its reputation, market position, the steam boiler on the balance sheet, its database, a strong product brand, a fantastic innovation set to launch soon, Bordeaux futures accidentally purchased by the boss, or merger rumors that have hit the market? Even a blind person like Reetta knows that a consensus on this won’t be reached right away. Still, someone always tries.
Reputation Dividend, based in London, quantifies the share of market value attributable to corporate reputation. Reputation Dividend claims that corporate anseende 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—or a solid 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 just a huge collection of these opinions. A shareholder has an opinion about the price, and if someone else is willing to pay more, a trade is 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 taking place right now.
Management should not focus too much on these opinions or on influencing them. The actual creation of value takes place in collaboration with other stakeholders, and the stock market reacts to this with its own opinions. That is why I believe it makes more sense to focus on understanding anseende for business operations rather than valuing it as a balance sheet item in euros.
The buyer, however, would disagree, because corporate acquisitions aren't played with play money—when a deal goes through, the buyer really does dig into their own pocket!
Let’s get back to reality. 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 issues involved. Here at T-Media, we all too often end up hearing the communications manager’s lament 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’t do much about it on their own. It’s tragic for the person and tragic for the company. Senior management has thus placed both the company’s greatest risk and its most critical competitive advantage on the shoulders of the communications director, who has virtually no resources and often even less influence. The stress can be immense. You’ve probably noticed that something has gone terribly wrong here. If
anseende isn’t communications and public relations, then what is it? It is the systematic creation of competitive advantage at the very heart of a company’s pursuit of success. In short: executive-level stuff that every business leader must 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 the wrong people to bear overall responsibility for competitiveness.
Riku Ruokolahti is the Director of Development at T-Media and is responsible for Reputation&Trust business unit. Riku coaches senior leadership and management teams anseende comprehensive anseende .
Riku has written a handbook on corporate reputation and its management. The article published here , “The Trillion-Pound Paradox: Does Your Communications Director 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
