Corporate reputation: Build it, guard it, gain from it

In recent years, the reputation of organisations has emerged as a strategic asset. Many senior managers regard this as a top priority. For CEOs to accept responsibility for the management of corporate reputation, it is essential that it is understood properly and measured consistently. Dr Marietjie Theron-Wepener, marketing and stakeholder relations director at the University of Stellenbosch Business School, recently developed an instrument to measure corporate reputation from the perspective of the clients of organisations delivering services. This formed part of her PhD studies. In this article, she explains why corporate reputation should be carefully guarded.

It’s a matter of trust

Although the phenomenon of corporate reputation has been with us for a long time, there has been an upsurge in interest by both academics and business over the past twenty years.

Executives now recognise the importance of a strong and favourable corporate reputation as a critical strategic asset, which translates into a source of competitive advantage.

One reason for the focus on reputation is the huge reputation losses of companies such as BP (Deepwater Horizon disaster in the Gulf of Mexico in 2010), the US Catholic Church (priest sex abuse), Martha Stewart OmniMedia (executive misbehaviours), Arthur Andersen (accounting scandals) and Toyota (huge recalls of certain models). Another reason is the worldwide economic crisis of the late 2000s.

Reputation is built on trust. In the last number of years, the business world has been characterised by economic disruption, unethical and fraudulent practices, bad publicity, cracks in the foundations of capitalism and climate change, to name a few. People have lost their trust in organisations and a climate of anti-business activism, scepticism, pessimism, blame and cynicism has emerged.

Reputations of organisations and governments are under pressure, and this is fuelled by the media, internet, social media and the behaviour of NGOs and pressure groups.

To add to this pressure, stakeholders are increasingly interested in the way large companies behave and call for transparency, accountability and social and environmental responsiveness. Ethics, values and stakeholder democracy are buzzwords in corporate boardrooms and business schools. The New York-based Reputation Institute talks about the reputation economy, where people watch a company’s behaviour before they buy products and services from it.

A strategic intangible asset

Today’s global economy is characterised by intangible assets, such as reputation, brand, knowledge, innovation, leadership and loyalty. These intangible assets have the potential to create value because they are difficult for competitors to duplicate, change or imitate. The development of unique relationships with key stakeholders serves as an example of why reputation is so difficult to imitate.

Because services are intangible, a favourable reputation could be even more important for organisations providing services than for those marketing tangible products. A service is difficult to evaluate. Therefore, a client’s evaluation of the reputation of the organisation would be valid for all its service offerings under the corporate umbrella. Stakeholders – more often than not – rely on the corporate reputation of a company when they make investment, career, product and other decisions. Reputation is a value signal in the case of incomplete information. The results of research show that 61% of buying decisions are influenced by the reputation of the company and 39% by perceptions about its products or services.

A favourable corporate reputation has many beneficial consequences: high levels of trust among stakeholders, commitment, loyalty, satisfaction, perceptions of lower risk and positive word-of-mouth recommendations. The company will have the luxury to charge a price premium for products and services and there will be higher entry barriers for potential competitors. History has shown that organisations with a favourable reputation will receive the ‘benefit of the doubt’ from their stakeholders when they are faced with a sudden crisis.

The benefits of a positive reputation also play out in the excess value investors are willing to pay for the company’s shares – the amount by which the market value exceeds the book value of its assets. A leading academic, Charles Fombrun, invented the term ‘reputational capital’ to describe this excess value.

There can be little doubt that an unfavourable reputation can be harmful and even fatal. In the case of Enron, its market value was $75.2bn and its book value (balance sheet equity) was $11.5bn in December 2000 – a market-to-book gap of almost $64bn. This value disappeared overnight. Enron’s quick decline illustrates the vulnerability of a company that loses its reputation and thus also its market value. The case of Andersen at the time of the Enron disaster also serves as an example of reputational damage. The clients of this organisation did not abandon it because of the poor quality of services or higher prices, but because they did not wish to be associated with an organisation of questionable reputation and ethics.

In the eye of the beholder

Everything and everyone has a reputation, whether it wants this or not, including organisations, individuals and countries. Stakeholders evaluate organisations based on their own expectations, experiences and value system and consciously or unconsciously decide on the organisations’ reputation. Reputation thus lies in the eye of the beholder. Reputation, therefore, cannot be controlled by organisations which means it is only partly manageable.

The reputation of an organisation also differs from stakeholder group to stakeholder group. Investors disappointed by recent investment returns may hold a very different point of view of an organisation than satisfied, loyal clients.

What reputation is NOT

Reputation is often confused with image (the short-term picture in our heads, based on day-to-day impressions) and brand (the expectations created and the promises made by organisations, expressed by communication messages, signals and behaviour).

Brands and reputations are, however, closely linked. Meeting the expectations created by the corporate brand and fulfilling the promises are important factors that underpin a positive reputation. A brand is owned and managed by an organisation, while corporate reputation is owned by its stakeholders and therefore much more difficult to manage. However, corporate reputations can be managed – in a sense – by keeping promises!

How reputations come into being

Before corporate reputation can be properly managed, one needs to understand how it is formed. Here, three groups of inputs are important:

  • Direct (personal) experiences of an organisation or direct observation of an organisation (behaviour of employees, experiences with certain services provided).
  • Indirect experiences of the organisation (hearsay or opinions about an organisation, carried forward by others such as the media and analysts).
  • Corporate messages and initiatives (advertisements, sponsorships).

Contrary to what is sometimes believed, reputation is not formed from an organisation’s communication and corporate branding efforts. People form impressions and act based on limited information or the opinions of others without even having had direct contact with the organisation. It is not factual knowledge alone that creates the sense among stakeholders that they know an organisation. The media plays an important role in spreading the word about organisations’ reputations.

Research has proven that, unless some crisis hits an organisation, its reputation tends to ‘stick’. However, despite the staying power of reputations, they can be easily harmed or even lost in the face of a crisis.

It has become clear that emotion plays an important part in the evaluation of an organisation’s corporate reputation. This study indicated that the Emotional appeal dimension forms the ‘main pillar’ of any service organisation’s corporate reputation with its clients. Without being liked by clients and without having earned their admiration and trust, and without clients having a good feeling about an organisation and being proud of it, the possibility of a positive reputation score among clients is slim indeed. Managers responsible for an organisation’s reputation will thus have to ensure that an emotional link is established with clients.

The Corporate performance dimension refers to the assessment of the financial soundness of the organisation and the regard in which its management is held.

The Social engagement dimension refers to whether the organisation is perceived to support good causes.

The Good employer dimension refers to the organisation’s ability to pay attention to the needs and well-being of its employees.

The Service points dimension refers to the functionality of an organisation’s online service delivery in terms of effectiveness, user-friendliness and ease of use. The significance of the Service points dimension can be partly explained by the fact that two rather ‘sophisticated’ sectors in the service industry were investigated, namely banks and airlines. Their clients expect modern technologies such as online booking facilities (in the case of airlines) and online banking facilities to be functioning smoothly. This study thus confirms that fully functional and up-to-date point-of-service information and communication technologies (ICT) are important differentiators in the case of large service organisations. The emergence of Service points means that organisations should pay attention to their interaction with clients at face-to-face as well as online service points.

Originally published in the University of Stellenbosch Business School’s Agenda magazine.