HOW CAN A GOOD REPUTATION CREATE VALUE FOR A COMPANY?

Transcription

1 HOW CAN A GOOD REPUTATION CREATE VALUE FOR A COMPANY? Ioana IRINA Doctoral School of Economics and Business Administration, UAIC Iasi Iasi, Romania Ioana930@yahoo.com Abstract The relationship between corporate reputation and profits has been discussed in many papers and the points of view are different: a good reputation can lead to greater profits, but sometimes happens that a good financial status changes positively people s perceptions about the company. Thus, it can be said that profit can be a cause or an effect of a good reputation. A better understanding of the link that exists between the financial results and the efforts of marketing departments in building a strong reputation would help not only researchers, but also stakeholders to focus more on this aspect. This paper illustrates how a good reputation can increase the value of a company and maintain a top position in the hierarchy while passing through a financial crisis or a decisive moment for the company s life. The discussion will also take into consideration corporate valuation and examples of companies in which its value helped in passing the crisis. Keywords: corporate reputation, corporate valuation, profit JEL Classification: M21, M31 1.REPUTATION AN INTANGIBLE ASSET WITH POTENTIAL The concept of reputation has been intensely discussed in the last decades and its dimensions have been described differently by several authors. Reputation is also a very used word nowadays; we see it on the newspapers, on the TV and at work, when we talk about business. We use it in relation to a person, organization or place and we talk about it not only in the context of celebrity. Seems to be difficult to define such a complex and dynamic aspect that places a strategic key in the development of companies. As per American Heritage Dictionary, the general description of reputation is: the way in which somebody is perceived by the public. However, in the fields of marketing and management, we lost the count of definitions. Schultz (2006) considered that reputation is a derivate of all organizational actions and comportments, being hard to isolate a unique variable and to interpret it as the one that influences the most the perception of stakeholders. Thus, reputation is the sum of the organizational representations during the time in the perception of the public (Grunig&Hung, 2002; Yang& Grunig, 2005) and it is developed by using a bilateral communicational complex between the company and its stakeholders (Rindova&Fombrun, 1999). Moreover, reputation is judged in the context of competitive market (Fombrun&Van Riel, 2004;

2 Shapiro, 1983; Schultz, 2006), it hasn t the same value for all stakeholders, it is not a standard. Relevant academic and practical literature explores different facets of the construct, but the views on the nature of corporate reputation as an organizational construct diverge. The organization might have numerous reputations for each public often considers a different set of attributes (Wartrick, 2002). But, it can be vital for stakeholder trust and competitive advantage (Pruzan, 2001). Defining reputation is a challenging task given it is difficult to conceptualize (Nguyen and LeBlanc, 2001b) and does not lend itself to discrete measurement. Organizations must consider that their reputation is a powerful means of measuring their overall performance in their market place, keeping in mind that this asset can contribute to value creation. As expected, having different points of view in regard to reputation has lead to different ways of measurement. John Low says that we can measure the reputation by classifying it as an intangible asset, like goodwill. Steven Wartick suggested that a scale to measure reputation would be misguided because it does not start with a clear definition. Moreover, reputation is often confused with the concepts of identity, image, prestige, esteem. Charles Fombrun (1996) defines the reputation as a perceptual representation of a company s past actions and future prospects that describes the firm s overall appeal to all of its key constituents when comparing with other leading rivals and creates a scale to measure it. His analysis contains five simple principles: distinctiveness, focus, consistency, identity and transparency. A more sophisticated measure of reputation was developed for Fortune by Leslie Gaines-Ross that relies less on financial performance and includes factors as trust, innovation, exemplary behavior, doing business in a caring way. None of the measurement scales took at the very beginning into consideration the financial results of the company or the profits, but reputation is considered a valuable asset (Caruana, 1997), a critical asset (Gray And Balmer, 1998). It has become a critical resource because it has the potential for value creation and because its intangible character makes replication by competing firms more difficult (Roberts and Dowling, 2002). 2.PROFIT A CAUSE OR AN EFFECT OF REPUTATION? Empirical studies have shown different results when trying to ask this question. Sabate and Puente (2003) studied the relationship between corporate reputation and financial performance. Surprisingly or not, they found that in some cases, corporate reputation was a cause of better profits and in other cases, the reverse was true. They couldn t actually confirm if a good reputation comes first or if the profits matter more. Of course that there might be some reasons of these discrepancies in the study regarding the measurement, the people surveyed, the research methods, etc. However, further studies continue to sustain this two-way relationship.

3 The valuation of companies is a road well travelled and includes both financial performance and corporate reputation aspects. According to Copeland, Koller and Murrin (2000), the four-part model of share market valuation is the one that helps companies to grow the share price, starting with value drivers (Return, Growth, Risk Corporate Reputation), financial indicators and continuing with intrinsic value (Capital Human, Knowledge, Reputation, Financial). This model sustains that a good reputation creates good share market valuation. This approach is based in economics, used by companies and consultants, taught in business schools. It is a largely rational approach to corporate valuation as opposed to others based on the psychology of investors. Robert and Dowling (2002) sustain a three step model: Past (Reputation Building, Financial Performance), Current (Reputation, Financial Performance), Future (Financial Performance). This position taken in the paper is that a good reputation is a valuable asset that allows a firm to achieve persistent profitability or sustained superior financial performance. Profits can be increased by building a good reputation and this are simultaneously processes. Recent papers of Fombrun (2012) have seen the reputation management as being a necessity and not an option: In an increasingly competitive environment, as companies fight for revenue, growth, market share and loyalty, measuring and managing corporate reputation has become the key driver of business value. He also talks about trust and considers it the most important aspect for companies to survive in the market: Business success depends on people supporting a company. That means customers buying products, investors buying stock, regulators giving license to operate and employees delivering on strategy. For people to do this, they want to know that they can trust the company and it will live up to its promises. That is the definition of reputation: the emotional connection stakeholders have with a company. The author considers that reputation creation has also a psychological aspect that places an important role, so the companies will have profits if they offer transparence and trust. Opinions are different even in regard to how reputation can create valuation for companies. But one thing is for sure: it is a good asset that can create great profits. The strategy used depends on many factors: market, stakeholders, history of the company, social factors, etc. 3.THE USE OF REPUTATION LOST OR EARNED MONEY? During hard moments, crisis or scandals, many companies lost money, but also some companies didn t. The Coca Cola Company is an example for the importance of reputation. In 1999, Coca Cola drinks have been banned in Belgium, when around 100 people, many of them children and 88 persons from France went sick after consuming the drink. Other countries, as Netherlands, Luxembourg and France attempted to talk at a high-level with Coca Cola s representatives (The Economist, 1999). In that day, June 14 th, the share market price was stable and it didn t decrease in the next days. Two days after the

4 incident, the chairman of the company sent his apologies, but seemed that it was not their fault; it was only about the transporting conditions that affected the drinks. During the days of scandal, the recipe of Coca Cola has been intensely discussed and the drawbacks of the huge amount of sugar from Coca Cola drink had been emphasized. But, the financial performance was nearly the same, no spectacular decrease. As a conclusion, this means that people trust the company and was waiting for an answer regarding this incident a good reputation that consolidates profits in hard moments. On the opposite side, it is the case of Rupert Murdoch that appeared before the Leveson Inquiry into media ethics and apologized for his short comings during the News of the World phone-hacking scandal. The Guardian (2011) reported that he said it had been a serious blot on my reputation. He admitted that he had failed, but he also blamed his editors for covering it up from him. This scandal manifested itself through share prices, which dramatically decreased from April 2011 to April 2012, when Rupert Murdoch appeared before the inquiry. Reputation Institute tracked the link between financial performance and its own reputation measurement system. This shows that in 2011, BSkyB s reputation was average with a score of 63 out of 100. In 2012, it dropped to 53 with governance and trust in particular suffering (Fombrun, 2012). This second example shows how an instable reputation is not helpful in the moments of crisis and how customers can easily change their minds. 4.CONCLUSIONS The aim of this paper was to establish the relationship between corporate reputation and profits by reviewing previous studies and offering real examples to sustain the results. The review of literature provides numerous indications that marketers are concerned about their companies reputations and the advantages wrought by a good reputation. Today there is no doubt that corporate reputation is give more attention than even before in the history of organized business activity. According to PricewaterhouseCoopers, the management of reputation will become a key business process like quality management, financial management or customer care (Pruzan, 2001). The relationship between corporate reputation and profits is two-sided, sometimes it is an effect and other time can be a cause. Researchers have built different models to measure and to predict this relationship, but opinions are contradictory. This might happen because of the specific details of each market, corporate history, previous actions, etc. Examples have shown that reputation can be a strong advantage that spreads trust to the people and consolidates profits, as it happened when Coca Cola was close to a scandal. In contrast, British Sky Broadcasting Group has lost lots of money because of a weak reputation.

5 Thus said, reputation has the potential to help a company in moments of crisis and its intrinsic value can protect from profit loss. The relationship between corporate reputation and profits in modeled in time by the company and has particular characteristics for every example. References [1] Caruana, A. (1997), Corporate Reputation: concept and measurement, Journal of Product and Brand Management, Vol. 6, No. 2, pp [2] Copeland, T., Koller, T. and Murrin, J. (2000), Valuation: Measuring and Managing the Value of Companies, John Wiley&Sons, New York. [3] Dolphin, R., (2004), Corporate Strategy a value creating strategy, Corporate Governance, Vol. 4, No.3, pp [4] Fombrun, C. and Van Riel, C. (2004), Fame and Fortune: How Successful Companies Build Winning Reputations, Prentice Hall, Upper Saddle River, NJ. [5] Fombrun, C., (2012), Corporate Reputation: The Main Driver of Business Value, Reputation Institute UK, May [6] Fombrun, C.J. (1996), Reputation: Realizing Value from the Corporate Image, Harvard Business School Press, Boston, MA. [7] Gray, E.R. and Balmer, J.M.T., (1998), Managing Corporate Image and Corporate Reputation, Long Range Planning, Vol. 31, No. 5, pp [8] Grunig, J. and Hung, C. (2002), The effect of relationships on reputation and reputation on relationships: A cognitive, behavioral study", Paper presented at the PRSA Educator s Academy 5th Annual International, Interdisciplinary Public Relations Research Conference, Miami, Florida, March. [9] Pruzan, P. (2001), Corporate Reputation: Image and Identity, Corporate Reputation Review, Vol. 4, No.1, pp [10] Rindova, V., and Fombrun, C. J. (1999), Constructing competitive advantage: the role of firm-constituent interactions, Strategic Management Journal, 20 (8) [11] Roberts, P.W. and Dowling, G.R. (2002), Corporate Reputation and Sustained Superior Financial Performance, Strategic Management Journal, Vol. 23, No. 1, pp [12] Sabate, J.M. and Puente, E. (2003), Empirical Analysis of the relationship between corporate reputation and financial performance: A survey of the literature, Corporate Reputation Review, 6(2), [13] Schultz, M., Moritsen, J. and Gabrielsen, G (2006), Sticky reputation: Analyzing a ranking system, Corporate Reputation Review, 4 (1) [14] Shapiro, C. (1983), Premiums for high-quality products as returns to reputations, Quarterly Journal of Economics, 98: [15] The Economist, (1999), retrived from [16] Wartrick, S.L. (2002), Measuring Corporate Reputation, Business and Society, Vol. 41, No. 4, pp [17] Yang, S. and Grunig, J., (2005), The effects of organization-public relationships outcomes on cognitive representations of organizations and overall evaluations of organizational performance, Journal of Communication Management, 9 (4),