Op-ed in the Gulf Times Newspaper - Investing in reputation through the economic cycle

38 months ago

Two seemingly unrelated items in the global business news at the start of the year point to an existential question for business leaders in uncertain economic times.

Firstly, Alphabet Group (the parent company of the artist formerly known as Google) surpassed Apple to become the world’s largest listed company by market capitalisation.

Secondly, the price of oil touched a 12-year low at $27 a barrel on the Brent crude indices and has been bobbling around the $30-35 mark for much of the year – 70% down on its recent highs of summer 2014.

Across the world, and in particular in oil and gas producing economies, fiscal budgets are tightening, and business leaders must look to manage costs and plan prudently for a period of prolonged budgetary constraint. 

So how are these two events related? Arguably Google/Alphabet is a great example of a company that invests through the economic cycle - both in its product development and innovation, but also in its reputation. 

The world over, the temptation may be for business leaders to see reputation as an operating cost to be struck through with a red line, rather than an asset and source of value creation to be nurtured through choppy economic waters as well as sunnier climes. 

Reputation is one of the determinants of short- and long-term business success and therefore a valuable intangible asset. A company’s management should ask themselves, does reputation enhance their ability to execute their strategy within a desired timescale and cost range? If the answer is yes, then reputation should be nurtured in the same way any tangible asset would be. 

Prolonged periods of prosperity can be deceptive: even businesses that are listing ships rise with the prevailing economic tide. By contrast, periods of economic downturn accelerate natural selection in business – sorting great businesses from the merely good, and good businesses from the average or failing in what Schumpeter termed “the arena of creative destruction”. 

Typically high-tech businesses understand this better than most, being exposed also to Moore’s law of computing, whereby computing power doubles every two years, accelerating the pace of innovation and restless renewal. 

As CEOs, CFOs and their consultants and advisers prepare to take a red pen to their balance sheets, the experience of past recessions demonstrates that those that treat reputation as an asset rather than a liability (or operating cost) will likely emerge stronger. 

On the other side of the storm, these companies will be better placed to capture subsequent economic growth. Those companies that tend to their brands, and employer brand, during a downturn just as they manage their tangible assets, can derive competitive advantage during the subsequent economic upswing. 

Proprietary research from the Blue Rubicon Institute and Oxford Metrica has looked at the performance, stretching over a period of 10 years, of listed businesses who had experienced some form of major correction (defined as a swing of 5% or more) to their share price related to a reputational shock.

Once market noise (the effect of the rising and falling tide of the market) had been adjusted for, our research showed those that had invested in their reputations traded at an 8% premium to their peers. While Google is exceptional as a company in many regards, if this were applied to their present market valuation, this would represent a “reputation premium” of over $40bn. 

History may be repeating: an academic study of major market corrections/crashes in the US stock market in 1987and 1989 found that in the case of a sudden market correction or shock, there was little to distinguish the share price performance of companies with good reputations from those without.

However, in the latter case, of a slower market correction, those companies with a proven “reservoir of goodwill” experienced far less severe declines of value1.  This phenomenon has also been termed a “forgiveness factor”. 

Apply this logic to developing, oil-producing economies, and the same logic holds true: cut too deep, and sacrifice your best international talent, and take knee-jerk decisions on spending, and the buy-in price for reacquiring the next, best global talent required to drive growth in an upturn will increase exponentially.

Short-term gain will lead to long-term pain. Those businesses that under-invest in reputation as an asset face declining levels of consumer (and therefore political) trust, higher costs of talent acquisition and retention, greater risk of regulatory intervention, and higher costs of doing business- from disadvantageous access to capital, to higher risk profiles and insurance premiums. 

For nation brands, where the public and private sector are closely intertwined, particularly in emerging and natural resource based economies, this can be deeply counter-productive.

The best business - and political - leaders prove their worth in times of economic stress. Those who ignore the worth of their reputations during a prolonged economic downturn risk becoming a mere footnote to history.

In contrast, those- like Alphabet- that display leadership in investing in their reputation and brands throughout the economic cycle write their own destinies. 

1 Jones, Jones and Little, ‘Reputation as a reservoir: buffering against loss in times of economic crisis’, as cited in the Corporation Reputation Review, Volume 3.1, 2000.

 - Neil Daugherty is managing director, Blue Rubicon Qatar. Blue Rubicon is a leading global strategic communications and public relations consultancy, with offices in Doha, London, Dubai, Singapore and the USA, which specialises in transforming reputations to create shareholder value.

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