Column in The Edge Magazine - Investing in reputation throughout the economic cycle

36 months ago

The world over, in times of economic constraint, 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 continue to nurture. Reputation is one of the determinants of short- and long-term business success and therefore a valuable intangible asset, writes Neil Daugherty.

As I write this article, the comedian Simon Brodkin has just ambushed Volkswagen’s presentation at the Geneva motor show. Brodkin was last seen in Switzerland throwing a fistful of dollars at Sepp Blatter. Whether you are FIFA or Volkswagen (VW), nowadays you can chart the nadir of your corporate reputation as when you become the butt of Brodkin’s practical jokes. 

You would forgive VW’s investors for failing to see the funny side – VW’s share price is down by more than 50 percent in the past year, since its emissions scandal. FIFA, with its own reputational challenges, has admitted it is USD550 million (QAR1.8 billion) behind its revenue targets for 2015 to 2018.

All of this plays out at a time when oil price is in the band of USD37 (QAR134.7) to USD40 (QAR149.2) – almost 70 percent down on the highs of summer 2014.  So in a world of economic challenges, what price does reputation command? 

The world over, in times of economic constraint, the temptation may be for business leaders to see reputation as an operating cost rather than an asset and source of value creation to continue to nurture. It is one of the determinants of short- and long-term business success and therefore a valuable intangible asset, enhancing a business’s ability to execute its strategy within a desired timescale and cost range. 

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.

As chief executive officers and chief financial officers, with 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 emerge stronger.  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 Blue Rubicon and Oxford Metrica has looked at the performance, stretching over a period of 10 years, of listed businesses which had experienced some form of major correction (defined as a swing of five percent 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, this research showed those that had invested in their reputations traded at an eight percent premium to their peers. Apply this ‘reputation premium’ to Alphabet/Google, the world’s largest listed business, and this represents USD40 billion (QAR145.6 billion) of shareholder value. 

The best business leaders prove their worth in times of economic stress. Those who ignore the worth of their reputations during a prolonged economic downturn, risk becoming either a mere footnote to history, or the punchline to a bad joke.

Neil Daugherty is managing director of Blue Rubicon Qatar.

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