What exactly is a corporate reputation? Is managing it really that important?
A popular definition of corporate reputation is “the overall estimation in which an organisation is held by its internal and external stakeholders based on its past actions and probability of its future behaviours.” Put simply, it is a term for how a company is perceived by others.
In Good Times and Bad
Reputation plays a pivotal role in shaping the success and growth of businesses, with numerous studies establishing a strong correlation between corporate reputation and financial performance.
Investors and lenders will scrutinise a company’s reputation as a key factor in their investment decision making process. A strong reputation can enhance a company’s perceived value, leading to higher valuation multiples and increased investor interest. Conversely, a tarnished reputation can significantly impede a company’s access to capital and its ability to attract new investors.
During periods of economic instability and recession, investors are even more cautious when it comes to capital allocation and are typically much more risk adverse.
“Reputation will always play a role when investors are looking at companies, but when the investment environment is riskier and more challenging, as it is today, reputation becomes an even more significant factor. The need for a business to have a compelling and clear story has never been more important. Investors really need to believe in the company and its investment case and that requires careful thought around how they communicate to build and sustain credibility with investors.” – Ben Woodford, Partner, Camarco
There is a lot of due diligence that goes into analysing stocks, and reputational risk forms part of this assessment. Among others, three factors investors will look at are the company’s value as a long-term investment, its quality of management and its financial soundness. During times of crisis, when companies face challenges or controversies, a positive reputation and good-will built over time can help mitigate the negative impact on valuation. In this instance, it is contributing to the long-term sustainability of the business.
Openness Creates Trust
Another component in creating and managing a business’s corporate reputation is transparency and disclosure. The management team and board of directors are key to this: if a company’s management are deemed to be not acting in the best interests of shareholders, then those shareholders are likely to sell their stakes, and potential investors will go elsewhere.
An example of a business that is doing this right is Greggs. For non-UK readers, this is a British bakery chain which is much loved for its sausage rolls and baked goods. Greggs listed on the London Stock Exchange in 1984 and has since grown rapidly. They are often commended for their transparency. This, combined with a clear strategy and very well-respected members of its management team and board, has engendered brand loyalty and a strong valuation.
“A company is only worth what people are willing to pay for it. A highly regarded, well-run company is going to command a higher premium than one in which investors have concerns about stewardship and integrity. The more communicative and transparent the business, the better investors understand its strategy and values. Confidence is key when it comes to investing in a business. When investors see a business standing by its values, they have faith their investment is in good hands. If you don’t believe in a company or its management team, you’re not going to invest.” – Jennifer Renwick, Partner, Camarco
Take Apple for example, the most valuable company in the world. Apple’s board is made up of some of the most experienced and successful CEO’s and executives in the world. These individuals are hugely respected and as a result of their stewardship, investors have confidence that the company is well run and effectively governed.
There are, of course, commercial sensitivities to being fully transparent, companies don’t want to open their books for everyone to see, it could damage their competitive advantage. However, the more transparent a company can be, the more trust they are going to engender in their stakeholders.
Companies that provide comprehensive and timely information demonstrate a commitment to accountability. Effective communication and disclosure practices foster trust, improve investor confidence and therefore, enhance a company’s reputation.
Moreover, companies should proactively address any potential risks. By acknowledging and addressing concerns, companies can demonstrate their commitment to resolving issues, which can help preserve their reputation and minimise negative impacts on valuation and access to capital.
Over the past few years, investor demands for ESG disclosure have become more difficult for companies to ignore. It is no longer just financial metrics that need to be disclosed. It is now expected that companies will disclose information relating to environmental, social and governance factors and failing to do so is likely to impact both reputation and valuation.
Ultimately, reputation is far more than a “nice to have.” Whilst it is easy as a business to focus on the tangible assets such as cash, raw materials, or real estate; companies should prioritise reputation management, focusing on building trust, transparent communication, and proactive disclosure. By fostering a strong reputation, companies can position themselves for sustained success in today’s competitive business landscape.
Answering my initial question, yes corporate reputation really is that important.