What is corporate reputation? (and WHY you should measure it)
Updated: Oct 9, 2019
In investment terms, corporate reputation is an indefinite, intangible asset. What does that mean? First, that your reputation doesn’t have a physical manifestation. Unlike tangible assets (land, machinery, inventory etc), intangibles cannot be seen or touched. Examples other than reputation include intellectual property, brand recognition and patents. And why indefinite? That means you can’t get rid of it: it stays with your company for as longs as it operates.
The indefinite nature of reputation is the reason why you must track and nurture it. You can’t simply buy another. As Warren Buffet so neatly expressed: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that you'll do things differently.” And why should we care? Consider the IPO of an exciting new tech company, or the reaction of investors during leadership changes at an established firm. Each of these situations is the visible, numerical manifestation of expectations based on “the opinion that people in general have about someone or something, or how much respect or admiration someone or something receives, based on past behaviour or character” – this is the Cambridge Dictionary’s definition of reputation.
A good reputation increases your share price, the loss of a CEO with a good reputation reduces it. A good reputation also acts as a shield, an insurance policy to fall back on when times are hard: if your reputation is good then staff, politicians, lenders will trust that you can come back from a mistake. Perhaps they will be more likely to believe that yours was a well-intentioned slip-up, rather than evidence of poor character. They may even be less likely to call for prosecution or additional regulation.
Yet because of its intangibility, companies often neglect to measure their reputation or to explicitly plan how to cultivate it. It is easier to focus on outcomes such as sales or customer complaints or media tracking. All of these things are related to reputation, fuelled by it, but none of them fully encapsulates it. Reputation appears too slippery, too diffuse, too contested to simply measure. Note, however, that while reputation is intangible in the investment sense, it need not necessarily be unmeasurable. And given the vital importance of reputation to the value of your business, it is foolish to pay it no mind at all. Are there any other existentially important assets you don't keep track of?
Next week I’ll tell you more about how to measure reputation but if you need an answer before then, drop me a line on email@example.com