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Why a good corporate reputation is important to your organization

By Kim Harrison,

Consultant, Author and Principal of www.cuttingedgepr.com

Corporate reputation is a ‘soft’ concept. It is the overall estimation in which an organization is held by its internal and external stakeholders based on its past actions and probability of its future behavior. The organization may have a slightly different reputation with each stakeholder according to their experiences in dealing with the organization or in what they have heard about it from others.

Many organizations put the importance of a good reputation to the back of their minds while they attend to more hard-edged, day-to-day urgencies.

On the other hand, many organizations consider their greatest asset to be their good name or reputation. This is especially true in knowledge-based organizations such as professional services firms in the consulting, legal, medical, and financial sectors and in universities. They work actively to build their good reputation, to build the ‘bank of goodwill’ towards them.

The main benefits of a good corporate reputation can be found in:

  • Customer preference in doing business with you when other companies’ products and services are available at a similar cost and quality;

  • Your ability to charge a premium for products and services;

  • Stakeholder support for your organization in times of controversy;

  • Your organization’s value in the financial marketplace.

Although reputation is an intangible concept, research universally shows that a good reputation demonstrably increases corporate worth and provides sustained competitive advantage. A business can achieve its objectives more easily if it has a good reputation among its stakeholders, especially key stakeholders such as its largest customers, opinion leaders in the business community, suppliers and current and potential employees.

If your organization is well regarded by your main customers, they will prefer to deal with you ahead of others. And these people will influence other potential customers by word of mouth. Suppliers will be more inclined to trust in your organization’s ability to pay and to provide fair trading terms. If any problems occur in their trading relationship with you, your suppliers will be more inclined to give you the benefit of the doubt when you have a reputation for fair dealing. Likewise, government regulators will trust you more if you have a good reputation, and they will be less inclined to punish you if you trip up along the way. And clearly, a potential employee will be more likely to sign up with you if you have a good reputation for your treatment of staff compared with an employer who may have an equivocal reputation.

A US survey by Burson-Marsteller found that 95% of chief executives surveyed believed that corporate reputation plays an important or very important role in the achievement of business objectives. Yet only 19% had a formal system in place to measure the value of their corporate reputation. If corporate reputation is so important, why don’t more organizations measure it? Possible reasons include:

  • Reputation is an intangible and complex concept, which takes time to change.

  • The dollar value of improvements to a growing reputation is difficult to quantify.

  • Senior managers are obliged to deal with more immediate and demanding operational priorities – reputation is a long-term concept.

  • Reputation ranges over such a broad area of the organization’s activities that it is difficult to allocate specific responsibility for work on enhancing the corporate reputation to individual functional areas.

  • Cost – the typical cost of applying a conceptual model to consumers, individual investors and community leaders in one major US city is about US$150,000. However, a study of companies in one industry might cost as little as $50,000, depending on the size of the industry.

One thing is certain, there is a high cost to pay for losing reputation, the good standing among stakeholders. Past experience has shown that a badly handled crisis can strip big chunks off a company’s share price, eg Exxon’s share price plunged 20% after the Exxon Valdez incident. A smaller organization could be devastated by loss of reputation. Conversely, the skilful handling of a major issue or crisis can maintain a good reputation and cushion the organization’s share price against a drop in market share.

Corporate reputation also is important to the career of your CEO. As part of the process of evaluating the performance of the chief executive, there has been a growing trend for boards of directors to measure changes in their organization’s reputation.

And international surveys show that more than half of an organization’s reputation can be attributed to the CEO. According to US research conducted in 2003 among 1,400 influential stakeholders, about 50% of a company’s reputation could be attributed to the CEO. The figure was even higher in German research conducted in 2001, where the CEO’s reputation accounted for two-thirds of overall corporate reputation. Thus the CEO’s reputation can potentially add millions of dollars to the market value of the company.

Professor Charles Fombrun, research professor of management at the Stern School of Business, New York University, is probably the leading international authority on corporate reputation. He believes that “a reputation develops from a company’s uniqueness and from identity-shaping practices, maintained over time, that lead stakeholders to perceive the company as credible, reliable, responsible and trustworthy…Best regarded companies achieve their reputations by systematically practicing mundane management. They adhere rigorously to practices that consistently and reliably produce decisions that the rest of us approve of and respect. By increasing our faith and confidence in the company’s actions, credibility and reliability create economic value.”

The two main sources of a corporate reputation are experience and information – a person’s past dealings with your organization and the extent and nature of their direct and indirect communication with you. A favorable reputation requires more than just an effective communication effort; it requires an admirable identity that can be molded through consistent performance, usually over many years.

US research found that the sources of information about the organisation that enabled business ‘influentials’ to form a view on an organisation’s reputation were:

Source of information Proportion
Personal experience 64%
Major business magazines 37%
Articles in national newspapers 35%
Word of mouth 31%
Articles in trade journals 30%
Television news 14%
Articles in local newspapers 24%
Television current affairs programs 13%

 

The business influentials comprised CEOs, senior business executives, financial analysts, institutional investors, government officials and the media.

Main components of corporate reputation

A US study showed that there are ten main components of corporate reputation used in reputation measurement systems such as “the most admired companies in America”:

  1. Ethical: the organization behaves ethically, is admirable, is worthy of respect, is trustworthy.

  2. Employees/workplace: the organization has talented employees, treats its people well, is an appealing workplace.

  3. Financial performance: the organization is financially strong, has a record of profitability, has growth prospects.

  4. Leadership: the organization is a leader rather than a follower, is innovative.

  5. Management: the organization is well managed, has high quality management, has a clear vision for the future.

  6. Social responsibility: the organization recognizes social responsibilities, supports good causes.

  7. Customer focus: the organization cares about customers, is strongly committed to customers.

  8. Quality: the organization offers high quality products and services.

  9. Reliability: the organization stands behind its products & services, provides consistent service.

  10. Emotional appeal: (it is an organization I feel good about, is kind, is fun.

Additional components were found in some of the systems studied. These included value, differentiation, presence, and communication quality

How you can build your corporate reputation

Your organization can’t actually control its own reputation – it can only operate in a sound and ethical way, and work to communicate this to stakeholders. Thus the common term ‘reputation management’ is misleading because you can’t directly manage your own reputation; you can only act to strengthen your standing in the areas that you consider important to your reputation.

Stakeholders’ attitudes towards your organization and their relationships with you (and hence your reputation in their eyes) can be influenced by stakeholder relationship management activities, especially when the activities are conducted on a two-way symmetric basis, which involves treating them with respect.

Reputation is also affected by the actions and attitudes of others, for example, a competitor launching breakthrough products or making greater profits, and by comments from industry observers.

Steps to build reputation

Corporate reputation is shaped more by operational practices than by communication practices – actions speak louder than words. Nevertheless, a corporate reputation can be influenced by communication activities. Communication programs are valuable for creating awareness of good operational practices and in enhancing the organization’s relationships with stakeholders. Dialogue with stakeholders also can help shape organizational practices.

These six steps can strengthen a corporate reputation through a stakeholder relations program: 

  • Conduct research to know key stakeholders better.

  • Assess stakeholder strengths and weaknesses, and focus on the gap between internal realities and stakeholder perceptions.

  • Research the main factors comprising the reputation of your organization and align them with policies, systems and programs in all functional areas. This produces a powerful re-orientation of priorities and behaviors.

  • Set plans to exceed stakeholder expectations.

  • Involve the CEO as the greatest ally or champion of a reputation program.

  • Measure regularly against targets and act to improve the results.

Correlation between PR investment and reputation

US research relating to the annual Fortune 500 ‘Most Admired Companies’ listing in 1999 found that companies which invested in corporate communication experienced a better reputation than companies which didn’t.

The study analyzed spending in a broad array of corporate communication functions: media relations, speechwriting, investor relations, annual/quarterly reports, social responsibility and community affairs, donations, corporate and issues advertising, employee communication, department management and counseling and spending on public relations firms by 476 companies.

Spending on communication by the top 200 of the most admired companies far exceeded the spending by companies that were ranked in the bottom half of the table of most admired companies. This supports the view that reputation, as measured by the ‘most admired ranking’, can be influenced significantly by good communication practices.

Ranking of companies

Corporate communication
spending
US$million

Top 100 $32
Second 100 $23
Third 100 $13
Fourth 100 $5
Bottom 76 $4

 

 

About the Author

Kim Harrison is a recognized authority in the public relations field. His website, www.cuttingedgepr.com, provides a wealth of informative articles and resources on public relations techniques and management.

 

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