17.08.09 - Corporate Communications

Most of us aspire to developing and maintaining a good reputation in our personal and professional lives. In addition, we seek and expect to find good reputations in the companies and institutions we deal with and abhor the loss of reputation when we witness it. Reputation is a concept we feel we know well one we have read about in the media and in countless business books. The truth is, however that we know more about measuring reputation that we do about creating and maintaining it. The fact that the term reputation is nearly always pre-ceeded today by the words ‘loss of’ indicates that we probably have reached a reputational crisis point and in order to develop some solutions it may be worth looking at reputation in a little more detail.

Leaving the Latin origins aside the most widely used definition of reputation today is the one developed in 1996 by Charles Fombrun founder of the Reputation Institute in the US. He said that corporate reputation is

‘a perceptual representation of a company’s past actions and future prospects that describes the firms overall appeal to all of its key constituents when compared with leading rivals’

There are three important things to note with this definition. The first is that reputation is ‘a perceptual construct’ that is it is measured on the basis of perception or attitude. Secondly reputation is an aggregate of views across a number of variables so you could be great at one thing but not at another but the overall score is what counts. Thirdly reputation is comparative in that most measures are rankings that compare one firm to another. These three aspects are subtle but important because the underlie most of the measures and most of the management advice relating to reputation.

Role and Importance of Reputation

So much for the definitions what is the origin of the modern focus on repetitions? We can find the origin of reputation as it relates to companies and markets in the theories associated with the Economics of Information. Michael Spence who along Messer’s Akerloff and Stiglitz won the Noble Prize for Economics as recently as 2001 admitted to a journalist after the ceremony that yes it was possible to win the noble prize by stating the blinding obvious that ‘sellers know more than buyers’! Spence was referring to the fact that markets are inefficient and characterised by information asymmetry where the seller knows more than the buyer.

In order to bridge this information gap and in so doing induce the buyer to pay a premium for your product or service (be it a car, stocks or bonds or a sliced pan) you have to use a range of signals to get your message across. One of the most popular signals is the use of reputation or as Spence said in a more noble prize winning manner ‘informed agents( the company) may have the incentive to take observable and costly actions( build a reputation) to credibly signal their private information to the un-informed ( the buyer) to improve the outcome( get a higher price)’

If you think of reputation in this way, as a method of transferring information about the quality of your product or service so you get a better outcome then you can begin to see the weakness of many of the popular measures of reputation.

Problems of Measurement

Currently most, if not all measures of reputation such as the Fortune Most Admired Company involve asking a selected sample of business people to rank companies across a number of variables. The most common variables used include quality of management, quality of product or services, innovativeness, long term investment value, financial soundness, ability to attract, develop and keep talented people, responsibility to the community and the environment and wise use of corporate assets. These are considered the key drivers of a company’s reputation and as such most of the managerial advice on how to build a great reputation is based on these variables.

Going back to the definition of reputation it is the perception of your performance on these variables that counts and that depends on who is doing the perceiving. No matter how well you score on any one variable it is the aggregate score that counts and finally it is how you stack up vis a vis others that will drive the perception.

There are many other criticisms of these measures including the fact that those surveyed are usually an ‘insider group’ and not representative of the population as a whole, there is a ‘halo’ effect from the financial variables so that a good financial performance counts for more and the surveys are only done once a year and a lot can happen in 12 months.

There are two more important criticisms. The first and perhaps the most important issue to emerge in the field of reputation studies is the fact despite what the theory tells us companies are no longer in control of their own reputation. This is known as reputational inter-dependence a big word for a concept all too familiar to the many Irish companies who have found their reputations impacted by the actions of their peers or their sector.

The second additional criticism relates to the fact that the reputational timeframe has altered completely. Firms can no longer hope to score across Fortune’s eight variables and rank well in the annual survey. The reality today is that reputations can be both created and destroyed in hours if not days in online forums.

So while companies have been busy measuring and managing to the big agenda from a reputational point of view we lost sight of the underlying issue. Reputation, as a signal of the quality of our company product or service only works if it is believed and belief is based on one very simple word trust.



Reputation and Trust

To create or to restore reputations involves the creation and restoration of trust between the two parties. The good news is that it is probably easier to restore a level of trust so that your signal is believed than it is to score a perfect 10 on the 8 variables listed earlier.

So where do we start? Perhaps not surprisingly one possible solution comes from the online world of e-commerce. Think back to the idea of information asymmetry where the seller knows more than the buyers and then think about companies like E Bay or Amazon or indeed any of the social network sites such as Face book and LinkedIn. In order to overcome what must have first appeared as almost insurmountable obstacles these online companies developed their own proprietary methods of measuring and ranking reputations in real time.

Instead of surveying a select group of people across a list of variables once a year they have developed very simple dynamic ranking and rating systems. The buyer rates the seller as follows you rate +1 for a good experience, zero (0) if a neutral experience and -1 is a bad experience. If you, as a seller get more than -4 you get banned from the site.

Think of some of the advantages of using these systems offline. They are simple, timely, transparent and democratic and think of the behaviour they demands. Each interaction, each transaction is a signal, an opportunity for the buyer to rate you and the aggregate of all the buyers scores decides your overall reputation. The more often you score a +1 the more likely you are to earn a good reputation. This is the discipline of continuous dealings. Go on try it.

Fiona Ross, IR Specialist at Murray Consultants, is a member of the Doctoral Research Programme at the Michael Smurfit Business School and a consultant on Investor Relations, Governance and Reputation issues.