The 2017 UK Reputation Dividend Report

The sheer size of these numbers is beginning to

shape communications and investment strategies

Anthony Hilton, London Evening Standard

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Corporate Reputations Have Never Been More Valuable – Cause for Congratulation or a Case for Concern?

u The combined value of corporate reputations of the 350 largest listed companies in the

UK stood at £986bn in January 2017; 39% of all shareholder value.

u Record levels of reputation impact in a post Brexit/Trump market drove values to the

highest levels ever seen and directly accounted for a third of the rise in market

capitalisation across the index over the year.

u But investor circumspection remains paramount. High reputation impacts tend to occur

in times of market stress indicating that managers cannot sit on success and need to

be making extra effort to help the investment community tread through the possibilities

and pit-falls of mis-placed risk.

Introduction

Reputation has long been one of the cornerstones of corporate value. The thoughts, feelings

and impressions that reside in the minds of professional observers are the foundations of con-

fidence and the lens through which investors consider their positions. Warren Buffet’s much

repeated mantra ‘We can afford to lose money – even a lot of money. But we can't afford to

lose reputation – even a shred of reputation’ continues to make the case. But just how much

those precious assets actually contribute, and how, has only become clear in recent years.

The 2017 UK Reputation Dividend Report summarises the current health of corporate reputa-

tion and its impact on shareholder value in the United Kingdom. It provides the latest perspec-

tives on how well, or not, reputations are working for companies and the people who invest in

them. It describes the essential drivers of reputation value and reveals opportunities for more

effective and more efficient messaging.

Reputation Value Analysis is critical intelligence. It provides company leaders and reputation

managers with acute understanding and a means to deploy for risk mitigation, growth and

lasting impact. Insight into the mechanics of the value generating capacity of company repu-

tations provides the basis to ensure that corporate communications work as hard as they need

to when uncertainty can all too easily distract attention.

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Overview

It used to be so simple. Investors would filter thoughts and collected impressions through the

lens of the prevailing economic backdrop to arrive at a level of confidence that would

drive the company’s share price. But now, events, dear boy, events – to borrow from Harold

Macmillan – are increasingly getting in the way, and to a degree not seen for some time.

As we all know too well, confidence has been shaken on many fronts by a string of ‘crises’ in

the last twelve months. A wave of populism leading to Brexit, the Trump administration, a new

French president from outside the party mainstream and so on have, are, creating deep and

seemingly unfathomable uncertainties. But life goes on and companies are thinking very care-

fully about how they’re seen by the markets and how their reputations are going to carry them

through what will undoubtedly be difficult times, because all the evidence suggests that the

rules have changed and there has been a marked dislocation.

In recent months share prices in the UK have been driven by a combination of the wall of cash

released after last year’s elections, a dramatically weaker pound and a disregard for funda-

mentals that seem to offer little by way of support for current valuations. Investors have come

to accept the need to take on more risk in order to find homes for excess cash and achieve

the returns they are seeking and it is having a direct bearing on the extent to which, and how

reputation assets are supporting shareholder value in the companies they describe.

The beginnings of the change were starting to appear early in 2016 when, after a year of

unfulfilled commercial promises, investors began to look beyond the numbers and put greater

store by the more qualitative indicators encapsulated in companies’ reputations. As a result,

while Reputation Contributions – the proportion of a company’s market capitalisation attribut-

able to the confidence inspired by its reputation - across the index rose substantially to support

share prices, it was not by enough to counter the effect of the retreating fundamentals and

growing concerns for political stability and the economy. Since then, the dislocation has become

even more apparent as the market responded to the cash steroid by putting even more weight

on company reputations and take the average contribution to a record high.

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Fig 1: Reputation Asset Development in the FTSE 350

As of January, the combined value of corporate reputations across the FTSE 350 stood at

£986bn. It comprised 42% of the gross market cap. in the lead index combined with 25% of

the mid caps. Both indicators are markedly ahead of where they were at the same time last

year, 3.5% points up in the FTSE 100 and 2.1% points in the FTSE 250 and all told, the

increased reputation impact accounted for an additional £130bn of shareholder value across

the two indexes.

All Reputations are by no Means Equal - the Top Ten

Size, aka market capitalisation, in so far as it implies ‘success’ and breeds familiarity, is

undoubtedly one of the factors behind the effectiveness of a company’s reputation. But it’s by

no means the only or indeed, the most important one. Whereas the average Reputation Con-

tribution in the top quartile of the FTSE 100 stands at 46% it’s only 9% points lower at 37%

at the bottom. Similarly, the average in the top quartile of the FTSE 250 is 31% compared

with 23% at the bottom. Size matters, but it’s what individual companies are known and stand

for that determines if, and then how, their reputation assets work and impact overall.

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Reputation Contributions across the index currently range from well below 0 where they are

so poor as to be actively destroying value, to over 50%. Royal Dutch Shell (57.6%) displaced

Unilever (56.3%) in the top spot as the company’s $30bn post BG divestment programme

gathered pace and it was seen to be successfully reshaping itself after the shock of the

enduringly low price of oil. Unilever, by contrast, suffered from some critical murmurings relating

to its prowess in innovation and the standing of its leadership. It remains to be seen whether

the fallout from the short-lived bid from Kraft Heinz in February provided the fillip the company

needs and indeed, claims to have secured.

Fig 2: Reputation Value, the UK Top Ten

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CompanyReputation Contribution

Change(% points)

Rank 2016Reputation Value

Jan/Feb 2017

57.6% 3.8% 2 £104,063m

56.3% -1.5% 1 £57,126m

50.3% 7.1% 11 £2,016m

50.1% 5.4% 8 £40,589m

49.6% 10.1% 40 £38,132m

49.4% 6.6% 18 £27,447m

49.2% 0.9% 3 £24,027m

49.1% 6.4% 19 £44,635m

48.8% 1.4% 5 £27,701m

48.5% 5.5% 17 £7,276m

The biggest riser in this year’s Top Ten was GlaxoSmithKline (up 10.1% points to 49.6%). The

company appears to have put much of the difficulty that dogged it in recent years behind it as

Emma Walmsley took over from Sir Andrew Witty in the Spring. The jury may still be out on

whether, as a ‘first time CEO’ she has all the necessary skills but the early signs are positive

and the company has recovered much reputational standing on critical factors including lead-

ership, innovation and attractiveness to talent.

Other big movers in the Top Ten included Diageo (up 6.6% points to 49.4%) and BP (up 6.4%

points to 49.1%) which jumped 18 and 19 places respectively. BP continues to make progress

in the long haul back from the post Deepwater Horizon lows and has recovered much of the

reputational ground lost. Diageo too, in 6th position, is back in familiar territory as the impact

of the changes of its own new (ish) leadership are increasingly seen to be delivering.

The Pillars of Reputation Value

Reputations are, by definition, complex properties comprising collected thoughts, feelings and

impressions. Corporate reputations are the expressions of how people with a professional

perspective, such as investors, see a company as an operating entity. Corporate reputations

create shareholder value according to how the company is seen to be performing on different

dimensions filtered through the lens of how they matter at the time. This may change as the

way that companies are perceived alters as a result, for example, of a communications

programme and as the interests of investors evolve. But ultimately, it depends on how well a

company’s reputation meets the needs of the people it’s constructed to serve.

Changes to investor interests during 2016 underline the dislocation noted above and provide

a general terms indication of the communications priorities for the year ahead. Movements

suggest that the investment community has begun to look past fundamentals and is making

judgements on the characteristics that they believe will give their investment targets the edges

over competitors that will help them to secure the returns they’re looking for. Expectations

shifted towards mid- to long-term characteristics with the result that growth factors such as

ability to attract talent (impact up 43%), innovation (up 42%) and quality of goods and services

(up 10%) have become more important. Conversely, interest in characteristics such as

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financial soundness (down 16%) and use of corporate assets (down 6%) was reduced as

fundamentals struggle to convince.

Fig 3: Drivers of Reputation Value Growth, 2017

The two most prominent casualties in the last year were quality of management and community

and environmental responsibility. While there was some cooling of interest in leadership

prowess as other characteristics moved centre stage the scale of the decline (down 37%) was

inflated by an atypically high baseline. Twelve months earlier, at the start of 2016, interest was

elevated by concerns as to the squalls, if not full blown storms, ahead. Interest in the factor is

undoubtedly lower but less so than the year on year comparison would suggests if compared

to the longer-run trend.

Community and environmental performance is however a casualty, although, it would seem,

a temporary one. Investor interest has been steadily rising as the benefits of sound practice

become more and more apparent. The 2016 set-back (down 29%) is more than likely a

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consequence of it being one too many things to worry about in the face of rising stress and

uncertainty.

Leveraging Reputation for Greater Shareholder Value

As every reputation manager knows, asset development requires attention to the strengths

as much as to the deficiencies. Much of the work is designed to make sure that communica-

tions are supporting the elements that are delivering and mitigating the impact of shortcomings.

Reputation Value Analysis provides a critical insight into how that can be achieved most

effectively and the unique company fingerprint that lies at the heart of a study provides the

guidelines for the messaging that is key to this.

Although every company’s fingerprint is different an aggregation of individual company profiles

across the FTSE illustrates the distinction between reputational characteristics that are deliv-

ering value at the start of 2017 and those which can be leveraged for value growth.

Fig 4: Messaging Priorities in 2017

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The bulk of reputation value across the FTSE (52%) is being delivered by perceptions of just

four of the nine headline components of reputation; attractiveness to talent, management and

product quality, and financial soundness. By contrast, the greatest leverage potential i.e. where

the returns on reputation building will deliver the greatest shareholder value uplift, lie in per-

ceptions of attractiveness to talent and long-term value.

Understanding how this plays out at the individual company level provides the critical frame-

work necessary to make decisions about its messaging and communications strategy. It offers

reputation managers the means to balance communications and messaging in a way that

secures and builds at the same time. Amid the economic headwinds, market volatility and

game changing transformations such as digital, understanding the role of reputation as a

means of risk reduction and delivery is more relevant than ever. Only then can managers be

sure that their activities will have greatest effect and the critical assets in their care work as

hard as they can, and indeed, must, if it is to serve the reputation owners and so shareholders

most effectively.

Clearly, reputation managers are to be congratulated for getting their charges into positions

where they are underpinning shareholder value to the degree they have but there is no place

for complacency. Reputations are, in many cases, providing solid foundations but they need

precisely structured messaging support ongoing if their influence is to be maintained or

extended.

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Looking ahead

The challenges for reputation managers are clear and demanding of answers if the assets are

to be managed to best effect. Reputation value analysis helps companies deal with uncertainty

and create the framework necessary in order to:

u Get back to the business of proactively managing corporate reputation: By spelling out

how much shareholder value is dependent on them and how much is at risk?

u Point to companies’ relative strengths, vulnerabilities and show how they can be

addressed in improved operational performance and messaging?

u Understand what matters most to investor stakeholders: Identify the drivers that have

the greatest impact on reputation value… and the messaging will move the needle?

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Reputation Value Analysis, Explained

Reputation value analysis explains the economic impact of corporate reputations with a view

to helping companies manage their reputation assets more effectively. It quantifies the financial

worth of corporate reputation - making the direct link to market cap and share price perform-

ance. Trending data on more than 700 Fortune and FTSE listed companies go back ten years.

Analysis is a two-stage process. To start with, the main factors that influence the investment

community, and thus the market capitalisations, of individual listed companies are identified.

This is achieved by means of statistical regression analysis of hard financial metrics, including,

for example, shareholder equity, return on assets, forecast and reported dividend, earnings,

liquidity and company betas and so on as derived from Bloomberg or Factset, and reputation

measures, in this instance, taken from Management Today’s ‘Britain’s Most Admired Compa-

nies’ and Fortune’s ‘World’s Most Admired Companies’ reports.

From there, a combination of metrics are calculated, including the gross economic benefit

shareholders derive from reputation assets, the location of value across the individual com-

ponents of companies’ reputations, the extent to which investment in reputation building will

produce returns in value growth, and the relative value potential of individual messaging

opportunities.

In addition to determining the financial value of a company’s reputation relative to its peers

and competitors, the contribution of the individual drivers of reputation value such as percep-

tions of companies’ ability to innovate, the quality of its management, its credential with regard

to corporate and social responsibility and so on are also calculated, as is their trajectory.

Given that the values of individual company reputations can often be significant, Reputation

Dividend’s work can be particularly useful in both uniting and aligning the focus of senior

management. Corporate clients span all sectors, many tabling their Reputation Dividend report

annually to their Boards by way of high-level reputation asset benchmarking.

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How Reputation Dividend Can Help

Analytics are applied on two levels.

Level 1: Dedicated Company Reports

Studies spell out:

u Reputation Contribution – the value of a company’s corporate reputation

(including trend data).

u Comparisons with competitors and peers.

u The sources of a company’s reputation value and its contribution to market

capitalisation - a company’s ‘Reputation Risk Profile’.

u The incremental value potential of each reputational driver and potential for ROI

– ‘what if’ analysis exploring different messaging possibilities.

u Guidance on reputational messaging priorities as they relate to securing and growing

shareholder value.

Individual company reports also include an executive level briefing and meetings with key

team members to discuss the implications.

Level 2: Customised Research and Consulting

For any company wishing to make a more comprehensive investigation, we offer a second

level of research and analysis. This provides a more detailed examination of the drivers of a

company’s reputation and its capacity to drive shareholder value.

This service is for organisations that wish to assess the impact of their corporate reputation

against company specific drivers, at times of major change (e.g. in a merger or acquisition)

or against a particular timeframe (e.g. in the run up to financial results).

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Level 2 reports take account of reputational and financial data from a mix of internal and

external sources. We can also undertake bespoke research as required. We use our own

research resources and can complement these with any additional sources.

These engagements often involve interviews with senior management, investment and

industry analysts to ensure that existing strategies are factored into our analysis.

In addition to everything in a Level 1 report, a Level 2 report will provide:

u The insights necessary to inform executive management teams how to allocate

resources and budget more effectively.

u A framework to align and adjust communications, messaging channels and budgets.

u Guidelines for revising the internal strategies to support the reputation opportunities.

u A basis to improve the coordination of communications and operational strategies.

u The insight and knowledge to better align corporate, internal and customer brand

management.

u The basis of a fully integrated and on-going reputation value management programme.

Level 2 engagements provide regular client liaison and findings review throughout the

process and culminate in a presentation to and discussion with the senior leadership team.

Reputation Dividend is proud to have worked with the following companies

For further information and how reputation value analytics can help yourcompany contact:

Simon Cole – Director & Founding Partner Simon@reputationdividend.com

Sandra Macleod – Director Sandra@reputationdividend.com

Or visit our website : www.reputationdividend.com

Valuing Corporate Reputation to Secure and Build Shareholder Value

© 2017 Reputation Dividend