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"There is a direct correlation between reputation and market capitalization. Reputation has to be treated as an asset, measured as an asset."
That's straight from Charles J. Fombrun, reputation guru, management professor at New York University's Stern School of Business, and founding director of the Reputation Institute. There are, of course, older quotations as well. Take Publilius Syrus from around 100 BC: "A good reputation is more valuable than money." In a world of Enrons, Arthur Andersens and WorldComs, all prominent members of Corporate America's Hall of Shame, this message takes evangelistic zeal to drive home. That's where the 48-year-old Fombrun fits in. The author of 'Reputation: Realising value from the Corporate Image' and editor-in-chief of the Corporate Reputation Review, a quarterly journal, few have been as reputation-crazed as he. On his first visit to India, he spoke to BT Online's Venkatesha Babu. Excerpts: Q: In light of scandals like Enron, Worldcom and Arthur Andersen, do you feel yourself vindicated? A: Very clearly. Scandals always serve the purpose of bringing immediacy and attention to the topic at hand. These companies are not victims. There have been crises before wherein often companies have been the victims like the Tylenol case with Johnson & Johnson, but not in these cases. Recent scandals are more due to failures of governance, failures of ethics, failure of responsible behaviour to the stakeholders. Corporates have been guilty. Q: Can something as elusive as reputation can it be defined? A: Reputation is like a halo. It is like a cloud, which sits on top of somebody's head. Be it an individual or a company. It could be favourable, unfavorable, attractive, unattractive. It has some characteristics. When we started off this exercise of measuring reputation we spoke to lot of people. From the feedback there were clearly six parameters, which were the dimensions of reputation. These were Emotional Appeal; Products & Services; Financial Performance; Vision & Leadership; Workplace Environment and Social Responsibility. Therefore very clearly it is much more that branding or public relations. Why did somebody like Sony? The answer was clearly great innovative products. In case of GE people said 'I love Jack Welch, there is a great team up there. Of course this was a couple of years ago, when Welch's halo had not been dented (laughs). Similarly is the case with Richard Branson and Virgin. The best part is that with these metrics it can be defined and measured. Measuring reputation is crucial because if you are not measuring it, you are not going to put a value to it and therefore might not manage it. Reputation has to be treated as an asset, measured as an asset. Q: Is reputation a bankable asset? Is there a co-relation between reputation and market capitalization? A: This is the holy grail of the entire thing. We all look for links between financial value and intangibles. Think of what a wealth of a company is. If we assume that the wealth of a company is its market value, what people are prepared to pay for it, then one has to decide what they constitute. Part of it is the physical assets of the company. It can be plant and equipment, all their property. In short anything which can be liquidated and sold. If you look at the numbers, it is worth 40-45 per cent of the market capitalization of most public company's value. So the book value is only about 45 per cent that the people are ready to pay. That means 55 per cent is what we call intangibles. This might include what maybe properterial client lists, know how in terms of technology, and ability. In short, human and intellectual capital. Typically this is valued at 20 -25 per cent. What is left is called good will but is more of the value of the brand, image and perception of the company. I call it the reputational capital. Thus Physical Capital + Intellectual Capital + Reptuational Capital = M Cap. The last is the area where I focus on. It is there and measurable. Efforts to correlate how people perceive and put a financial number to it are the entire issue of "reputation measurement and management." This reputation capital can be easily seen in times of crisis. Crisis does not affect your intellectual capital, not your organizational and physical capital. Then what does it affect? It hurts the RC. For example, take Perrier getting affected by the discovery of benzene in their water and M Cap being reduced by 10 per cent. Exxon seeing a 8 per cent drop in a single day because of a oil tanker crash and spill. Q: If reputation derives from perception, how can it be managed? A: Companies have to be more expressive. Throw more light on the functioning of the organization. This will reduce scandalous and irresponsible behaviour. As transparency and disclosure increases better the reputation. Companies have to communicate with their stakeholders and not just their shareholders, though even in that area companies have been failing in their tasks. Milton Friedman does a great injustice by saying "The only business of business is profit." It is not just that. Companies are tools of society. We seem to have forgotten that and are thus paying a price. Q: Is there a specific area which Indian companies have to focus on in the area of reputation management? A: Inspite of the success, which India has had in the Infotech sector - I have heard of companies like Infosys, Wipro and Tatas - more can obviously be done. Indian companies should push for more visibility. In NYU where we teach, India is heard in the context of a case study, which is only all about Bhopal and Union Carbide mess. That is the most frequent association that several biz schools internationally have with Indian companies.
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