We focus too much on the value of reputation at the expense of its purpose.
Business leaders increasingly recognise the importance of reputation. But is there too great a focus on the value of a good reputation, instead of asking: a good reputation for what?
Shareholder value skew
Many of the metrics that seek to measure the monetary value of reputation base their models on market capitalisation. This is not dissimilar to the way brand equity is measured. The problem is not only that reputation equity metrics are over a decade late to the party, but a number of research papers point to the deficiencies of focusing on shareholder value for the long term performance of a business.
Shareholder value, when coupled with quarterly reporting, incentivises quick wins over long-term performance. This means firms with large reputation equity values, might be artificially overcooked and see sharp falls in the future. Shareholder value also focuses reputation studies on publicly listed companies and, particularly, US stocks because of the large data sets available about them. This skews our understanding of reputation to one type of company listed in one part of the world. We end up with a very US-centric outlook.
Value, purpose and direction
Reputation is often referred to as a strategic business asset, however, if something is truly strategic, you need to know more about it than its monetary value or whether it is ‘good’. You need to know which factors affect it, where it helps your business, where it’s a hindrance and how it can be deployed advantageously.
London’s black cab drivers have a good reputation. Their vehicles are iconic the world over and they know London intimately. Their great reputation for getting people across the city quickly hasn’t stopped them being Uber’d by a cheaper, on-demand rival whose drivers have satnavs.
Meanwhile, the dabbawalas of Mumbai, who equally have a fantastic global reputation and are also known for getting things across a city quickly, are now working in partnership with Flipkart, an Indian online retailer, to deliver online purchases across Mumbai.
In both examples, the group in question has a good reputation. However, what they have a good reputation for and the context within which they operate mean that while one group sees eroding incomes, the other is growing into new roles.
As we see disruption across a number of business sectors, reputation has become one of the few protectable and transferable assets companies have. However, to fully capitalise on your reputation you need to understand its drivers.
Tata Group, the Indian conglomerate, has a reputation for hands off ownership, trusting management and investing in the companies it buys. Its purchase of Jaguar Land Rover saw Tata enter the luxury segment of the automotive market when its previous sector experience was largely limited to manufacturing and selling very basic trucks and buses almost solely for the Indian market.
Jaguar Land Rover has grown strongly under Tata’s ownership following years of anaemic growth under previous owners Ford; a company that on paper had the experience and scale to grow the Jaguar Land Rover brand.
Tata went through extensive discussions with suppliers, union representatives and government officials to reassure them of its plans. Its reputation helped the firm buy its way into a new sector in which it has subsequently built a strong market position.
Reputation can be strategically important and it’s right that chief executives are increasingly showing awareness of this. However, we should move beyond discussions of good or bad when talking about reputation and stop trying to construct value metrics derived from shareholder value.
Only by understanding what companies have a reputation for and the context within which they operate can we provide truly strategic advice on business issues.