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Corporate Reputation: Assessing the Impact of Your Next Investment

Like brand equity, corporate reputation is an intangible asset that has some very tangible ramifications. It has the power to affect every aspect of the business, including enhancing or destroying shareholder value. But when it comes to tracking and measuring the value of investments we make in enhancing reputation, it seems surveys of investor and analyst attitudes are all that make it onto our marketing dashboards.

Much work has been done to demonstrate the correlations between positive impressions reported on a battery of attitudinal questions and share price multiples above the sector average. The general consensus is that if one can positively impact the attitudes of the audiences who influence the company’s ability to operate — analysts, regulators, investors, etc. — those audiences will act in ways that are more favorable to the company’s interests, which in turn will eventually translate into increased shareholder value in the form of share prices at a higher multiple than the sector average.

Unfortunately, sector-price multiples rise and fall in the broad markets, owing to a great many variables beyond reputation. Any business case for investments in enhancing corporate reputation built on the assumption of achieving a higher stock price multiple is, in effect, a bet on the broader market trends. And if you were so confident in your ability to read the broader markets, why waste your time managing corporate reputation when you could be running a hedge fund? This is precisely why it’s a career-limiting move to promise your CEO that stock prices will rise in response to a proposed investment in initiatives intended to improve the corporate reputation.

So how do you measure the payback on the next investment you might make in seeking to enhance that reputation?

While it may be comforting to know that people in influential positions think highly of your firm and feel better about the company, unless those attitudes translate into some action or beneficial behaviors (including, in some cases, deliberate inaction), more positive feelings don’t generate economic value. Absent some reasonable expectation for how a stronger reputation will translate into tangible value for shareholders, the money dedicated to changing attitudes isn’t an investment, it’s just an expense. Measuring attitudinal shifts alone is like measuring purchase intentions without testing the correlation to actual purchase. It’s only half the picture, at best. The whole picture emerges only by focusing on the underlying behavior shifts.

The first step is developing clear ideas of who you’re trying to influence and what you’re specifically trying to accomplish before you begin.

Beneficial Constituent Behaviors
Constituency groups that affect the corporate reputation can be virtually any group that the company interacts with — customers, employees, investors, shareholders, financial analysts, the media, interest groups, regulators, partners/resellers, and suppliers.

Bill Margaritis, senior vice president of worldwide communications and investor relations at FedEx, includes “emerging markets” as a distinct constituency group because he feels you have to communicate differently with people in markets you are entering than you would with people in markets in which you already have an existing reputation.

Judi Mackey, senior vice president and director of the U.S. corporate and financial practice of public relations firm Hill & Knowlton, splits consumer customers and B2B customers into separate buckets because she feels consumers seldom base their purchase decisions on a corporate brand (unless there is a scandal). Conversely, she’s found that if a corporation behaves badly, it influences B2B customers more.

The chart above shows examples of profitable behaviors by constituency group. Each group is unique in how its behaviors can positively or negatively affect a company’s reputation and bottom line. Favorable employee opinions can result in longer employee retention and higher morale, which reduces employee acquisition and training costs and improves productivity. Meanwhile, bad morale or publicity can cause an employee exodus.

Favorable ratings from financial analysts can indeed help improve share price, but more tangibly they can lower the cost of capital and generate greater interest in the company’s bonds amongst the investment community. Meanwhile, an endorsement from an influential community interest group can open doors for powerful partnerships, increase acceptance among customers, employees, and analysts, and could even generate increased interest within the investment community.

Each of these constituent behaviors is trackable, measurable, and can be directly related to a desired financial outcome. The key to achieving those outcomes is to set reputation goals that tie in directly with your business goals, then to create metrics that measure performance against them.

The Measurement Fits the Goal
Consider this example: Retail investments giant Company A invests $2 million in a public relations campaign in a mid-sized market centered around a donation to revitalize youth sports facilities, in return receiving naming rights on a prominent Little League complex. Its rationale for making this gesture is to enhance the image of the company as a community-minded local organization and to associate its brand with the youth and vitality of sports.

Given these objectives, Company A measures the effectiveness of its investment in terms of the change in attitudes amongst the local customer, prospect, employee, agent, legislator, and vendor constituent groups. It develops elaborate surveys on key brand equity attributes and measures the pre-post differential in the affected market vs. nearby control markets where there are no such sponsorships. It also measures the number and nature of media “hits” received in the local press and calculates the value of that exposure if it were paid at rate card for each media.

So when all these indicators respond positively, what does Company A tell the shareholders? “The campaign was a huge success! The attitudinal shifts are through the roof. And we generated over $2.5 million in free media exposure, giving us an ROI of 25% on the media value alone!”

Compare Company A’s approach to retail investments giant Company B, which makes a similar investment in a different market, but does so against the stated goals of:

increasing the number of “power agents” (those doing more than $10 million annually in sales) from 38 to 54;
improving employee retention in their local call centers from 70% to 85%; and
getting a local ballot initiative on the legislative calendar to create greater flexibility for the introduction of new products.

Company B’s strategy is to achieve the objectives above by influencing the agents to carry more of its products, giving employees more reasons to feel pride in their association with the company, and providing legislators with a basis for supporting legislation that some may consider controversial.

Like Company A, Company B painstakingly measures shifts in key brand attributes amongst the key audiences. And it measures the amount and nature of media coverage it receives in the local press. But the firm also measures the number of agent-to-power-agent migrations, employee retention rates, and the week-by-week progress of its target legislation. So when it comes time to report back to the board on the campaign effectiveness, the board can relate not just that attitudes have improved amongst the key constituency groups, but more tangibly that:

the firm increased the number of power agents to 57, which has a forecasted net present value (NPV) of $1.4 million;
employee retention fell slightly short of the 85% goal at 82%, but the expected savings in recruiting and retraining are still worth $1.8 million NPV based on employee tenure and productivity; and
the ballot initiative is in the right committee of the state assembly and a straw poll of legislators suggests a 65% likelihood of passage within the next six months, which would translate into a probability-adjusted $4.2 million in incremental net profits from new product sales.

Bottom line: The managers in Company B can report to shareholders that not only have they improved attitudes among key audiences, but the investment they made in enhancing the company’s reputation has achieved short-term payback of $3.2 million, for an ROI of 60%, plus the prospect of a longer-term payback of an additional $4.2 million. And that’s before the value of any incremental media exposure is taken into account — which sophisticated investors know is not really worth the rate-card value of the exposure, unless the company had intentionally planned to forego other advertising or communications expenses in achieving it.

So what did Company B do differently than Company A? It set expectations for the investment it was making in more financial, tangible terms, and then developed the framework for measurement in terms of the expected economic behaviors it intended to create. Sure, it included the attitudinal shift surveys to diagnose the effectiveness and consistency of its message. It just didn’t stop there.

Two Holes in the Business Case
When it comes to measuring the value of investments in corporate reputation enhancement, most companies fall short in developing the business case for one of two main reasons.

First, many believe that the actual economic outcomes that create tangible shareholder value are subject to too many variables beyond the reputation initiatives being proposed, and that basing the assessment of effectiveness solely on those program components would undersell the value. Unfortunately, this argument, while true at its core, doesn’t hold water in an era in which science has taught marketers so many new ways to isolate the impact of test variables from the overall market dynamics (experimental design, multivariate testing, etc.). It’s not a trivial undertaking to reach a companywide consensus on the incremental impact of the investments in reputation initiatives, but it can be done.

Second, the question of the certainty of expected long-term benefits can always be called into question, placing great political risk on the head of the “assumer.” Circumstances change over time, competitors come and go, management isn’t consistent in its priorities or resource allocations, etc., etc. Again, true at the core, but not a sufficient excuse for failing to provide a reasonable estimate of the expected value to be derived from an investment being contemplated today, based on what is known or likely to be true as of this moment — the moment in which a decision is required.

The net effect of these process deficiencies is that, unless the quantifiable near-term benefits are unassailably attractive, the measurement methodology falls back to the less-predictive assessment of attitudinal shifts. And while this methodological retreat to unimpeachable ground may preserve one’s technical credibility, it fails to provide the real guidance the business needs regarding how and where to invest to grow shareholder value.

So how can you reasonably forecast how much of the money being spent today is going to pay back this quarter, next quarter, next year, etc.? Long-term reputation value creation can generally be divided into two categories: risk management and opportunity management.

Measuring Reputation Risk Reduction
Reputation management is, in many respects, risk management. To some degree, money is spent on managing the company’s reputation to minimize the negative effect on shareholder value of events such as privacy breaches, product liability lawsuits, environmental mishaps, labor actions, or other things management wouldn’t like to read in the newspaper. This is commonly known as “putting water in the bucket in case a fire breaks out.”

There are some well-accepted methods for determining the expected cost of such risks. If you can identify the types of reputational risk you are exposed to and then rank them according to the probability of occurring and severity of outcome, you can develop a risk strategy matrix to decide how to deal with them.

A team of internal and external “experts” with knowledge of the company’s workings and exposures can work together to come to a consensus on the relative probability of each of these events occurring based on their assessment of the scope and quality of management processes in place today. The same group would likely be able to reasonably predict, for each type of risk, whether the cost to shareholder value could be in the millions, tens of millions, or hundreds of millions. Multiplying the probability of any given risk occurring by the potential magnitude of the impact on shareholder value gives us an economic framework for assessing the exposure to that risk, and consequently the amount of effort and money management should be willing to spend to avoid it.

The primary structure of the risk-avoidance business case is “insurance.” The money you propose to spend should be as little as you need to get the job done, but in no case more than the probability-adjusted cost of doing nothing. If, for example, the risk of a particular reputation affront is estimated to be $100 million in loss of shareholder value, but the probability of the event occurring is estimated to be 5%, then the maximum investment in management or mitigation programs should be $5 million. Ideally, the cost would be far less.

In this case, the critical metrics to track would be:

the leading indicators on the likelihood of the negative outcome occurring — surveys, media message tracking, legislative progression, etc.;
the continuously adjusted probability of occurrence; and
the improving efficiency of efforts to contain or mitigate the risk, calculated as the financial value of risk reduction per each dollar of investment in proactive avoidance.

The effectiveness of these risk-avoidance investments is then measured in how well the company continues to reduce the probability and avoid the negative outcome at lower and lower cost over time, until the risk has practically disappeared.

Measuring Reputation Opportunity Realization
Sometimes, reputation management is about realizing opportunities. Positive reputations can create a more fertile field for sowing the seeds of success in terms of gaining “permission” to operate more freely based on the trust and confidence of the general public, interest groups, government regulators, employees, and customers. This provides clear benefits when introducing new products or markets, making acquisitions, or changing pricing. It can also reduce the cost of recruiting and lower the cost of capital investments by engendering confidence in the financial community.

If these are the principal arguments in favor of investing in reputation management, then your expenditures should be matched in relationship to the value of the anticipated economic outcome. In other words, all other things being equal, what would future shareholder value look like with the proposed investment vs. without?

Thinking back to the earlier example of the two retail investment giants A and B, we would construct the opportunity business case around the expected value of achieving the targeted levels of agent recruitment, employee retention, and new product sales resulting from a more favorable legislative agenda. Measuring effectiveness is then a function of:

properly stakeholdering the assumptions about the value to be derived from achieving the goals;
developing the behavior tracking processes to count the behavior shifts and correlate them to profit realization; and
continually monitoring the assessment of the probabilities of longer-term paybacks and reassessing the need for incremental spending on a “forward-return” basis (one that looks at the prospective payback of an incremental investment from this date forward).

Whether your objectives are opportunity realization or risk avoidance, it’s hard to make the business case for spending the money when resources are constrained or you lack the knowledge to determine what level of investment in people and programs would be required to get to “critical mass” of effectiveness. But if you build your business case around achieving the desired financial outcomes by changing behaviors, not just attitudes, you’ll find the pieces will begin to take shape and the measurement tactics will become more evident.

Dangerous Disaggregation
One paradox of measuring the impact of investments in reputation is the need to separate out the impact by constituent group to calculate the value of specific behaviors, when in reality most reputation investments are executed in ways deliberately intended to have impact across constituencies. If you’re struggling to find reasonable means of forecasting the impact by constituency, assemble a team of experienced, informed managers and advisors and use Delphi or response function techniques to derive the best possible expected value of behavior change.

The objective is to disaggregate by constituent group as much as you reasonably can, and no further. Not enough disaggregation leads to stalemated, theoretical conversations about all the variables that are uncontrollable. Too much disaggregation leads to unrealistically oversimplified assumptions about the independence of variable elements on the final outcome.

Key Takeaways
It’s not easy to develop a robust measurement program for determining the value of investments in corporate reputation. But like other types of marketing investments, you can create a more informed foundation for expected economic outcomes. In addition, the process will promote a more deliberate knowledge base development with regard to how changes in attitudes among key constituencies translate into changes in behaviors to continuously improve the accuracy and predictability of your efforts. Where possible:

use a combination of survey research, syndicated tracking studies, media monitoring, content analysis services, econometric analysis, and qualitative data-gathering (see the next page for more information on each technique);
develop hypotheses about potentially beneficial programs/initiatives and test their appeal through modified conjoint or choice-options research methods; and
pilot test programs in defined geographic markets (with matched controls) if you can to determine the outcomes under full macroenvironmental conditions.

Taking all or even some of these steps may cost more than the total reputation-management investment program. Like all measurement challenges, one of the first questions to grapple with is, “What’s the value of the better information I expect to get?” Unless you have reason to believe that the outcomes will be materially better and far greater than the cost of deploying additional research and measurement tools, you might just stick to facilitating key stakeholder assumption-making.

Regardless of which research or tracking tools you choose to employ, a well-thought-out plan with clear economic-value targets based on strategies to shape the specific behaviors of constituency groups (not just their attitudes) will help drive the measurable payback that investments in corporate reputation will have on shareholder value.