Reputation key for brand owners

08 April 2011

LONDON: Corporate reputation plays a key role in shaping valuations and shareholder perceptions of companies, a study has argued.

Consultancy Bestra calculated this area contributes almost £460bn in shareholder value to firms in the FTSE350, approximately 30% of the group's market capitalisation.

This figure climbed by three percentage points on an annual basis in 2010, and has increased in each of the last three years.

More specifically, the report suggested reputation generates £430bn of the total net worth attributable to FTSE100 members, making up 32% of overall value.

Such a strong contribution can be compared with the remaining, smaller 250 enterprises, where it provides £30bn, or 14% of their net worth.

The benefits of improving reputation was shown by the fact a 5% lift in scores here yield a 1.8% jump in market capitalisation for a FTSE 100 firm, and 2% for a FTSE 250 counterpart.

In the first instance, Bestra used data across fields like earnings, shareholder equity, return on assets and dividends.

The findings were combined with analysis of nine core capabilities, like the standard of corporate leadership, products, innovation, marketing, social responsibility and financial management.

Based on this methodology, energy giant Royal Dutch Shell's reputation delivered 52.1% of its value, beating FMCG manufacturer Unilever, securing 52%, and natural gas expert BG Group, posting 49.9%.

Retailer Tesco achieved 49.8% on the same metric, ahead of resources company BHP Billion's 48.8%, media owner BSkyB's 48.2%, and energy provider Centrica's 47.7%.

Defence-to-aerospace titan Rolls Royce logged 46.1%, healthcare operator GlaxoSmithKline attained 44.8%, and spirits maker Diageo received 44.7%.

Among this top ten, reputation made up 48% of shareholder value, equivalent to £228bn, Bestra said.

By contrast, the ten worst performers witnessed "erosions" in their capitalisation as a consequence, averaging out at 10.7%, and collectively worth £720m.

Directories specialist Yell was the most affected, at -44.9%, followed by retailer Sports Direct on -17.8%, and Enterprise Inns, the pub network, posting -15.8%.

Other organisations in negative territory included broadcaster ITV, registering -6.3%, and communications firm Cable & Wireless, on -4.4%.

Reputation assumed the greatest significance in the oil and gas sector, supplying 51.2% of capitalisation, slipping to 30.4% for basic materials, 27% for healthcare, and 24.5% for consumer goods.

According to Bestra's study, the main contours impacting this area at present are the strength of management, products and corporate and social responsibility programmes.

This constitutes a shift from the height of the recession, when long-term value, product quality and financial soundness were essential, while CSR was viewed in an unfavourable light.

"With investors' uncertainty having settled a little, arguably, it is factors like 'quality of management' and 'quality of goods and services' that they are increasingly looking to," the study said.

"Furthermore, and most likely stimulated by BP's difficulties last year, they are appreciating the importance of 'community and environmental responsibility' again."

"Whereas it was being marked down by the investment community before the Deepwater Horizon disaster it is now, quite rightly perhaps, recognised as a key value driver."

Data sourced from Bestra; additional content by Warc staff