Tuesday, October 1, 2013
Before I went to law school, I had a career in public relations and brand management. I had the pleasure of having a client that was among the best when it comes to brand reputation, Nintendo, where I was responsible (with our client and a solid team) for product launches like this, this, and this (PDF, p. 3). A few years ago, I even wrote an article combining my interest in branding and my interest in entity law: The North Dakota Publicly Trade Corporations Act: A Branding Initiative Without a (North Dakota) Brand.
Anyway, when I recently received my version of ERN Economics of Networks eJournal, (Vol. 5 No. 68), I took note of the paper, Corporate Reputation and Social Media: A Game Theory Approach, which is available here. The paper states in the abstract, “Corporate reputation is more and more the most valuable asset for a firm. In this day and age, corporate reputation, although an intangible asset, is and will grow as the most essential asset to publicize and also protect.” My first thought: as a general matter, can that possibly be true?
It appears not, though it is obvious that reputation can matter quite a bit to corporate (or other entity) value. (I leave the commentary on congressional reputation to others.) One study found that “Corporate Reputation contributes on average 26% of the value of a company's market cap.” In addition, a 2011 study found:
Analysis found that on average, corporate reputation is delivering proportionately more value to FTSE100 companies (c32 percent of market cap) than to FTSE250 ones (c14 percent). The study found that Royal Dutch Shell, Unilever, BG Group and Tesco are the top performers in terms of reputational contribution to market capitalization in 2010. Others in the top 10 included BHP Billiton, British Sky Broadcasting, Centrica, Rolls-Royce, GlaxoSmithKline and Diageo.
. . . .
The ten most valuable corporate reputations are contributing on average 48 percent to shareholder value (as measured by market cap). That represents a combined value of some £228bn. By contrast, the ten least effective reputations ( alist that includes Yell Group, Sports Direct, Enterprise Inns, UTV and Cable & Wireless) eroded value in 2010, by on average 10.7 percent of market cap worth a total of £720m.
Reputation contributions vary considerably by business sector. They range from an average 51 percent in the oil and gas sector to 16 percent in technology and utility companies.
One would expect that the value of reputation would vary by sector. It is not shocking to me that the value of reputation in the oil and gas sector is high or that the value for utility companies would be low. Technology companies on the low end seems odd, if you think Apple, Google, or Samsung. Apparently this study was talking more about tech companies like Molex, who most of us had never heard of until recently.
The harm that comes from reputational harms, though, is clearly a corporate concern. Just ask BP and for, that matter, other industry players, following the Deepwater Horizon disaster. Much of my current research is in the oil and gas area, especially related to hydraulic fracturing for those resources. Hydraulic fracturing already has a reputational problem, to say the least, but a major disaster could have fair reaching effects. And there are ways to drastically reduce the risk of bad events. As I have explained elsewhere (footnotes omitted):
A massive hydraulic fracturing accident could cause broad-reaching harm to the environment, landowners, drinking water, industry employees, and consumers. As witnessed when BP’s Deepwater Horizon oil platform suffered a blowout in the Gulf of Mexico, everyone can suffer when an industry actor errs. In that circumstance, one industry leader stated, “[i]t certainly appears that not all the standards that we would recommend or that we would employ were in place.” Nonetheless, all of the companies in the industry were negatively impacted by the moratorium placed on offshore drilling following the disaster.
Although companies need latitude to determine their own course on many business decisions, API and industry leaders seem to agree that there are some parts of the drilling process that must be followed. Industry leaders, trade associations, environmental leaders, engineers, scientists, and state and federal regulators should be working together to ensure that there are baseline standards in place to create a list of, and then avoid, “never events” for oil and gas drilling.
All involved need to avoid allowing the enemy of their version of “the perfect” to be the enemy of the overall good. Instead, we need to learn from the BP disaster and we need to learn from the experiences of those drilling, regulating, and studying hydraulic fracturing. As Laurence J. Peter, once said, “[t]here’s only one thing more painful than learning from experience, and that is not learning from experience.”
As it turns out, protecting against reputational harm does not only protect company value. It often also has corresponding economic, environmental, and social value.