Does reputation have market value?
RESEARCHERS and investment analysts need to pay attention to the track record and reputation of the principals behind listed companies. With the media coverage of business players now at par with their political and entertainment counterparts, reputation has figured in the valuation of the company. Thus has “reputational risk” entered the picture in addition to the traditional credit or liquidity risks when “stress-testing ” an organization.
Some positives drive up the premium in pricing. These include a track record like increasing the market cap of the stock through efficiencies, a strong management line-up, clear strategy, or an aggressive cash dividend policy. A character discount may arise from unkept promises on an acquisition, weak second-tier management, lack of transparent succession planning, or a luxurious personal lifestyle funded by the company.
The importance of reputation has increased exponentially with 24-hour news channels and the rise of social media. Business is now covered by a tabloid-style of business reporting. Purveyors of scandal can affect reputations in the blink of an eye. Integrity takes years to build up and minutes to destroy with a malicious post.
In business, even more than entertainment, reputation has become an intangible asset (or liability) even when it is not financially reflected in the books. Although in acquisitions, this matter of character is lumped into “goodwill” cost.
The value of an actively traded stock is posted daily, with its price fluctuations determined by financial metrics as well as reputation. The latter can sometimes figure even larger in the valuation than the level of capital expenditure.
In the credit ratings of companies and individuals, bankers use the five Cs of Credit: the traditional four of Character, Capacity, Capital, Collateral, with the 5th being Conditions. It is the first C where reputational risk is measured.
The reputation attached to a company and its principals is not based on hard numbers. Because of its CEO, a company may be dismissed as volatile when aggressively acquiring companies that don’t fit any strategy — like a bake shop mixed with shipping and oil distribution.
Reputational branding is becoming a PR business, no longer just limited to political figures and maneuvering for upcoming elections. TV interviews are arranged to show the philanthropic side of a tycoon. Even awards are solicited to prop up the personal profile. Philanthropy is now more focused on certain advocacies like education, sports, or the arts. While such interests do promote the common good, there is a reputation-building aspect of this charitable endeavor.
Still, the personal branding of a CEO may not be enough to protect him from internal forces in his own organization. Being too high-profile can attract envy and undue attention which competes with the corporate brand itself. (Hey, we sell services not “likes” on social media.)
The effect of reputation on price is more evident in products with highly emotional and discriminatory content such as art. Certain players bid irrationally for an artwork to expand a collection by a particular artist enjoying a high reputation. Art then is a good example for the reputational effect on market value.
In local business with its small and well-connected grapevine, reputation reigns. Stocks are associated with their principals and lumped together as the “ABC” group, with that combination of letters representing a person or family. Rumors of the takeover of a sleepy company by a particular character are enough to lift a dormant stock into the stratosphere or fall back in a hard landing when nothing seems to be going on — we are still finalizing the closing conditions. The research analysts’ valuations, based on future cash flows and acquisition synergy, are enhanced or devalued by the reputation of the principals involved.
Ours is a business scene dominated by a few families and personalities, with their sometimes-zigzagging reputations. Buying shares of a company is a declaration of faith not just in its financial performance but in the character of its leadership. Such perceptions are not static. They swing with a company’s fortune and the scrutiny of regulators and political players.
Reputations, whether good, bad, reinstated, or on the decline again, eventually fade from disuse. Only in notices of deaths are old reputations exhumed… with some hazy recollections and a lack of details.