How reputation matters for business success?

Prof. Dr. Patrick HumphreysLondon School of Economics and Political Science

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“In a market system based on trust, reputation has a significant economic value .”-Alan Greenspoon (former chair, US Federal Reserve Board)

“ Improvement in reputation can change stakeholders behavior, positively adding around 6% to an entity’s value; diminished reputation can cost an average 7%.”

“ In an acute reputational crisis, however, an entity’s pre-existing reputation can spell the difference between its survival or failure.”

“ A 2011 survey by audit firm Eisner & Amper revealed reputation risk as second only to financial risk as most important to boards.”

‘’ In 2011, 283 of the S&P 500 constituent members disclosed, in their annual

filings, that reputation risk was material to their enterprise value, up from 40 only three years ago.”

-Steel City Re, 2012

Enterprise IP and Reputation

“The business processes that drive ethics:

innovation, quality, safety, sustainability and security create reputation and are intellectual properties (IP).

These process are also intellectual assets (IA).

Reputation is the new IP.

Miller & Kossovsky, Intellectual Asset Management, vol 36, 2009

Reputation is important in assessing corporate value

‘’We challenge traditional ideas of how patents, trademarks, PR and insurance relate to corporate value because changing business conditions necessitate a shift in our collective thinking.’’

‘’Nowadays:

Reputation is valued and valuable, can be measured and quantified and these metrics can provide extra-financial feedback on business process management.’’

Miller & Kossovsky, Intellectual Asset Management, vol 36, 2009

Google search trends: reputation vs. patents

Google search trends: reputation vs. IP

Increasing interest in Reputation Management

Source: Lexis searches for terms “intellectual property management “ and “reputation management in a combined database of major newspapers and periodicals

Reputation: a major aspect of IP or IC?

When firms report their “intangible” assets, (such as “the positive reputation of the organization”) as having defined value in their annual accounts, they like to present it as a kind of “Intellectual property (IP)”, thus suggesting IP can by valued like physical property.

But a firm’s reputation is really part of its Intellectual Capital (IC) IC differs from “[physical] property” in three important ways:

1. IC resides in people’s minds and informs their social transactions.2. If you give IC away you still have it.3. IC is ephemeral - if you do not constantly nurture and look after IC, it

can vanish (it is not safe to “leave it in the bank - or under the bed” until you need it)

The three components of a firm’s Intellectual Capital

1. Human Capital is the range of knowledge, skills, experiences and capabilities of employees.

2. Structural Capital covers research and development, organisational routines, procedures, systems, databases, and intellectual property rights owned by the firm.

3. Relational Capital contains all resources linked to the external relationships of the firm, such as relationships with customers, suppliers, or collaborators.

Reputation Management is essentially about maintaining and improving Relational Capital. Xsights’ model applied for the Turkish Reputation Index covers all aspects of Relational Capital.

How to manage reputation effectively: the case of Nike

Nike is engaged in the design, development and worldwide marketing of footwear, clothing, athletic equipment, and accessory products.

• In 2007, Nike was experiencing the effects of headline risk associated with charges in the mass media of labour practices inconsistent with evolving notions of ethics and sustainability.

• On 31st May 2007, Nike released to the media a “landmark corporate responsibility report” in which it committed to bringing systemic change for workers’ rights throughout its supply chain, and to the entire industry.

Nike: reputation management and share price

But should reputation management be reactive (damage limitation) or proactive?

Where do you think that Nike lies in the 2011 Turkish Reputation index’s “Top Ten firms” in the textile sector, in comparison with such international brands as Addidas and Levi’s: is Nike now at the top, or does it lag behind the reputation leaders?

Better to treat reputation as Intellectual Capital (IC) – to be continually nurtured and looked after – involves proactive bottom-up management processes. InCaS

InCaS’ measurement and leaning paradigms

Building on an assessment of the SME’s strengths and weaknesses related to intellectual capital, InCaS identifies those areas most suitable for organizational improvement and innovation.

• InCaS measurement paradigm: The Intellectual Capital Statement (ICS), produced by this process, provides a means by which soft factors and important intangible assets of the SME may be communicated to external stakeholders

• InCaS Learning paradigm: The ICS process facilitates and manages IC flows, informing collaborative decision making within an SME to strategically develop the company.

InCaS enterprise process model (learning paradigm)

How to build facilitating infrastructurefor IC (reputational) flow management?

Key Question: In what domains do the relevant flows lie?

Traditionally: mass media's (TV, Newspapers) mediation set & communicated the reputation context – hence large enterprises employed “spin doctors – working with the media => top down attempts at reputation management.

But, increasingly, direct links though transactions and informal

networks matter

TRI: Information Sources about Organizations

Reputation Index, Base 2055, 2012

Other

Bureaucrats

Academicians/Scientists

Members of civil society organization/institution officers

Politicians

Columnist/Editors

Employers of organizations

Web pages

Written and visual press

Family and socail environment

0 10 20 30 40 50 60 70 80 90

0.1

7.3

9.6

9.9

9.9

18

33.4

56.9

82.9

83.6

%

How do you fiinf out about organizations ?

Reputation management via mass media?

For SME’s (98% of business in Europe and in Turkey) building reputation enhancing relational capital with the mass media is difficult

SME’s generally activities fall below the mass media’s “radar” (& hence reputation-making media communications) because “SME’s are too insignificant to warrant mass media attention”.

So SMEs have to rely on local, informal or distributed social

networking to mobile the relational capital needed for reputation enhancement.

Generate ‘Internet buzz’ via Face Book, Twitter, Trip Advisor reviews.

Bottom-up Reputation Management

• For a SME, effective top down management of reputation management is an elusive process- better to focus on bottom-up rather than top down reputation management

• Business process management in a facilitating environment, e.g. “Marketplace” Feedback systems focusing on ‘transaction reputability’ that involve buyers and sellers (or service providers and clients) publicly rating each other and thus generating relational capital).

• E.g., Ebay (copied by Amazon Marketplace) set up a comprehensive

feedback system to increase transparency and trust between buyer and sellers – Also collectively enhancing Ebay’s reputation.

Reputation enhancement- gaining collaborative advantage

the reputation index –applied only within a measurement paradigm still does little more than produce “league tables” – but in the competition to get into the “the ten most reputable organizations in the sector” there must always be many more losers than winners ---

Sectors can gain collaborative advantage through collectively improving their reputations.

Turkey’s Reputation Index’s sectorial approach is well placed as it offers information at sectorial level hence does not limit its self only to top five, or ten…

Cross-organizational Assessment and Development of Intellectual Capital

www.cadic-europe.org

CADIC is a European initiative to help small and middle sized enterprises (SMEs) to form collaborations, also called clusters.

CADIC team is building a framework, including tools and services to support the clusters all the way - starting even before its initiation.

CADIC is based on the concept that through clusters, all participating enterprises can increase their turnover, commercial reach and their chances of survival.

CADIC is thereby driven by the genuine needs, interests and experiences of SMEs and their business networks

CADIC

Thank you for your attention