The Economics of Reputation A practical toolkit for a complex subject Contents Introduction 1. What is reputation? 2. Why has reputation become a critical issue? 3. How is reputation created? 4. How does reputation bring value? 5. How is reputation measured? Concluding thoughts Further reading Introduction The Interest Over the last twenty years, interest in the subject of reputation has grown exponentially in both the business and academic world. Today, few CEOs would argue that their corporate reputation isnt one of their companys most valuable assets. In the business press, several publications have put forward reputation rankings which rate companies based on their overall reputations. In academic spheres, scholars have created their own tools for measuring reputation and delved into questions of definition, creation and valuation. Your brand reputation is everything and youve got to fight to protect it. RICHARD BRANSON Founder & Chairman The Virgin Group The Confusion Yet, as the volume of literature has grown, the task of developing a clear understanding of reputation has become ever-more problematic. Different definitions exist, various measurement tools have been proposed and a range of opposing ideas put forward. In todays world, where ideas are increasingly displacing the physical in the production of economic value, competition for reputation becomes a significant driving force, propelling our economy forward. MILES D WHITE CEO & Chairman Abbott Laboratories Aim This toolkit provides a straightforward way into the topic. We will focus on 5 fundamental questions. We will give an overview of the relevant literature produced by academic and business sources. We will share the perspectives of leading industry figures. We will consider where reputation research is heading in the future. Industry figures we spoke to... The Five Fundamental Questions ONE What is reputation? Different definitions of reputation exist in business and academia; with this lack of clarity there have been calls for scholars to unite around a commonly agreed upon definition. Salient Themes in Literature In our review of the existing literature, definitions appeared to cluster around three attributes REPUTATION AS PERCEPTION REPUTATION AS JUDGEMENT REPUTATION AS AN ASSET Perception Several definitions stressed how reputation is about stakeholders having a perception of a firm. In these definitions, reputation was discussed as a net perception or representation of an organisation. Reputation is a buyers perception of how well-known, good/bad, reliable, trustworthy, a firm is (Levitt, 1965) Reputation is the perceptual representation of a firms past actions (Fombrun, 1996) Reputation is the perception of a company developed over time (Bennett & Kottasz, 2000) Judgement A further significant theme was the idea that reputation involved observers making a judgement of a firm. Reputation was defined as an assessment, evaluation or gauge. Reputation is an overall evaluation of a company over time (Gotsi and Wilson, 2001) Reputation is a gauge of a firms relative standing (Fombrun and Rindova, 2001) Reputation is an estimation of a person or thing (Mahon, 2002) Asset Other definitions stressed that reputation was something of value or significance to a firm. Reputation was described as a resource or as an intangible asset. Reputation can be defined as an intangible asset (Drobis, 2000) Reputation is an intangible resource (Goldberg et al., 2003) Reputation is a valuable but fragile intangible asset (Miles and Covin, 2002) The Stakeholder Perspective Is reputation static or ever-changing? We think fluidity should be an important part of any definition of reputation. Now more than ever reputations are dynamic. Firms once highly regarded may be viewed unfavorably by contemporary standards In 2008, Starbucks was accused of wasting more than 23 million litres of water each day when it was revealed that its outlets deliberately left taps running non-stop in order to achieve health and safety targets around washing equipment. The so-called Dipper Tap scandal seriously damaged their reputation. Starbucks was demonised in the media and left facing customer protests and boycotts. Fifty years ago would this story have caused the same level of damage to a companys reputation? TWO Why has reputation become a critical issue? Today, due to a combination of factors, reputation is seen as a critical concern for consumers, businesses and academics alike. Salient Themes in Literature We found that the reasons given by scholars to explain the explosion of interest in corporate reputation could be broadly grouped into two categories CONSUMER WORLD BUSINESS WORLD The Consumer World Several academics have highlighted how one-off events and wider societal trends have driven interest in reputation. The rise of digital and high- profile reputation scandals were widely cited. Heavy press coverage of corruption and misconduct at previously trusted institutions has caused public outcry Today consumers have a voice. Social networks have empowered them A huge shift has occurred in the last 20 years digital has grown to become a central part of our everyday lives... Source: Hunter et al., 2010 & Fan et al., 2013 The Business World Others have attributed the growth in concern for reputation to changes that have occurred in the economy and the ways in which businesses operate. The pressure is on for organisations to be more transparent (see Carroll, 2009) consumers are challenging firms to share information such as profits, production techniques and environmental credentials. There is no longer anywhere to hide (see Carroll, 2009) a firm cannot afford to be let down by a reputational crisis (see Schnietz, 2009) The Stakeholder Perspective Has the rise of digital lessened the importance of corporate reputation? Many argue the rise of digital has forced organisations to pay greater attention to reputation, yet we believe the reverse is true. The pressure is on for organisations to be more transparent (see Carroll, 2009) Bad sentiment around a brand is quickly forgotten in todays digital world On the one hand, digital has forced organisations to pay more attention to their reputation as it has meant the spread of negative stories is quicker and more far- reaching than ever. However, we believe the ubiquitous nature of the digital in our lives today means that bad sentiment around an organisation is quickly forgotten by consumers as it is replaced by the next wave of headline, tweets and Facebook posts. Consider how supermarkets have recovered after the horsemeat scandal, or how Cadbury is still the one of the nations most loved brands despite a Salmonella scare in 2006. THREE How is reputation created? Once a firm understands this, they can take steps to actively build and manage their reputation, as well as repair it when it is damaged. Salient Themes in Literature From our review of the existing research, three distinct mechanisms for developing reputation were visible PARTNERSHIPS INITIATIVES ASSOCIATIONS Partnerships A number of studies explored how young firms without a reputation of their own can borrow the reputation of prestigious third parties by partnering with them. Young firms can benefit from the prestigious reputations held by investment banks that serve as underwriters during initial public offering stage (Gulati & Higgins, 2003) The benefits of associations with prestigious affiliations include higher survival chances, ability to attract future strategic alliance partners, improved innovation, growth and financial performance (Pollock & Gulati, 2007) Firms can borrow the reputations, preferably prestigious, of actors with whom they affiliate (Stuart, Hoang & Hybels, 1999) Initiatives A further cluster of studies focused on how firms can create a reputation through implementing reputation-building initiatives. Companies can build reputation by winning product awards and competitions (Reuber & Fischer, 2005) Companies can build reputation through symbolic actions and communications (Rinadova, Petkova & Kotha, 2007) Companies can build a reputation through innovation and new product introduction (Reuber & Fischer, 2005) Associations A final cluster of research highlighted how firms can build reputation by accumulating the personal reputations of the founders of the company. The breadth and experience of founders can improve a young firms reputation and access to venture capital (Beckham & Burton, 2008) Experienced founders transfer to their new firms some of their personal reputations because their experience reduces stakeholder perceptions of uncertainty with regard to the new firm by ensuring that it possesses the necessary organisational and technical expertise (Pollock, Fund & Baker, 2009) Venture capital investors perceive less uncertainty about firms founded by experienced entrepreneurs (Sapiens & Gupta, 1994) The Stakeholder Perspective How can consumers play a role in the creation of reputation? The existing literature mostly sees reputation as something created by organisations themselves, but we think consumers play a role too. Consumers can play an active role in shaping reputation via social media We spoke to David Levin, who is behind the Twitter accounts of the X Factor and BBC shows including Doctor Who and The Voice. He described how consumers have been empowered by social media: Each day, brands are actively discussed just about everywhere online by consumers, which can bring both great benefits but also negative consequences. Positive stories and product reviews can help to attract new customers, however, negative discussions of the brand can seriously harm perceptions of the company. FOUR How does reputation create value? There is almost unanimous agreement that reputation creates value, however, in terms of identifying just how reputation creates this economic value there is much less of a consensus. Salient Themes in Literature In our broad overview of the existing literature that relates to how reputation creates value, two themes were visible CREATING VALUE EXTERNALLY CREATING VALUE INTERNALLY Creating Value Externally Many authors highlighted how reputation can bring financial benefits by influencing processes and relationships that are external to an organisation such as improving supplier relationships and driving customer demand. In terms of investors, a good reputation can lower the cost of capital (Cao et al., 2010) Good reputations breed loyalty among customers (Bontis et al., 2007) Customers are willing to pay a premium for the offerings of high- reputation firms (Shapiro, 1983) Creating Value Internally Others focused on how reputation has a value as it impacts positively upon processes that are internal to a company such as motivating staff and improving employee retention. Working at an highly- reputable organisation is motivating and can therefore result in a more productive workforce. (Ritter, 1984) A firm with a good reputation will possess a cost advantage because, ceteris paribus, employees prefer to work for high-reputation firms, and should therefore work harder, or for lower remuneration (Roberts and Dowling, 2002) There is a direct correlation between employee retention and reputation staff want to stay at companies that are well-known and admired (Stigler, 1962) The Stakeholder Perspective Can a good reputation ever have a negative impact on a company? Whether through attracting customers and investors, or though lowering the costs of production, the work we reviewed was united by an agreement that a good reputation is a positive thing that can create value. The Innovation Cycle At stage 1 of cycle the firm is performing well and in turn building a strong reputation for itself By stage 2, the firm is falling into the status quo trap: appearing to have a formula for success sorted, the firm continues to operate in the same ways By stage 3, this lack of innovation is resulting in the firm being left behind by competitors By stage 4, the firm has lost its reputation as market leader By stage 5, the firm has been forced to innovate and improve its offering in order to rebuild its reputation and thus the cycle begins again This model illustrates how we believe a good reputation can sometimes hinder a companys ability to innovate, and thus its potential for future growth. FIVE How can reputation be measured? Although, reputation has long been recognised as a valuable asset, it is only recently that tools have been developed to measure it Salient Themes in Literature In our review of the various measurement tools that have been applied, we identified three broad categories RANKING RATING MULTIPLE STAKEHOLDER Ranking Measures A number of the measures which have been proposed by business media rank organisations based on their reputations in comparison to one another. e.g. Fortunes Worlds Most Admired Companies, surveys approximately 15,000 senior executives, outside directors, and industry figures and asks them to rate a shortlist of companies based on nine attributes. These scores are then aggregated and a ranking produced. Rating Measures Others have used rating-based measures, which are compiled through asking stakeholders to rate the reputation of the company in question. e.g. Helms (2005) Rating based model measures the reputation of firms using open-ended interviews with customers, employees and shareholders. Multiple Stakeholder Measures Multiple stakeholder measures recognise how reputation is a collective construct and bring together the different perceptions of a company different stakeholders have. e.g. The Reputation Quotient Model developed by the Reputation Institute and market research firm Harris Interactive, sees a diverse group of respondents, from different national and demographic backgrounds, asked to rate companies based on a standardised 20 attribute scale. The Stakeholder Perspective Are the consumer and business reputations of organisations colliding? We believe that no longer are different stakeholders solely focused on specific aspects of a companys reputation. The consumer and business reputations of a organisation are colliding Increasingly the consumer is interested in the financial and business life of organisation behind the brand, and likewise investors and those in business are increasingly concerned with the how consumers perceive the brand. This means that multiple stakeholder measures for reputation may be redundant as all stakeholders will have the same concerns. This collision of worlds is likely to make the study of reputation, and the value it adds, more complex and fascinating in the future. Concluding Thoughts An entry point We hope this toolkit has provided an entry point into thinking around the topic of the Economics of Reputation. Instead of providing stock answers to standard questions, the idea has been to stimulate thinking and provide a set of reference frames and language tools, that each user can apply to their own examples, in order to create answers to a potentially demanding matter. Further Reading Barnett M. L., Jermier J. M., Lafferty B. A (2006) Corporate Reputation: The Definitional Landscape, Corporate Reputation Review, 9, 26-38. Beckman, Christine M., and M. Diane Burton. (2008). Founding the future: Path dependence in the evolution of top management teams from founding to IPO. Organization Science 19: 3-24. Bennett , R . and Kottasz , R . (2000) Practitioner perceptions of corporate reputation: An empirical investigation, Corporate Communications: An International Journal , 5 (4) , 224 234 . Bontis, N. and Booker. L, D., (2007) The mediating effect of organizational reputation on customer loyalty and service recommendation in the banking industry, Management Decision, 45, 1426-1445. Burke, C., Obermiller, C., Talbott, E and Green, G. (2009)Taste Great or More Fulfilling: The Effect of Brand Reputation on Consumer Social Responsibility Advertising for Fair Trade Coffee. Corporate Reputation Review, 12, 2, 159-176. Cao Y., Myers J., Myers L., Omer T. (2010) Firm Reputation and the Cost of Capital. Dowling & Gardberg (2012) Keeping Score: The challenges of measuring corporate reputation, In. Barnett M. L and Pollock T., (2012) The Oxford Handbook of Corporate Reputations, 34 - 69, Oxford University Press: Oxford. Carauana A., (1997) Corporate reputation: Concept and measurement. The Journal of Product and Brand Management, 6 (2), 109-118. Carroll, C. (2009) Defying a Reputational Crisis Cadbury s Salmonella Scare: Why are Customers Willing to Forgive and Forget? Corporate Reputation Review, 12, 1, 6489. Chun R. (2005) Corporate reputation: Meaning and measurement. International Journal of Management Reviews, 7 (2) 91-109. Davies, G., Chun, R. and da Silva, R. V. (2001) The personification metaphor as a measurement approach for corporate reputation, Corporate Reputation Review, 4 (2), 113 127. Davies, G. Chun, R., da Silva V., Roper, S. (2004) A Corporate Character Scale to Assess Employee and Customer Views of Organisation Reputation, Corporate Reputation Review , 7, 125-146. Dowling & Gardberg (2012) Keeping Score: The challenges of measuring corporate reputation, In. Barnett M. L and Pollock T., (2012) The Oxford Handbook of Corporate Reputations, 34 - 69, Oxford University Press: Oxford. Drobis, D. (2000) Public relations: Priorities in the real economy, Vital Speeches of the Day, 67 (1), 15 19. Fan, D., Flory, F. and Geddes, D. (2013) The Toyota Recall Crisis: Media Impact on Toyota's Corporate Brand Reputation. Corporate Reputation Review, 16, 2, 99 117 Fombrun, C . J . (1996) Reputation: Realizing Value from the Corporate Image , Harvard Business School Press: Boston. Fombrun, C . J . and Rindova ,V . P. (2001) Fanning the flame: Corporate reputations as social constructions of performance , in J. Porac and M. Ventresca (eds.), Constructing Markets and Industries, Oxford University Press: New York. Fombrun, C . J . and van Riel , C . B . M . (1997) The reputational landscape, Corporate Reputation Review , 1 (1/2) , 5 13. Fombrun C. J. (2012) The Building Blocks of Corporate Reputation: Definitions, Antecedents, Consequences, In. Barnett M. L and Pollock T., (2012) The Oxford Handbook of Corporate Reputations, 94 114, Oxford University Press: Oxford. Goldberg, A.I Cohen, G. and Fiegenbaum, A. (2003) Reputation building: Small business strategies for successful venture development, Journal of Small Business Management, 41 (2), 168 187. Gorry, A and Westbrook, R. (2009) Winning the Internet Confidence Game, Corporate Reputation Review, 12, 195 203. Gotsi, M . and Wilson, A . M. (2001) Corporate reputation: Seeking a definition, Corporate Communications: An International Journal, 6 (1) , 24 30. Harvey, W. S (2011) How do University of Oxford Students form reputations of companies?, Regional Insights,12-13. Helm, S. (2005) Designing a formative measure for corporate reputation. Corporate Reputation Review, 8 (2), 95-109. Further Reading Helm, S. (2005) Designing a formative measure for corporate reputation. Corporate Reputation Review, 8 (2), 95-109. Higgins, M. & Gulati, R. (2003) Getting off to a good start: The effects of upper echelon affiliations on underwriter prestige. Organisational Science, 14, 244-263. Hunter, M. and Soberman, D. (2010) The Equalizer: Measuring and Explaining the Impact of Online Communities on Consumer Markets. Corporate Reputation Review, 13, 4, 225-247. Levitt, T . (1965) Industrial Purchasing Behaviour: A Study of Communications Effects, Harvard Business School: Cambridge. Lewellyn, P. G. (2002) Corporate reputation: Focusing the zeitgeist, Business & Society, 41 (4), 446 456. Mahon, J. F. (2002) Corporate reputation: A research agenda using strategy and stakeholder literature , Business & Society , 41 (4) , 415 446 . Miles, M. P . and Covin, J. G. (2002) Exploring the practice of corporate venturing: Some common forms and their organizational implications, Entrepreneurship: Theory and Practice, 26 (13), 12 - 41. Petkova, A. (2012) From the ground up: Building young firms reputations, In. Barnett M. L and Pollock T., (2012) The Oxford Handbook of Corporate Reputations, 383 - 401, Oxford University Press: Oxford. Petkova, A. Rindova, V. Gupta, A. (2008) How can New Ventures Build Reputation? An Exploratory Study, Corporate Reputation Review, 11, 320-334 Pollock, T.G. & Gulati, R. (2007) Standing out from the crowd: The visibility enhancing effects of IPO-related signals on alliance formations by entrepreneurial firms. Strategic Organization, 5(4): 339-372. Pollock, T.G., Fund, B.R. & Baker, T. (2009) Dance with the one that brought you? Venture capital firms and the retention of founder-CEOs. Strategic Entrepreneurship Journal, 3, 199-217. The Reputation Dividend (2014) The 2013 2014 UK Reputation Dividend Study, available at:http://www.reputationdividend.com/files/2413/9029/4988/201314_UK_Reputation_Dividend_Report.pdf, accessed on: 02/05/2014. Reuber R. and Fischer, E. (2005) The Company You Keep: How Young Firms in Different Competitive Contexts Signal Reputation through Their Customers, Entrepreneurship Theory and Practice, 29 (1), 5778. Rindova, V. P., Williamson, I. O., Petkova, A. P., and Sever, J. M (2005) Being good or being know: an empirical examination of the dimensions, antecedents and consequences of organisational reputation. Academy of Management Journal, 48, 1033-1049. Ritter, J.R. (1984) The hot issue market of 1980, Journal of Business, 57, 215-240 Roberts P. W. And Dowling G., R. (2002) Corporate reputation and sustained superior financial performance, Strategic Management Journal, 23: 10771093. Sapienza, H. J. & Gupta, A. K. (1994) Impact of agency risks and task uncertainty on venture capitalist- CEO interaction. Academy of Management Journal, 37, 1618-1632. Schnietz, K. and Epstein, M. (2005) Exploring the Financial Value of a Reputation for Corporate Social Responsibility During a Crisis. Corporate Reputation Review, 7, 4, 327-345. Shapiro C (1983) Premiums for high quality products as returns to reputations. Quarterly Journal of Economics, 98, 659679. Stigler, G.J. (1962) Information in the labor market, Journal of Political Economy, 70: 49-73. Stuart, T. E., Hoang, H., and Hybels, R. C. (1999) Interorganisational endorsements and the performance of entrepreneurial ventures. Walker, K. (2010) A systematic review of the corporate reputation literature: Definition, measurement and theory. Corporate Reputation Review, 12 (4), 357 387. Whittington, R. and Yakis-Douglas, B. (2012) Strategic disclosure: Strategy as a form of reputation management in Barnett, M.L. and Pollock, T.G. eds. The Oxford Handbook of Corporate Reputation. Oxford University Press: Oxford. Thank you