Accounting for reputation
BEYOND the lifestyle pages of media, corporate chiefs have a distinct reputation. Does this association with a certain lifestyle, personality (he’s very aloof), and management approach carry any corporate weight?
While reputation has no formal entry in the balance sheet of a corporation, it still needs to be viewed as an asset or liability. It affects the market value of a corporation. The care and protection needed to nurture a company’s character and status are thus open to “reputational risk.”
Researchers and investment analysts 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. Online chat groups have been actively reporting on incidences like finding a cockroach inside a bakery product.
Some positives enhance reputation. 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 a transparent succession plan, or a luxurious personal lifestyle charged to the company.
The structure of Philippine business can be characterized as a concentration of a few names or families controlling large conglomerates in varied fields like banking, property development, utilities, and even food chains. A failure of one company in a particular group can be like the falling domino raising the risk factor for the whole group. This introduces the concept of “reputational risk.”
When reputation turns sour as in the high-flying lifestyle of the principal or the failure to meet loan amortization schedules and the need to float high-yield bonds for “refinancing,” then reputation becomes a factor in evaluating the value of a company or group.
The importance of reputation has only been highlighted by 24-hour news cycles online and the rise of social media. Business is now covered by tabloid-type of reporting, spotlighting personalities with scandalous behavior or sudden resignations “for health reasons.”
In business, reputation has become an intangible asset (or liability) even when it is not formally reflected in the financial statement. Although in acquisitions, this matter of character is sometimes tucked under the general item like “goodwill.”
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.
Branding has become a marketing effort. TV interviews are arranged to show the reputational side of a tycoon. Celebrity endorsers lend their own good name and popularity to a product or company. Philanthropy too has become more focused on certain advocacies like education, sports, or the arts.
The effect of status on price is more evident in products with a high emotional and discriminatory content such as art. Certain buyers in an art auction bid high for an artwork to expand their collection of a particular artist enjoying high brand recognition. Art has become a good example for the market value of reputation. The only lookout involves provenance and authenticity, especially when the artist has passed away.
In local business with its small and well-connected grapevine, reputation cannot be ignored. Stocks are associated with their principals and lumped together as the “ABC” group, with that combination of letters representing a patriarch or his family. Rumors of the takeover of a sleepy company by a particular character is 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 terms of the merger.
Ours is a business culture dominated by high-profile personalities. Sometimes, these same characters cross the line to politics and raise their profiles even higher. Buying shares of a company is a declaration of faith not just on its past financial performance but on the reputation of its leadership. Such perceptions are not static. They swing with a company’s fortune and the scrutiny of regulators and political players.
Reputation indeed has market value. Names associated with quality and reliability through the years enjoy premium pricing from consumers and clients. When a new company is launched, the first question asked is — who’s behind it?
Tony Samson is chairman and CEO of TOUCH xda
