ideas
Corporate Reputation Index
Measurement is essential for effective management. The Steel City Re Intangible Asset Financial Management (Reputation) Index is an essential tool for intangible asset financial management.
The Steel City Re Index has been tracking intangible asset financial management since late 2005. The index today is known as the Corporate Reputation Index because the intangible assets being managed establish a company’s reputation.
This is why. Reputation is the impression formed by stakeholders of how a company manages its intangible assets. Stakeholders comprise employees, suppliers, customers, competitors, and investors. Reputation creates among stakeholders a set of expected behaviors. The Steel City Re Reputation Index captures the financial implications of both the aforementioned stakeholder behaviors and expectations of stakeholder behaviors as determined by corporate reputation.
There are practical reasons, too, for the emphasis on reputation. The Steel City Re Index correlates well with some of the best known indices of corporate reputation including those published by Forbes magazine, Fortune magazine, and the Harris Organization. By two key metrics -- (i) correlation of the rankings, and (ii) the power of the reputation indices to discriminate and rank the order economic return -- the Steel City Re index has shown itself to be a good proxy for reputation. In fact, the Index is a good leading indicator of financial performance and returns on equity
This is because reputation has economic consequences. Steel City Re has amassed a significant amount of empirical data from this index showing that superior managers of corporate intangible assets (corporate reputation) reward shareholders with above average equity returns.
The data from a study published last year (links below) show that companies whose index rankings place them in the top 25% of the 2,483 companies studied during the 28 month period from Dec 2005 to Feb 2008 rewarded their shareholders with an average (portfolio) return of 18% which is about three times the market return of 6%. Moreover, companies whose IA management was very good and who continued to improve, delivered outstanding returns.
Among the companies whose average index ranking was in the top 25%, those whose index rankings did not decline during the 28 month period, numbering 290, rewarded their shareholders with an average (portfolio) return of 50% which is about three times the top quartile average. Companies whose index rankings declined, numbering 331, rewarded shareholders with average (portfolio) returns of -6%.
Our analysis of corporate reputation as a reflection of intangible asset financial management is ongoing. Steel City Re shares highlights of these studies through postings on the Intangible Asset Finance Society blog, MISSION:INTANGIBLE.
The bottom line is that superior intangible asset stewards earn their reputations. They then reward their shareholders with superior economic returns. We believe these differences in returns reflect differences in management’s perception of the role of intangible asset stewardship and its link to reputation. Briefly, those views can be summarized as:
• Intangible asset management is the price of doing business (the as little expense as possible approach).
• Intangible asset management is a good (standardise across the operation to strengthen IAM ).
• Intangible asset management is a strategic opportunity that creates widespread operational and financial benefits that are reflected in a company's P&L statement, earnings multiples, stock price stability, and overall cost of capital (seize opportunities to gain.)
Click here to download a copy of an expanded description of the above by Gerken PJ, Liscouski RP, Kossovsky N: Reputation resilience. IAM magazine 2008; 31: (Aug/Sept) 37-41.
For a relevant MISSION:INTANGIBLE blog posting, click here.