ideas
Corporate Reputation Index
Measurement is essential for effective management. The Steel City Re Corporate Reputation Index is an essential tool for executives seeking to manage the business processes that impact more than 70% of the average company's value.
The Steel City Re Index has been tracking corporate reputation value since 2002. The index, originally launched as the Intangible Asset Financial Management Index, ranks firms on the basis of the financial effects of how they manage their intangible assets. These intangible assets are the business processes that govern ethics, innovation, quality, safety, sustainability and security. The pathway by which these intangible assets become the sources of reputation and enterprise value is explained in detail in the book, Mission: Intangible. Managing risk and reputation to create enterprise value.
Steel City Re also tracks the long term economic consequences of intangible asset management and reputation through composite indices. Here are descriptions of two examplary composite indices -- one that is based exclusively on reputation metrics and a second that is also based on market fundamentals on the premise that stakeholders may not converge on a common reputational assessment simultaneously.
One examplary composite index, the Steel City Re RepuStars™ Composite Index, comprises up to two firms in each of 20 major sectors with the greatest periodic rise in their Steel City Re Corporate Reputation Index ranking sampled from the large cap segment of the U.S. equities market. Eligibility requirements are market capitalization >$3.5B, share price >$5.0, and reputation ranking between the 25th and 85th percentile.
A second index, the Steel City Re RepuStars-II™ Composite Index, comprises up to three firms in each of 19 major sectors, and is similar to the previously described Index with the following exceptions: (1) market capitalization >$1.5B, and (2) constituent members are filtered for market fundamentals.
The benchmark metric for both reputation-based indices is the S&P500 composite index. Data are posted weekly on the blog of the Intangible Asset Finance Society.
Other composite indices we track include an index comprising firms with reputation rankings in the top quartile and a short-strategy composite index of firms with poor reputations generally ranking in the lower 15%.
Reputation and Enterprise Value
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 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.
More specifically, companies with superior reputations create value through superior pricing power, lower operating costs, and lower credit costs. Thay have higher net incomes, higher earnings multiples and lower equity betas.
The most recent data are compiled in the book, Mission: Intangible. Managing risk and reputation to create enterprise value (IAFS with Trafford, 2010). The book is available from the Intangible Asset Finance Society (IAFS) and from major online book retailers.
The data from an early study published in 2008 (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.
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 current MISSION:INTANGIBLE blog posting, click here.