As the Toyota Motor Corp. is learning, none of the perils a company faces is harder to measure than damage to its reputation. Other hazards, from a plant explosion to a terrorist attack to a natural disaster, may threaten a company’s very ability to operate, but a sullied corporate image exacts a price that other risks don’t: devaluation in the eyes of your customers.
Toyota can, of course, compensate buyers, retool its production methods, and invest in image-rebuilding ad campaigns. But it has no real way to predict when, to what extent, or if its brand can regain its former sparkle — or what it may have lost as a result of its vehicles’ infamous acceleration problems.
To be sure, metrics tied to a company’s brand have long existed. In accounting terms, such things as patents and trademarks, business processes, and training policies are referred to as intangible assets and generally thought to be key components of a brand. When a company is acquired, the buyer accounts for the cost of its new intangibles on its balance sheet and continues to hold them on its books as they depreciate.
But while such assets are certainly measurable as a corporate expense, they don’t add up to a reputation. So companies have tried various workarounds. One common approach is to subtract a company’s tangible equity from its market value. “That difference, to a large degree, is your reputation,” says Bruce Nolop, the CFO of E-Trade Financial Group.
But Nolop agrees that while that calculation sounds straightforward enough, there may be less to it than meets the eye. “What’s scary about reputation is that it doesn’t have to be something that’s true,” he says. Goldman Sachs has expressed that fear: in its 2009 annual report it took the highly unusual step of citing, among various risk factors, its belief that, “We may be adversely affected by…negative publicity.” Critical press coverage, “regardless of the factual basis for the assertions being made, often results in some type of investigation by regulators, legislators, and law-enforcement officials, or in lawsuits,” the investment bank stated in March.
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One way to gauge reputation is simply to ask. The Harris Reputation Quotient (RQ) surveys thousands of American consumers to identify and rank the 60 most visible firms. A Harris spokesperson says that at least 6 companies’ boards of directors use the RQ score as one component of senior executive evaluations, and Harris is now working to gauge the correlation between a company’s RQ and its stock price.
A newer index purports to measure and compare the reputational swings of 7,000 publicly traded U.S. and foreign corporations. Offered by Steel City Re, a consultancy that targets “headline risk” (the risk stemming from bad publicity), the index is based on four “forward-looking” indicators: shareholder behavior, communications effectiveness, operating costs, and a company’s ability to command premium pricing based on its brand.
While Nir Kossovsky, Steel City Re’s CEO, refuses to reveal the exact calculations that make up “the special sauce” of his index, he notes that Toyota took a steep dive relative to 87 companies with market caps of $50 billion or more, dropping from the 80th percentile to the single digits despite posting financial results superior to the auto industry as a whole. Most of its large-cap peers saw their reputational scores decline and then improve through 2009, but Toyota’s did not.