While it may not be currently feasible to put a dollar figure on the value of a company’s reputation, it is certainly possible to identify correlations between changes in corporate reputation and financial performance.
This is because a company’s reputation is defined as the perception of its behaviour or actions by its different stakeholder groups over time.
A decrease in corporate reputation reflects dissatisfaction among one or more stakeholder groups, which may lead them to alter their relationship with the company, with shareholders potentially disinvesting or customers considering switching providers.
Ultimately this has a direct impact upon the company’s bottom line, hence the correlation between reputation and financial performance.
The current nuclear crisis provides many strong examples of this relationship with the organisations most affected by the events in Japan being EDF, E.ON and RWE due to their status as leading operators in the nuclear industry.
As opposition to nuclear power from regulators, environmentalists and the general public accelerated, these companies’ reputation scores nosedived, with a resultant sharp decrease in share price. Indeed, the reputational change of the three companies during March provides a clear example of how share price and reputation can be positively correlated.
EDF’s share price on the 1st of March opened at EUR32.255 and closed at EUR29.645 on the 31st of March offering a -8.06% return on equity for the period.
Equivalently, the company’s reputation score decreased from 7.28 on the 1st of March to 5.76 on the last day of the month, suffering a -20.88% reputational loss.
We can use these figures to define a ROE to Reputation Change Ratio, which in this case is +0.40, indicating a positive correlation.
Similarly, E.ON produced a ROE to Reputation Change Ratio of 0.46 and RWE a ratio of 0.45. The ratio is a measure of the share price movement relative to its reputational change.
A higher ratio means that the change in the company’s share price is more attributable to its reputational damage and it can be generally interpreted as the percentage of the share price movement that is attributable to the company’s reputational loss or gain.
It is very interesting to see that the share prices of the three companies most affected by Japan’s nuclear crisis all produced a ratio of around +0.40, indicating a positive correlation of their share price movement and reputation loss. This is evidence that reputation is a significant driver of financial performance and shareholder value.
Alva methodology
Alva calculates its reputation scores on a 1 to 10 fractional value basis, which represents the perception of various stakeholders and market segments at any given point in time.
The scores are based on the daily analysis of over half a million news and financial announcements, trading and analyst reports and social media comments.
—————- Nicholas Chrysanthou, energy consultant analyst at Alva
