Why companies with stronger corporate reputations are more likely to withstand stock market shockwaves

Companies with stronger corporate reputations are more likely to withstand stock market shockwaves reveals new research from by global M&A advisory AMO.

Key findings

  • The world’s top 15 market indices owe more than a third of their valuation to corporate reputations, amounting to $16.77 trillion of value for shareholders.
  • The UK’s FTSE 100 saw reputational factors contribute nearly 50% of overall market capitalisation.
  • More than one in five companies in the world’s top stock market indices suffered market cap erosion due to poor corporate reputations.
  • Technology, telecoms and healthcare enjoyed the greatest value boost from their strong corporate reputations.

Discussing how the study came about, Neil Bennett, chief executive of comms consultancy Maitland/AMO, a founder member of AMO, says: “To really understand the value of corporate reputation, we decided to tackle one of the most difficult questions within communications – how much is a company’s reputation worth?

Reputation contribution range by equity markey - Highest, lowest and average

Putting a price on reputation

“Working with Reputation Dividend, we found that corporate reputation plays a very real role in supporting company value. During the first three months of 2019, our research revealed that corporate reputation accounted for over 35.3% of the market capitalisation of the world’s 15 leading equity market indices. This amounts to a staggering $16.77 trillion of value for shareholders.

Average reputation contribution (market cap weighted)

Four most important factors driving reputation contribution to stock prices

  • Investor perceptions of a company’s long-term investment value (accounting for 13% of reputational value).
  • Quality of management (12.5%).
  • Financial soundness (12.2%).
  • Ability to manage people (11.7%).

“Our findings reiterate the importance of reputation in driving and securing shareholder value, but also sends a strong signal that companies need to carefully manage their reputation. At a time when we’re experiencing trade wars, Brexit disruption and frothy markets, it will be the businesses who invest in their reputation that stand a chance of weathering the storm.

The role of PR

Bennett concludes that PROs must recognise their contribution to boosting companies’ stock prices: “As strategic communications advisors and guardians of corporate reputation, we must recognise that communications and reputation are inextricably linked. Communications professionals play a vital role in understanding the triggers that will protect and enhance reputation and I hope our new report will provide the industry with some useful insights into the price of reputation.”

Background

Drawing on research by Reputation Dividend, the AMO report What Price Reputation spells out how reputation contributes to the stock market valuations of over 1,000 of the world’s largest companies in 15 leading national indices.

Reputation value analysis is founded on the understanding that no single method of valuing companies can fully explain market capitalisation with any consistency. Each company’s reputation value is measured by calculating the extent to which its actual stock market capitalisation differs from the value implied by standard financial metrics alone, such as earnings multiples,discounted cash flows, or free cash flow yields.