Reputations

In April 2000, Barclays Bank closed 117 village branches without warning. The resulting fury from consumers and MPs made headlines in newspapers throughout the country. The bank's share price faltered, dropping considerably over the period from April to August.

When August came, Barclays' announced that its profits had doubled in the first six months of the year. This added to widespread cynicism among the public, but it pleased investors. The share price began rising and by early February 2001, it stood at a three year high.

These two shifts in share price both come from shifts in corporate reputation. Corporate reputation generally means the regard in which a company is held. Different groups of people - consumers, investors, the workforce, regulators and governments - all play their part in fixing, and changing a company's repuation.

Market research organisation MORI carried out research for the Co-operative Bank last year to find out what criteria different groups use in assessing companies. City Investors and the Business Press went for financial performance and quality of management - both of them treated as relatively unimportant by the general public. Treatment of staff was the most important factor for abour MPs - and the least importanf for Conservative MPs. For the general public, quality of products or services topped the list.

This survey shows the different constituencies that make up corporate reputation - and the different standpoints of each constituency.

Reputation and raising cash
Damage to corporate reputation can make it more difficult to raise finance. Credit agency Standard & Poor's has placed Railtrack on credit watch with negative implications partly because of the potential effect of customer reaction to its many service problems in late 2000 and early 2001 on its ability to service debt.

In the aftermath of a June 2000 contaminated milk scandal, Moody's Investors Service down-graded long-term debt ratings of Japan's Snow Brand Milk Products Ltd., based on concerns that the company would have trouble regaining its leading position in the country's dairy market. Sales of the company's core products - milk, cheese and ice cream - tumbled after thousands of people fell ill drinking Snow Brand milk.

Ranking the risks
A survey of 51 food and drink companies carried out for Lloyd's in 1999 showed which risks they believe are most likely to damage their corporate image. The questions were constructed to include previous sources of damage to corporate reputation - crass remarks by the chairman about the company's products, for instance.

Risk factor / Mean scoreout of 5
Accidental product contamination 4.46
Extortion/sabotage to products 3.98
Health and safety issues 3.86
Environmental issues 3.74
Loss of intellectual property 3.51
Fraud 3.20
Abuse of trade practices 3.18
Behaviour of senior management 3.16
Natural/man made disasters 2.96
Civil litigation 2.96
Racial/sexual discrimination issues 2.72
Behaviour of external individuals associated with the company (such as celebrities) 2.45

This list shows how critical the role of publicity is to corporate reputation. As many cases have shown, poor handling of an incident can generate massive adverse publicity.

Michael Regester of London based crisis management consultants Regester Larkin says most media will cover the angles of a story in the following order: people, the environment, property and then money. Companies with a disaster on their hands should deal with topics in the same way.

In addition to traditional media, the internet is also a force affecting corporate reputation - from raspberry blowing "companysucks.com" sites to campaigns by advocacy groups. PepsiCo., for example, knows how the internet can be used to heighten awareness of ethical issues - investment in Burma - among consumers and shareholders. Environmental groups like Greenpeace make extensive use of the internet to promote and co-ordinate their campaigns against genetically modified crops and the companies that produce the seed.

The internet has globalised access to information. FBI reports on the EgyptAir crash into the ocean off the US east coast on 31 October 1999 are available for anyone in the world through the official web site of the US National Transportation Safety Board. Via the internet, it is easy to read local and national publications from all over the world and listen to broadcast reports.

Even more significant in terms of reputation management is that internet access is still heavily weighted toward the better off and better educated - opinion formers and decision makers now or in the future.

Shareholder value
Ultimately, the aim of a business is to create value for its shareholders. The relationship between widespread and unfavourable reporting of certain events, damage to product brand, damage to corporate reputation and the effect on shareholder value is a complex one, because such events do not occur isolated from all other factors that affect a company's operations, from the macro-economic to the sector specific.

In the case of a high profile product recall, there will be an immediate impact on sales. The share price will probably (but not necessarily, see Sara Lee case) fall, but there may not be an effect on shareholder value, defined as the comparative performance of the company's shares against its sector over time. If the stock market does not regard the problem as material to earnings, if it is well managed and the company is able to communicate genuine concern, general market sentiment and fundamentals will soon predominate. This does not mean that the share price will not go down, just that if it does, it will be for reasons other than the crisis.

Issues relating to perceptions of company business practices, as Nike found in relation to its manufacturing practices in the Far East, are more difficult to manage, since they challenge the ordinary behaviour of the business.

Sara Lee Recall
In December 1998, the US firm Sara Lee recalled tons of hot dogs and cold meat products produced by its Bil Mar Foods plant in Illinois after an outbreak of Listeria which probably resulted in 21 deaths and approximately 100 illnesses. However, after adjusting for a split, its share price was higher on 4 January 1999, immediately after the recall than at any time during the previous 12 months.