Corporate reputation impacts business results and as such should be treated with as much vigor as other business risk. However, findings of the 2003 Hill & Knowlton and Korn/Ferry International Corporate Reputation Watch (CRW) and other research suggest inconsistency between CEOs’ stated importance of corporate reputation and how organizations act to create the information base necessary to effectively manage their reputation. A multi-stakeholder measurement approach is necessary to fully inform executives’ decisions concerning their corporate reputation. At a minimum, it is essential for CEOs to understand their company’s reputational strength among employees, customers, the media, and the financial community. These stakeholders are intersecting forces in the formation of a corporation’s reputation.

The Increasing Importance of Corporate Reputation

One of the clearest findings to come out of CRW is that most CEOs in top corporations believe that a company’s corporate reputation is considerably more important to the company today than it was five years ago. It has become increasingly clear that reputation can no longer be taken for granted. In the last few years corporate heads have witnessed unprecedented turmoil over bad business practices, with the reputation and success of many major companies going from great to abysmal seemingly overnight. Yet, when we examine other findings from CRW, it is not clear whether recognition of the issue has translated into the appropriate actions.

In CRW, the perceived importance of corporate reputation is particularly strong in Europe (with 97% saying it is "much more" or "somewhat more" important than five years ago, compared to 85% in North America). These findings are supported elsewhere by a November 2002 study by the Institute of Chartered Accountants of England and Wales and the Risk Advisory Group, which indicated that reputation risk is seen as one of the most important business risks among financial directors and other senior managers at FTSE 500 companies. Yet despite this recognition—at least in the US— only slightly more than one in four individual investors say CEOs are as concerned as they should be about the reputation of their company.

What is at Risk When Reputation Fails?

The CRW results also show that, from the perspective of CEOs, the two most often mentioned key objectives that corporate reputation can help achieve (and therefore, what they would consider to be most at risk when reputation declines) are recruiting and retaining the best employees, and promoting transactions and strategic partnerships. The traditional business results of increasing sales, enhancing stock price, building "insulation" against a crisis, and others were cited less frequently as outcomes accruing from a good corporate reputation.

Inarguably, however, it is precisely the quality of employees, strategic partnerships, and other often less tangible short-tem impacts that lay the foundation for achieving coveted business outcomes such as increased sales, enhanced stock price, goodwill among stakeholders, and so on. A company’s reputation is the external manifestation of its people, internal practices, culture, management talent, and overall competitiveness. These are the critical factors that determine the leaders and laggards in the world of business. The mechanisms through which quality employees yield good customers, increased sales, etc. are well known—more effective employees can mean better products and services, more efficient operations, more positive "moments of truth" in customer interactions, and so on. Further, it is not just a person-to-person, employee-to-customer event that induces positive business results—for example, positive media coverage can intermediate as well by spreading the word about high-quality employees—or management—and their actions.

The "internal" aspect of reputation management is often either overlooked or approached with inadequate rigor. The chart below illustrates the relative impact of various employee-related factors within a company on business outcomes. This analysis was conducted by ORC as part of an employee research program performed for a major corporation. It shows that numerous factors impact organizational contribution, and suggests in particular that individual pride in the organization and personal success/alignment interact closely with other aspects that depend more on what management and the organization do—such as clarity of structure, goals, and values and brand integrity.

What Influences Corporate Reputation?

This last point is reflected in other findings from CRW, which show that among CEOs, communication and relationship issues are thought to be the top internal influencers of corporate reputation (other than financial performance, which is an assumed given influence on reputation). These issues include the ability to communicate, transparency, human values, and treatment of employees. This strongly reinforces the view that, overall, it is the operation of the organization—how employees act and how the organization provides the right environment for them to act—that has a significant influence on reputation. In this light people are key—not only is their character influenced by corporate reputation, but they are also key to driving reputation.

According to the CRW respondents, firms depend on customers more than any other external factor to achieve a positive reputation—customers are by far the most-mentioned external influencers of reputation. And certainly these internal and external forces interact. Presumably, customers will be a more positive influence on reputation if those internal issues of communication, transparency, values, and employee treatment are also in alignment.

(At this point it also is worth noting that the fact that CEOs believe such a variety of internal and external forces impact their companies’ reputations strengthens our view that the complete assessment of corporate reputation must include focus on multiple stakeholders, as will be discussed later.)

Reinforced by the latest CRW results then, the following model illustrates the linkages among employees, organizational practices, customers, reputation and business success. This model provides at least a partial picture of what is believed by business leaders to produce corporate reputation and what they believe it can then accomplish.

Research has provided evidence supporting the importance of employees in this regard and has demonstrated that the strength of the link to corporate reputation can vary, depending, for example, on the industry. For instance, a retail firm, with a relatively large number of interpersonal customer transactions and other "moments of truth," would be expected to show a stronger link than would, for example, a manufacturing firm.

This model, describing the role that employees can play in reputation, further amplifies the importance of internal reputation assessment as a critical input into senior executive decision-making relating to building effective reputation management programs. As we shall further show, evidence also exists to highlight the need for reputation measurement to focus on some combination of other audiences as well.

How Is and How Should Corporate Reputation Be Measured?

The CRW results reveal that a variety of measures are in place to assess corporate reputation. Most-mentioned are monitoring of media coverage and financial performance, as well as financial analysts and general word of mouth. Actual research on customers, employees, and other stakeholders is also being done, but this is not the most often-mentioned measurement type. In fact, approximately half of the CEOs surveyed indicated that they do conduct stakeholder research or have created the measurement systems required to make decisions concerning the management of their company’s reputation.

This seems contradictory to the stated importance CEOs ascribe to reputation, and given the high place that employees and customers hold in the chain linking employees, customers, and reputation. Taking together the evidence that has been seen—the perceived key place of customers and the "human side" of companies in determining corporate reputation, and the impact of reputation on employee retention and the ability to promote transactions and strategic partnerships—it appears natural that any assessments of corporate reputation should include measurement of at least these audiences.

In fact, as CEOs have indicated in the CRW results, and as other research has demonstrated, any company has multiple stakeholder audiences that indeed are central to its reputation. Among them, besides customers and employees, are strategic alliance partners, shareholders, regulators, competitors, media, and others that may be specific to a company or its industry. The relative centrality of each of these to the reputation of a given firm in a given industry will vary, and should be understood early in any complete assessment of corporate reputation. Regulators, for example, are usually assumed to be much more relevant to telecommunications, pharmaceutical, and utility companies than they are to retail companies.

Conclusion

During the past few years, a number of events that have tarnished the reputation of—and in fact led to the demise of—many high-profile companies, have strongly reinforced the importance of corporate reputation. However, it also is clear that while CEOs today are more cognizant of the need to manage their company’s reputation, many have not yet approached this issue with the vigor and completeness with which they protect their firms against other forms of business risk. Make no mistake about it—one of the hallmarks of the great CEOs of the next decade will not only be the effectiveness with which they manage the infrastructure of their businesses, but also the degree to which they build and use their corporate reputation as a competitive weapon. As professor Stephen Greyser, world-renowned marketing expert at Harvard Business School has said, "Where reputation is concerned, the CEO is the ultimate custodian."