‘Good’ Reputation Doesn’t Guarantee Good Returns
February 20, 2007 by Eric Eggertson
Filed under Marketing
If we didn’t already know that corporate social responsibility and reputation management aren’t guaranteed to solve all business problems, a research report takes a swipe at the idea.
Two university professors and an investment firm CEO recently released a report that shows survey respondents to Fortune magazine’s Most Admired Companies list favour large capitalization stocks over small cap stocks – despite the historically good payoff of small cap stocks.
“We find, consistent with the Shefrin and Statman (1995) that Fortune respondents rate companies as if they believe that good stocks are stocks of good companies. Ratings on perceptions of quality of company and perceptions of the investment value of their stocks are highly positively correlated. “
With this biased attitude built into the response, the Forbes most admired index is biased by the heft of a company, which could also be a factor in its reputation.
I haven’t gone deep on their analysis to confirm every assumption built into their findings, but this bias in the survey doesn’t surprise me. Big cap companies also tend to have more established brands, which help reassure investors about the stability and value of the company.
Stability has its benefits, but it doesn’t lend itself to the sudden growth spurts that smaller companies can accomplish.
Does this mean companies should give up on reputation management? Not at all. The brand building and public relations practised by those big cap companies probably helped them rate better on the Fortune surveys. Compared to a smaller company, their weight has helped them create a better perception of value.
Steven Silvers has a good take on the corporate ratings games that publications play each year in his post Corporate Reputation Rankings Are Better at Selling Magazines than Proving Shareholder Value.
Tags: business, corporate, big cap, small cap, investor relations, fortune, most admired companies
I find performance and customer service is more important than reputation. They both lead to having a good reputation. But they come first and last. Because if you have a good reputation and don’t provide good service and performance, you’ll quickly loose it.
True, Dawud. If all your focus is on the media, advertising and influencing a few major stakeholders, you’re doomed to failure. The fundamentals of customer service have to be there, or any amount of reputation management is wasted.