Reputation is all – a view from the city

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How do investors put a value on reputation? Reputation is genuinely priceless because it cannot be bought on the open market. It has to be earned the hard way, the long way, by never putting financial interests above values. 

In a corporate environment, this is embodied in the culture of a company, and underpinned by strong governance and strict adherence to compliance, regulation and risk. 

It is displayed by always looking after the interests of clients, shareholders and employees. It is never forgetting that without shareholders’ capital there is no company; without clients there is no business; and without employees there is no service. 

Companies can rebuild their reputation after once losing it – but it is a long climb back, and the management must be seen as a fool who has learned his lesson. 

Rolls-Royce, for example, went into administration in the 1970s, but over time recovered its reputation and standing and, today, is still the generic term for ‘the best of the best’.

So is reputation important in making investment decisions? While the business model is the ultimate determinant of success, the market views management and its reputation as equally critical to an investment decision. Simplistically, management reputation is the P (price) of the P/E (price/earnings) ratio, and business model the E. 

That is why there is a huge price differential between Exxon Mobil and Rosneft – both companies have the same provable oil reserves, and the same daily output, but the former is valued five times as highly, and widely considered to be a stalwart of good governance. In the final analysis, reputation is the value of a company’s goodwill; it is the difference between market capitalisation and net tangible assets.

Companies can have different reputations for different things – but do investors care? Long-term investors know that a successful and sustainable company needs to look after all of its constituents – total shareholder return (TSR) for stakeholders, HR for employees, and products & services for customers. They know that a good reputation for TSR/HR/products & services translates into top-line growth and, even more importantly, bottom-line growth in the form of rising dividends and returns. 

Hence, a major oil company known for dirty toilet facilities in its motorway petrol stations ended up paying more than $50bn for an oil spill in the Gulf of Mexico. It had scant regard or respect for its consumers and, ultimately, this cultural indifference translated into slack safety and risk-management procedures. 

Similarly, a leading supermarket chain not unknown for sham special offers based on feigned earlier higher prices ended up with a horsemeat scandal. 

There are many more corporate examples – from airlines to motor manufacturers – where a culture of institutional failure in one area has ultimately translated into failure across the board.

Much of this is due to short-termism, which goes a long way to explaining why some of the world’s finest – and best-performing – companies are family-owned. 

Their decisions are made on a long-term, generational view, and cash flow is deployed in research & development and capital expenditure to create organic growth and capture market share. 

This contrasts with making acquisitions and doing buy-backs, which create faster returns, but usually cost more. Essentially, the former is acquiring market share over time, while the latter is paying through the nose for instant results. 

It is interesting to note that fans of family-controlled businesses view the lack of liquidity in the equity as being more than offset by the certainty of dividend. Ironically, this does not suit the box-tickers. 

Lorna Tilbian is executive plc director and head of media at Numis Securities