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Coaching Tip: Reputation is a big reason Exxon Mobil trades at a much higher price-earnings ratio than Royal Dutch Shell

Headline: The Power of Perception

Consumers are flooded by corporate marketing campaigns linking to social issues. 

Indeed, the public now expects just about every company to be allied with a cause, according to Carol Cone, whose brand-strategy firm recently conducted a survey on cause-related marketing.  The best corporate reputation belongs to Microsoft Corporation, according to one of the oldest and most respected indexes from Delahaye.  It’s top spot is cemented by its well-publicized philanthropy.

A more sophisticated understanding of the power of perception is starting to take hold among savvy corporations.  More are finding that the way in which the outside world expects a company to behave and perform can be its most important asset.   A company’s reputation for being able to deliver growth, attract top talent, and avoid ethical mishaps can account for much of the 30%-to-70% gap between the book value of most companies and their market capitalizations.

A company’s message must be grounded in reality and its reputation is built over years.  In the late 1990s, investors began to recognize reputation was in part responsible for the sky-high market values of the likes of Cisco Systems and Inc., companies with relatively few brick-and-mortar assets such as factories, machines and real estate. 

Interest really took off after the tech bust and accounting scandals of 2001, which made investors more aware of risks if a company’s reputation is trashed by governance and leadership lapses.  Companies also realized their shares were increasingly vulnerable to negative publicity over employee and social practices.

Reputation is a big reason Johnson & Johnson trades at a much higher price-earnings ratio than Pfizer, Procter & Gamble than Unilever and Exxon Mobil than Royal Dutch Shell.  And while the value of a reputation is vastly less tangible than property, revenue or cash, more experts are arguing it is possible not only to quantify it but even to predict how image changes in specific areas will harm or hurt the share price.

Source: BusinessWeek, July 9, 2007

Online Extra: Slide Show: Reputation Role ReversalGraphic: The Value Of Perception

Graphic: Message Behind The Message

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