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Tesco and the true cost of losing a good reputation

Reputational value is a vital contributor to market capitalisation, and it can be measured, say Simon Cole and Sandra Macleod of Reputation Dividend.

by Simon Cole and Sandra Macleod
Last Updated: 12 Feb 2015

What's a reputation worth? It's a question that every board in the country would love to have an answer to, and it's one that a closer look at the cumulative results of Britain's Most Admired Companies can help shed some much-needed light on.

Take the corporate morality tale that is Tesco. Not so long ago, it was a major force in the Britain's Most Admired rankings, on its way to being a permanent glittering fixture. It has won the overall title a record six times, and achieved first or second place in three out of the four years up to 2010, when chief executive Sir Terry Leahy announced his retirement.

See the full list of Britain's Most Admired Companies here

But since then, things have gone badly wrong: the horse-meat scandal, profit warnings, that £263m black hole and now an SFO investigation. This year, it's at 181 in the table. How much reputational damage has been done? By our calculations, the firm has lost no less than £13.5bn of reputational value since the peak at the end of 2011 (see graph).

By applying regression analysis techniques to the kind of metrics consumed by institutional investors - financial results, consensus forecasts and the results of surveys including Most Admired - Reputation Dividend calculates the contributions of a company's reputation to its total market capitalisation, and the component parts of that reputation. Lessons can be drawn not only as to the overall financial value of a reputation, but also on the capacity of reputation to create and secure market capitalisation.

At its peak in late 2011, Tesco's market cap was around £32.2bn, half of which - £16.6bn - was the value of its reputation. By September 2014, its cap had dropped to £18.6bn, only £2.6bn of which was the value of its reputation.

That's quite a fall in less than three years, and goes to show how reputational slides, once begun, can be hard to arrest. But Leahy's departure challenged the previously unquestioning enthusiasm of company watchers, and other problems - concerns about the company's market dominance and trading practices, for example - became too big to ignore in the wider investor community.

The tipping point came in January 2012 when the decline in confidence led to a collapse in the value attributable to the company's reputation - its reputation contribution - that even the seemingly healthier forward-looking financial indicators in 2013 could not stop. The share price fell much further than it might have done.

It may well help to rationalise why other companies that once occupied the leader board of Britain's Most Admired, such as Serco and BP - let alone much of the banking industry, currently languish closer to the bottom.

The signs of impending reputational calamity are there for those with eyes to see them. Looking for and attending to those signs may have helped stem the tide of shareholder value losses for Tesco, BP et al. But years of success often leaves organisations deaf to such signals. The lessons for reputation stewards lie in how reputations are structured. Reputation-value analysis of the companies in this year's Most Admired report indicates that it's not just how well a company is known but what it is known for that matters.

Unilever, for example, consistently generates great reputational value - 49.7% of its market cap is due to reputation - by delivering a sound financial performance and advertising its ability to attract talent, its marketing prowess and commitment to its community and environmental credentials. All of which have been of interest to investors in 2014 as they appreciate not only the risk protection, but also the focus on creators of growth and goodwill.

And as with any investment, the value of a company's reputation can go up as well as down. Take AstraZeneca, Most Admired's highest climber this year, up 158 places to 54. Having seen off the attentions of Pfizer, its 'national gem' status was acknowledged with its contribution up more than a quarter to 40.3% of market cap, around £23bn.

So the evidence is clear. Corporate reputations are not just nice to have: they make the intangible tangible in the shape of higher share price and increased market capitalisation - nearly £575bn in total across the FTSE100 alone, as of October 2014. More importantly, understanding 'how' and 'why' provides boards with the critical edge they need to manage the asset to the greatest benefit of the company.

Reputation Dividend is a specialist reputational valuation consultancy.

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