When Charles Fombrum landed in Mumbai after a long flight from the US, the first thing he asked the cab driver was to name some of the companies in India. "Pepsi, Coke and McDonald's," pat came the reply. "What about naming some Indian companies?" asked Fombrum. The driver could name only the Tata group. "I am sure he would have named Infosys or Wipro if I were in Bangalore," Fombrum says.
The conversation with the driver was nothing unusual for Fombrum, executive director of the US-based Reputation Institute. He does these things almost routinely in all parts of the world as part of his exercise to gauge the reputation that a company enjoyed in a country.
Fombrum's institute, a private research and advisory organisation, conducts research in 15 countries (his latest trip to India is to make the country 16th in the list) to help leading companies know how they are perceived by their stakeholders.
"Reputation is a hidden asset, but an extremely important one," says Fombrum.
While reputation is still considered to be an esoteric term and an "expense item" by a majority of companies all over the world (only the UK allows capitalisation of reputational investments), Fombrum says there is an enduring economic value in a strong corporate reputation.
This means all companies - whether in services or in manufacturing - have to rely not only on people and plant and equipment but also on intangible assets such as patents, trademarks, copyrights brand names and goodwill.
"People form impressions of companies based on what they read, what they hear and what they see," says Fombrum. "These experiences create a 'halo' around a company that constitutes its reputation."
He gives the example of McDonald's, which has been able to create a tremendous reputational value despite the controversy over its product quality ("junk food"). The company has done this through its pioneering social welfare work through the Ronald McDonald's homes for poor children.
But how can you put a value on reputation? Fombrum has developed what he calls a Reputation Quotient (RQ) that can be used by companies to survey 20 attributes of reputation. The Reputation Institute uses it to conduct customised surveys and annual RQ survey, a poll of the general public only.
The survey is designed to capture the concept of the "halo" around a company's performance, which means exploring impressions rather than facts.
Fombrum's institute is now doing the exercise for 25 leading Indian companies on its own.
The RQ is based on six categories: emotional appeal (how much a company is liked and respected); products and services (perceptions of quality, innovation, value and reliability); financial performance (competitiveness, profitability, growth prospects and risk); vision and leadership (does the company demonstrate clear vision, strong leadership and an ability to recognise and capitalise on market opportunities?); workplace environment (is the company well managed; what is it like to work there; what is the quality of its employees?); and social responsibility (does the company have high standards in its dealings with people, good causes and the environment?).
Fombrum feels many companies underinvest in building reputations. "I think it's extremely important to build a distinctive reputation - something that is not like everyone else. The most important thing is not to try and be something you are not. Some entrepreneurs try to look big when they are not, and people see through that. Reputation is not about spin," he says.
On the economic returns of reputation, Fombrum says companies create hidden assets that give them a distinct competitive advantage by developing strong and consistent images. A company has certain value in terms of its market capitalisation.
Physical capital alone turns out to be on an average about 40 to 45 per cent of the value in the books of the companies. The rest of that value is intangible and consists in part of intellectual capital, human capital and reputation capital.
All great companies strive to build a "reputation bank "which can be useful in times of crisis. Companies, which did something to create the bank, have invariably recovered faster because they handled the crisis better and their reputation gives them a cushion.
Fombrum gives the example of Cadbury's India, which recovered fast from the "worms crisis" in India because it had lots of deposits in its reputation bank.
But big companies already have elaborate PR machinery, brand managers and so on to take care of the reputation angle. So what's the USP of the Reputation Institute? The former professor of the Stern Business School has a ready answer.
Reputation is managed in most companies in a very segmented manner with separate departments. So the responses are dispersed and a company ends up sending very chaotic messages about themselves to the outside world.
That is where a centralised reputation management system helps in terms of consistency in its messages.Do you want to discuss stock tips? Do you know a hot one? Join the Stock Market Investments Discussion Group