Embed Size (px)
Citation preview
The UK 2021 Report
REPUTATION IMPACT HEIGHTENED IN FACE OF PANDEMIC
The economic impact of UK company reputations, and so, indirectly, their monetary worth, grew markedly as the pandemic tightened its grip towards the end of 2020. Having plumbed a ten year low at the height of the coronavirus crash, the influence of reputation assets recovered in the last quarter of the year to the present position where they are, on average, now underpinning more a third (33.8%) of the combined market capitalisation of the FTSE 350; £823 billion of shareholder value. Markets continue to be buoyed by what has become more than a decade of QE, ultra-low interest rates and most recently, vaccine optimism regardless of the fact that the prospect for underlying company earnings remains muted (average 1 year forward EBITDA c15% below pre-pandemic level). Within that context, many companies saw the underlying strength of their reputations increase through the crisis while optimism-fuelled investor sensitivity was on the rise more generally. As a result, the proportion of share price attributable to the confidence inspired by reputation – the Reputation Contribution – was up by more than 8 percentage points on average by the start of 2021 pointing to a substantial increase in ‘promise’ if not, as yet, ‘delivery’.
ALL CHANGE AT THE TOP IN 2021
The one in every three pounds sterling of FTSE 350 corporate value tracking back to corporate reputation comprises individual reputation assets contributing anything up to 56.6% of companies’ market capitalisations. Each of the companies in the Top Ten boasted Reputation Contributions in excess of 49% and, while five of them were relatively unchanged over the preceding 12 months, the others were new to the leader group this year. Across the index as a whole, contributions were mainly positive indicating value creation. However, in close to 20 cases they were sufficiently poor as to be a drain on companies’ market caps, and costing shareholders accordingly.
Unilever’s corporate reputation is currently the most potent in the UK having returned to the number one spot for the first time since January 2018. A growing appreciation of Alan Jope’s strategic intent, successful unification of the Anglo-Dutch structure, a mission to prove the financial benefits of sustainability and strong commercial performance helped produce a 6 percentage point rise in Reputation Contribution to 56.6%. That, along with Royal Dutch Shell, the previous leader, losing ground in the face of questions as to its navigation of the pandemic and shift to lower carbon energy topped by a first ever headline loss, combined to help reinstate Unilever at the top of the table.
Reputation value in the FTSE 350
1
40%
35%
30%
25%
20%
15%
10%
5%
0%
3,000
2,500
2,000
1,500
1,000
500
-
Jan-18
Jan-19
Jan-20
Jun-20
Jan-21
Repu
tatio
n Co
ntrib
utio
n
Mar
ket c
ap (£
bn)
Non reputation value
Reputation value
Reputation Contribution
Produced by:
Simon Cole
Greg Quine
Sandra Macleod
The UK 2021 Report
The three most notable entrants to the Top Ten were AstraZeneca, up 17 places with an 11.4 percentage point Reputation Contribution increase to 53.9%, Halma, up 13 places with a 10.4 percentage point rise to 53.2%, and Berkeley Group Holdings which was up 24 places with a 13.6 percentage points rise to 49.9%. AstraZeneca’s leap to the number two spot should not be a surprise given Pascal Soriot’s transformation of the company, its intentions re China, the $39 billion acquisition of rare disease specialist Alexion and its high-profile role in the battle against coronavirus. More surprising, but not for everybody perhaps, was Halma’s elevation to the number two spot. Well-re-spected management, strong financials and history of augmenting organic growth with well-judged acquisitions have fostered regard to the point where the company was recently described in Management Today as “one of the best companies you’ve never heard of”. Berkeley Group Holdings 24 place rise to the number 9 spot might, on the other hand, be described as a return to business as usual having been in or close to the Top Ten on a regular basis up to 2019.
The principal newcomer to the Top Ten was JD Sport Fashion. Having been included in the study for the first time this year it was immediately obvious that the company possessed a powerful reputation asset with the management being rewarded for among other things its acquisition led expansion programme (not least in the US where revenues were very likely helped by the $1,200 stimulus payments), its robust position on rents in the UK and an all-around strong commercial performance.
DRIVING REPUTATION IMPACT 1. EVOLVING INVESTOR INTEREST
Once the initial shock of the pandemic downturn had subsided and things had begun to stabilise, investor attention started to shift from defensive to cyclical characteristics. Interest turned to corporate qualities that not only suggested companies are well placed to ride the storm but also, and critically, best positioned to capitalise on the up-turn as and when it comes. All headline reputational characteristics continued to attract atten-tion however, there was a distinct change in emphasis reflecting a recognition that corporate edge would most effectively and indeed rapidly be achieved by serving the numerator in the customer value equation rather than the denominator. As such, qualities reflecting the quality of companies’ goods and services, their capacity to innovate and their ability to attract talent became seen as more important while factors related to their use of corporate assets, competitiveness and financial soundness less so.
Leading UK corporate reputations
2
The Top TenRep Cont
Value (£m)
Unilever 56.6% 64,999
AstraZeneca 53.9% 53,849
Halma 53.2% 5,151
Ashtead Group 53.0% 8,742
GlaxoSmithKline 52.5% 36,738
JD Sports Fashion 51.7% 4,159
Diageo 51.2% 35,109
BHP Group 50.6% 54,296
Berkeley Group 49.9% 2,801
Experian 49.3% 12,261 As at January 2021
The UK 2021 Report
2. INDEX EFFECT
Index inclusion continues to exert considerable effect on reputation impact albeit indirectly. The average Reputation Contribution across the FTSE 100 grew by 9.5 percentage points to 38.0% compared to the FTSE 250 where it was up 6.7 percentage points at 15.3%. Leading index companies tend to be higher profile and thus by definition more familiar and reputation vested. Similarly, ‘automatic inclusion’ in index funds fosters assumptions as to performance with all it implies for reputation by extension. By contrast, the absence of the familiarity that flows from higher profiles increases the requirement to examine performance more closely leaving less room for reputation stock.
3. SECTOR DIVERGENCE
The shock of the pandemic has been far from symmetrical in respect of both trading performance and management response as investors move to seek upside potential through sector rotation. Notwithstanding individual company differences (within sector) some industries have been hit particularly hard – Hospitality, Travel, Oil etc – while others have benefitted from a combination of rising demand and expectation. Above trend Reputation Contribution rises in the Utility sector (+15 ppts) were largely due to having been depressed at the end of 2019 in response to what was at the time a high degree of transparency and so predictability of performance. The rises across Consumer Discretionary (+10 ppts) and Financials (+11 ppts) were in response to pandemic induced changes in expectations for consumer behaviours. Separately, the rise in Health care (+10 ppts) was a unique, largely sector wide reflection of the ‘coronavirus premium’ anticipated from companies stepping up to the mark in support of the frontline of the pandemic.
3
FTSE100 FTSE 250
Market cap £1,988 bn £445 bn
Rep Cont 38.0% 15.3%
Rep value £755 bn £68 bn
Reputation impact by index
0%
5%
10%
15%
20%
25%30%
35%
40%
Energy
Teleco
mmuicatio
ns
Consum
er Disc
retiona
ry
Techno
logy
Jan 20 Dec 20
Health C
are
Financ
ials
Utilities
Basic M
aterial
s
Consum
er Stap
les
Real Es
tate
Indust
rials
u
u
uu
u
u
u u u
Reputation Contribution by Sector (Average)
Change vs overall average
Sector differences in reputation impact provide managers with an important ‘first check’ as to how their reputation assets are performing but they have to look deeper in order to develop a complete picture of the threats and opportunities. Differences in perceived reputational qualities indicate wide variation in reputation impact within sector and ultimately the location of value i.e. the Reputation Risk Profile. For example, whereas reputational prowess in community & environmental responsibility is one of the lesser contributors overall (accounting for 5.8% of reputation value), it is proportionately more impactful in utility companies (10.7%) where it can more easily make a difference. Similarly, innovation has more of a bearing on reputation impact for financial companies (15.1%) than in real estate (7.3%) where there is perhaps less scope to distinguish.
The UK 2021 Report
4
* Factor shorthand code: QMan – Quality of management; FS – Financial soundness; QG&S – quality of goods and services; AAT – Ability to attract talent; VLTI – Value as a long-term investment;
CI – Capacity to innovate; Comp – Competitiveness; C&ER – Community & environmental responsibility; UCA – Use of corporate assets
QMan FS QG&S AAT VLTI CI GComp C&ER UCA
Basic Materials £4,303m 8.0% 10.7% 16.7% 15.1% 19.5% 11.6% 12.0% -0.5% 7.0%
Consumer Discretionary £1,092m 12.6% 7.7% 13.8% 11.0% 12.3% 11.7% 14.1% 5.0% 11.7%
Consumer Staples £5,747m 10.7% 10.5% 14.1% 12.9% 11.3% 13.9% 10.2% 7.0% 9.5%
Energy £7,002m 11.3% 10.1% 22.9% 7.7% 2.9% 13.5% 12.3% 3.8% 15.5%
Financials £2,032m 11.9% 11.9% 12.1% 11.2% 13.8% 15.1% 8.8% 5.8% 9.2%
Health Care £9,637m 9.7% 10.5% 15.1% 11.2% 9.5% 14.3% 10.8% 7.6% 11.2%
Industrials £1,148m 10.8% 11.1% 14.1% 11.0% 11.3% 14.7% 9.2% 7.0% 10.9%
Real Estate £747m 13.9% 12.3% 17.0% 14.0% 9.9% 7.3% 10.8% 7.8% 7.1%
Technology £794m 12.5% 11.4% 16.0% 9.7% 15.0% 9.9% 12.2% 4.3% 9.1%
Telecommunications £2,614m 10.9% 23.9% 17.1% 8.9% 16.3% 1.5% 10.2% 8.8% 2.5%
Utilities £2,238m 10.9% 8.4% 15.2% 12.5% 13.3% 10.1% 6.3% 10.7% 12.6%
FTSE 350 £2,351m 10.7% 10.6% 15.4% 11.7% 11.6% 13.0% 10.8% 5.8% 10.4%
Location* of Reputation Value - Reputation Risk Profile - by sectorAverage company
reputation valueSector
The UK 2021 Report
SUMMARY – MOBILISING REPUTATION FOR THE RECOVERY
Reputation managers may not be able to do a great deal about the index or sector effect but they undoubtedly provide useful points of comparison. Knowledge of precisely how any particular reputation asset performs relative to its peers and competitors reveals essential insight and so direction as to the need or opportunities for reputation support. Most importantly, precise understanding of the structure of a company’s reputation, i.e. the specific location of strengths and weaknesses, provides crucial evidence as to the messaging priorities for communications. High performance companies need to ensure that their reputation assets are deployed to both protect and secure existing value as the crisis plays out over the months ahead and take advantage of the inevitable opportunities that will be presented in the upturn. That can only be achieved with a timely and objective assessment of the value creating structure of their own and their peers and competitors’ corporate reputations. Markets are already looking through the short term and reputation managers need to act now in order to ensure that they’re fully prepared and ready to take advantage as the pandemic plays out.
5
For more information about how Reputation Dividend and reputation value analysis can help your company
Contact:
Simon Cole – Director & Founding Partner
Sandra Macleod – Director
Or visit our website : www.reputationdividend.com
Corporate reputation - the collected
thoughts, feelings and impressions that come to mind when thinking of the company as an
operating entity
Inspiring confidence in the company’s ability to deliver the financial returns promised and
or expected
Creating shareholder value through the
direct impact on share price and market
capitalisation
The UK 2021 Report
REPUTATION VALUE ANALYSIS
It is well known that while there are many widely recognised methods of valuing companies, none explain market capitalisation with any degree of accuracy. Moreover, few, if any, provide actionable insight into the influence of intangible assets such as companies’ reputations. Equally, survey research measures of reputation are inevitably hamstrung and limited because they offer little means of contextualising their outputs and answers to the question ‘so what?’
Reputation Dividend addresses this head on through the application of its proprietary Reputation Value Analysis to both explain and quantify the influence of the main non-financial component of corporate value namely the accumulated thoughts, feelings and impressions that make up its corporate reputation.
The unique approach to reputation measurement which lies at the heart of the process uses a range of financial inputs and drivers that both contribute to a company’s value and shape the ‘standard practice’ valuation methodologies of the accountancy and the capital markets worlds. A combination of hard financial data sourced from the likes of Bloomberg and Morningstar and softer survey research based measures of corporate reputation such as reported in the Most Admired Companies studies published by Management Today and Fortune magazine are analysed using statistical regression techniques designed to identify the principal drivers of company value as indicated by the markets.
Analysis involves a systematic examination of if, and then how, each of 40+ candidate ‘explanatory’ factors work both individually and as a whole to explain the differences between companies’ values. By looking at more than 250 of the country’s largest listed companies at the same time it distinguishes between those factors that are having a bearing on shareholder value and those that are not. From there, it prorates a proportion of each company’s market cap to the main contributing factors according to their relative influence – including corporate reputation if it is found to be having an impact. Finally, with further drilling down, the value impact of each of the different headline reputation drivers is identified individually and assessed. Ultimately, this explains close to 95% of companies market capitalisation and constitutes the ‘General Model’ of investor behaviour.
Armed with that the specific circumstances of individual companies can be examined in order to calculate the strength of their unique reputation assets and value risk profiles. This reveals the degree to which investors are paying a premium or discounting compared to the value implied by the financials alone. So, where a greater proportion of market cap is attributed to reputation the asset is by definition working harder with the premium denoting the contribution to shareholder value. Conversely, where the proportion is negative (in a minority of cases) it indicates that the reputation is in fact destroying value and at a discount relative to the financial drivers.
6
The UK 2021 Report
REPUTATION DIVIDEND
Reputation Dividend was founded by a team of reputation and brand economists and analysts in 2009. It is the only recognized consultancy focused on the financial value of corporate reputation measured in hard monetary terms. Its mission is to help companies deliver more effective reputation management through measuring, monitoring and evidencing the financial impact of companies’ reputations. Reputation Dividend is a trusted advisor to leading companies in the United States, the United Kingdom, mainland Europe and the Far East and publisher of the annual UK and US Reputation Dividend reports now in their 13th year.
7
For more information about how Reputation Dividend and reputation value analysis can help your company
Contact:
Simon Cole – Director & Founding Partner
Sandra Macleod – Director
Or visit our website : www.reputationdividend.com
