The Value of Our Reputation
I am no marketing, sales or branding expert but after a few minutes with Casey Boggs and Michele Houck of ReputationUs last week, I sure felt a lot smarter. What I am working on is developing a tangible link between market value and book value. In general, the difference is normally explained by three overarching themes.
1. Tangible assets have appreciated or depreciated at a different rate than the book value. A good example of this is when we acquire land. By prescription, our accounting rules legislate the cost of the land be recorded and maintained on the books for what we paid for it. As the market in land appreciates our books still reflect historical cost. That is our company is worth more than the book value by this appreciation. (Accounting rules prescribe falling land values be recognized by writing down the value. I was “raised” in the mark to market world of commodity trading so this lower of cost or market concept has never been very satisfying to me. It feels like an indictment of our profession – as if we aren’t capable of accurately valuing our tangible assets or worse, aren’t trusted to do so.)
2. A company has expected cash flows – based on past performance - that exceed the company’s net assets on a present value basis. This is the traditional argument an MBA would make – this assumes we are confident in our cash flow projections and discount rate…after that it’s a simple math equation. Of course, it isn’t easy. Folks who get these pieces right… well, they get rich.
3. A company’s “brand” has created value beyond the tangible assets and historical cash flows. Casey and Michele were quick to point out that “brand” includes the messages and images companies craft to let stakeholders know who they are. What really creates (or negates) value for company is “reputation”, which includes the image stakeholders have of what the company stands for. Companies can control the messages they send to influence reputation (branding) but they don’t control two key variables in the reputation equation.
- The stakeholder’s reception of the company’s message – was it received with the same meaning the company intended?
- Any message about the company not initiated by the company – how congruent are these messages with the company’s message.
Over the coming months CFO.University will be exploring how this third theme, reputation, impacts value. I hope you’ll join us on this journey by sharing your ideas and reacting to ours. Although we are setting out to explore reputation in the context of the businesses we run, I have a sense there will be a lot to learn about ourselves and the reputations we aspire to earn with those most important to us.
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