Company financials: a bad quarter doesn’t mean a bad reputation

September 06, 2017
Ed Coke

Picture the scene: a company is in turmoil. Its CEO has resigned abruptly; its finances don’t look good, having just reported a 5% decline in mid-year revenues. And now, it’s having to cut its workforce by 8%, predicting that it is unlikely to return to growth for at least two years.

Based on these facts alone, some might think this company has a reputation problem, similar to those dealing with major crises like Sports Direct or G4S.

But this is Lego – a standing dish among so many Top 10 accolades, not least the annual Forbes Most Reputable Companies. According to the 2017 rankings released in March, Lego posted as the second most reputable company in the world, just touched off for the number one slot by Rolex. And with a growing presence in entertainment, including Hollywood movies, to external audiences Lego continues to appear a huge success story, with no apparent reputational catalyst for this downturn.

Add to this the halving of profits at John Lewis Partnership, the arbiter of taste for Middle England, and the relationship between reputation and financial performance can seem more complex than many believe.

Many clients often search for the holy grail of a conclusive dollar impact of reputation on key financial indicators such as revenue, share price or profit. It’s a search to unite the most intangible measures with the most tangible. But a clear, causational relationship between reputation and detailed financial performance may never be found.

In my opinion, this is due to two factors: the continued confusion many have around the definition of corporate reputation, and the expectation some have around the short-term benefits a strong reputation can bring a company.

Let’s deal with the definition of reputation first. Reputation is the sum of holistic perceptions of the behaviours, talents and values of a company, held by several influential stakeholder groups. It is a fluid and at times complex interplay between many audiences, often with differing expectations and priorities. It should not be misunderstood as a brand valuation or customer satisfaction metric, but rather as a rigorous health check of company across the whole of its entity.

And, like going to the doctor for an annual check-up, if you act on the recommendations and invest in improving weaker areas of your corporate health, a strong reputation will likely follow over time.

Continuing the health analogy, a strong reputation, like that of Lego or John Lewis Partnership, will likely protect you from systemic ‘illnesses’ that could compromise less well-regarded companies.

But a strong reputation will only get a company so far. It is not a guarantee of short or even mid-term financial success; that is much more to do with executing a strong strategy and adapting to market conditions. At its optimum, reputation can provide the best possible climate in which to conduct business over the long-term. But it does not provide a blueprint for high financial performance, regardless of the circumstances.

Long-term, many studies have shown a proven correlation between reputation and stock price or market value. But these are slow-burn metrics that should be considered over years rather than pressurized financial quarters.

My belief is Lego, John Lewis Partnership and others who have invested in their reputations for the long-term will ride out these short-term financial declines. But market observers should be cautious about highlighting this news as the beginning of the end.