Reputation 'Crucial' To Ratings

Corporate reputation and perceived leadership quality are of crucial importance to financial analysts' ratings and opinions, according to a major survey on corporate reputation. Return on Reputation is the latest of Hill & Knowlton's Corporate Reputation Watch studies, conducted with Ipsos. In the survey, 282 financial analysts in North America, Europe and Asia were asked about reputation and its impact on their opinions and ratings of companies.

When asked what specific tangible and intangible factors are very or extremely important in making recommendations to invest in a company, "financial performance" (87%), "quality of the leadership team" (86%) and "making good on promises" (85%) were the top criteria globally. "Quality of leadership team" scored the highest with 42% in the "extremely important" category. Analysts put so much importance on reputation matters that the great majority (88% of North America, 91% of Continental Europe, 93% of UK and 94% of Asia Pacific) agreed with the statement that "a company which fails to look after the reputational aspects of performance will ultimately suffer financially too".

Continental European analysts put more emphasis than the global average on strategy (20% versus 12%), market position, (16% versus 9%) and track record (10% versus 4%) as the most important factors driving a company's reputation.

The study found that across the globe the C-Suite's reputation, consisting of the CEO, CFO and COO, was more important in influencing analysts (96%, 95% and 90% respectively rating their reputation as important) as a group, than business unit leaders (81%), the company Chairman (76%) or the independent Board of Directors (68%). However, continental European analysts place less importance than their international counterparts on the CFO, COO and non-executive directors.

Analysts from mainland Europe find intangible factors to be of much greater importance in assessing the performance and reputation of a CEO. Having a CEO with a focus on issues in society was seen as very or extremely important by 21% of continental European analysts compared to the global average of just 9%. In addition, being a thought leader or spokesperson for the industry was seen to be very or extremely important for 32% of European analysts compared to the global average of 26%.

Surprisingly, 52% of analysts across the globe said that up to three consecutive quarters of poor financial performance could be forgiven but only 29% would allow a CEO 5 or more bad quarters However, analysts from mainland Europe are far tougher on CEOs than their US and APAC colleagues. 54% said that a poorly performing CEO should be removed within four or fewer quarters compared to 39% in North America and 41% in APAC.

The Return on Reputation study found that both transparent disclosure as well as clear and consistent communication with key stakeholders were widely influential non-financial elements affecting analysts' assessments, 93% agreeing that each of these contributed to their assessment of a company's value. Both ranked high (88% and 79% respectively) in causing respondents to give a company a negative rating when done poorly. A "clear path or strategy" and "achieving milestones against that strategy were rated as the most important items to communicate to the investment community, 87% and 86% respectively rating them as very or extremely important".

When assessing company value, mainland European analysts are more likely to see communicating a clear path or strategy as extremely important (57% versus 46% of the global sample). The same is true of communicating new product or service developments (30% versus 19%).

There are also nuances that differentiate mainland European analysts in the way they like to do their research and gather information. They place a greater importance than the global average on annual reports (48% versus 28% extremely important) and periodic mailings or emails (59% versus 39% very or extremely important).

Technical details

Return on Reputation is designed to understand the various ways financial analysts assess companies and their performance and to identify the key factors driving investment decisions, especially the role of management. It is a survey of 282 telephone interviews with buy and sell side analysts with over 2 years' experience. The analysts surveyed were located in Australia, Canada, Denmark, France, Germany, Italy, Hong Kong, Japan, Netherlands, Norway, Singapore, Sweden, UK and US. Interviewing was conducted between 30th September and 3rd November 2005.