Businesses are becoming better corporate citizens, so why is public perception lagging behind?
When I left politics for business two decades ago, it was taken for granted that those who ran the country would be held more accountable than those who ran our companies.
Today, in many cases, levels of scrutiny on business now seem more intense.
Leave aside the fact that conduct and persistent policy failures which would, at the very least, put business careers in serious question now appear no bar to holding political office. It is also that expectations on those leading our companies are greater and areas of responsibility wider than ever before.
There are good reasons for this. The financial crisis showed the negative externalities that businesses can generate – the lives of millions of people were impacted. They have the right to voice opinions about the businesses which, directly or indirectly, affect them.
And the digital revolution made it easier to do just that. Social media has allowed citizens more information about businesses and given activists a platform to launch campaigns against them.
The result is that businesses are now expected to do more and their leaders are judged against a broader range of tests than ever before. Consumers are quicker to mobilise and governments of all persuasions keener to intervene.
The move away from judging business performance simply on returns to shareholders and the need to respond to digitally-empowered stakeholders have affected every sector.
A decade ago, a supermarket could offer school vouchers or sell fair-trade bananas and expect praise. Now the same companies are grilled on everything from employee contracts and gender pay gaps to CO2 footprint and single-use plastics.
At the moment, there is no really good model for investors to quantify the future reputational risk that companies or sectors face when reaching valuations.
In assessing a company’s cost of capital, analysts rely on its past share price volatility compared to the market (a co-efficient known as Beta), rather than a forward-looking assessment of risks, including reputational risks.
This isn’t good enough. And for that reason, efforts are underway to integrate Environment, Social and Governance factors into calculations of cost of capital and develop a better model.
One useful data point to assess reputational risk is to look at the total value created by a business in society compared to the perceptions of that value by the population.
Where perception of total value is worse than the reality, companies need to get more credit for the value they are creating. Where perception of total value is better than reality, companies need to make their actions live up to the expectations of their stakeholders.
Portland’s Total Value Index, launched yesterday, gives this data. It does not provide all the answers, but it is, we hope, an important contribution to the debate about how to integrate reputational factors into company valuations.
Using a wide range of measures from profit, dividend and R&D levels through to employee diversity, satisfaction and records on corporate tax and the environment, we have assessed and ranked the total value performance of businesses and sectors.
Importantly, we have also tested these findings against how an external informed audience assessed the value created by different sectors.
There were fascinating and, if you are leading a business, often worrying differences between reality and perception.
The index shows that businesses are largely responding to the greater pressures put on them to be good corporate citizens. But in many sectors, they are not yet getting the credit. Businesses are having a greater positive impact, both economically and in society, than was perceived.
Some sectors have a smaller perception gap than others. Surprisingly, banks, which took such a reputational battering for their role in the financial crash, appear to be well on the road to recovery in reputation terms.
In fact, largely because of their efforts to be better citizens and employers, the total value of banks is higher than other sectors, and perceptions are not adrift from reality.
But other sectors are still struggling to get their story across.
Based on actual performance, technology, media and telecoms contributed the greatest value to the economy and society.
This, however, is not how these companies are perceived. Doubts over issues such as workplace culture, privacy and corporate tax contributions mean that the perception of their value is considerably lower than the reality.
This perception gap, of course, provides the conditions in which tough new regulations can be imposed to the detriment of shareholders, and possibly their consumers.
This area of study will continue to develop rapidly, but it is clear that reputational risks should be factored in better. And measures like Portland’s Total Value Index will certainly help businesses and investors adapt to this changing landscape.