We often say having a strong reputation builds trust and trust builds value. But what is the logic behind this statement?
Today’s value of a company is based on the present value of its future cash flows. To establish this value, investors are usually pouring over a business’s results and future plans to establish their view on the future cash flows and value of the company. This is fundamental to being an investor and deciding which companies offer the most opportunity to invest in. A logical question that is asked in this analysis is how certain are the future cash flows and what could go wrong to cause them to change?
If you look at Boeing’s bad experience with the 737 Max, the recognition of bad news detracted from their reputation and consequently their stock price declined from a mid-2019 closing high of $380/share to $150/share by January of 2020 – more than half the company’s value was lost. This deterioration of the stock price reflects investors putting a higher risk on their future cash flows than they had been assuming before the negative events. For example, would it be likely Boeing will sell less planes than previously planned? Will there be higher legal costs? How much uncertainty is there in the future? The stock price trading is now trading at approximately $230/share. This implies investors still do not have as much confidence in future value, certainly not to the levels they did before the 737 Max events.
So how do organizations build reputation to protect against negative reputation events ….by focusing on the right things. Here are four key questions leaders should ask themselves.
- Does my organization have the right strategic focus? Is it based on the company’s core values and capabilities? And, does it have the integrity in its business plans to deliver on that strategy?
- Do the key leaders in the company have the right skills to be at their most effective leadership level, both externally and internally?
- Is there a routine to periodically examine areas of reputation risk for the business? Have you listened to where your employees think the risk is? What are the areas of risk for your business that need to be addressed, both internally and externally?
- Is my company well organized and prepared to respond in an effective way to reputation events? Are the key spokespeople “60 MINUTES” ready?
With the beginning of the New Year, it is an ideal time for organizations to assess if they are poised to Build, Strengthen and Defend their reputation in 2022.