FiftyOneZeroOne

Reputation doesn’t aid performance: Study

Posted on: May 31, 2007

It’s a ‘received wisdom’ that a good reputation aids the financial performance of an organisation. We call it the “doing good will lead to good” notion. An Australian study of major banks has, however, found that there was no causal relationship between corporate reputation and financial performance (in either direction), contrary to studies in other countries. 

The case put forward by Robert Inglis and fellow researchers at RMIT University, Melbourne was based on comparison between two major banks, Westpac and NAB. According to a reputation index, RepuTex, Westpac was the leading company in the national banking sector in 2003 and 2004. Westpac, however, was losing market share in deposits and home loans to competitors. 

“If consumer decisions were made on reputation, it would not be unreasonable to expect Westpac to have the dominant market share and the others to trail behind. The fact that Westpac was not dominant in the market suggests that factors other than reputation may be taken into account by consumers when their decisions are made and/or that Westpac has not exploited its reputation advantage.” (p.942) 

They also said that NAB, which previously had a high reputation for corporate governance, suffered financial losses of $A360 million and replaced CEO and chairman when fraud was discovered in its currency trading operation in early 2004. On the other hand, within six months of the fraud revelation and subsequent corporate upheaval, it was recording strong growth in business lending and led in market share.  

“In the NAB case there is seen a company that had a lower reputation than its close counterpart in the same industry, Westpac, yet was achieving a higher performance.” (p.943) Inglis and his co-authors commented that reputation indices are also no predictors of company performance as shown by NAB’s high reputation for corporate governance that was undone by internal system failures. 

Inglis, R., Morley, C. and Smut, P. (2006) Corporate reputation and organisational performance: an Australian study. Management Auditing Journal. 21 (9), pp. 394-947

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4 Responses to "Reputation doesn’t aid performance: Study"

Reading this I wondered how reputation is measured and if at a macro level whether micro level factors are ignored, so I wondered if perceived quality of service could be a factor where existing or potential customers perceive the branches as similar on the big things, trust etc, so are swung by the little differences. Haven’t read the piece but there may be parallels with Gordon Brown, he can run the economy and perceived as a good leader but falls short on the less tangible factors.

I’m always interested in these kinds of studies, but wonder about the elements of reputation and their role in the mix. Among the specific reasons why someone buys or not, surely reputation has some impact, particularly with financial services. To Darren’s comment above, we’d need to see the elements that comprise the index to understand their impact. Did the analysis include correlations broken down by item? A firm with minimal reputation but an aggressive pricing strategy can perform better than its counterparts in the short term…. What happens if you extend the time frame? What was the role of name recognition in the buying decision? What other activities were under way? Did the study look solely at reputation?

Sean: I’m reporting on a study from one country which the authors admit runs against the norm and is related to one country only. I’m puting it forward as a contrary view because of the acceptance of received opinion that reputation = advantage.

You raise some good challenges, as does Darren, as to whether other factors may have influenced the apparently weaker reputationed NAB having an advantage over the leader, Westpac. I was in Australia at the time and NAB was getting a hammering in the stock exchange and in media sentiment. The point that Inglis and colleagues make is that, despite the “reputational flak”, NAB did better in its key consumer and business markets.

A more recent example in the UK of this phenomena is the Carphone Warehouse mobile phone and telephony group which offered a free broadband service to customers last year. It had massive demand and failed to meet installation promises, which also generated adverse media coverage and a slide in its share price. But its sales did not suffer and, apart from taking an initial charge on its accounts for the launch of the service, it is cash positive and developed its share of the mobile phone market.

It exemplifies the question that can be raised over the “reputation = advantage” wisdom. Obviously much more research is needed but it’s a reasonable proposition to explore.

The paper also implicitly questions the value of reputation indices which operate with a financial ‘halo’, such as the Fortune 500. In this case the reputation measure is called “RepuTex” and is based on media coverage. Perhaps the media filter is the wrong measure of “reputation” and consumers trust their own judgement and that of friends and colleagues more.

I guess that rather like the Fombrum experiment the circular nature of the reputation index will make it pretty meaningless and things like the 500 most admired combined with Wall Street Journal cooing, was always going to be problematic in his case.

So I guess on both the index side and the performance measurement side there are problems with this kind of study.

There is a third angle and that is that organisations do not own their reputations so one has to look at the diversity of User Generated Segment to seek real opinion.

The radical view may be that segmentation is ignored completely and that reliance on pull would identify reputation in its own right.

But this is getting very close to having a reliable for of Public Relations measure as well.

Then what would we all do?

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