Corporate reputation and financial performance : perspectives of South African executives

Abstract

The concept of corporate reputation has received considerable attention in the last few decades from both researchers and company executives alike, amid indications that having a good corporate reputation ultimately improves financial performance in companies. It is now widely acknowledged that companies that are viewed as reputable tend to gain more trust from their stakeholders, become more competitive and sustainable and are able to improve financial performance. However, despite this apparent recognition, corporate reputation remains largely ignored by executives and is often not regarded as highly as the other assets of a company. It also does not feature prominently in financial accounting. The heightened research interest in corporate reputation over the past few decades has coincided with an increase in cases of corporate misconduct and disasters globally, the consequences of which have included the serious loss of company reputations. This, in turn, has affected the financial performance and sustainability of these companies. The field of corporate reputation is still evolving and the exact nature of its association with financial performance is being investigated in various disciplines (Fombrun, 2012; Chun, 2005). There is also mounting evidence suggesting that it has become an important intangible factor for companies. This study addresses three separate but related core research objectives. Firstly, it seeks to determine, using South African data, whether or not a company’s reputation and its financial performance influence each other. Secondly, it explores the perspectives of South African company executives of corporate reputation in order to understand how they regard the concept in relation to financial performance. This should provide some insights into why corporate reputation remains largely overlooked as a resource that can be harnessed to improve financial performance. Thirdly, the study develops a strategic framework to guide researchers and executives in the management of corporate reputation. Adopting a mixed-method approach in the collection and analysis of data, this research was approached in three phases. The first phase focused on determining whether or not corporate reputation and financial performance influence each other. This was done through a regression analysis of archival data that included reputation rankings of South African companies, as well as, certain financial performance metrics. The purpose of this analysis was to test the strength of the relationship in either direction between corporate reputation and financial performance. The second phase of the research consisted of a structured survey on how South African company executives view corporate reputation and its relationship to financial performance. This was followed by the third phase, which included interviews with South African company executives to further explore their perspectives on the topic. In the first instance, the results revealed a generally weak-to-moderate negative association between corporate reputation and financial performance in either direction of the relationship. This indicated the existence of a relationship between the two variables, even though this was not very strong. Significantly, this finding confirms that the two variables influence each other but also suggests that the influence is not as strong as was expected in the study. In the second instance, with regard to the opinions that South African company executives have of corporate reputation and financial performance, a key finding was that the executives generally recognised corporate reputation as an important factor in the competitiveness and financial performance of their companies. Likewise, financial performance was also recognised and confirmed as a key driver of corporate reputation. However, despite this recognition, the results showed clearly that most executives grappled in practice with the management of corporate reputation in their companies. This suggests that a gap exists between how the executives view corporate reputation and their knowledge to manage it in practice. Some of the executives who participated in the one-on-one interviews attributed this gap to the lack of a proper grasp of the concept itself, including how to measure and put a financial value on it. What is interesting is that, despite years of research on the topic, there are indications that executives still feel that they do not know how to manage this phenomenon. In the third instance, the strategic framework for managing corporate reputation and understanding how it relates to financial performance, as proposed in this study, is an attempt to address this gap. It is a pragmatic lens through which executives and researchers can manage corporate reputation effectively in ways that improve financial performance. A key implication of this study is that management executives can, in fact, improve the financial performance of their companies by focusing on enhancing their corporate reputations, and improving financial performance to build stronger reputations.