What's in a name?
Good name in man or woman, dear my Lord/ Is the immediate jewel of their
souls/Who steals my purse steals trash; ‘tis something, nothing:/ Twas mine, ‘tis his, and has been slave to thousands;/ Robs me of that which not
enriches him, / And makes me poor indeed.
William Shakespeare
Othello
Corporate reputations have bottom-line effects., A good reputation
enhances profitability because it attracts customers to the company’s products, investors to its securities, and employees to its jobs. In turn,
esteem inflates the price at which a public company’s securities trade. The economic value of a corporate reputation and examines more closely a
market based measure of repuational capital.
Valuing Image
When consummate image maker Andy Warhol died in 1987, the value of his
estate was estimated at some $700 million. By 1993, that estimate had been revised by Sotheby’s to a lowly $20 million. what happened to the other
$480 million between 1987 and 1993? Over the last few years, that exact question has slowly wound its way through the court system. Warhol’s former
estate lawyers filed suit against the Warhol foundation, claiming that the higher value was more accurate. To them, of course, this was vitally
important; their fee was tied to the true value of the estate.
The value of art depends heavily on two familiar factors: demand and supply.
A dead artist’s work generally increases in the value because, while supply remains fixed, demand for the artist’s work increases. Demand also
depends heavily on the reputation of the artist at the time of death. A strong reputation inflates demand and raises subsequent auction prices for the
artist’s work increases. Demand also depends heavily on the reputation of the artist’s work. As one art observer put it: “The reputation of the artist and
the work reinforce one another: we value more a work done by an artist we respect, just as we respect more an artist whose work we have admired.”
In the years since Warhol’s death, not only did an economic downturn reduce
overall demand for art, but Warhol’s reputation itself suffered vilification. Not
surprisingly, pieces of his art have fetched lower prices at auctions. In itself,
this was an ironic outcome, given the few artists since the Dutch painter Rembrandt have proved quite so skillful as Warhol at projecting an image
and sustaining a reputation during their lifetime. As one art critic puts it, ”Rembrandt was an entrepreneur of the self,’ someone ‘who invented the
work of art most characteristic of our culture -- a commodity distinguished among others by not being factory produced, but produced in limited
numbers and creating its market, whose special claim to the aura of individuality and to high market value bind it to basic aspects of an
entrepreneurial (capitalist) enterprise.”
Like Rembrandt, Warhol deftly manipulated the media in a quest to secure
for himself more than the 15 minutes of fame to which he claimed everyone else was entitled. He was an accomplished poseur, endlessly staging
himself in a bid for the world’s attention. A many of very few rods, he took to
hosting a television talk show. The magazine he edited -- ‘Interview’ -- published amidst outsized photographs, a mere scattering of words, few of
them his. The dialogue in the films he directed was entirely improvised. All in all, Warhol probably represents one our era’s most artful social constructions
and would be sorely disappointed in the mangers of his estate for having so poorly handed the reputation he consigned to them.
In contrast with Warhol’s art, Pablo Picasso’s paintings have fared rather
well auction. Works that sold for $500,000 -- $800,000 in the early 1980s fetched $2 -- $3 million in 1993, despite the recession. Why up for Picasso
but down for Warhol? If Picasso’s paintings have proved more successful at auction, it is partly because more systematic efforts were made to prop-up
his reputation. For instance, soon after Sotheby’s was retained by a Picasso collector to engineer a sale of 88 pieces, the auction house systematically
pursued prospective collectors and dealers around the world. All the pieces were sent on a tour of major art capitals. By the time the auction was held in
November 1993, adroit promotion had created pent up demands.
Pirated bidding at the auction racked up a total of $32 million for the
collection. Contrast that with a smaller auction of 16 Warhol paintings held 6 months earlier at which only 2 pieces were sold.
A recent study by the Economist found that prestige products hold their value
well over the years. Table 4-1 contrasts the current and historical prices of some top products from five high reputation companies;’ a top of the line
Jaguar two seater, a Parker Duofold fountain pen, a Dunhill silver plated Rollagas lighter, a Louis Vuitton suitcase and a Cartier Tank watch. In real
terms, the prices of these companies’ products have grown systematically over the years, averaging an increase close to 2 per cent per year after
controlling for inflation, a remarkable rate of growth.
Much as some branded products hold their value well, so have managers
begun to recognize that there is an enduring economic value in a strong corporate level reputation. In part, recognition of this fact has come from
service providers who are particularly hard put to identify other assets of note
in their portfolios. In fact, all companies-- whether in services or in manufacturing -- rely not only on people and plant and equippment but also
on intangible assets such as patents, trademarks, copyrights brandnames and reputation. Lacking material products, service companies are especially
dependent on their repuations to stay in business. In conversation, investment bankers love to remind listeners that their principal assets go
down the elevator every night. Don’t take that to mean “We care about our people.” It simply reflects appreciation for the fact that employees carry with
them the capacity to make or break the companies most valuable asset: its reputation. Well known investor Warren Buffett made a celebrated remark to
a group of Salomon Brothers managers in the aftermath of the trading scandal that shook the bank in 1991. “If you lose dollars for the firm by bad
decisions I will be very understanding. If you lose reputation for the firm, I will
be ruthless.”
The same concern naturally extends to providers of accounting and legal
services. In 1992 and 1993, top accountants Arthur Andersen and Ernst & Young agreed to pay $65 million and $128 million, respectively, to settle
federal charges that their audits of failed savings and loan banks were negligent or misleading. Joining them with penalties of $41 million, $50
million, and $45 million, respectively were the blue chip law firms of Kay Scholer; Jones, Day; and Paul, Weiss. Although assenting to the fines, none
of these services firms admitted guilt. Their reasoning: it is cheaper to pay a fine than to risk deflating a firm’s economic value in a
court battle. Settling avoids protracted litigation and publicity that would only further sully the firm’s
good name and lower the underlying value of its most prized intangible asset, its reputation.
Despite its obvious worth, the dollar value of a company’s reputation proves
difficult to quantify. In essence, it derives from the profits a company can expect to generate from its intangible assets, only a small pat of which are
embodied in patents and other forms of intellectual property. That makes most future revenue streams uncertain. Where patented products are the
principal source of value, however, we can estimate the revenue stream that might obtain over the patent’s 17 year life, assuming no rival brings out a
substitute product to cannibalize sales.
Since the costs directly associated with obtaining the patent are easily
identified, the task of compiling, capitalizing and amortizing them on a company’s balance sheet is straightforward. so the economic value of a
corporate reputation that depends heavily on the patents the firm owns can be calculated in some detail. In essence, the company’s reputation merely
reflects the value of the firm’s intellectual capital.