Companies with strong reputations set to share a $475 billion market cap bonus when the race to rebuild stock prices hit by the Covid-19 crisis starts.

An upcoming report from Reputation Dividend


Judging by the current consensus it’s not so much a case of ‘if’ things are going to recover but ‘when’. Ten weeks in and the unprecedented scale of the crisis is painfully clear. There may be tantalising signs of the beginnings of a turn but there is frustratingly little by way of solid evidence. More than a third of the world is under some form of lockdown, governments are committing unimaginably large levels of monetary and fiscal support and financial markets remain depressed and stalked by volatility. Few things can be taken as certain at the present time other than the belief that we will get through it and things will get better.

Although much remains unclear it is readily apparent that when the market recovery does kick in companies will need to apply all their efforts in deploying resources to critical effect. The unique nature of the present crisis means it is hard to draw parallels with previous events such as the financial crash of 2007-08, however, one thing that will almost certainly hold true is that company reputations are going to play a significant part in sorting the winners from the losers.

Then, as now, the scale of market fall was shocking. The immediate aftermath of the collapse of Lehman Brothers in 2008 saw the S&P and FTSE down by -32% and -38%, similar to the declines of -34% and -32% noted when the coronavirus pandemic first hit. Although the underlying dynamics of that crisis were perhaps better understood than now, and the road to recovery easier to map, there are still some useful lessons to be learned.

"...lessons to be learned about the role of reputation in stock price recovery

Close examination of the pace and scale of recovery from the Great Recession revealed a number of pointers. Individual company performances notwithstanding, stock price rises were broadly steady after the initial collapse and, three years on, the S&P had regained much of the ground lost with the FTSE not far behind. While this may offer some basic encouragement, the headlines hide some compelling evidence. In particular, in the importance of a strong and appropriately structured corporate reputation which was plain to see in the difference between the stock price growth of companies with high-performing reputations and those with lesser properties.

Market Cap Recovery in the Three Years Following Lehman's Collapse in 2008

Two factors were found to have been of critical importance. First, the underlying ‘strength’ of the company’s reputation. A year after the demise of Lehman Brothers market caps were down by an average of -10% in the S&P 500 and by -13% in the FTSE 100. Within that however, a close look at the stock price performance of the 650+ companies tracked in our annual reputation value study revealed that those with above average Reputation Contributions - the proportion of market cap attributable to the confidence inspired by reputation - showed market cap declines averaging just -8%, a full 6 to 10 percentage points ahead of companies with below average Reputation Contributions.

"...strong reputations help to mitigate downward pressures on stock price

Two years later and three years after the crash, the market caps of S&P 500s with high performing reputations had grown to the point where they were 6% above pre-crash levels with their counterparts in the FTSE 350 up 2%; 13 and 8 percentage points ahead of companies with lesser properties. The slower road to recovery followed by the latter group of companies resulted in a gross market cap ‘shortfall’ amounting to 2.4% of the S&P and 1.5% of the FTSE; $293 billion and £28 billion of ‘lost’ shareholder value in each index.

The second driver of recovery was the structure and make-up of companies’ reputations. Investor interests change as times and circumstances evolve and it was apparent by late 2011 that companies seen to be performing on characteristics such as long-term investment potential, people management and quality of products were creating more confidence and edging ahead compared with those rated for ‘lesser’ qualities. Influence was driven by a range of factors but the winners were the companies that best matched their reputation assets to prevailing investor interests.

The conclusions are clear, significant and compelling. Strong, well-structured reputation assets will help companies mitigate the impact of the crash and promote faster recoveries. Findings that, when applied to the present day, post Covid-19 share price recoveries could see additional stock price rises equating to as much as $475 billion of market cap in those companies with above average performing reputations; £27 billion in the FTSE and $440 billion in the much larger S&P.

"...strong, well-formed reputations fuel faster recoveries

Corporate reputations will have a key role as companies’ work to rebuild ravaged stock prices but success will be determined by how well they are structured for investor needs. Reputation Dividend is closely monitoring company performance and trends as the current crisis unfolds and will be publishing its 2020 Report, Reputation For The Recovery, as soon as the ‘curves’ that we’re all focused on show signs of flattening and market volatility begins to settle. The report will summarise the state of corporate reputation in both the US and the UK, identify the companies with the most impactful reputation assets and, most importantly, spell out the reputational factors of most interest to the investment community and so best placed to create value in a world coming to terms with Covid-19.


To pre-book an advance complimentary copy register here:


 

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