Corporate Reputation Review
In Practice
Corporate Reputation Review,
Vol. 9, No. 2, pp. 134-143
© 2006 Palgrave Macmillan Ltd,
1363-3589 $30.00
134
Volume 9 Number 2
How Good Corporate Reputations Create
Corporate Value
Grahame Dowling
Australian Graduate School of Management, University of New South Wales,
Sydney, NSW, Australia
ABSTRACT
Corporate Boards, CEOs, CFOs, consult-
ants, investors and academics are all interested
in the question of – if and how corporate rep-
utations create financial value for companies.
To date, much of the research that tests the
claim that a good corporate reputation directly
creates such value has produced conflicting
findings. This paper illustrates how a good
corporate reputation can enhance the market
value of a company. This discussion also
suggests that it is premature to try to put an
accurate financial value on a company’s brand/
reputation.
Corporate Reputation Review (2006) 9, 134–143.
doi:10.1057/palgrave.crr.1550017
KEYWORDS: corporate reputation; corporate
value; financial performance; value drivers
INTRODUCTION
Does a Good Corporate Reputation Lead
to Greater Profits?
This is a simple question to ask, but one that
seems to be quite difficult to answer – and
support with ample evidence to satisfy a
CEO (and his or her CFO) and the aca-
demic community. Sabate and Puente (2003)
suggest that the prime reason for this diffi-
culty is the lack of a theoretical explanation
of cause and effect. For example, a key issue
www.palgrave-journals.com/crr
is whether a good reputation leads to better
profits, or do better profits lead to a good
corporate reputation? (More on this in the
next section.)
The aim of this paper is to present a
conceptual framework that links the creation
of a better corporate reputation to the crea-
tion of shareholder value. Knowing that there
is a financial payoff from investing in, and
maintaining a good corporate reputation is
welcome news for companies, their investors,
and many social commentators.There are two
reasons for this. One is that it helps to substan-
tiate the long-standing claims made by
companies like Johnson & Johnson and the
Body Shop that a company can do financially
well by being socially good. Second, it helps
to resolve the tension between the warm and
fuzzy feelings of the socially conscious advo-
cates and the hard-nosed concerns of the
economic rationalists about the (in)efficiency
of broad-based corporate social responsibility
activities.1
A better understanding of the role of
corporate reputations in creating financial
value will also benefit practitioners, in partic-
ular, company corporate affairs managers and
consultants. Both groups often find it diffi-
cult to communicate to their (internal)
‘clients’ the process by which a good corpo-
rate reputation contributes to better financial
performance and hopefully to a higher share
market value for a company.

To develop the thesis that corporate repu-
tations do affect corporate value, this paper
proceeds as follows. First, I briefly review
why there has been debate about the direc-
tion of causality between profits and corpo-
rate reputations. Then, the discussion shifts
to the broader issue of corporate valuation.
This section also introduces a framework
that can be expanded by others to show
where a good corporate reputation can
impact on the drivers of corporate value. To
round out the valuation theme, the next
section focuses on how share prices are
thought to reflect the intrinsic value of a
company. This discussion helps to see the full
chain of events between the development of
a good corporate reputation and its effects
on share prices. Finally, I conclude that the
review of corporate valuation detailed earlier
suggests that it is premature to put a dollar
value on a company’s corporate reputation.
PROFIT – THE CAUSE OR EFFECT OF
A GOOD CORPORATE REPUTATION?
Sabate and Puente (2003) review the
empirical literature analyzing the relationship
between corporate reputations and financial
performance. Not surprisingly, they found
that some studies supported corporate repu-
tations being a cause of better profits and
that some found the reverse to be true. Now
there can be a host of reasons for these dis-
crepancies, such as the measures of profit and
reputation used, the people surveyed, the
research methods employed, the statistical
analysis conducted, etc. Unfortunately how-
ever, concluding that there is likely to be a
two-way relationship allows both advocates
and critics to support their claims for more
or less funding for the development of a
better corporate reputation.
One study that was omitted from the
Sabate and Puente (2003) review was done
by Roberts and Dowling (2002).2 This study
analyzed the corporate reputations and
financial performance of Fortune 1000
companies during the period 1984–1998. It
© 2006 Palgrave Macmillan Ltd. 1363–3589 $30.00
Dowling
had a number of interesting properties that
provide insight into the cause–effect rela-
tionship between profit and reputation:
— The data set was cross-sectional and
longitudinal, and contained 3,141 firm-
year observations
— The statistical analysis (autoregressive
profit models and proportional hazards
regression models) enabled the impact
of corporate reputation on the path of
future financial performance to be esti-
mated
— The respondents who provided corpo-
rate reputation scores for each compa-
ny were senior managers, directors and
financial analysts who knew about the
companies they rated.
It is the last property of the data that is par-
ticularly interesting. If any group is likely to
use profits as a key driver of corporate rep-
utation, it would be this group – especially
given the fact that two of the (eight) reputa-
tion rating scales were ‘financial soundness’
and ‘investment value’. Given this potential
bias, these data provide a ‘tough test’ of the
hypothesis that corporate reputation drives
profitability. To search for this relationship,
the authors decomposed each company’s
overall reputation score into a component
that is predicted by its previous financial per-
formance (labelled as ‘financial reputation’)
and that which is ‘left over’ and due to rep-
utation-building activities that have no direct
impact on current financial performance.
The hypothesis was that rather than there
being a two-way relationship, there was a
two-part relationship. Hence, both types of
reputation would simultaneously help to
drive above industry average financial per-
formance. And both effects were found to
be acting in unison. Thus, this study suggests
that the way for companies to achieve sus-
tained, superior financial performance is to
invest in being more profitable and in being
perceived as good.
Vol. 9, 2, 134–143 Corporate Reputation Review 135
 How Good Corporate Reputations Create Corporate Value
The next section of this paper describes
how this two-part reputation of a company
combines to contribute to enhance corpo-
rate value. To do this, I introduce one of the
most-used general frameworks for corporate
valuation. This also provides the broad
context for assessing the various approaches
used to estimate the value of corporate
brands.
CORPORATE VALUATION
The valuation of companies is a road well
travelled, but one that is dangerous neverthe-
less. As seen during the dot-com boom and
bust, it is not easy to value a new type of
company. Hence, the choice of approach is
critical to the outcome achieved as evi-
denced by the variance in analyst valuations
and recommendations.
Figure 1 presents a four-part valuation
model from Copeland et al. (2000). This
approach is based in economics, used by
consultants and companies, and taught in
many business schools around the world. It
is a largely ‘rational’ approach to corporate
valuation as opposed to one based on the
psychology of investors (see, for example,
Burnham, 2005). (This is briefly discussed
later in the paper.) The inherent logic of this
model, as formulated in a series of stages,
makes it useful to isolate where corporate
reputation impacts on value creation.3
4-Part Model of Sharemarket Valuation
3. Intrinsic
4. Share Price Value
Capital
• human
$ • knowledge
• reputation
• financial
t • etc
Sharemarket Valuation
Model
(Based on Copeland, Koller and Murrin, (2000).
Figure 1: Four-part model of sharemarket valuation
136 Corporate Reputation Review Vol. 9, 2, 134–143
The next section focuses on Stages 1–4
of Figure 1, with particular emphasis on how
good corporate reputations affect the drivers
in Stage 1 to enhance the reputation capital
aspect of the intrinsic value of a company
in Stage 3. Following this discussion, the
focus shifts to the somewhat contentious
issue of how the intrinsic value(s) of a
company are reflected in its share price.
Creating Corporate Value
Many companies and sharemarket analysts
use an approach that values a business
according to its expected future cash flows
discounted to present value at the weighted
average cost of capital (eg, Luehrman, 1997).
The main reason for this is that discounted
cash flow (DCF) is the primary driver of a
company’s sharemarket value. In this world,
‘cash is king’ and anything that effects future
cash flows or how these are discounted to
present value is a value driver.
Stage 1 – Corporate value drivers
At a strategic level, the theory says that cor-
porate value is created by addressing three
basic imperatives (Black et al., 1998):
— investing to achieve a return in excess of
the cost of capital (Return)
— growing the business (Growth)
— managing risk (Risk).
2. Financial
Indicators 1. Value Drivers
Corporate Reputation
A/cing
Metrics Return
BUT Growth
“Cash is Risk
King”
Corporate Valuation Model
© 2006 Palgrave Macmillan Ltd. 1363–3589 $30.00

The DCF approach suggests that these three
major drivers of financial value are best
measured as: cash in and cash out – over an
appropriate time horizon, and given the rel-
evant cost of capital.
As outlined below, a good corporate repu-
tation can help a company grow by (a)
unlocking incremental sales from current
markets, (b) fuelling future growth by helping
the company to expand into new markets,
(c) lower the risk of doing business with the
company, and (d) creating options by helping
the company to test the viability of new
business ventures.
Stage 2 – Financial indicators – cash is
King
While companies report various accounting
metrics such as profit and earnings, com-
pany valuation experts tend to focus on cash
flow because it is not as easy as the account-
ing numbers to be manipulated (eg, by
changing inventory policy, pre-booking sales,
capitalizing expenses, etc). Also, cash is what
funds future investments and is available for
distribution to shareholders. The key finan-
cial components of a DCF valuation are:
— Cash In – Sales is the primary source
of a company’s cash. Sales are driven by
attaining and retaining (the most prof-
itable) customers, and by getting the
Corporate Reputation’s Impact on Corporate Value
Return
Cash In 1 2
Sales
4 (a) Performance 5
Cash Out Bond
(b) Corporate
Brand
6 7
Time Horizon
Profitability
Cost of Capital 8 9
Investors
No Impact Potential Impact
Figure 2: Corporate reputation’s impact on corporate value
© 2006 Palgrave Macmillan Ltd. 1363–3589 $30.00
Dowling
greatest share of their product category
requirements, given their natural ten-
dency to be loyal to one or more (com-
plementary) brands (Uncles et al., 2003).
Returns from cash-generating corporate
assets is another part of cash-in for some
companies (such as the money IBM
receives from licensing its many patents).
— Cash Out – This is the company’s work-
ing capital, payment of taxes, and expend-
iture on tangible and intangible assets.
— Time Horizon – This is generally either
the short- or long-term strategic plan-
ning time frame or some estimate of
the company’s period of competitive
advantage. If this time horizon is short,
then often the future cash flows will not
include the returns from recent invest-
ments in new capital expenditures (such
as an investment in R&D). A longer time
horizon will capture more of this.
— Weighted Average Cost of Capital – This is
an expression of the return a company
must earn if it is to justify the financial
assets it uses. It includes a measure of the
riskiness of the investment.
The question of interest for this paper is
‘How does a good corporate reputation
affect the three principal value drivers –
Return, Growth and Risk, and manifest itself
in future cash flows?’ Figure 2 indicates
Growth Risk
Corporate 3 Sales
Brand Variance
Corporate
Brand
Profitability
Credit
Rating
Minor Impact Major Impact
Vol. 9, 2, 134–143 Corporate Reputation Review 137
 How Good Corporate Reputations Create Corporate Value
where these effects are likely to occur. Thus,
some of the following claims are tinged with
an element of informed speculation and
should be regarded as hypotheses. They are
based on a growing body of research that
focuses on product and service brands (eg,
Srivastava et al., 1998), corporate brands (eg,
Schultz and de Chernatony, 2002) and sum-
maries of corporate reputation research (eg,
Fombrun and van Riel, 2004).
1 More Sales Revenue – This comes about
through a good corporate reputation help-
ing to increase sales revenue through any
one or more of the following mechanisms:
— Increase the size and stickiness of the
customer base, where size means the
number of customers and ‘stickiness’
is the number of loyal customers.
— Increase the volume purchased by
each customer.
— Increase the price premium obtained
relative to competitive products and
services.
— Reinforce customer satisfaction (a
halo effect) and counter an isolated
episode of customer dissatisfaction
(by allowing customers to rationalize
a service failure). These effects in-
crease the probability that a customer
will repeat purchase.
— Decrease the sensitivity to price rises.
— Decrease the effects of price discounts
by competitors, especially with loyal
(and sometimes switchable) customers.
The rationale here is simply that a good cor-
porate reputation either makes it psychologi-
cally easier for a consumer to choose (eg, by
reducing perceived risk, and/or by conjuring
up positive associations – informational, eval-
uative and emotional), and/or it acts as a ‘per-
formance bond’ posted by the company that
enhances the overall value of the product or
service. The first sales enhancement effect is
well documented in the marketing literature
(eg, Dowling, 2004) and the second in eco-
nomics (Milgrom and Roberts, 1992).
138 Corporate Reputation Review Vol. 9, 2, 134–143
2 Corporate Brand Effects – When a com-
pany uses its name as an umbrella
brand for its products and services,
its corporate reputation is also sig-
nalled and signified by the corporate
name. Thus, companies with good cor-
porate reputations can leverage this
asset (or brand equity as it is sometimes
called) through their product-branding
strategy by launching new products and
services, and entering new markets un-
der the umbrella of the corporate brand.
For example, a good corporate brand can
help to gain access to markets through
established distributors, set a higher price,
as well as speed up the adoption and dif-
fusion of a new product or service (eg,
Keller, 1998). This effect has been also
labelled as an informative signal (Sabate
and Puente, 2003).
3 Lower SalesVariance – Following from point
2, because a good corporate brand (and
reputation) is often responsible for more
customer loyalty, this can help to produce
a more stable sales base and thus reduce the
variance in sales when economic condi-
tions or competitive actions act against the
company.
4 (a) Performance Bond Effects – A good cor-
porate reputation acts as a perform-
ance bond for companies (they put
their reputation at risk if they default)
and this may allow them to negotiate
better terms of trade than a less well-
respected competitor (eg, Milgrom
and Roberts, 1992). This effect has
also been called a contract guarantor
by Sabate and Puente (2003).
(b) Corporate Brand Effects – Companies
with strong corporate brands often
need to spend less on their marketing
than their less well-respected counter-
parts to achieve the same target sales
(eg, Keller, 1998). For example, the ad-
vertising for strong brands is likely to
decay at a slower rate than for weak
brands (eg, Rossiter and Percy, 1997).
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5 Corporate Brand Effects – It is easier, and
thus often less costly to launch new
products and services under an already
established strong corporate brand than
a weak brand (eg, after a corporate life-
time of selling sports cars Porsche was
able to successfully sell a 4WD). One
reason is that there may be established
relationships with distributional channel
members. Another is that it costs less to
establish brand name recognition among
target consumers.
6 Profit Effects – The Roberts and Dowling
(2002) research noted at the beginning
of the paper has shown that Fortune
companies with a better reputation than
their industry rivals enjoy a longer pe-
riod of sustained profitability. That is, a
good corporate reputation helps to pro-
long profitability.
7 Profit Effects – The persistent profit effects
in point 6 above also suggest that the
better reputation companies will be less
risky to investors and other stakeholders
who have a fiduciary relationship with
the company.
8 The Investor Base – Companies with
good reputations often attract more in-
vestor interest than those who do not.
And because investment banks raising
new equity price the risk of under-sub-
scription into their fee structures, a com-
pany with a good reputation may be able
to structure a lower cost of new equity.
Also, good reputation companies can be
issued a higher initial price and thus re-
turn more money to their owners. For
example, when Australia’s premier air-
line Qantas became a public company,
its share float was over subscribed – even
though the airline industry is relatively
unprofitable (when compared to most
others) and Qantas was not a particularly
big or profitable international player.
9 Credit Rating – Well-respected compa-
nies are often considered to be less risky
entities for investment – both for work-
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Dowling
ing capital and new capital expenditure
(eg, see Orlitzky and Benjamin, 2001).
In summary, Figure 2 shows how good cor-
porate reputations can drive the indicators
of corporate value in a number of different
ways. And as noted at the beginning of the
paper, because this framework is populated
by examples that need to be expanded and
refined by others, one of its prime uses is as
an agenda for further research.
Figure 1 suggests that the various accounting
metrics reported in a company’s traditional
financial statements (P&L and Balance Sheet)
provide only a partial indication of the
intrinsic or fundamental value of a company.
From the perspective of an investor (Stage 4),
there are many other types of capital that
combine to form the total intrinsic value of
a company. These are typically referred to as
intangible assets and discussed in the next
section. Following this, three theories of how
estimates of intrinsic value are translated into
share prices is looked into.
Stage 3 – Intrinsic value
This part of the corporate valuation model
in Figure 1 indicates that the intrinsic value
of a company is composed of various types
of capital that it acquires, develops and uses.
While the DCF approach focuses mainly on
financial capital, in the ‘new economy’ com-
panies seek to build up their stocks of other
types of capital such as human capital (em-
ployees), organizational capital (databases,
trademarks, intellectual property), customer
capital (brands, customer base) and stakehold-
er capital (corporate reputations). All these
sources of capital can be funded by reinvest-
ing cash, hence one reason that ‘cash is King’.
In the strategic management literature, the
resource-base theory of the firm indicates that
these very important resources can be the
primary source of competitive advantage for
many companies (Barney, 2001).
It is one thing to state that the intrinsic
value of a company is composed of its capital
Vol. 9, 2, 134–143 Corporate Reputation Review 139
 How Good Corporate Reputations Create Corporate Value
stocks, but quite another to provide accurate
measures of these stocks over time. There has
been much criticism of the essentially back-
wards-looking generally accepted accounting
principles (GAAP) as a valid and reliable
basis for estimating financial capital, let alone
the other types of capital identified above.
To address this criticism, the UK Accounting
Standards Board has recently decreed that
UK listed companies will now provide a
forward-looking report (Reporting Standard
1 – ‘Operating and Financial Review’) to
assist with the assessment of the company’s
strategy and prospects (Acha and Martin,
2005).4 This report focuses directly on iden-
tifying the uncertainties, resources, risks and
relationships that may affect the company’s
long-term value. Because corporate reputa-
tion is one key indicator of long-term value,
its recognition by the Accounting Standards
Board provides increased legitimacy for the
basic premise of this paper that good reputa-
tions enhance corporate value.
Stage 4 – From corporate value to
share price
Conceptually, the market value of a share is
simply the present value of the expected cash
flows from the share, discounted at the
required rate of return appropriate to the
riskiness of these net cash flows. This
approach is known as the dividend valuation
model (Bishop et al., 2000). If the shares are
not to be sold, then expected cash flow is
the future dividend stream. Thus, in a perfect
market, share price equals present value.
Ah, but share markets are not perfect.They
are bedevilled by both financial (such as
transaction costs and taxes) and non-financial
(such as the expectations of analysts and the
psychology of investors) imperfections.
Depending on an investor’s beliefs about the
relative influence of these imperfections on
share prices, they tend to fall into one of
three broad groups. One group believes that
share prices are the best guide to a compa-
ny’s intrinsic value (as decomposed in Stage
140 Corporate Reputation Review Vol. 9, 2, 134–143
3 in Figure 1). The second group believes
that careful analysis of the historical price
and volume history of a company’s share
prices, and/or the fundamentals of its
operations can reveal under and over-priced
shares. The third group are sceptics. They
believe that given the scope available for
companies to obscure their financial perform-
ance with accounting wizardry, and the poor
track record of the gatekeeping organizations
(stock exchanges, auditors, credit-rating
agencies, law firms and banks) signalling
impending corporate trouble, it is too diffi-
cult to understand the published accounting
data of the modern company (Partnoy, 2004).
As Warren Buffet said ‘when I take a look
at a company’s annual report, if I don’t
understand it, they don’t want me to under-
stand it’.
The first group subscribes to what is
known as the efficient markets hypothesis
(EMH). In lay terms, this says that the share
market is efficient if new information is
instantaneously (or quickly) reflected in a
company’s share price. This new information
can originate outside the company (eg, a
report about the company’s industry
or a competitor) or inside the company (eg,
a statement about its future prospects). In the
short term, share prices are thought to be
driven more by the company’s performance
compared to (analysts’) expectations than to
its long-term prospects. However, the market
does take a long-term view (paradoxically, as
evidenced by the valuation of many Internet
companies like Amazon that had (quite)
large market capitalizations, but no profits).
Thus, the EMH would factor in an invest-
ment that increases reputation capital into
the price of the company’s shares.
The second group of corporate valuers split
into two sub-groups. One is called technical
analysts or chartists, the other fundamental
analysts. The chartists believe that share prices
move predominantly because of supply
and demand pressures for particular shares,
and that this is driven by the expectations and
© 2006 Palgrave Macmillan Ltd. 1363–3589 $30.00

emotions of investors. A good reputation can
play a role here, by fostering positive emotions.
For example, part of the reason that the
Qantas float mentioned earlier was oversub-
scribed was because it was a highly respected,
iconic Australian brand.5
The fundamental analysts believe that a
company has an intrinsic value and they
collect all the publicly available (and some-
times inside) information to estimate this
value. This is essentially the Warren Buffet
approach. This group uses tools like financial
ratio analysis (such as P/E multiples) and
DCF analysis to estimate corporate value.
When a share price is not equal to its intrinsic
value, they trade. The role of a good corpo-
rate reputation will be that it is a part of the
company’s intrinsic value that is then factored
into its share price.
The third group, the sceptics, have a low
reputation of most companies – and the
managers who run them, and the gatekeeping
organizations that are supposed to validate
their claims. Each new corporate crisis rein-
forces this view. They do not believe in the
efficiency of markets. In their view, what drives
share prices is investor irrational exuberance.
And for them, it is rational to remain ignorant
– the costs simply outweigh the benefits of
trying to understand how share prices are
determined. This group does not care about
the relative reputations of companies.
Thus, two out of the three methods of
share price valuation can accommodate the
effects of a good corporate reputation.
In summary, Figure 1 is a useful frame-
work to assess the potential effects of a good
corporate reputation on corporate value –
both intrinsic value (Stage 3) and share price
value (Stage 4). And as more accounting
standards bodies require companies to report
on their intangible assets, measures of corpo-
rate reputation will appear in their statutory
reports (Stage 2). What Figure 1 is also
useful for is to ground a discussion of the
financial valuation of corporate brands and
reputations.
© 2006 Palgrave Macmillan Ltd. 1363–3589 $30.00
Dowling
A STEP TOO FAR?
As noted previously in the discussion of
Stage 3 of Figure 1, corporate brands and
reputations and the relationships they engen-
der with company stakeholders are a peculiar
type of intangible asset that are now for-
mally recognized by some prominent ac-
counting bodies and sharemarket regulators.
However, the discussion of the DCF ap-
proach to valuation and the way that intrin-
sic value is converted into share prices (or
market capitalization) suggest that any esti-
mate of financial value is contingent on a
number of contestable judgements. Thus, it
will be difficult to answer the question of
‘What is the (specific) financial return from
building a better reputation?’ The reasoning
for this assertion is also based on what has
happened in the field of brand valuation.
Consider the various generic methods
that have been used to value a company’s
brands. They include (Keller, 1998):
— The market value of the company’s
shares (more suitable for a single-product
or umbrella-branded company).
— The difference between market value
and book value – a market value added
approach.
— The brand’s replacement value – based
on the accumulated historic investments
in distribution and marketing.
— The difference between the value of a
brand and a similar unbranded generic
product – usually calculated as the sum
of the present values of the price pre-
mium and extra volume sold.
— The present value of the free cash flow
from the brand.
For a specific brand each of these will pro-
duce a different dollar value. And the vari-
ance can be considerable, because as we saw
in Figure 1, they are located at different
stages of the overall valuation framework and
thus rely on different sets of assumptions. So
which approach should be chosen as the best
Vol. 9, 2, 134–143 Corporate Reputation Review 141
 How Good Corporate Reputations Create Corporate Value
estimate? Or should multiple methods be
used and somehow combined? Should range
estimates be required, accompanied by a con-
fidence estimate? It is all very complicated.
One solution to this problem has been to
use a respected company like Interbrand to
do the valuation. They take a DCF approach
and add some marketing magic dust. For
example, they calculate the differential EBIT
of a brand over a three-year time frame,6
adjust for inflation and risk, and then multiply
by a factor to reflect the brand’s strength.7
As these two endnotes suggest, this is very
complex and not very transparent. For
example, to value a brand requires some esti-
mate to be made of the number of customers
that buy it and the amount they buy. Coca-
Cola, 2005’s most valuable brand would, and
arguably could not, have any reliable idea
about these (worldwide) numbers. (The
brand values are reported in Berner and
Kiley, 2005.) Other authors then go on to
estimate the value of these brands as a
percentage of a company’s market capitaliza-
tion (eg, Rubinson, 2005).8 Such an estimate
of the financial importance of brands adds
yet more assumptions about brand value.
In support of brand, and by logical exten-
sion company (brand) reputation valuation,
there are two arguments for going through
any such valuation procedure.The first is that
the process is more useful than the (dollar)
outcome. It forces managers to confront
many assumptions they make about the
strength or otherwise of their brand. The
second argument is that a close look at the
Interbrand measurement procedure reveals
that their valuation is effectively a forecast of
brand value. For example, to use a DCF
approach requires forecasting future cash
flows directly attributable to the brand. And,
while these will be based on the information
provided by managers, they are ‘audited’ by
an independent firm before use in the valu-
ation. This may then provide a more reliable
estimate of this aspect of the intrinsic value
of the company (Stage 3 of Figure 1). Also,
142 Corporate Reputation Review Vol. 9, 2, 134–143
if the same valuation approach is used over
time, then trends can be established that may
be useful for both managers and investors.
However, the users of these estimates of
brand value need strong faith to believe that
a measure based on many contestable assump-
tions can provide insight into how to create
a better corporate (brand) reputation.
The position advocated in this paper is to
adopt Albert Einstein’s theory of measure-
ment, namely that:
Not everything that can be counted
counts, and not everything that counts can
be counted.
The counterpoint to this position is that we
as a field of study need to figure out how
to value a brand/reputation. And that while
the current approaches seem suspect, this
should not deter us from this endeavor.These
competing views are left to the readers to
ponder.
CONCLUSIONS
The aim of this paper has been to explain
how corporate reputations can help to
enhance the intrinsic value of a company
and its sharemarket value. DCF and three
sharemarket valuation models were chosen
to illustrate these effects. While each of these
models has its critics, and even their advo-
cates admit that valuation is as much art as
science (Copeland et al., 2000: 293), they are
widely used and thus helpful to illustrate the
financial logic of why company boards,
CEOs and CFOs should invest in creating a
better corporate reputation for their compa-
nies. This analysis supports, by explaining
how good corporate reputations enhance
corporate value, the research that shows that
there is a general empirical relationship
between good reputations and better (than
industry average) financial performance.
However, what the discussion also suggests
is that there is a long way to go before robust
estimates of the dollar value of a company’s
reputation will be available.
© 2006 Palgrave Macmillan Ltd. 1363–3589 $30.00

NOTES
1 In 1970, Milton Friedman stated his famous opin-
ion that has been paraphrased as ‘the business of
business is business’. In 2005, at the age of 93 he
reaffirmed this opinion in Grow et al. (2005).
2 Because this was published in late 2002, it prob-
ably appeared in print after Sabate and Puente’s
review was accepted for publication.
3 Another approach is gaining currency in business
schools and investment banks. It is called Real
Options Reasoning (see, for example, McGrath
and Nerkar, 2004).
4 The United States SEC (Form 20-F) also requires
much of this information.
5 Another reason was that it was a government
airline, and the Australian government had a small
incentive to under-price the offering in order to
establish its good reputation so that when other
government enterprises (such as Australia’s biggest
telecommunications company – Telstra) were
floated, they would be regarded favorably.
6 The differential EBIT is the difference between
the earnings before interest and tax of the brand
and an equivalent unbranded product. The three-
year time frame is the current and previous two
years, where year − 2 is weighted as 1, year − 1
is weighted as 2 and year 0 is weighted as 3.
7 Brand strength is a weighted combination
of seven factors: leadership, stability, market,
geographic spread, trend, support and protection.
And some of these are comprised of sub-factors!
8 For example, Rubinson (2005) suggests that the
value of Interbrand’s 100 most valuable brands
equals nearly 30% of their market capitalization.
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