THE REPUTATION INDEX
ancial statements are woefully inadequate in terms of assessing and managing corporate reputation.
Developing a Corporate Reputation Index In response to the need to evaluate intangibles associated with corporate value, several methodologies have been developed that incorporate market values and book values to provide a residual measurement of intangibles. Baruch Lev and Marc Bothwell formulated a Knowledge Capital Scoreboard based upon subtracting the book value of corporate assets from market value (Mintz, 1999). Their approach utilizes historical and expected rates of return that differ for tangible and intangible assets. The resulting Scoreboard is based only on public information and provides a ratio that is an assessment of the degree to which the company is knowledge-based. Baruch Lev is also in the process of obtaining a patent for The Value Chain Scoreboard (Lev, 2001, p. 110) which is similar to Kaplan and Norton’s Balanced Scorecard (1996) in that it is a comprehensive attempt to quantify non-financial measures as indicators of performance. Lev intends that the Scoreboard functions as both a tool for internal decision-making and as a means for external disclosures. The Scoreboard measures such value-creating activities as internal renewal, customers, intellectual property, and growth prospects. Lev notes that the Scoreboard must be customized to an individual company and recommends a total of 10–12 indicators. Forbes magazine showcases a value creation index (Baum et al., 2000) that resulted from a joint research initiative begun in 1999. The team developing the index incorporated their own wisdom, outside surveys, and empirical research to create eight major drivers of corporate value. Once the drivers were identified, they weighted the driver categories according to the explanatory power of the driver in terms of market value. The Canadian Institute of Chartered Accountants has developed Total Value Creation to provide a means to assess the value creation potential of organizations (Upton, 2001). This method is the result of collaboration with global partners to address the need for better performance tools to report value in the new economy. The method is designed to supplement financial reporting and function primarily for use by senior management and the board. Future plans include making the information available to those external to the firm. The European Foundation for Quality Management employs a model to encompass non-financial performance measures and is used by companies such 204
as British Telecom (Leadbetter, 2000). The components of the model are based on the elements used for the determination of the Malcolm Baldridge Award for Quality. Although not as aggregate a measure as knowledge capital or value creation, the value of a key corporate brand can be the primary intangible asset for many companies. In 2001, Business Week magazine partnered with the leading international brand consulting firm, Interbrand, to provide the first list of the best 100 global brands (Khermouch et al., 2001). Interbrand uses their own methodology for quantifying the value of a brand much in the same way as these other indices. These indices look at either individual elements that will affect corporate reputation or try to measure the intangible assets or liabilities, but none isolate all of the comprehensive elements of corporate reputation. Much like knowledge capital, corporate reputation is an aggregate intangible asset that must be evaluated using both internal and external information. Harvey and Lusch (1999) suggest the most relevant foundation in their methodology to assess off-balance sheet liabilities deriving from intangibles. However, this methodology must be expanded and standardized to create a type of disclosure comparable across companies and industries.
Case Studies of Similar Aggregate Indices Given the difficulties in assigning a value to numerous intangible assets, we propose developing a composite index that relies on various scale weights that would allow standardization in the measures rather than on absolute quantitative values. We envision developing the index using a series of categories and relative weights to derive an overall classification value based on both internal and external information. The index would thus parallel other indices that develop an aggregate classificatory weighting such as the US News & World Report College Rankings or the Moody’s Bond Ratings (cf. Cornelissen and Thorpe, 2002). The college rankings are based on up to sixteen indicators of academic excellence that vary according to the mission of the university. Each indicator is incorporated in creating an overall score by a weighting factor determined by US News & World Report staff. The weighting factors may change from year-to-year and are completely subjective and judgmental. In creating the rankings, US News & World Report employs surveys to solicit such intangible components as faculty dedication to teaching in evaluating academic reputation. Over successive years of reporting these college rankings, the scores and weightings do start achieving a longitudinal sort of self-consistency. European Management Journal Vol. 21, No. 2, pp. 201–212, April 2003