I’m a numbers person. But I’m also a business person whose career began as the industrial era was giving way to a new era. This new era is fueled by information technologies and a new sensibilities about the proper role and responsibilities for business. In this new era, your reputation is as or more important than your financial bottom line. So, I have had to learn to look beyond the numbers.
The financial bottom line still tells you whether or not your company can produce the money it needs to be strong and to invest in the future. But many of the drivers of your profits are not visible in the financial statements–they are not on the balance sheet so they only appear as costs on the income statement.
In fact, the average balance sheet today does not directly report four of the six capitals in the integrated model. It’s missiing a big portion of the productive capacity of your business. The financial statements don’t capture the operating story as you invest in, operate and monetize your intangible capitals. And, most importantly for your reputation, very little concrete information on intangibles gets through to your stakeholders.
This lack of good information on intangibles means that for many external partners, your business is a black box. They cannot see inside the box so they guess what it’s like based on bits of information or experience. Based on their experience, they’ll give you a score in their heads. You’ll be a 10 as long as everything goes well. But when something goes wrong, they assume that there is probably more bad news on the way. Your stock price will go down. Your partners will start to worry. Job candidates will think twice about joining you. Existing employees doubt the wisdom of sticking around. Even an isolated problem can quickly damage your overall reputation.
The focus on reputation is also being fueled by a second large-scale trend. There is increased pressure on businesses to not only make money but also to be good citizens of the world. Consumers, corporate customers and your community care about whether you are a steward of your natural and social environment. So your reputation will be influenced not just by what you do but also how you do it and the effects of your actions on your natural and social ecosystems.
All this means that the metrics by which you are judged is changing. You lose your reputation and it won’t matter how much money you made last year. Your reputation is your license to operate. Without it, you won’t have the ability or market support to make money this year or next.
It can be a pretty confusing environment for the average businessperson. To date, most companies are hanging tight, figuring that it is better to not say anything than to say the wrong thing. But your stakeholders are going to make up their minds about you anyway. Wouldn’t you be better off to help them make the best possible decision by giving them more complete information?
How to do this? Think proactively and holistically. Your reputation is determined by the total of experiences that people have with your company. Not just your branding but every touch point they have and every conversation that happens in the marketplace. The only way to “control” these experiences is to manage holistically using the integrated model to ensure sustainable value creation.
This post was inspired by the last chapter of Intangible Capital which is entitled Reputation is the New Bottom Line. The concepts behind intangible capital are now being incorporated into the integrated reporting model.
Photo Courtesy of Miriam Wickett at RGB Stock