Investors' perspective: No outperformance without reputation

The capital market not only focuses on figures and strategies. The company's reputation is equally as important – without acceptance, there can be no economic success. This is mainly due to the critical view of the opinion-forming public on economic decisions and the resulting political pressure on companies. For communications this means that companies cannot focus solely on the capital market, they have to see themselves as part of the society. CEOs and chairmen of the board, in particular, have to explain their business decisions in a wide context and seek dialogue on new platforms. How businesses handle these growing demands and potential areas of improvement is the topic of a current DAA trend study, consisting of interviews with 25 capital market experts in Germany – including analysts, investors, lawyers, IR representatives, investment bankers and M&A consultants.

At the same time, measuring business decisions not only economically, but also in relation to sociopolitical issues is an integral part of debates in the general business community. This is also important for the capital market.

Thus, a bad reputation is a growing investment risk. The participants of the study made it clear that reputation is just as important as hard figures. Otherwise, "further outperformance is not possible," as an IR manager said in an interview.

According to all study participants, reputation risks have grown within the last few years. But companies in Germany are not yet sufficiently prepared in comparison to other countries: more than half of the survey participants think that companies do not focus enough on their role as part of society. A risky behaviour – especially as more than nine out of ten interview partners assume that the social responsibility of companies will become even more important within the next few years.

With regard to good reputation, the public perception of the leadership team is crucial. Excessive salaries and violations of compliance rules in the past have made the public more sensitive. "Misbehaviour as demonstrated by the ERGO group for example is not tolerated anymore", said a fund manager. Public debate on such scandals is highly emotional. The Executive Board – especially the CEO – is expected to be a role model. Today, the CEO is the representative figurehead with a great influence on reputation. "More than ever, he is the face of the enterprise," a study participant said. "In the past, the CEO was responsible for strategy and procedure. Today he is the company's 'anchorman' in the public eye in terms of his personality, lifestyle, behaviour and, in particular, his misbehaviour," said a banker.

About seven out of ten of the study's participants think that chairmen are now more the focus of public attention. This is partly due to the increased tasks of the control committee. "Activities have grown enormously. It's no longer done with just four meetings per year. A considerable professionalisation has taken place, which will continue," concluded a banker. Furthermore, the board's control of the CEO will grow, mainly because of compliance and corporate governance. "The chairman is personally liable and therefore more responsible," according to a study participant. The board will have a stronger controlling and operational function in the future. "The days of board meetings with a tea party character are over," summarized an IR director.

All in all, the complexity of the tasks has grown considerably for the CEO and the chairman of the board. There are more contradicting interests to handle, such as a high safety need of investors and employees on the one hand and growing stakeholder demands for business renewal on the other hand.

To fulfill the interests of relevant groups, sustainability reports and stakeholder formats are prevalent today. "CSR is common today. It's just part of daily business," according to a fund manager. "Many enterprises integrate the CSR report into their financial reports. Reporting to all stakeholders would be better, also a public one, which addresses political issues, for example."

Many of the study's participants share this view. Contrary to popular opinion, the CSR report alone does not have a decisive role for reputation building according to the capital market experts. Only around one third thinks that the report is important or even very important for a company's reputation. This is mainly due to the fact that reporting is generally an ex-post review, according to a banker.

Companies often lack the ability to speak openly about mistakes – reporting is often white-washed window-dressing, according to a DAX 30 manager. It is more critical that companies communicate in a timely and proactive manner. Particularly in crisis situations "you cannot beat about the bush," because during "bad times it becomes clear, who really understood what reputation management is about. It's about transparency, honesty and getting to the point quickly," formulated a survey participant.

Stakeholders expect CSR reporting. Because of an EU-directive it will even become mandatory for listed companies till the end of 2016. But this will not be sufficient – reporting must be part of an integrated approach. This includes a sincere relation to relevant stakeholder groups, client- and dialogue-formats and transparent public relations. "In the long run companies have no success if they transgress public expectations or violate the customers' code of values. With the strengthening of consumer protection it is no longer only about quality, price and brand promise," said a banker.

Increased demands of external stakeholders reflect increased attention on the CEO and the chairman of the board. At the same time communication becomes faster and less controllable. Violations of compliance rules, low product quality and wrong business decisions are observed and commented on in real time. "Small transgressions can become a major reputation issue on Twitter, Facebook and Blogs in no time," according to a lawyer. It is no wonder that the study participants worry about 'tsunamis in social media'. "You build something up for ten years – and within a second it’s all over," concluded a Dax 30 manager.

"Most companies' use of social media is pretty backwards," said a survey participant. Businesses have to better prepare for possible attacks, using subsequent monitoring and communication formats.

To react to the growing challenges, target-specific communication is indeed a key factor. Therefore, it is critical for businesses to build up their own channels to communicate positions to relevant stakeholder groups, as well as in social media, where appropriate.

"The obligation to communicate more frequently, more transparently and more comprehensively will increase even further," predicted an IR director in his interview. This is mainly due to the fact that business models are changing and are subject to a critical public. As one financial expert concluded: "In disruptive situations the need for explanation is even bigger. Everyone who wants to change something has to explain the benefit – for the customers and for society."