Русский

Corporate
Reputation in Russia:
yesterday, today, tomorrow*

*The research was held in November 2016
© 2016 EmCo and EQS Group. All rights reserved

Summary

The Most Important in the Study

  • over the past 15 years, Russian companies have experienced a considerable quantitative increase in the significance of corporate reputation
  • the gap in the weight of intangible assets, including reputation, as compared to the markets of developed countries remains huge
  • quantitative increase in the significance of corporate reputation in Russian companies has not transformed to qualitative, and the attitude to reputation remains utilitarian
  • taking into account the political and economic situation, in the coming years reputation is likely to become one of the key value growth drivers for Russian companies
from 5% to 12%
increase in the weight of intangible assets over 15 years
from 0% to 33-38%
increase in the share of companies incorporating intangible aspects in their goals and missions
the increase in the value of companies with a strong reputation was below the increase in the share price of companies with a weak reputation
12% vs. 63%
the weight of intangible assets in Russia is still dramatically lower than in developed markets:

Goals of the study

Global significance of corporate reputation

60% of chief executives said they believed corporate brand and reputation represented more than 40% of their company’s market capitalization
Survey released by Fleishman-Hillard
at the World Economic Forum

It is now common practice to assess companies’ performance based not only on financial and operational indicators (tangibles), such as revenue, capitalisation, market share and stock liquidity, but also on intangibles, such as reputation, brand, corporate governance quality, social responsibility, transparency, etc.

between 30% and 50% of a company’s success
depends on its image and reputation according to Ernst & Young estimates

The reputation is increasingly influencing on companies’ value

RepuStars® Variety Corporate Reputation Index calculated by S&P / Dow Jones also clearly demonstrates that high reputation companies are traded at a premium to the S&P 500 index

The weight of reputational factor is growing globally

According to EmCo’s calculations, the share of intangible assets in the top 50 S&P 500 companies by capitalisation grew from 36% in 2000 to 63% in 2015. Over this period, the share of goodwill grew from 27% to 40%, which confirms that the significance of business reputation grows with time

from 36% in 2000 to 63% in 2015
The share of intangible assets in the top 50 S&P 500 companies by capitalisation grew

The situation in Russia is not identical to global

A comparison of companies’ intangible assets share of S&P500 index and MICEX index shows that currently the importance of intangible assets in Russia has not yet reached a global level of 15 years ago

The country's reputation - additional restriction

  • experts at Reputation Institute also note that Russia heads the list of countries with the largest gap between their self-image reputation and external reputation – 41 points
  • Reputation Institute compiles an annual country reputation rating , and in the 2016 report Russia gained 4.7 points versus the previous year and reached No. 65 (between Nigeria and Algeria)

Goal of the Study

To identify the current role of corporate reputation in Russia, the dynamics of its development over 15 years and prospects for the coming years

Objectives of the Study

  • to identify the weight of intangible assets of Russian companies
  • to study Russian companies ‘ dynamics of attitude towards their reputation
  • to identify a degree of reputation influence on the value of securities in Russia
  • evaluate the role of reputational risks and the corporate approach to their management
  • to evaluate the interconnection of reputation and corporate governance

The Main Areas Studied

1

A link between the reputation and the value of securities

2

Reputational risks as part of the overall risk management system

3

A link between Russian companies’ corporate reputation and management structure

4

The change in Russian companies’ approach to reputation over the last 15 years

5

The share of intangible assets in Russian companies ‘ total assets

Findings of the Study:

Weight of Intangible Assets

  • the study results showed that the share of intangible assets on the balance sheets of Russian companies included in the MICEX index grew on average from 5% of the total of intangible and tangible assets in 2000 to 12% in 2015
  • a situation comparable to what is happening in Russia is also observed in China. As an example, we took 50 largest companies included in the Shanghai Composite index. The share of intangible assets in the total of intangible and tangible assets of these companies grew from 7% in 2000 to 19% in 2015
  • however China is moving quickly - to date the share of intangible assets accounts 19% in China and 12% in Russia

Findings of the Study:

Attention Increase to the Reputation

Number and Structure of Missions

Year

Number of missions

Aspect

Leadership

Operational

Financial

Intangible

2000

1

14%

-

0%

1

50%

1

50%

-

0%

2005

13

25%

2

7%

11

41%

7

26%

7

26%

2010

41

42%

8

11%

34

45%

13

17%

21

28%

2015

72

61%

9

8%

58

50%

11

9%

38

33%

Number and Structure of Goals

Year

Number of strategic goals

Aspect

Operational

Financial

Intangible

2000

5

71%

7

100%

-

0%

-

0%

2005

27

53%

30

53%

20

35%

7

12%

2010

77

79%

86

67%

38

27%

16

11%

2015

87

74%

101

51%

63

32%

34

17%

Findings of the Study:

Attention Increase to the Reputation (cont'd)

Mentions of reputation-related words

Year

Average number of reputation-related words

Reputation

Image

Brand

2000

1.6

1.6

-

-

2005

1.2

2.0

0.5

1.2

2010

2.7

2.6

0.7

4.7

2015

5.0

5.3

1.1

8.5
  • in 2015 the word “reputation” was used not only by companies focused on retail customers (Sberbank, Qiwi, Moscow Exchange, M.video, Yandex) but also by B2B enterprises (TransContainer, PhosAgro)
  • in 2015 state-owned companies on average more frequently used the word “reputation” (8.4 times) compared to private companies (3.2) The analysis shows that large companies also more frequently use the word “reputation”, though we have not discovered any significant relation between the company’s liquidity, the stock exchange where its shares are traded, and the frequency of mentions of reputation-related words

Findings of the Study:

Link between the Reputation and the Value of Securities

Companies scoring above 70 and below 60 in the RepTrak® Pulse ranking
According to Reputation Institute, reputation scoring below 60 is deemed weak, and above 70 – strong
  • it is worth noting that during 2006-2012 years value growth of Russian companies with high reputation significantly lagged behind those with reputation at a low level
  • the trend has not changed even once during the period and as far as can be judged retained in recent years
  • it can be stated that the reputation of Russian companies has very little effect on the value of these companies

Findings of the Study:

Impact on Governance Structure

Number and Structure of Committees

Item

2005

2010

2015

Number / Share of companies which disclosed information about Committees

23 / 46%

76 / 79%

105 / 90%

Total number of Committees

65

245

342

Number / Share of Committees dealing with intangible assets

5 / 7.7%

14 / 5.7%

25 / 7.3%

Structure of the Management Board

Item

2000

2005

2010

2015

Number / Share of companies which disclosed the structure of their Management Boards

6 / 86%

27 / 54%

72 / 75%

90 / 77%

Total number of Management Board members

81

245

641

784

Number / Share of Management Board members responsible for intangible assets

3 / 3.7%

12 / 4.9%

54 / 8.4%

65 / 8.3%
  • the analysis has confirmed that, on the one hand, Boards of Directors and Management Boards have come to pay more attention to CSR and risk management, however, the interest in information disclosure, ethics and corporate governance has decreased

Conclusions:

Changes over 15 Years

Quantitative changes
over 15 years have been considerable

  • the weight of intangible assets has grown from 5% to 12%
  • the number of mentions of reputation in annual reports has almost tripled
  • the number of companies which incorporate intangible aspects in their missions has grown from 0% to 33% of the total

Qualitative changes
over 15 years have been minimal

  • the weight of intangible assets is still lower than in developed countries
  • there is no explicit correlation between the declared reputational efforts and companies’ value
  • corporate reputation has not become a tool supporting business development and value increase

Conclusions:

Today’s Picture

Russian companies declare the significance of intangible assets in their missions and risk factors; however, the structure of their strategic goals, as well as their governance and motivation structures fail to reflect the declared strategic interest in reputation and sustainable development.

This is due to the fact that company owners and top managers do not see a direct influence of reputation on companies’ business and value

  • Russian public companies came to use reputation-related words in their annual reports on average three times more frequently than in 2000
  • the share of intangible aspects in missions and strategic goals reached 33% and 17%, respectively
  • the organisational structure of Board committees and Management Boards changed to give more attention to CSR and risk management, however, the interest in information disclosure, ethics and corporate governance decreased
  • In 2015, executive management bodies’ compensation was linked to intangible KPIs in 14% of Russian companies
  • In 2015, reputational risk was identified as a separate risk factor in 30% of cases. 18% of companies included reputational risk in other risk factors
  • the majority of companies do not pay significant attention to reputational risks and do not disclose relevant information in their annual reports
  • companies which do disclose such information do not provide a sufficiently clear and detailed description of reputational risk, its peculiarities, and a description of steps to be taken to minimise it
  • most companies mention reputational risks as formality rather than a representation of actual efforts to manage them

Conclusions:

The Main Challenge Today

The current situation in the area of corporate reputation management is unique: it slowdowns the development of Russian companies, but it also creates new significant opportunities for its development

Brake

  • retaining of the current approach to the reputation will only increase the backlog of Russian companies
  • as reputation is cumulative the backlog in the foreseeable future could become critical in relation not only to companies of Western countries, but also the emerging markets
  • when the crisis will end one way or another, most companies will have to catch up wasting time and resources

Driver

  • during the crisis and finance access limitation reputation could become the basis for the growth of a company's value
  • reputation is a factor that can reduce volatility and "speculative" of Russian market
  • current relatively low level of corporate reputation importance creates its substantial reserve as a driver
  • for 15 years Russian companies have accumulated enough experience to raise reputation management to a new level

With that in mind, EmCo sees two the most likely development scenarios

Perspective View:

“Inertial” Scenario

  • Corporate reputation issues remain of secondary importance; reputation management is applied sporadically, and usually after reputational damage is done
  • A “reputational discount” persists in the assessment of a company’ market value
  • The cost of corporate borrowings at least remains flat, and in many cases it increases
  • Companies do not fully realise the human capital potential due to the high significance of reputation in the perception of employees
  • The overall image of Russian companies perceived around the world remains largely negative, which influences the overall perception of the country as well
  • The overall image of Russian companies perceived around the world remains largely negative, which influences the overall perception of the country as well
  • Reputational efforts rely mainly on obsolete tools dating back to the beginning of the 21st century

Perspective View:

“Innovative” Scenario

  • Corporate reputation management becomes a truly strategic function
  • Reputation and, consequently, the human factor become the key growth drivers for Russian companies as long as limitations imposed by the crisis and sanctions are in place
  • The gap in the significance of intangible assets between Russian and leading global companies is closing
  • Companies’ investment appeal is strengthening and their market value is growing; a discount versus developed countries on key multipliers is reducing
  • Losses in financial markets during the crisis period are reduced through proactive engagement with stakeholders
  • Not only the reputation of individual Russian companies, but also the reputation of industries and the country in general improves
  • In their reputational efforts, companies shift towards modern tools based on up-to-date global trends

Conclusions:

Relevant Trends in Reputation Management

EmCo identifies several essential trends
that determine the nature of reputational efforts in the next 5 years

By 2020, Big Data will become the fundamental factor of reputational efforts, and companies should already take it into account when planning their efforts

Reputational efforts will ultimately become a continuous and long-term process which is not based on immediate goals while nevertheless taking them into account

These efforts will be led by corporate communication directors reporting directly to the CEO and acting as coordinators aligning the efforts of various functions (IR, PR, public affairs)

Company employees will become one of the key “promoters” of reputation in the outside world

Company employees will become one of the key “promoters” of reputation in the outside world

Authors of the Study

Pavel Kim

Partner, Head of Investor Relations

+7 (926) 645-93-48

Katerina Esayants

Investor Relations
Project Manager

+7 (965) 387-85-33

Oleg Skegin

Investor Relations Project Manager

+7 (906) 756-58-90

EmCo is a Russian consulting company established in 2000. Services offered by EmCo include investor relations, sustainable development and government relations

Company is a member of the Investor Relations Society (IRS) and the Financial Communications and Investor Relations Alliance (ARFI)

Since its inception, EmCo has implemented over 150 projects. Our clients include Russian state and private companies along with a number of international corporations

Partner

We are grateful to our partner in this study, EQS Group, for assistance in gathering and analysing information, as well as for valuable comments on the study methodology

EQS Group is a leading provider of online services in the field of corporate communications and investors relations in Europe, Russia, the CIS and Asia. Offices of the Group are located in Munich, Hamburg, Zurich, London, Moscow, Hong Kong and Singapore. The spectrum of EQS Group services includes: disclosure of companies’ information on the major stock exchanges (LSE, FSE / XETRA, NYSE, NASDAQ, HKSE, SGX etc.), distribution of corporate news, development of corporate and IR websites, IR-tools and IR- application, organization and conducting of conference calls and audio / video webcasts, designing of annual reports and interactive presentations, other corporate and IR solutions

We also wish to thank Reputation Institute represented by its co-founder Cees van Riel for the provided data.

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© 2016 EmCo and EQS Group. All rights reserved