European Management Journal Vol. 21, No. 2, pp.

201212, 2003
2003 Elsevier Science Ltd. All rights reserved.
Pergamon
Printed in Great Britain
0263-2373/03 $30.00 + 0.00 doi:10.1016/S0263-2373(03)00015-X
The Reputation Index:
Measuring and Managing
Corporate Reputation
KAREN CRAVENS, The University of Tulsa
ELIZABETH GOAD OLIVER, Washington and Lee University
SRIDHAR RAMAMOORTI

, Ernst & Young LLP, Chicago

Perhaps the most critical, strategic, and enduring
asset that a corporation possesses is its reputation.
Although corporate reputation is undoubtedly a
signicant and relevant corporate asset, formidable
measurement challenges have effectively kept this
major intangible asset out of the nancial state-
ments. We propose the creation of a reputation
index that would be of broad scope and attempt to
capture key dimensions and evaluate diverse
organizational components including corporate
strategy, nancial strength and viability, organiza-
tional culture, ethics and integrity, governance pro-
cesses and leadership, products/services, strategic
alliances and business partnering, and innovation
along with information already contained in the
corporations annual report.
2003 Elsevier Science Ltd. All rights reserved.
Keywords: Corporate reputation, Intangible assets,
Measurement, Reputation index, Financial
reporting
Traditional nancial statements reect a reliability
relevance trade-off: they are historically focused
(thus ensuring reliability) but omit key intangible
assets that are frequently seen to be amongst the most
signicant value drivers (thus underemphasizing
relevance). Consequently, they do not provide
adequate, relevant information about the market
value of companies. The resulting divergence
between book value and market value became most
apparent as the pace of globalization and the Internet
revolution caused the prevailing business paradigm
to experience a tectonic shift during the last decades
of the 20th century. Overly optimistic markets caught
up in the changes in technology and in the shape of
the emerging, complex global economy drove up the
value of companies to unimaginable levels. Then in
2001, everything changed: venture capital money
European Management Journal Vol. 21, No. 2, pp. 201212, April 2003 201
began to dry up, and what was previously labeled
irrational exuberance was abruptly replaced by a
sort of irrational pessimism. Seemingly stable rms,
almost overnight, began to lose signicant amounts
of market value. This roller-coaster ride that the capi-
tal markets have given us over the past 20 years, if
nothing else, has persuasively demonstrated the gap
that can exist between a companys market valuation
and the information provided by current nancial
statements. Federal Reserve Board Chairman Alan
Greenspan comments on the importance of this gap
in terms of corporate reputation:
As the recent events surrounding Enron have highlighted,
a rm is inherently fragile if its value added emanates
more from conceptual than from physical assets. A physi-
cal asset, whether an ofce building or an automotive
assembly plant, has the capability of producing goods even
if the reputation of its managers falls under a cloud. The
rapidity of Enrons decline is an effective illustration of the vul-
nerability of a rm whose market value rests largely on a capi-
talized reputation. The physical assets of such a rm com-
pose a small proportion of its asset base. Trust and
reputation can vanish overnight. A factory in such a con-
text cannot. (Greenspan, 2002, emphasis added).
To date, questions about this gap and how to quan-
tify it have been raised, but not even the appropriate
questions are clear. More importantly, in the wake of
increased attention to corporate reform measures,
this gap becomes even more of a critical issue. This
paper proposes the creation of and lays the frame-
work for a new measure, a corporate reputation
index, which would be used in the context of
additional recommended disclosures in the nancial
statements. The reputation index could accompany
the nancial statements much like a bond rating sum-
marizes the overall risk associated with investing in
a company.
Before discussing the preliminary components of the
THE REPUTATION INDEX
corporate reputation index, we review some of the
major studies and metrics that have been produced
thus far. These studies have helped to identify the
need for information, while a set of potential metrics
has begun to address those needs. The next section
highlights the importance of corporate reputation;
then we describe how such an index would be
developed. After illustrating the various components
of the index, a methodology is provided as to the
mechanics used to arrive at a summary evaluation
metric. The nal sections denote these issues in the
context of a corporate reputation audit, with a con-
cluding section providing questions for future
research.
Previous Studies: Business Reporting,
the 21st Century Global Economy and
Intangibles
A variety of reports and initiatives have served to
focus attention on the objective of business reporting
in general, and more specically on the need to
address the recognition, measurement and disclosure
of intangible assets. While most academics acknowl-
edge the array of problems associated with the valu-
ation of intangible assets, these difculties have not
prevented an almost universal recognition that we
must address this issue. The business world has
changed dramatically, creating an urgent need to
assess the efcacy of business reporting in providing
a faithful representation of business performance.
In 1994, the American Institute of Certied Public
Accountants (AICPA) released Improving Business
Reporting A Customer Focus. In the report, the AIC-
PAs special committee argues that the focus on busi-
ness reporting should be more forward-looking, be
more centered on factors that create longer term
value, and better align externally reported infor-
mation with that used for internal business purposes.
The report specically cites the need to focus on non-
nancial measures (p. 5).
While the AICPA report (1994) does not deal directly
with issues in the new economy, the Canadian Insti-
tute of Chartered Accountants (CICA) Performance
Measures in the New Economy (McLean, 1995), which
came out in the following year, does. This report
recognizes the need for a radical shift from the cur-
rent accounting model and nds Canadian compa-
nies experimenting with new measures of perform-
ance. If the report is correct, the profession is
currently undergoing a paradigm shift that will con-
tinue for another 1015 years, a shift that will enable
accountants to better report the economic reality
behind knowledge-intensive businesses, intangible
asset values, along with green accounting issues.
Non-nancial performance measures collected by the
European Management Journal Vol. 21, No. 2, pp. 201212, April 2003 202
Danish Agency for Development of Trade and Indus-
try with the co-operation of 10 companies were pub-
lished in 1998. That memorandum, Intellectual Capital:
Reporting and Managing Intellectual Capital, summar-
izes the companies reasons for developing intellec-
tual capital accounts. While these accounts help the
company develop and grow, they also can provide
information to other interested parties.
In The Netherlands, the Ministry of Economic Affairs
approached accounting for knowledge capital from
another angle in its 1999 pilot project, Balancing
Accounts with Knowledge. Instead of case studies using
companies, this project depends on the reports of
four accounting rms, KPMG, Ernst & Young, Price-
waterhouseCoopers, and Walgemoed, which had
been asked to carry out a practice-oriented study of
the intangible assets of a number of their clients, and
to produce a trial appendix to the external nancial
annual report (p. 5).
Another study published by the Institute of Char-
tered Accountants in England and Wales (ICAEW)
in 2000 looked at New Measures for the New Economy,
suggesting three alternative approaches to dealing
with intangible assets. These approaches range from
the incremental, the radical, to the hybrid.
In April 2001, the FASB published its special report.
This report summarizes and analyzes previous stud-
ies. The report also evaluates the merits of consider-
ing an intangible element as an asset and the various
trade-offs available for measurement and reporting.
The SEC also established a taskforce to report on the
relative merits of alternative disclosures.
These reports point to the current lack of consensus
concerning the denition of corporate assets. Yet
researchers have begun to develop ways to quantify
assets that previously have been treated as intan-
gibles. As Baruch Lev notes, measurement and valu-
ation difculties concerning intangibles should not
provide an excuse for nondisclosure of relevant infor-
mation about intangibles (Lev, 2001, p. 102). Lev is
in the process of applying for a patent for his Value
Chain Scoreboard which proposes nine areas of mea-
sures that encompass indicators that are quantitative,
standardized, and empirically linked to value (Lev,
2001, pp. 111115).
Harvey and Lusch (1999) look at the other side of the
intangibles, describing a classication and assess-
ment index for intangible liabilities. Their classi-
cation schemata develops four categories of poten-
tial liabilities related to process, human,
informational, and conguration issues. They also
describe a six-step framework created to assess the
magnitude of these liabilities. Harvey and Lusch note
the importance of an awareness of the potential liab-
ilities that may be created outside the boundaries of
traditional nancial statements (off balance sheet
risks), arguing that if intangible assets make their
THE REPUTATION INDEX
way to the nancial statements, preparers, manage-
ment, and regulators must examine the other side of
the journal entry. These liabilities, that may contain
the potential to destroy value, are necessary to bal-
ance the books as an offset to the equities generated
from intangible assets.
Harvey and Lusch assert that the end result of this
assessment be a reserve for off-balance sheet liabilit-
ies (1999, p. 91) included as supplementary infor-
mation to the nancial statements. We build on their
work by focusing on a more comprehensive assess-
ment of corporate reputation as a supplementary dis-
closure to the nancial statements. This reputation
index would focus on disclosure of the positive as
well as negative aspects of corporate reputation and
would provide an additional degree of standardiz-
ation. With standardization of measures, the index
would thus be more comparable across rms and
industries.
The Importance of Reputation in the
New Economy
Arguing that good reputations create wealth, Fom-
brun indicates that high reserves of reputational capi-
tal give an organization distinct advantages:
Their products and stock offerings entice more
customers and investors and command higher
prices.
Their jobs lure more applicants and generate
more loyalty and productivity from their
employees.
Their clout with suppliers is greater and they
pay lower prices for purchases and have more
stable revenues.
Their risks of crisis are fewer and when crises
do occur, they survive with less nancial loss
(Fombrun, 1995).
Thomas Mosser of Burson-Marsteller, then the
worlds largest public relations rm, expands on the
idea of reputational capital in dening the interde-
pendence of corporate brands and branded products
this way:
Every institution or corporation has two assets on which
success and survival are based its Brand (upper case B
representing the image, reputation of the corporation or
institution, including its nancial assets, performance and
people) and its brand (lowercase b the products or ser-
vices it sells or provides). The interrelationship between
these two assetsefforts against either of them must (not)
be reduced, with one taking precedence over the other.
(Harris, 1998, p. 22)
Both Mossers and Fombruns comments highlight
how truly important the intangible asset of corporate
reputation is to the entire strategic mission of the
European Management Journal Vol. 21, No. 2, pp. 201212, April 2003 203
organization. Perhaps the most dramatic illustration
of the power of intangible assets, such as corporate
reputation, is the market phenomenon associated
with various dot-com start-up companies. Without
substantial tangible assets, a working infrastructure,
or a functioning business operation, many dot-coms
were able to attract substantial venture capital fund-
ing and generate tremendous market values over a
relatively brief amount of time. This shows the power
of the Brand (upper-case B) as concentrated on a very
few intangible assets comprising corporate repu-
tation. The fact that many of these rms are no longer
in business or are suffering low market values shows
the capricious nature and critical importance of cor-
porate reputation. Why would the market attribute
such high values to companies that as yet had no
established reputation? The answer is two-fold: rst,
the product/service being sold was in vogue and the
market was good, and second, the new rms corpor-
ate reputation was derived from the rms associated
with it during the start-up period. With various stra-
tegic alliances and business partners, venture capital-
ists, underwriters, or banks connected to a dot-com
start-up company, the reputation of these associated
companies acted as a proxy for the reputation of the
edgling company. This illustrates Mossers Brand
rather than brand association (Harris, 1998). The
asset of corporate reputation, suggesting an ability to
attract funding and talented personnel to launch a
business, was indeed an intangible or hidden asset
in this case. The market was recognizing and
responding to an underlying asset the corporate
reputation of the afliated companies.
The relationship among corporate reputation, market
value and nancial performance highlights the func-
tion of nancial statements for both internal and
external users. Financial statements have tradition-
ally existed in somewhat of an intermediary role
between the public-oriented needs of regulators and
creditors, and the more private concerns of investors
and management. However, recent research indicates
that there is increasing evidence of the deteriorating
usefulness of nancial reports as a valuation measure
(Lev, 2001, pp. 99100). Over time there is less of a
relationship between key nancial variables and
stock prices.
In terms of corporate reputation, the nancial state-
ments are not designed to function as the primary
means for reputation management. After all, it is well
understood that it is the fundamentals of value cre-
ation business performance that drive the
accounting. Hence, the ultimate effect of decisions
regarding corporate reputation will ow through to
the nancial statements of the rm and eventually
translate to market value. Empirical evidence regard-
ing the diminished usefulness of nancial reporting
information (Lev and Zarowin, 1999) also lends sup-
port to the idea that additional disclosures sup-
plementing nancial information are necessary. Fin-
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 asso-
ciated 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 formu-
lated 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 Score-
board is based only on public information and pro-
vides 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 Nortons Balanced
Scorecard (1996) in that it is a comprehensive attempt
to quantify non-nancial measures as indicators of
performance. Lev intends that the Scoreboard func-
tions 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 1012 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 sur-
veys, and empirical research to create eight major dri-
vers of corporate value. Once the drivers were ident-
ied, 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 collabor-
ation with global partners to address the need for bet-
ter performance tools to report value in the new
economy. The method is designed to supplement
nancial reporting and function primarily for use by
senior management and the board. Future plans
include making the information available to those
external to the rm.
The European Foundation for Quality Management
employs a model to encompass non-nancial per-
formance measures and is used by companies such
European Management Journal Vol. 21, No. 2, pp. 201212, April 2003 204
as British Telecom (Leadbetter, 2000). The compo-
nents 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 part-
nered with the leading international brand consulting
rm, Interbrand, to provide the rst list of the best
100 global brands (Khermouch et al., 2001).
Interbrand uses their own methodology for quan-
tifying 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 foun-
dation in their methodology to assess off-balance
sheet liabilities deriving from intangibles. However,
this methodology must be expanded and stan-
dardized to create a type of disclosure comparable
across companies and industries.
Case Studies of Similar Aggregate Indices
Given the difculties in assigning a value to numer-
ous intangible assets, we propose developing a com-
posite 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 classication
value based on both internal and external infor-
mation. The index would thus parallel other indices
that develop an aggregate classicatory weighting
such as the US News & World Report College Rankings
or the Moodys Bond Ratings (cf. Cornelissen and
Thorpe, 2002).
The college rankings are based on up to sixteen indi-
cators of academic excellence that vary according to
the mission of the university. Each indicator is incor-
porated 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 cre-
ating the rankings, US News & World Report employs
surveys to solicit such intangible components as fac-
ulty 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.
THE REPUTATION INDEX
Components of the Corporate Reputation Index
There has been aggregate information gathered that
will help shape the index. A survey of 650 CEOs
listed has high quality products and services (72 per
cent) and is a company you can trust (72 per cent)
as the two most important components of corporate
reputation (Winkleman, 1999). Other components
include: has high-caliber management (43 per cent),
adds value to all customer transactions (39 per cent),
conducts business in a human and caring way (28
per cent), and is an innovator in the industry (23
per cent). These comments capture the most essential
components of corporate reputation: leadership,
strategy, culture, and innovation. We expand on
these categories to suggest a corporate reputation
index based on specic measures relating to: pro-
ducts, employees, external relationships, innovation
and value creation, nancial strength and viability,
strategy, culture, and intangible liabilities. Our goal
is to provide a comprehensive set of components for
the index and an initial set of illustrative measures
from which to begin empirical research. Thus, while
we believe that the components of corporate repu-
tation are comprehensive, the specic component
measures featured in the index will develop over
time as research progresses. We envision the repu-
tation index as a standardized set of common as well
as unique component measures that would be con-
sistent across companies and industries.
Table 1 illustrates the components of the corporate
reputation index and includes illustrative measures
for each of the components. In contrast to other meas-
ures of intangible assets, the corporate reputation
index is based primarily on internal assessment of
non-quantitative factors and does not rely on market
values or asset values. Instead, the components of
corporate reputation are evaluated on the basis of
internal and external information. The basic index
includes (common) factors that should be relevant in
assessing corporate reputation in general. If an
element is not relevant, then that item is neither a
reputation-enhancing nor a reputation-destroying
component and hence would not factor into the over-
all score. That is why the nature of the index is such
that a classication ranking is created rather than an
absolute value.
One of the most important activities in developing a
reputation index will be to query key groups who
interface with the organization to assess their opi-
nions of corporate reputation. The most important
key group is obviously the customer (e.g., customer
satisfaction, customer loyalty, customer prospects,
churn rate, etc.). Similarly, reputation should be
assessed from the perspective of suppliers,
employees, partners in alliances or partnerships, and
even from competitors. This assessment would differ
from typical surveys developed by a corporation in
that the survey should be much more comprehensive
than an assessment of satisfaction. The following sec-
European Management Journal Vol. 21, No. 2, pp. 201212, April 2003 205
tions list the elements that would be measured in
the index.
Products
The product (good or service) offering of the organi-
zation represents one of the key means for value cre-
ation and for building a brand image through
product/service reputation. With the value and
image, however, comes a major area of risk exposure
in terms of corporate reputation.
The product provides the essential interface with the
customer and a major driver of corporate reputation.
If the product does not offer value to the customer
or has a negative quality association, then it is almost
impossible to create a strong corporate reputation.
The reputation index needs to consider whether the
corporate name and reputation (in their relationship
to company brands) can be separated. For example,
the store name Gap is linked with the clothing and
accessories sold under the same brand name. How-
ever, all customers may not be aware of the fact that
Gap, Old Navy, and Banana Republic are owned by
the same company. The index must assess the extent
to which the reputation of one store name affects the
overall corporate reputation. It is also important to
assess awareness of the corporate name and any
brand names across a wide group of constituents (e.g.
the notions of cross-branding or co-branding pro-
ducts and services). In addition to consumer aware-
ness, the index must measure the strength of the cor-
porate reputation in terms of the attributes of the
products or services offered, including quality. Simi-
larly, the extent of external quality failures as evi-
denced by warranty and liability claims is also a part
of reputation.
Employees
The employees are the means by which a corporate
reputation is created. Through the actions of all
employees, at the senior management and lower lev-
els, the public derives an image of the corporation.
For most industries, if the employees are not loyal to
a company, then it is unlikely that customers and
other stakeholders will be loyal
1
. A similar situation
applies with respect to trust. That is why it is essen-
tial to assess the employees opinions of corporate
reputation and overall satisfaction with the company.
The index could evaluate the length of time that
employees remain at the company and the extent to
which new applicants seek jobs at the company.
Training and development reects an investment in
both the employees (by the rm) and in the company
(by the employees).
Management makes the decisions regarding strategy
and products or services and creates the company
culture in which choices that affect corporate repu-
tation are made. Since upper management is the most
visible group of employees, the level of trust inspired
by upper management is also an important measure.
This trust will also be reected in the degree to which
THE REPUTATION INDEX
Table 1 Components of the Reputation Index
Index components Illustrative measures Anchor scale values:
1= least desirable; 9 = optimal (ideal)
Products/services Quality associations Almost none (poor) Highest (perfect)
Public awareness of corporate name and Almost none (poor) Highest (perfect)
products/services
Extent of brands and umbrella brands Single brand item Numerous brand lines
Warranty claims Often, numerous Never
Liability claims Often, numerous Never
Employees:
All levels Employee satisfaction with employer Almost none (poor) Highest (perfect)
Turnover Common, extensive Almost none (perfect)
Exit interviews None conducted Formal, informative
Number of applicants for open positions None, unlled positions Excessive, high interest
Training and development efforts None or rare Extensive
Employee feedback relative to meeting None or rare Highest (perfect)
employee needs
Coordination and communication efforts None, isolated, lack of Extensive and regular
across functional and business areas information ow
Upper management CEO personal reputation only Almost none (poor) Highest (perfect)
Competency Poor Highest (perfect)
Turnover Common, extensive Almost none (perfect)
Compensation and evaluation packages Incongruent, at odds with Congruent and contributes
and goal congruence with strategic long-term objectives to achieving long-term
objectives objectives
Information collection from subordinates None, isolated Regular, participative
External relationships (non customer):
Suppliers Payment terms
Major supplier quality Almost none (poor) Highest (perfect)
Relationship quality of major suppliers Poor, no level of trust Highest level of trust
Relationship duration for major suppliers Beginning Enduring, long-term
Quality of suppliers for suppliers Almost none (poor) Highest (perfect)
Partners Existence of alliance relationships None Numerous
Longevity of alliance relationships None or beginning Enduring, long-term
Recognition of key strategic partners Unknown Well-known
Reputation of key strategic partners Poor High
Joint venture contractual agreements None Numerous
Competitors Industry participation Isolated Active, exchange of info
Competitor response to key corporate Ignores Immediately matches or
initiatives responds to actions
Investors Market premium None Highest
Market stability None, unstable Long-term stability
Environment Environmental policy None Formal, well-developed
Dedicated employee positions None Dept. and sr. manager
Liability claims Often, numerous Never
Regulatory intervention Often Never
Society Charitable endeavors None Extensive and varied
Employee quality of life initiatives None Extensive and varied
Innovation Formalized program to generate and None Mature, successful
evaluate innovation
Growth relative to customer needs Stagnant (poor) Steady and consistent
New product/service development None Extensive at all stages
Value creation Identication and responsiveness to Unaware of customer Anticipates and meets all
customer needs needs needs
Customer retention Frequent loss No customer defection
Financial strength Information content of annual report Almost none (poor) Highest (perfect)
Additional disclosures None Numerous and extensive
European Management Journal Vol. 21, No. 2, pp. 201212, April 2003 206
THE REPUTATION INDEX
Table 1 (Continued)
Index components Illustrative measures Anchor scale values:
1= least desirable; 9 = optimal (ideal)
Strategy Strategic priorities relative to reputation Ignores reputation Highest priority
Integration of strategy across business None Complete formal and
units operational integration
Management control system fostering No formal system in place Formal system with perfect
consistency consistency
Culture Ethics policy None in Place Highly effective
Reporting procedure for ethics violations None in Place Highly effective
Upper management attitudes Unethical or ignores Corporate priority
Ethics committee on the board No Yes
Intangible liabilities Inadequate research and development No formal process Highly developed and
process successful process
Lack of adequate information infrastructure No infrastructure Well-developed
Organizational structure lack of exibility Totally inexible Highly exible
Bad word-of-mouth among customers Numerous and common Non existent
Inadequate distribution channels Numerous and common Non existent
communication and coordination exists across func-
tional areas and the level of information exchange
between managers and subordinates.
Although the actions of all employees are reected
in corporate reputation, upper management and the
CEO in particular can have a signicant individual
effect on corporate reputation. The personal repu-
tation of the CEO should be evaluated. Consider how
central the reputation of key CEOs such as Jack
Welch, Rupert Murdoch, Bill Gates, and Michael
Eisner are to their respective companies (GE, News
Corporation, Microsoft, and Disney). Similarly, the
competency and turnover of all upper management
should be assessed as well. Management must be
competent to make decisions and their motives
should also be examined. Thus, the evaluation plans
and incentives should be examined in relationship to
both strategic objectives and to the motives for
decision-making. For example, the recent rush by a
number of corporations to restate earnings may
reect an awareness of how performance plans are
tied to corporate reputation. Executives may have
received substantial compensation through the exer-
cise of short-term options without a corresponding
increase in company value. This lack of goal congru-
ency between the goals of the shareholders and the
goals of managers could thus have a negative effect
on corporate reputation.
External Relationships
External relationships, in addition to the relationship
with customers, are important components of corpor-
ate reputation. Key relationships with suppliers, part-
ners, investors and even competitors may be over-
looked in traditional accounting measurement and
evaluations. The quality and nature of these relation-
ships will also contribute to corporate reputation.
To some extent, an association with an external rm
acts as a form of product guarantee (Klein and
European Management Journal Vol. 21, No. 2, pp. 201212, April 2003 207
Lefer, 1981) or as a replacement for corporate repu-
tation when none exists (Larson and Starr, 1993). This
is commonly reected by the choice of an under-
writer for rms undergoing an initial public offering
(Beatty and Ritter, 1986). Once rms are established,
the choice of a partner may still be used as a means
to enhance reputation (Kotha et al., 2001).
In a study of the effect of reputation on corporate
performance, Kotha et al. (2001) showed that repu-
tation borrowing did enhance rm performance in a
sample of pure internet rms. Internet rms without
a history of performance were able to benet by an
association with venture capitalists who did possess
a favorable and stable reputation.
The reputation index should measure the quality of
the suppliers and even the suppliers suppliers. Simi-
larly, the corporate reputation of any strategic
alliance or joint venture partner can have an impact
on reputation. One study showed that although pre-
vailing business opinion rated alliances fairly low in
generating corporate value, alliances are one of the
primary drivers in value creation (Baum et al., 2000).
Results documented that companies with more joint
ventures and alliances enjoyed higher market values.
The extent to which investors have condence in the
corporation is an informative measure that can be
determined through analyst activity, share volume,
and surveys. It is also necessary to examine corporate
reputation from the perspective of competitors. Is the
company respected in the industry and how do com-
petitors respond to actions by the company? Well
respected companies can expect a rapid response
from competitors to any key corporate initiatives
while those with less reputation may be ignored.
External relationships encompass the interaction
between the company and society and the environ-
ment. To the extent that the company contributes to
THE REPUTATION INDEX
charity and is concerned with societal and environ-
mental issues, this will be reected favorably in cor-
porate reputation. Consider the motivations of Philip
Morris in creating television commercials that
describe the charitable activities of its Kraft subsidi-
ary. Some companies may emphasize the importance
of societal or charitable concerns by creating internal
performance measures related to these issues (e.g.,
Skandias Annual Report supplements from 1996 to
1999).
Innovation and Value Creation
Both innovation and value creation are essential cor-
porate attributes in the new economy. Boulton et al.
(2000) detail various means of value creation determ-
ined from a three year study of 10,000 rms. They
assert that value creation starts with the investment
and management of a portfolio of key assets. These
assets vary by rm yet range from the more tra-
ditional physical or nancial assets to customer,
employee and supplier, and organization assets. Sup-
porting research from a survey of 113 US and Euro-
pean rms documents the positive nancial rewards
from customer value initiatives (Troy, 1996). Meas-
ures to assess corporate reputation in terms of inno-
vation and value creation should be centered on cus-
tomer-focused attributes. For example, growth
relative to customer needs, new product/service
development and customer retention are useful mea-
sures.
A joint research project involving Forbes magazine,
Wharton and Ernst & Young found that innovation
was the single most important driver in corporate
value for durable manufacturing (Baum et al., 2000).
They also found that customer satisfaction was tied
to innovation rather than to market value. Additional
quantitative measures of innovation and value cre-
ation are suggested by Lusch (2000) in terms of cre-
ating long-term marketing value. Lusch (2000) pro-
poses metrics such as: (1) per cent of sales from
products introduced in the last three years; (2) per
cent growth projected over the next three years in
size of target markets; and (3) per cent of sales over
the last three years from new-wave marketing chan-
nels. Quantitative measures such as these could be
incorporated into the corporate reputation index to
evaluate innovation and value creation.
Financial Strengths and Viability
It has been suggested that nancial reporting is a
reputation-management tool in that it enables com-
panies to release private information to the public
domain, preferably in the most favorable light. Ulti-
mately the extent to which users of nancial state-
ment information can trust the information affects its
value. The rash of recent restatements undoubtedly
affects the rms reputation. The same is true for
additional disclosures. Consumers of additional cor-
porate disclosures may question the motives for such
disclosures, yet the disclosures will still inuence cor-
porate reputation.
European Management Journal Vol. 21, No. 2, pp. 201212, April 2003 208
Strategy
The strategy of the company should be at the focal
point of decision-making. Thus, the extent to which
strategic priorities address corporate reputation
issues will emphasize the importance of reputation.
Similarly, the degree of risk involved with various
strategic choices will have an impact on corporate
reputation. The degree of risk amplies both the suc-
cess and failure of strategic initiatives. The reputation
index should assess strategic priorities and consider
how these priorities are integrated across business
units. The lack of a coordinated strategy or lack of
coordinated strategic implementation could lead to
a loss in value of intangible assets and a decline in
corporate reputation. The management control sys-
tem of the organization implements the strategy and
fosters consistency in application across the business
units. This consistency is accomplished by gathering
information and providing incentives that align the
goals of managers with the goals of the company. A
review of the management control system as part of
the reputation audit identies if mechanisms are in
place to support maintenance of reputation in terms
of strategy and incentives.
Culture
Aside from creating a culture that is receptive to an
internal evaluation and external disclosure of repu-
tation, the evaluative process should involve specic
attention to the ethical climate of the organization.
Ethical violations have the potential to create signi-
cant negative reactions from all stakeholder groups.
Bausch and Lomb suffered from negative publicity
after exposure of unethical sales practices in a Busi-
ness Week cover article (Maremont, 1995). Subsequent
regulatory attention included an investigation by the
US Securities and Exchange Commission.
Thus, the index should take into account the exist-
ence and extent of a corporate ethics policy. Is the
policy actively reviewed and are the employees made
aware of the policy? More importantly, are there
channels for the employees (and those external to the
rm) to report ethical violations or questionable prac-
tices? The attitudes of key management are parti-
cularly critical with respect to ethical concerns. Even
if a strong policy exists, if upper management does
not enforce the policy it is not effective. Establishing
an ethics committee on the board of directors can
indicate the level of priority attached to ethics issues
in the organization. The ethics committee can also
provide a hierarchy for reporting ethics violations at
high levels in the organization.
Intangible Liabilities
The nal component of the index should consider
separately the intangible liabilities that may be gener-
ated by corporate action or reputation. Although liab-
ilities may be implicit in the other components of cor-
porate reputation, considering areas of exposure
together will increase the likelihood that potential
liabilities are not overlooked. The same sort of actions
THE REPUTATION INDEX
that generate positive intangible assets in terms of
corporate reputation can also yield liabilities. Harvey
and Lusch (1999) developed a classication schemata
to categorize and assess intangible liabilities. The nat-
ure of these liabilities are such that there is a future
claim on the rms assets that is unrecognized on the
balance sheet at present. The liabilities result from
actions in the past that could retard future growth or
earnings. It is perhaps more difcult to estimate an
intangible liability because the liability can relate to
an asset but may be the result of an error or lack
of judgment. Because of this complexity, Harvey and
Lusch (1999) create separate categories for internal
and external liabilities that fall into four main areas:
(1) process issues; (2) human issues; (3) informational
issues; and (4) conguration issues.
Harvey and Lusch (1999) suggest liabilities in the
internal process issues category ranging from weak
strategic planning and inadequate research and
development to antiquated manufacturing and poor
new product development processes. External liab-
ilities can result from poor product quality and lack
of regulatory compliance. For example, Citigroups
negotiations for a settlement with the Federal Trade
Commission regarding predatory lending practices
were motivated by a desire to settle the issue and
avoid further damage to corporate reputation for lack
of regulatory compliance (Beckett, 2002). Human
issues consider employee turnover, training and
competency along with negative word-of-mouth
among customers and customer liability suits.
Internal information issues liabilities may be the most
difcult to estimate, but could potentially be the
most critical.
Harvey and Lusch identify lack of adequate infor-
mation infrastructure and inability to turn data into
information, or lack of analysis as the prime internal
liabilities. Externally, they identify decreasing cor-
porate reputation, negative brand or product infor-
mation in a recall, successful litigation against the
company or unfavorable analyst reports as liabilities.
Potential liabilities in the conguration issues cate-
gory bring together elements from the other compo-
nents in the framework from Table 1 as well. Harvey
and Lusch describe potential internal liabilities
resulting from organizational structures with a lack
of exibility, lack of patents and copyrights, or inad-
equate geographic locations. External liabilities could
result from inadequate distribution channels or lack
of strategic alliances.
Assigning Values to the Index to
Develop an Aggregate Measure of
Corporate Reputation
To transform the qualitative measures in Table 1 into
a form more suited to computing a reputation index,
European Management Journal Vol. 21, No. 2, pp. 201212, April 2003 209
we suggest a nine-point scale to assess the magnitude
of the measure. The scale values for the measures in
Table 1 are anchored with 9 as an ideal or benchmark
and 1 as the lowest, or least desirable measure on the
scale. The responses to the scales for the individual
measures should be averaged for each separate
component of corporate reputation. Once there is an
aggregate measure (value of 19) for each compo-
nent, an overall measure can be created by applying
weights to each of the components and summing the
values. We suggest a range for the weights of the
components in the index in Table 2. The analytic hier-
archy process would be an ideal technique to validate
suggested weights for the various indicators
2
. As this
is an exploratory framework for considering corpor-
ate reputation, we suggest a range of weights but
advocate that a more rened range of weights should
be determined for each of the components.
In suggesting weights to apply to the various compo-
nents of corporate reputation, we consider the effect
of the product or service offered to be of primary
importance. The range for the weight of this compo-
nent might range from 30 to 60 per cent. Employees,
external relationships, innovation, and value creation
can each reach a maximum of 20 per cent as noted
in Table 2. All of these components are important, yet
the relative impact on corporate reputation depends
upon the strategic mission and operational efforts of
the company at a given point in the corporate life
cycle. Thus, these components may vary signicantly
in importance according to specic company charac-
teristics and priorities. Although the minimum value
for these components ranges from zero to one, value
creation has a minimum weight value of 5 per cent.
This component is so critical in terms of the repu-
tation of the company that there is a higher minimum
value. The annual report, strategy, culture, and intan-
gible liabilities components have a maximum weight
of 10 per cent as some of the elements of these
components are implicitly considered in other areas.
The nal step in creating a corporate reputation
index is to translate the overall single scale measure
(range of 19) to a classication ranking. We employ
Table 2 Relative Weights for Index Components in
Developing an Aggregate Measure of Corporate
Reputation
Index Component Range of weights
(sum to 100%)
Products or services 3060%
Employees/suppliers 120%
External relationships/alliances 10%
Innovation 020%
Value creation 520%
Financial strength and viability 010%
Strategy 110%
Culture 10%
Intangible liabilities 00%
THE REPUTATION INDEX
nine classication categories for the index that are
associated with descriptions of various standards of
corporate reputation. This ranking is similar to rat-
ings for bonds as developed by Moodys. Table 3 lists
the classication rankings and suggests general
descriptions for the range of overall scale measures.
Since the descriptions noted with the scale value of
9 for measures in Table 1 are ideal, we do not antici-
pate that many companies would achieve a score of
9 for many of the measures of corporate reputation.
Thus, it is unlikely that many companies would be
classied according to the highest rating of A1 on the
scale in Table 3. Few companies should also fall into
the lowest range of the scale, C1C3, as companies
with very poor corporate reputation must correct this
or perhaps would cease to operate. In this scale, the
majority of companies should fall within the B categ-
ories or in the A2 or A3 categories.
The Reputation Index as an Output of
Auditing Corporate Reputation
The process of creating a reputation index would be
most effective if conducted by an entity viewed as
independent from the organization. Having the index
developed by an independent consulting rm or as
part of the traditional or reputational audit would
increase the reliability of the information and would
reduce any inherent bias. A formal reputation audit
is one way to evaluate how the elements of corporate
reputation relate individually and collectively to the
overall value of the rm and to its stakeholders. We
suggest that the reputation index may be created as
the output of a formal audit process. Fombrun (1995)
advocates the performance of a periodic reputational
audit in light of the corporate entitys culture and
competitive strategy. The reputation audit will
encompass all areas and levels of the organization
transcending traditional boundaries. Much like brand
valuation or market orientation initiatives, a repu-
tation audit provides a unifying element for separate
areas of the business. Similarly Petrick et al. (1999)
suggest that executives be involved in assessing glo-
bal corporate reputation through an annual global
Table 3 Classication Rankings and Descriptions for a Corporate Reputation Index
Index Value Overall Scale Range Description
A1 9 An ideal level of corporate reputation rarely achievable
A2 88.9 A more practical goal for corporate reputation
A3 77.9 A high level of corporate reputation
B1 66.9
B2 55.9
B3 44.9
C1 33.9 Corporate reputation has minimal value
C2 22.9 Corporate reputation has marginal value
C3 11.9 Corporate reputation has little or negative value
European Management Journal Vol. 21, No. 2, pp. 201212, April 2003 210
reputation audit including global awards and rank-
ings and organizational quality indices. Costa (1998)
recommends that a regular ethical orientation audit
will create long-term trust in a step-by-step process.
By instigating a formal reputation audit rather than
a reputation assessment, the process is associated
with a greater degree of credibility and importance.
With a reputation audit, management can address
potential concerns from the public regarding the
motives for disclosure and completeness of infor-
mation supplemental to the nancial statements.
Including the reputation index in the context of a
reputation audit allows for the index to have validity
in an external disclosure environment.
Research Questions for Future
Empirical Investigation
Our objective is to provide a platform from which to
begin an investigation into the assessment and
measurement of corporate reputation. Although vari-
ous initiatives around the world have begun to value
the collection of key intangible assets of a corpor-
ation, corporate reputation warrants a singular focus.
This is particularly true given the litigious nature of
the current business environment:
Quite often, in matters of litigation, a companys reputation
becomes the main focus (offensively or defensively) of its
case. In this regard, reputation management has emerged
as an important factor in positioning a company or product
at every stage of its development, evolution, and mainte-
nance and validating the strength of its position with
research. (Marconi, 2001, p.10).
We envision future research considering corporate
reputation to rene the specic measures suggested
for the components of corporate reputation. This pro-
cess will help to highlight the critical importance of
this key intangible asset and to encourage corpora-
tions to actively manage the components of corporate
reputation. Empirical work is necessary to validate
the components of corporate reputation and to com-
pletely develop the constructs used to measure cor-
THE REPUTATION INDEX
porate reputation. Similarly, it is necessary to rene
the weighting scales for the components by means of
primary research including survey data and appli-
cation of prioritization techniques such as the ana-
lytic hierarchy process.
Research in general on intangibles has begun to sug-
gest that these assets are so central to most organiza-
tions that the valuation issues cannot be ignored. The
creation of a corporate reputation index is the rst
step in standardizing measurement and management
of the most central intangible asset of all corpor-
ate reputation.
Declaration

The views expressed in this manuscript are Dr Srid-

har Ramamoortis personal views and should not, in
any way, be construed as reecting the views of, or
endorsement by, Ernst & Young LLP.
Notes
1. An exception may exist in industries such as fast food
retailing. McDonalds or Wendys may experience a high
staff turnover, yet in reality it is the quality of the service
experience that matters in terms of customer loyalty.
2. The analytic hierarchy process uses a series of pairwise
comparisons so that an individual decision-maker can
evaluate the relative importance of a multitude of items
without simultaneously considering more than one combi-
nation. The analytic hierarchy process provides a way to
aggregate the opinions of numerous decision-makers and
reconcile inconsistencies to arrive at a relative set of
weights for the items being evaluated.
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THE REPUTATION INDEX
KAREN S. CRAVENS, ELIZABETH GOAD
The University of Tulsa, 600 OLIVER, Williams School
S. College Avenue, Tulsa, of Commerce, Economics
OK 74104-3189, USA. E- and Politics, Washington
mail: karen-cravens@ and Lee University, Lexing-
utulsa.edu ton, VA, USA. E-mail:
oliver@wlu.edu
Karen Cravens is Arthur
Andersen Faculty Fellow Elizabeth Goad Oliver is
and Professor of Accounting Associate Professor and
at the University of Tulsa. Associate Dean of the Willi-
She is a licensed certied ams School of Commerce,
public accountant, and has published widely in aca- Economics and Politics, Washington and Lee Univer-
demic and professional journals. sity. Much of her research has investigated the inu-
ence of culture on pensions and welfare benets.
SRIDHAR
RAMAMOORTI, Ernst
and Young LLP, 111 N.
Canal Street, Chicago, IL
60606, USA. E-mail:
sri.ramamoorti@ey.com
Sridhar Ramamoorti is
Assistant Director of
Thought Leadership in the
Litigation Advisory Services
practice of Ernst and Young
LLP, Chicago.
European Management Journal Vol. 21, No. 2, pp. 201212, April 2003 212