DAA trend study

The capital market does not only focus on facts and figures and strategies. A company’s reputation is equally as important – without a good reputation, there can be no economic success. This is mainly due to the critical view of the opinion-forming public on companies’ 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 society. CEOs and heads of supervisory boards, in particular, have to explain their business decisions in a wider 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 in terms of figures, but also in relation to socio-political issues is an integral part of debates within the general business community. This is also important for the capital market.

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

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

With regard to good reputation, how the public perceives the leadership team is crucial. Excessive salaries and violations of compliance rules in recent years have made the public more sensitive. “Misbehaviour is not tolerated anymore,” said one 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 and has a significant influence on reputation. “More than ever, the CEO is the face of the enterprise,” a study participant said. “In the past, the CEO was responsible for strategy and procedure. Today they are the company’s ‘anchor’ in the public eye in terms of personality, lifestyle, behaviour and, in particular, misbehaviour,” said a banker.

About seven out of ten of the study’s participants think that supervisory board heads have moved more into the focus of public attention. This is partly due to the broader mandate of the supervisory entities. “The spectrum of activity has expanded enormously. It's no longer a question of just four meetings per year. These tasks have become much more professionalised, and the trend will continue,” concluded a banker. Furthermore, the supervisory board will have more control over the executive board, mainly because of compliance and corporate governance. “The supervisory board will become more accountable and therefore bear more responsibility than it does today,” according to a study participant. The supervisory board will have a stronger expert and operational function in the future. “The days of laid back board meetings where tea is sipped are over,” summarised an IR director.

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

To comply with the interests of relevant groups, sustainability reports and stakeholder communications formats have become very prevalent. “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, even in the form of a published report 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 play a decisive role in 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 one respondent, 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 has really understood what reputation management is really about. It’s about transparency, honesty and getting to the point quickly,” formulated a survey participant.

Stakeholders expect CSR reporting. But this will not be sufficient – reporting must be part of an integrated approach. This includes fostering a sincere relationship with relevant stakeholder groups, client and dialogue campaigns and transparent public relations. “In the long run companies will have no success if they transgress public expectations or violate the customers’ code of values. With stronger consumer protection these days, it is no longer only about quality, price and brand promise,” said a banker.

Increased demands of external stakeholders mean that there is more attention on the CEO and the head of the supervisory board. At the same time communication is becoming faster and less controllable. Violations of compliance rules, low product quality and wrong business decisions are noticed 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 ‘social media tsunamis’. “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 backward,” said a survey participant. Businesses have to better prepare for possible attacks, using follow-up monitoring and communications.

To react to the growing challenges, target-specific communication is a key factor. Therefore, it is critical for businesses to build up their own channels to communicate their 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 greater. Everyone who wants to change something has to explain the benefit – for the customers and for society.”

How important is a company’s reputation in the capital market? What does this mean for CEOs and supervisory board heads? Olaf Arndt and Volker Heck of Deekeling Arndt/AMO discussed these questions with capital market experts.

Find more information on this topic in the recently published AMO report “What price reputation?”.