Paul Holmes 01 Dec 2002 // 12:00AM GMT
Investor confidence in all their traditional sources of information about publicly traded companies is in freefall, according to a survey by Rating Research, a firm founded by a group of former Moody’s analysts that specializes in measuring corporate reputation.
In June, 13 percent of U.S. investors said they were “very confident” in investment advisors as a “trusted source” for information about companies’ reputations; that figure dropped drastically to 6 percent in the most recent survey, released last week.
Similarly, there were signs of declining investor confidence in other sources including the government (down from 10 percent to 8 percent); the media (7 percent to 5 percent); large brokerage firms (6 percent to 3 percent); and companies’ advertising and communications (6 percent to 1 percent).
“These findings illuminate the meltdown of faith among investors in the information they receive from established institutions, despite recent actions by the federal government to eliminate financial accounting abuses,” said Stephen Greyser, a Harvard Business School professor and renowned marketing and reputation expert, who serves on the Rating Research board. “Given the intense emotions involved here, it will require many entities—corporations, financial analysts, government and the media—to play a part in earning back investors’ good faith.”
Even more troubling is the fact that investor confidence in the information to them is declining at a time when they want more information. Almost two-thirds (64 percent) of all investors say information about a company’s reputation is more important to them than one year ago. That’s a healthy increase since June, when just over half of investors (54 percent) said this information was more important than a year ago.
Investor confidence in financial information provided by publicly traded companies also declined since the survey was first fielded in May. Today, almost one-half (49 percent) of investors say they are either “not very confident” or “not at all confident” in the financial information provided by corporations, more than double the number of investors citing the same viewpoint in the spring.
And more than six in ten (62 percent) investors claim they are less confident in the financial information provided by publicly traded companies than they were a year ago, as compared to 58 percent in June who felt this way and only 38 percent in May.
Coupled with the lack of confidence in investment information, there has also been a 13 percent increase in the number of investors expressing a lack of confidence in the ethical business practices of senior management. Confidence in CEO ethics did not fare any better with just 3 percent of investors today stating that they are “very confident” that CEOs of publicly traded companies engage in ethical business practices, while almost six in ten (57 percent) investors express a lack of confidence in the ethical business practices of CEOs of publicly traded companies.
“Investors rightly view the CEO as responsible for the reputation—and ethical behavior—of his or her company. Today’s business environment requires CEOs to view ‘reputation’ as a strategic asset that requires time and resources on an ongoing basis,” says Greyser. “Board members of public corporations should view key intangible assets, such as reputation, as critical to increasing long-term shareholder value. How well senior executives manage their firm’s reputations should be considered in reviews of executive compensation.”
Rating Research is a joint venture between The Ratrix Group and Opinion Research Corporation and was founded by a group of former Moody’s executives, led by former head of the company’s structured finance and international rating groups, dedicated to providing objective and independent analysis of companies’ intangible assets.
The company has already published reputation ratings for companies in the retail sector (Wal-Mart scored highest; Kmart and Ames lowest); the pharmaceutical industry (Johnson & Johnson and Merck scored highest); and the electric power sector (Duke Energy and the Southern Company scored highest, PG&E scored lowest.)
“We examine the critical intangible assets that are generally not apparent in a financial statement, but that can impact future performance, “ said Dory Gasorek, principal and chair of RRC’s Rating Committee. “At the same time, we don’t ignore the financials - we recognize that financial flexibility provides the opportunity for companies to make necessary changes and adjustments.”