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Corporate brand campaigns are a highly efficient tool for value creation but very few CEOs use brand effectively because they don’t understand how brand value is created. Accounting standards do not allow for the valuation of intangible assets like brands despite the enormous growth in corporate brand value in recent decades. We believe corporate brand communications is essential for projecting the strategic direction of the corporation. Corporate brand should be seen as a long-term investment with returns best measured over years, not by quarters. Therefore, we believe the corporate brand is an asset class that should be protected, nurtured and even funded at the board of directors’ level.
James R. Gregory
Corporate Branding and Its Impact on Stock Performance
CoreBrand’s research and analysis identifies corporate brand equity as accounting for 5 percent to 7 percent of market capitalization, on average, across the 800 US companies measured. That is a value of more than $2 billion for the average company in our database, and averaging more than $10 billion each for the top 100 branded companies in our research study.
Brand equity can also vary significantly by type of industry and general economic conditions. For some industries, like building materials, the brand has relatively low impact, with only a 2 percent average impact on market capitalization. In the beverage industry, however, the corporate brand plays a major role, showing an 11 percent average impact on market capitalization.
The first step towards successfully understanding the relevance of this data is to examine a specific company in the context of its industry peer group. Comparing a firm’s quarterly brand equity value against its peer group is an excellent dashboard measure of the health, vitality and value of the corporate brand.
Intangible Assets = Tangible Value
The corporate brand, according to GAAP standards is an intangible asset that can only be valued when it is bought or sold. That simplistic rule is more for the convenience of the accounting industry than for good accounting. Corporate brand equity value is a stable, predictable and identifiable value that we believe should appear on the balance sheet. At the very least, the value should be reported in the footnotes of annual reports. Similar to the way oil companies report known reserves, or pharmaceutical companies report drugs in development.
The gap in GAAP standards causes most CFOs to completely dismiss the benefits of corporate branding. Since the corporate brand is not currently on the balance sheet, any money spent on the corporate brand is purely an expense and not an investment in the long-term financial health of the company. As a result, we have found that 7 out of 10 corporate communications budgets are underfunded. This then becomes a self-fulfilling prophecy, which means an underfunded program will underperform – proof positive to the CFO that it wasn’t worth the cost. Clearly corporate branding needs the protection of board oversight if it is to succeed.
The Brand is Bigger than Any One CEO
We’ve all seen the super star CEOs and the impact they have on stock performance. Jack Welch, Bill Gates and Steve Jobs are all geniuses who have led their respective companies and the stock market was highly and correctly influenced by their every move. What happens to the corporate brand when these monolithic leaders leave their company?
A vacuum forms when a bigger than life CEO departs and the company is burdened by doubts for years to come. Board oversight of the corporate brand will insure a more steady hand at the helm and look beyond the current CEO.
CoreBrand’s twenty-year quantitative research study and regression models (collectively called the Corporate Branding Index®), provide continuous data and insights into how much the corporate brand impacts the stock side of the value equation for more than 800 companies, across 49 industries. Our research and models have identified the corporate brand is an intangible asset that:
- Represents the reputation portion of goodwill.
- Can be accurately and consistently measured.
- Can be accurately and consistently valued.
- Can be compared to competitive companies and industries.
- Can be managed like other assets—including budgeting.
- Can grow or lose value over time.
- Can be evaluated on a ROI basis.
- Can be used as a company-wide management tool.
- Provides a dashboard measure on the health and vitality of the company.
Boards should have oversight and ultimate responsibility for nurturing the long-term health, vitality and value creation of the corporate brand. While the board should expect a CEO to develop a plan to build and nurture the corporate brand and to report on its value on a quarterly basis, they may also wish to consider taking a more active role to ensure that management is taking action on this key asset in a way that maximizes shareholder value.
James R. Gregory is the founder and CEO of CoreBrand, a global brand strategy and communications firm. For more information, Gregory can be reached directly at (212) 329-3055 or JGregory@corebrand.com.
This approach is enlightened. Any forward thinking board member should consider these observations and approaches.