BulletProofBlog the blog on crisis communications

Each week, Bulletproof Blog features exclusive interviews with thought leaders on issues of critical importance to companies and countries. This week, we interview University of Georgia Assistant Professor Mike Pfarrer, who – along with Tim Pollock of Pennsylvania State University and Violina Rindova of the University of Texas at Austin – just completed a groundbreaking study of how corporate “reputation” and “celebrity” affect investor decisions after positive and negative earnings surprises.

A leading expert on issues of corporate perception, Professor Pfarrer shared insights on the definition of “reputation” and “celebrity” as they relate to Corporate America; the benefits of each; how they can be earned; and how they can be most effectively leveraged with Bulletproof™:

How do you define reputation and celebrity as they pertain to Corporate America? Why are these assets important? How can they be earned and spent wisely?

Mike Pfarrer: Reputation and celebrity are both intangible assets. They create value for firms by stimulating social approval (or favorable collective perceptions) from multiple stakeholder groups. Both reputation and celebrity have positive effects on firm performance because they increase stakeholders' positive perceptions of, and associations with, the firm. There is a large body of research in strategy that has shown a positive relationship between reputation and firm performance. Celebrity is a new concept and our recent study (which is derived in part from the theories developed in a 2006 article entitled Celebrity Firms: The Social Construction of Market Popularity) of its effects on investor responses to earnings surprises is one of the first to provide empirical evidence of the positive performance effects of celebrity.

What our research shows is not only that these assets are important for performance, but that they are different in interesting ways. Reputation, as it pertains to corporations, is an asset that is built over time and is based on public recognition of the quality of a firm’s products, services, or activities. In contrast, celebrity is an asset that results from high levels of public attention and positive emotional resonance with stakeholders. Celebrity is developed when firms engage in bold, non-conforming actions and the media develops narratives that valorize their unusual strategies and cultures in ways that make them appealing and accessible to stakeholders. It is important to recognize that firm celebrity is not just media visibility. Simply being in the press, absent the generation of positive emotional resonance, is insufficient for the firm to accrue the benefits of celebrity.

It is also important to note that while celebrity can be developed more quickly than a high reputation, it is also harder to sustain over the long-term. Further, each asset is developed based on very different kinds of actions and behaviors. To take full advantage of this asset, celebrity firms should use the opportunities celebrity affords to develop the resources, market position, and opportunities that increase the likelihood that it will develop a strong reputation over time.

What’s the correlation between reputation and celebrity as it influences the behavior of investors (individual and institutional), analysts, credit rating agencies, and other marketplace participants?
 
Mike Pfarrer: Both reputation and celebrity generate positive social approval; thus, generally possessing high levels of either of these assets can benefit a company. However, we argue that the large emotional component of celebrity generates a different kind of social approval than the social approval generated by a history of high quality and strong performance. We studied the effects of possessing high reputation and celebrity on investor responses to material positive and negative earnings surprises, and found that both high reputation and celebrity firms experience significantly larger positive market reactions than firms that do not possess either asset when they experienced positive earnings surprises, and were not punished by the market at all when they experienced negative earnings surprises. However, we also found that celebrity firms experienced significantly larger positive responses than high-reputation firms to their positive surprises.

We would expect that analysts, credit rating agencies, and others would be affected in essentially the same way as investors. Although our research only focused on one type of surprise behavior – earnings surprises – and one kind of marketplace participant – investors – we would expect to see high levels of reputation and celebrity increase positive reactions to positive events such as announcements of new innovations and new product launches, and that they would serve as buffers in the face of negative events such as recalls, earnings restatements, and environmental compliance errors.

If you were a CEO, would you rather that your company be categorized as “high reputation” or “high celebrity?” What are the most direct benefits of each?

Mike Pfarrer: This is a tricky question. The strategies that lead to the development of reputation and celebrity can make it difficult to build the other. Thus, very few firms appear to possess both assets simultaneously. The challenge for managers is to understand the short- and long-term costs and benefits of each asset and to figure out which they can develop most readily given “where they are” relative to other firms and “where they want to be” in the future.

For example, although celebrity can be short-lived, it also appears to make a bigger impression among stakeholders amid positive events. Thus, firms that are new or those that are engaging in new, bold behaviors that deviate from industry norms might consider being proactive in garnering media attention and providing the media with the sorts of information that allow stakeholders to develop a positive, emotional connection with the firm. Once they have accomplished this, they may then begin to build a lasting, positive reputation based on the opportunities and resources their celebrity makes available.

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Larry Smith is Senior Vice President of Levick Strategic Communications, the nation's top crisis communications firm, and a contributing author to Bulletproof Blog. Connect with Levick on Twitter: @Levick.