The idea of putting the corporate brand on the balance sheet is an audacious proposition. One that can revolutionize marketing, change the role of everyone responsible for the health of brands, and make the US more competitive in the world.
The gap between marketing and finance has never been greater. And, the chasm will never get smaller unless valuing the intangible brand and putting it on the balance sheet becomes a reality. The fault doesn’t reside with marketers, rather current accounting standards are inefficient for valuing brands.
Financial standards don’t account for increased value when intangible assets are key drivers of the brand. Corporate financial statements and annual reports are insufficient for assessing the performance of the brand value.
In 2007, I spearheaded a blue ribbon committee that approached the Financial Accounting Standards Board (FASB). The group, an academic, a CFO, an accountant, and myself, approached the board of directors and petitioned them to change the way they account for brand value.
One of the results was FAS 157, which allows for valuing the corporate brand only when a company is bought or sold. Unfortunately, it does not value the brand over time, or the way brand equity is actually created. While a step in the right direction, it didn t give us the tools we were looking for.
Today, we have an opportunity to create a win/win situation for marketing and finance. Every professional communicator knows inherently the amazing value of branding. We experience this value creation every day. Unfortunately, we don’t have a way to account for this value and when marketing budgets are not accountable they tend to be under-funded.
We see an opportunity because accounting standards are changing. FASB and IASB (International Accounting Standards Board, the primary accounting standard authority in Europe) have been coordinating efforts to develop one global accounting standard. IASB has a more open-minded view of brand value so this is an encouraging development for a full discussion of the topic.
Where there is change, there is opportunity. Communications professionals and the organizations to which they belong should take advantage of this time of change to get their fair share of the marketing budgets.
The metrics for measuring brand value have advanced by light-years. Interbrand, Millward-Brown, Corebrand, and others have been working on brand value metrics for the past twenty years. But, we’re competitors. We all keep our data and our analytics inside a black box. What I suggest is a change to the status quo. We should find the best value measurement practices in the industry. We should work cooperatively to identify how value is created, and devise the best possible way of valuing brands.
Here’s what CoreBrand brings to the table. We know everything a company says and does impacts the corporate brand. As a result, the brand impacts financial performance in two ways: revenues and stock performance.
Product branding relates to the revenue side of the equation. You build brand power, measured as “familiarity” and “favorability” toward the brand, which impacts sales, earnings and cash flow, and ultimately, stock performance.
But, there’s also a direct relationship between corporate brand building and stock performance. This impact is the “reputation” portion of the intangible asset, known as goodwill, which is a very stable number and this is the number that should be on the balance sheet.
Drilling deeper you can analyze both sides of these value equations with two different models. On the product branding side, look at market share analysis and business share analysis, then project market share at different spending levels. Then, through a discounted cash-flow analysis, evaluate Return on Investment (ROI).
On the corporate branding side, you need consistent, quantitative research over time. Model against industry peers and the stock market, then project ROI based on improving the position and market capitalization. Finally, evaluate ROI performance based on improving the brand equity and value.
The benefits of valuing your brand are significant. The corporate brand is an intangible asset that represents the reputational portion of goodwill. It averages about 5-7% of the market cap of every company in the CoreBrand 800 (companies tracked in the Corporate Branding Index. The corporate brand can be accurately consistently measured and valued over time. You can measure it against specific competitors, peer groups and entire industries. It can be managed like other business assets. And, it can grow or lose value over time on an ROI basis.
There was recently an article in The Wall Street Journal (April 10, 2010), “Reality Stars go on to Stock Success” about CEOs appearing on Undercover Boss, and the fact that their stock price increased after each episode. Well, as my daughter would say, “Duh.” We know it works and it’s a very consistent model.
The red bar is a “peer group.” It can be your competitors. It can be an industry. It can be any number of companies you want to evaluate against. That’s the brand equity value you measure every single quarter. Then, you have the client’s brand equity; again you evaluate it quarterly contrasted against the peer group. Finally, you evaluate the improvement or decline on a quarterly basis, as well as the communications pressure. It becomes a simple, clean dashboard for the corporate brand.
This is a more realistic and meaningful valuation approach than current royalty relief methods, and a more logical answer than the profit- analysis method. CoreBrand has over 20 years of quantitative research on over 800 companies across 49 industries to support these valuations.
This brand equity valuation allows you to look at your brand over the continuum of time, which allows a company interested in its past performance to go back in time and evaluate what happened if or when we did something. You can identify specific events: a change of management, an advertising campaign, reorganizations or mergers. You can evaluate what happened, because that data exists in our archives.
This evaluation tool is a systematic method for budgeting, evaluating ROI, or simply setting the value of the company’s reputation. With FASB and IASB working hard to bring these accounting standards together, we have an enormous opportunity to put the brand on the balance sheet.
© 2010 – 2015, James R. Gregory. All rights reserved.