This post follows on from Part 1 and assumes the reader is familiar with it
Accountants measure value all the time – giving an opinion on a set of accounts or valuing a potential acquisition for a purchaser, or disposal for a seller.
In order to value a company accountants use a variety of techniques. Examples include:
– Multiples of “profits”, where profits can be defined in an alphabet soup of different ways – PBT (Profit before tax), PAT (Profit after tax), EBIT (Earnings before Interest and Tax), EBITDA (Earnings before interest, tax, depreciation and amortisation- phew!)
– Discounted cash flow models otherwise known as NPVs (Net Present Value) using WACC (Weighted Average Cost of Capital), CAPM (Capital Asset Pricing Model) – yes even more letters! – and other tools to work out the discount factors used.
Despite the complexity involved in some of these techniques they all basically pose the question:
“How much money (in today’s terms) will owning this company, or a share of this company, entitle me to in the future?”
What they are all attempting to do therefore is predict the future.
Unless you are Mystic Meg this is clearly an impossible task. There is no way that anyone can predict the future with any certainty and hence any valuation is almost certain to be wrong. But that doesn’t stop accountants doing it everyday.
So when you try and predict the future earnings of a company what are the factors that you take account of?
Clearly there is the current level of profitability as a starting point. You can then go on to consider factors that demonstrate market potential, competitive advantage and barriers to entry such as:
– Market expectations in the future for that company’s products
– IP the company has or is developing
– Market share
– Potential to improve efficiency and hence profit margins
– Management team and their likelihood to deliver the company’s plans
Public/Investor relations plays a role in increasing the “value” placed on a company where these sorts of factors are concerned by communicating these areas effectively.
But in addition to this the key component of a company’s competitive advantage, and hence its ability to make future profits, is the reputation of its brand. If reputation changes then value can be created or destroyed. This is because the change in reputation will affect perception of the very factors that drive value, such as the likelihood of the company exploiting markets, launching new products and the confidence in the management team.
And PR is the custodian of reputation.
So accountants give opinions and value companies and yet, with the greatest respect to my former colleagues and fellow professionals, probably don’t understand reputation as well as PR professionals.
What does this all mean?
Perhaps we need to look at PR “measurement” in a different way. Perhaps we should be looking at how brand values change, share prices move and the changes in profitability of a company’s products and services. We could then try and demonstrate, through a framework, how reputation management and development through PR has contributed to improvements in these areas. This way PR claims the Value of what it has helped to achieve not the activities or even the actions that have occurred.
In Parts 3 and 4 I will try and suggest some practical ways we could perhaps seek to do this.