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 U.S. more competitive in the world.
The gap between marketing and finance has never been greater, and this 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 wanted.
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 underfunded.
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 their organizations 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 20 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.
Product branding relates to the revenue side of the equation. You build brand power, measured as "familiarity" and "favorability" toward the brand, which affects sales, earnings, cash flow, and ultimately, stock performance.
However, a direct relationship between corporate brand building and stock performance exists. This is the "reputation" portion of the intangible asset, known as goodwill, which is a stable number, and one 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 reputation portion of goodwill. It averages about five percent to seven percent 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.
A recent article in The Wall Street Journal, "Reality Stars go on to Stock Success," discussed CEOs who appeared 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; it's a consistent model.
The red bar is a "peer group." It can be your competitors, an industry, or 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 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 they did something. You can identify specific events like a change of management, an advertising campaign, reorganizations, or mergers. You can evaluate what happened.
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.