The 2014 Enterprise Value Study: How Confidence Drives Stakeholder Behaviors. October 2014

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1 The 2014 Enterprise Value Study: How Confidence Drives Stakeholder Behaviors October 2014

2 Enhancing and Protecting Enterprise Value ENGAGED LEADERSHIP, COMMITTED WORKFORCE Leadership positioning Employee engagement Change management Engaged leadership, Committed Workforce RESEARCH-BASED INSIGHTS Landscape analysis Media/dialogue analysis Reputational benchmarking Message testing Market & Reputational Leadership MARKET & REPUTATIONAL LEADERSHIP Organizational positioning Marketing communications Thought leadership Crisis preparedness and response ENHANCED LICENSE TO OPERATE Public affairs Corporate social responsibility Issues management Enhanced License to Operate Optimal Valuation OPTIMAL VALUATION Capital markets counsel Corporate governance M&A advisory Risk mitigation 2

3 The Basis of This Research As a global business advisory firm, FTI Consulting helps companies drive business outcomes that enhance and protect their enterprise value. Our Strategic Communications business works with companies to help them engage and communicate with their stakeholders to support business outcomes They want employees to be passionate about working for the company They want customers to buy products and services They want investors to invest in the company And they want citizens to support the company operating in their communities This research project was conceived and designed to better understand how communications and engagement can drive these critical business outcomes. 3 3

4 Audiences Employees N = 1,815 Full- or part-time private sector employees of companies with 100+ workers What drives employee behaviors? What drives decisions to buy from a supplier? B2B Customers N = 312 Decision makers within companies who have purchase authority and responsibility Public Influencers N = 2,099 Top 10% of Americans involved in their communities, engaged and vocal on public affairs issues What drives support for a company s public agenda? What drives decisions to invest? Investors N = 107 Globally located institutional portfolio managers and analysts 4

5 Summary Findings & Implications To drive stakeholder behaviors, it is more impactful to drive confidence than reputation A good reputation is necessary, but not sufficient, to drive desired stakeholder behaviors. To achieve confidence, companies have to satisfy certain attributes Strong Leadership Good Employer Strategic Execution To achieve those attributes, companies should provide insight into their vision and behaviors The company s 5-10 year vision How it will execute its vision The company s plans for serving customers How the company treats employees By, increasing confidence, companies can turn stakeholders into advocates for companies Confidence helps segment stakeholders into: Advocates, the Moveable Middle, and Detractors. 5

6 To drive stakeholder behaviors, it is more impactful to drive confidence than reputation

7 For companies to attract investment and drive optimal valuation, it is more important for them to build confidence than to build reputation Investment Criteria Company's record of financial performance Importance to Investment Decision 74% Confidence in the company 72% Whether industry conditions are favorable Trust in leadership to make future decisions 44% 71% 2.4x The overall reputation of the company 31% How much you agree with the company's past decisions 6% The reputation of the company as an employer 3% 13x 7 In an additional question about what drives optimal valuation, investors ranked confidence behind only financial performance and industry conditions 13x that of reputation. When thinking about a company as a potential investment there are many important factors to consider. Below is a list of seven factors that are often said to be important. Please rank the top three (in order) based on how important they are to you. 7

8 Likewise, across other stakeholders, confidence is a higher-order behavior than reputation Employees Customers Public Most Difficult to Achieve Support Legislation the Co. Supports 45% Recognized & Rewarded for Work 47% Would invest in the Co. 48% Would Recommend as Employer 51% Informed about Co. Progress 54% Has Confidence in Co. 55% Would Continue Working at Co. 59% Inspired to Perform 61% Feels Work Makes a Difference 61% Co. has Good Reputation 66% Least Difficult to Achieve Most Difficult to Achieve Support Legislation the Co. Supports 34% Recommend Goods & Services 46% Increase Business Relationship 46% Has Confidence in Co. 50% Co. has Good Reputation 66% Least Difficult to Achieve Most Difficult to Achieve Co. has Important Viewpoint on Issues 21% Would Defend Co. s Reputation 22% Support Legislation the Co. Supports 27% Support Co. Operating in Community 33% Has Confidence in Co. 36% Co. has Good Reputation 48% Least Difficult to Achieve On average, stakeholder confidence is 27% more difficult to achieve than is a good reputation. 8 Top two box scores on behaviors asked about.

9 In nearly 1-in-5 cases, it is possible to have a good reputation without having confidence. But, it is almost impossible to create confidence without having a good reputation Confident, but poor reputation Good reputation, but not confident 5% 3x 17% 3x Reputation is three times more foundational to Confidence than Confidence is to Reputation. 9

10 Once achieved, stakeholder confidence affords companies a better probability of achieving the desired behaviors Stakeholder Behaviors All Recommend Goods & Services to Others Increase Business Relationship with the Company Would Recommend as Employer Support the Company Operating in the Community Would Invest in the Company Would Continue Working at the Company Would Defend the Company s Reputation The Company Has an Important Viewpoint on Issues Informed About Company Progress Support Legislation the Company Supports Recognized & Rewarded for the Work I Do Inspired to Perform At My Best The Work I Do Makes A Difference Advantage of a Good Reputation 7% 13% Advantage of Stakeholder Confidence 38% 36% 33% 27% 6% 4% 0% 48% 17% 84% 121% On average, companies have a 30% better chance of achieving the desired behaviors if stakeholders are confident than if stakeholders say the company has a good reputation. 10 *Advantage is calculated as the ratio of the probability of achieving the behavior if the stakeholder is confident in the Company to probability of achieving the behavior if the stakeholder rated the Company as having a good reputation.

11 To achieve confidence, companies have to satisfy certain attributes

12 There is a progression of attributes that lead to both a good reputation and stakeholder confidence Agreement with Co. s Past Decisions Co. Cares about Communities where it Operates % of Companies that Achieve Level 43% Achievement of Stakeholder Confidence 46% Has Strong Leadership Executes its Strategy Well Has a Reputation as a Good Employer 52% Has Innovative Products/Services Industry Conditions are Favorable 54% Has a Good Reputation 57% Leader in Industry Has Good Financial Performance Provides Value to Customers Focused on Delivering for Customers 59% 12 *All possible combinations of attributes were analyzed based on the average ratio of the probability of achieving the attribute given the paired attribute is not achieved to the probability of not achieving the attribute given the paired attribute is achieved. Subsequently, the attributes were tiered based on descending order of aforementioned ratio. **% change in difficulty is calculated based on the average probability of achieving the attributes at the specified level in the hierarchy versus the average probability of achieving the attributes at the preceding level in the hierarch.

13 Rate of Increase in Confidence via Attribute Average = 8.39x Certain attributes are both necessary and significantly impactful to achieving greater confidence 1.04 Nice to Haves Pinnacle Attributes Cares About Communities Where it Operates Agree with Company s Past Decisions 0.98 Good Leadership Average =.954 Price of Entry Favorable Industry Conditions Innovative Good Financial Performance Industry Leader Customer Value Good Employer Executes Strategy * Rate of increase in confidence via each attribute was calculated based on the slope of the least-squares regression line with confidence as the dependent variable and the specified attribute as the independent variable. ** Increase in odds of confidence if attribute achieved is the ratio of the odds of confidence given the specified attribute was satisfied versus the odds of confidence given the specified attribute was not satisfied. Customer Focus Need to Haves x 6.5x 7.0x 7.5x 8.0x 8.5x 9.0x 9.5x 10.0x 10.5x Increase in Odds of Confidence if Attribute Achieved

14 Least Impact Most Impact Certain attributes are both necessary and significantly impactful to achieving greater confidence Nice to Haves Cares About Communities Favorable Industry Conditions Pinnacle Attributes Agree With Company s Past Decisions Strong Leadership Good Employer Executes Strategy Cost of Entry Innovative Good Financial Performance Industry Leader Need to Haves Customer Focus Customer Value Least Essential Most Essential 14

15 Probability The payoff from having achieved those attributes significantly improves confidence 100% 90% 80% 70% 60% 50% Probability of Confidence Δ 56% Avg. Probability of Confidence if Attributes Achieved 71% Avg. Probability of Achieving Key Stakeholder Behaviors Δ 60% Avg. Probability of Behaviors if Confident 72% 40% 46% 45% 30% 20% 10% 0% Given achievement of attributes, a company can significantly increase its probability of achieving confidence. 15 * Probability of confidence is calculated as the average probability of achieving confidence across all stakeholders and attribute levels; Avg. probability of confidence if attributes achieved is the average of the conditional probabilities of confidence given the specified attribute is achieved, across all attributes. ** Avg. probability of achieving stakeholder behaviors is the average probability of achievement of each behavior across all stakeholders and attributes; Avg. probability of behaviors if confident is the average of the conditional probabilities of each behavior given confidence is achieved, across all behaviors.

16 To build confidence, companies should provide insight into their vision and behaviors

17 What areas do stakeholders say will help build confidence? Employees B2B Customers Investors Public Influencers 25% Financial & company execution 29% Financial & company execution 35% Honest & forthcoming w/ information 25% Quality product/ services 13% Quality product/ services Quality product/ services Strategic Plan/ Vision 27% 35% 9% Social responsibility 10% Financial compensation & benefits Financial & 7% Communication 26% company 9% execution Financial & company execution 17 Open-ended responses

18 Channels to increase confidence: Business Media Coverage, Face to Face & Financial Reports Employees B2B Customers Investors Public Influencers 39% Employee newsletters Meeting w/ Company Leaders Analyst Reports 56% 90% 70% General business media 39% Department Manager Meeting With Account Reps Annual Reports 55% 84% 34% Annual Reports 32% 31% 26% Employee Intranet Meeting w/ Company Leaders General business media General business media Meeting w/ Company Leaders 35% 72% 34% Industry/ Trade 33% Analyst Reports 62% 29% General Business Media 28% Industry/ Trade 60% 20% Industry/ Trade Info shared by friends & family Social media/ websites 30% Meeting w/ Company Employees 18 Open-ended responses

19 Increasing confidence can turn stakeholders into advocates for companies

20 Breakdown of stakeholders Detractors 17% Moveable Middle 65% Advocates 17% However, progression to advocacy requires achievement of confidence and behaviors. 20 * Advocates, Moveable Middle, and Detractors were determined based on each participant s average score across all relevant behaviors, including confidence; the average scores were ranked by percentile with the Moveable Middle occupying the middle 80%, and the Detractors and Advocates occupying the lowest and highest 10%, respectively.

21 Levels of knowledge and interactivity vary by segment Detractors 17% Moveable Middle 65% Advocates 17% Confident 6% Knowledgeable 43% Interact weekly 30% Confident 43% Knowledgeable 47% Interact weekly 40% Confident 95% Knowledgeable 81% Interact weekly 67% Advocates are significantly more confident, knowledgeable, and interactive than other segments. 21 * Advocates, Moveable Middle, and Detractors were determined based on each participant s average score across all relevant behaviors, including confidence; the average scores were ranked by percentile with the Moveable Middle occupying the middle 80%, and the Detractors and Advocates occupying the lowest and highest 10%, respectively.

22 Probability Ratio of Advocates to Detractors Four attributes are significantly more important to advocates than they are detractors 100% 90% 80% Advocates Agree 27x 30x 25x 70% 60% 50% 40% Leadership 10x Cares 16x Good Employer 16x 20x 15x 30% Detractors 10x 20% 5x 10% 0% Industry Leader Fin. Perf. Industry Cond. Customer Focus Customer Value Executes Innovative Leadership Cares Good Employer Agree 0x Advocates are as much as 27 times more likely to exhibit certain behaviors compared to detractors. 22 * Probability of each attribute is based on the average probabilities among Advocates and Detractors, respectively. The ratio is the ratio of the probability of the attribute among Advocates to that of Detractors.

23 Advocates access richer sources of information Content of All Stakeholder Groups Employee Content Customer Content Public Content Advocates seek multiple types of content The company s vision for the next 5-10 years (44%) How the company plans to execute it strategy (32%) The company s long-term succession planning (32%) The company s plans for products & services (27%) Advocates access multiple channels Company s publications on trends (30%) Financial analyst reports of the business (28%) Meetings with executives / company leaders (23%) Employee newsletters (21%) My department manager (19%) Detractors seek fewer sources of content How the company treats its employees (54%) The company s plans for serving its customers (40%) How the company addresses public issues (37%) How the company plans to sustain/ improve operations (33%) Detractors access fewer and more informal channels General business media coverage of the business (57%) Industry-related / trade publications (27%) Information my friends, neighbors, family, co-workers share (19%) Peers and coworkers (18%) 23

24 Other Stakeholder and Industry Findings

25 Employees of small companies have the highest confidence in their employer. There are only minor differences by type of work or type of company. Employees CONFIDENCE in the company (top 2 box) 55% 61% 51% 56% 57% 57% 55% 54% 56% 56% 54% 25

26 More frequent interaction with management yields dramatically more support and buy-in from both managers and rank-and-file employees. Employees Impressions of Employer by Frequency of Interaction with Company Leadership < Once per week 1-2 times per week 3 or more times per week Degree of CONFIDENCE Would like to work for the company over the long-term Would recommend the company as an employer Would invest in the company Would support legislation the company supports Satisfied with information received about priorities & progress Appropriately recognized & rewarded for the work that I do I feel the work I do makes a difference I am inspired to perform at my best Managers 54% 61% 74% 56% 62% 76% 49% 64% 71% 50% 61% 67% 46% 47% 42% 59% 59% 67% 72% 62% 66% 62% 71% 78% 57% 72% 74% Non-Managers 44% 64% 64% 50% 65% 69% 39% 57% 61% 35% 53% 62% 30% 47% 50% 41% 62% 62% 33% 56% 57% 47% 67% 69% 48% 67% 66% 26 26

27 Energy, Chemicals & Materials Companies Engender the Highest Confidence Among Their Customers B2B Customers By industry, the percentage of B2B Customers Who Are Very Confident In The Companies They Do Business With (% Top 2 Box 6-7) Energy, Chemicals & Materials 65% Consumer Products 60% Telecom Technology Health Care Financial Services Industrials Durables 53% 52% 50% 47% 47% 45% Business Services 31% 27

28 Among B2B Customers, their stated likelihood to increase business with a provider rises dramatically with increased levels of confidence. B2B Customers Likelihood to Increase or Broaden Business with Company By Level of Confidence (7-point scale) 89% 73% 22% Confidence 5 Confidence 6 Confidence 7 28

29 Appendix

30 Methodology: Research Audiences Employees N = 1,815 B2B Customers ( Customers ) N = 312 Institutional Investors ( Investors ) N = 107 Public Influencers ( Public ) N = 2,099 At least 18 years old All races and genders High School Graduate or above No household income requirement Employed full-time or part-time Salaried or paid hourly Works at company with at least 100 employees Works at a private-sector company At least 18 years old All races and genders High School Graduate or above At least $50K in household income Employed full-time Salaried or paid hourly Globally located institutional investors Portfolio managers and analysts At least 25 years old All races and genders Four-year College Graduate or above At least $50K in household income Employed full-time Salaried or paid hourly Works at any size company Works at a private- or public-sector company, or government 30

31 Methodology: Segment-Specific Stakeholder Behaviors Tested B2B Customers Support Legislation the Company Supports = I would support legislation that this company supports Increase Business Relationship = This company is one with which my company would increase or broaden our business relationship with Recommend Goods & Services = Recommend to co-workers in my company or industry purchase this company s goods and services Employees Support Legislation the Company Supports = I would support legislation that this company supports Informed About Company Progress = I am satisfied with the information I receive on the company's priorities and progress Recognized & Rewarded for the Work I Do = I am appropriately recognized and rewarded for the work that I do at this company The Work I Do Makes A Difference = I feel the work I do makes a difference at this company Inspired to Perform at My Best = I am inspired to perform at my best at this company Would Continue Working at the Company = This company is one I would like to continue working for over the long term Would Recommend as Employer = Recommend to a friend, family member or co-worker that they go to work for this company Would Invest in the Company = Invest in your company, if given the opportunity Public Influencers Support Legislation the Company Supports = I would support legislation that this company supports Would Defend This Company s Reputation = Defend this company s reputation to a friend, family member or co-worker Support the Company Operating in the Community = Support this company operating as a business in my community The Company Has an Important Viewpoint on Issues = This organization is one I think offers an important viewpoint on public issues 31

32 Methodology: Stakeholder Attributes Tested Stakeholder Confidence = Overall, to what degree do you have confidence in this company? Good Reputation = The overall reputation of the company is good Good Employer = The company s reputation as an employer is good Agree with Company s Past Decisions = I generally agree with the company s past decisions Good Financial Performance = The company s record of financial performance is good Strong Leadership = The company has strong leadership and decision makers Executes Strategy = The company executes its strategy well Favorable Industry Conditions = The conditions of the industry the company is in are favorable Customer Focus = The company is focused on delivering for its customers Customer Value = The company provides value to its customers Innovative = The company has innovative products/services/ processes Industry Leader = The company is a leader in its industry Cares About Communities Where It Operates = The company genuinely cares about the communities where it operates 32

33 Contact: Bob Knott Senior Managing Director Strategic Communications FTI Consulting