What's your company's reputation worth?

Probably more than you suppose. With so much at risk, the care and feeding of corporate reputation, as distinct from brand image, is becoming a high priority for CEOs. In the following roundtable discussion CEOs examine how best to build and maintain reputational "equity."

Oscar Wilde once remarked that one could live down anything except a good reputation. Many companies - and some CEOs - should only be so lucky. Goodwill and public trust may strike some as the softest of the soft issues facing business leaders. What is a good reputation really worth anyway, and should hardheaded practical people, focused as they are on quantifiable stuff such as EPS and p/e ratios, really care? Judging from the following roundtable discussion co-sponsored with Hill and Knowlton, apparently they do care - a lot. All agreed that a good reputation can serve as a kind of capital account of stored trust, which can in bad times be drawn upon as a buffer. The evidence, though circumstantial, is compelling. According to a Yankelovich Partners survey of upscale customers, 58 percent of those surveyed are likely to buy products from a "winning" company versus 18 percent who would do so from "non-winners." Fortune's "Most Admired Corporations," it is said, enjoy better margins than the least admired. But does this confuse cause with effect? In a study by NYU's Stem School of Business, corporations with a good reputation, after controlling for other factors, have a rate of profitability in excess of the industry average. Those with stronger reputations also command a premium on their stock market values. For example, one year EPS forecasts made by financial analysts are most heavily explained by standard performance indicators, but the Stern study found these were partly influenced by the non-financial component of the company's reputation.

In their book, Contented Cows Give Better Milk, authors Bill Catlette and Richard Hadden created a hypothetical portfolio of common stock of companies they designate as "contented cows," companies with long-standing reputations as employers of choice ranging from Disney, FedEx, and Herman Miller to Nordstrom's, Southwest Airlines, and Wal-Mart. The "fund" performance is posted on the Internet with site visitors encouraged to make investment recommendations. Since March 1995 the Contented Cows fund has consistently outperformed the S&P 500 and the authors have offered a friendly challenge to Fidelity that it will outperform its vaunted Magellan Fund from April 1998 through March 1999.

Assuming reputation counts and that CEOs bear the responsibility for its care and feeding, what can they do to build equity? Participants argued, some strenuously, that character matters. One must not only have integrity at the top but be ruthlessly intolerant of those who undermine the integrity and values of the company. In a cynical age CEOs should do more than merely "walk-the-talk" and insist on ethical behavior. Communicating one's message to the public and most importantly, repeating the message with employees, is seen as critical.

In the end, a company's reputation is a fragile orchid. Ninety-nine ethical acts will be undone by one breach. The Tylenol scare transformed Johnson & Johnson into the poster child of reputation management, but that was 15 years ago. Only a few years ago, Bill Gates was the poster boy for American entrepreneurialism at its finest, and Microsoft as the upstart David to IBM's Goliath. Although the general punic hasn't soured on him or his company, Gates's detractors seem to be everywhere from the halls of Congress to Internet chat rooms, complicating his quarrel with the U.S. Justice department. As participants are painfully aware, the price of a good corporate reputation is eternal vigilance. CEOs should take nothing for granted particularly with one's employees, as it is suggested that this is where the news media looks first for ammunition when attacking a company or its products. But, as Waste Management's Steve Miller explains in the following roundtable, one's reputation is rarely as bad - or as good - as the media portrays. Having been associated in the turnarounds of Chrysler, Olympia & York, Morrison Knudson, and WMX - a virtual who's who of reputation-challenged companies, he should know.

REPUTATION: THE 'SOFT' STANDARD

Howard Paster (Hill and Knowlton): People tend to think of a reputation as a soft standard. But though financial performance certainly counts, it's not enough by itself. Chief executives are told, "You're the guardian of the brand equity; you have the responsibility of taking care of that equity." Corporate reputation is a natural corollary of grand equity. It's not as well understood, but the principle is the same.

The best case study continues to be, 15 years after the fact, Johnson & Johnson's handling of the Tylenol recall. That was a good example of how a corporate reputation helps a company get through a difficult time. And, on the other side, almost 20 years ago, when I was working for the auto workers, we were trying to prevent Chrysler from going under. One of the serious impediments to getting that job done was Chrysler's shoddy product reputation. As we went about to try to save Chrysler, the reputation of the company was right in the way of trying to get the outcome we wanted.

People sometimes confuse financial performance and reputation. Financial performance is very important, and I don't want to belittle the importance of delivering to shareholders. But so are values, so is how you deal with people, how you communicate to the various stakeholders, employees, shareholders, customers, vendors, and the communities in which you operate and have facilities. All of these things, which are considered the soft side of reputation, also may affect the outcome. Just because the financial results are good, it doesn't mean you're maximizing shareholder value.

Dick Clarke (Yankelovich Partners): We've done studies that illustrate that if you have a good reputation, the price/earnings ratio is somewhere between 15 and 20 percent higher than a poor reputation. If you took 10 to 20 percent of market cap value and illustrated it to a marketing group or a research group and said, "Do you think it's worth going after?" they'd be out of the room before you could get a vote.

Michael Roth (The Mutual Life Insurance Co. of New York): The insurance industry, with all the sales practice issues, has gone through a dramatic attack on the reputation of its product and the way it's sold. The industry had to get together and figure a way to address the issue because our customers were turning to banks and mutual funds, who are now selling similar products.

We tried to address this by forming an industry standard and group that would review the compliance and sales practice processes and ethical behavior, and develop a seal of approval that companies can participate in. We spent a lot of money to get this certification, which was released as of April 1.

Meanwhile, people were suing in class action lawsuits based on the fact that the industry and particular companies had a plot to deceive the consumer. Our company spent a year deciding whether we would accept these huge settlements as some of the other companies did. We decided to take the class-action lawyers on, on the basis that we have a sales practice program that addresses the issues these lawsuits were all about. The court moved favorably to dismiss in summary judgement and the judge cited our ethical training and sales practice program as a reason why it wasn't a corporate plot.

We are living proof that unless you have a reputation of standing behind your products and providing fair and equitable treatment to your customers, you're going to lose market share, revenue, and you're going to lose business, period.

Allen Mebane (Unifi): We've never lost an EEOC case; we've never lost a case over workman's comp. We will fight those things to the end. Because if you're right and you don't fight, you're sending the wrong signal to your people.

Joe Lynaugh (NYLCare Health Plans): I'm in an industry that's clearly very troubled right now, the managed care industry. There's been a great deal of emphasis now within the managed care companies on quality of care. And this turns into, "We have the best outcomes, we have the best doctors, we have the best hospitals." From what I can see, that's not what the people are concerned about. The reputation question is coming more from, "Are you processing my claims? Are you treating me fairly on the phone, in the benefits, in the administrative processes?" So it's like ships passing in the night in many of the managed care companies in terms of what people really want.

Paster: Three years ago, managed care was the savior of the health industry, and in 24 to 36 months, it went to being the villain. Part of the problem is that there isn't a common voice.

Sales practices in life insurance created a whole set of problems. And every one of us, no matter what business we're in, has to deal not just with how we conduct ourselves, or being ethical in our own business, but the reputation of our industry. We have to be leaders in order to drive it, because we're going to have a certain amount of assessed penalty or benefit, depending on how it's viewed.

Hugh Westbrook (VITAS Healthcare): Reputation finds its foundation in a very specific relationship you have with the customer. We're a service business. Every week, we have 750 people who are referred to our hospices for care. Forty-five percent of those people this week who are referred will not have been told by their physicians or anyone else that they're terminally ill. We used to resent that and think, the doctor's not doing the job. Now we've developed an expertise in delivering that news. So the physician uses us over and over again, because we have the reputation for being able to deliver on something that he or she doesn't want to have to deal with.

Brian Merriman (TOPAC USA): When we try to acquire American companies - we being part of a Japanese company, and with no financial references - they know we're here, that we're a big company, but they don't know if we're making money, losing money, or what the impact of the Asian crisis is, for example. So the reputation becomes everything, much more than the product or what we think we might do. It's more about, what have you done, how have you treated the people inside the companies you've already acquired, what have those strategic alliances led to already? J.P Donlon (CE): What happens when bad things happen to a good company? If you're doing everything you can to keep your company where it should be, but your industry is tarnished, what do you do?

Paster: You start back about five years earlier. You want to put perceptual good will in the bank and create that asset. You build equity. J&J had such a fine standing, they were given the benefit of the doubt in a tough time. You can't buy that insurance after the barn's burned. You have to start earlier. If you haven't dealt with your reputation before the bad time comes, you've got an immense problem.

Clark Johnson (Pier 1 Imports): The question is, who do you want to have a good reputation with? We've all got lots of constituencies, but the model I've followed all my business career is you want to have a good reputation with your customer. That, in effect, is the key to driving any successful business. In the case of the retail business, the customer's face-to-face time is with the 13,000 associates in our stores. And the challenge there is, how do you get extraordinary results out of ordinary people?

Before a store can be a great place to shop, it first needs to be a great place to work. The level of motivation of any organization can only rise as high as the level of trust. So you start out by building trust with employees, through your policies and procedures. At Pier I Imports, the customer is always right, even when she's wrong, and there's no such a thing as an unjustified complaint. So we have empowered our associates to do whatever it is the customer wants, and take the customer's point of view instead of the company's.

As you build that level of trust - like equity in the bank - you build a trust account. As long as you're honest and open and have a consistent policy, it pays off in the end. If you have a great reputation with your customers, the by-product of that is a reputation in the financial community.

Roth: Dealing with a customer after a sale is almost as important as dealing with them before the sale. What we do is we follow up and ask them, "Were you happy with the service? Do you believe the product was the right product to meet your needs?" We do this so they know we care and feel they were treated fairly. And if they weren't, there's a remedy in terms of meeting their complaints.

Donlon: And how many times have any of us been on the phone to a software company because of a problem with a PC and just got nowhere? How is it that these companies are still around?

Clarke: The iceberg is melting underneath them. People who really get annoyed don't only stop buying the product or service, but they start to negatively market your product and tell their friends not to buy it. Mebane: This whole process starts when you start a business, and how you teach your employees or lead them to where you want to be.

Every supervisor on our factory floor wears a necktie because he or she is different from the employee who reports to them. We want that person to look different, act different, be able to field employee questions. We spend a lot of time training these people to do this. And that's where your communications start, right down on the factory floor.

DO UNTO CUSTOMERS

Judge Eugene R. Sullivan (U.S. Court of Appeals): Your reputation is your trust, and it's not just from the customer, but the employees. You've got to treat your customers as you want to be treated yourself. You should call up your own companies every now and then and say you've got a complaint just to see how you're treating the people. Remember: one lie, whether it's to the customer or your employees, destroys a whole reputation for integrity.

John Binswanger (Binswanger): We're really selling either a process or a service, so the relationships we have to build are our key. We're spending much more time with the customer and have a much higher grade of people to do that than we used to, because the relationship is the only niche we have that's different than anybody else. Roth: The point on communication is the most important. You have to be accessible to your people as well as to your customers. When we were in a crisis environment, we made ourselves available to our policyholders. I used to take calls from them and talk to them directly. I was involved, and I communicated. I went to the field, as opposed to them coming to the home office, the ivory tower. And that makes a big difference.

Westbrook: I'm wondering if there's not a sense that the environment somehow is changing, that things are becoming a little more vicious out there, the media is after you a little more, things are being more regulated than they were.

Merriman: I don't know how many of you have had the pleasure of spending two years in Chapter 11. You have to talk to customers on the phone every day, communicate with them and with employees as to where you are in the process, what happened in the latest cash flow, the latest forecasts. When we did those kind of things correctly, we got through that process. It took two years. But communication and reputation became everything. It wasn't something that was delegated to somebody else; you did it yourself or it didn't get done.

Clarke: I don't want to get into morals or values, but there's an interesting shift in the way our public thinks now because of the notoriety of the current administration. It's almost like, "That's okay, everybody does something like that once in a while." And there seems to be a lowering of leadership respect. That could be business, religion, anything. If you lie once, you can't make it up with 99 goodies.

Harry Gould, Jr. (Gould Paper): Expectations in ethics and morals have been lowered. A perfect example is when I was at Harvard B-School with the idea of a required course in ethics. Now it's not even on the radar screen. The same lowered expectations of politicians now exist in the general community as it relates to business. And it's up to business to change that.

Westbrook: There is a change in the environment, and the world is changing, but it's not necessarily a lowering of standards. People are trying to sort out what counts and what doesn't. Some of that applies to people in public life, and a lot of it applies to business. The whole issue about reputation that's changing is that it's becoming a question of depth and trying to get that reputation more deeply grounded in what we do and what we are as an organization.

We make it a practice among our managers to try to keep up with some ex-employees so that we maintain a good relationship. This may or may not work when we need it, but when we have an ex-employee bad mouth us somewhere, we can bring out 20 other ex-employees who think very highly of the company and counter it. Now, that's a terrible way to think about being prepared, but it's the kind of thing that's going on.

Clarke: We found the most damaging situation in a crisis is somebody in the media getting to an employee, who said, "This company is crap." And it doesn't matter if the CEO or whoever else gets up and says, "He lied." It doesn't matter anymore.

Binswanger: In Philadelphia, the business community put together a group to meet with the newspapers and talk about the positives of what was going on in the business community rather than the negatives. I don't think it's changed dramatically, but it has changed. And there is more interaction and discussion all the time with the editors of the papers.

Bill Murdy (LandCARE USA): I remember the days when you could get away with saying, "I'm not going to dignify that with a response." You can't do that now. We've tried to inculcate in our employees and have them understand, through a constant communication program, what we are about and what standards we have. I don't denigrate the importance of the CEO role in this, but every employee's got to know what you stand for, what your qualities are, so that they can respond in a disaggregated fashion to these attacks. There are plenty of people who are ready to vilify any major target, and you have to respond.

Doug Stanard (AMF Bowling): It's hard to argue with the concept of reputation - it's a little bit of motherhood and apple pie. But it seems to me we're all talking about managing the horse, sitting there with our hands on it, and making sure it goes this way or that, faster or slower, and keeping it groomed, etc. But the reputation is something you earn; it flows from all these things. It's a by-product, the cart behind the horse. How can you manage a reputation other than just running your business?

If you run your business over time and do all these things that are so essential to the operation of a well-ran business, the reputation follows. But you can't just go out and make it better by talking about it.

Paster: One problem with the question is that you imply it's a cart and a horse and it's linear, but it's not. It's an ever-feeding circle. And you're absolutely right; if you run your business well, it will help your reputation. But the fact is that you can help your reputation not simply by delivering financial results, but by how you deal with employees.

Stanard: I agree. What I'm saying is that all these things have to be done. It's the doing of all these things; it's talking to the customers, it's being there at six o'clock at night, it's being on the shop floor from day one. Those are the practical things that create a reputation. You earn your reputation. If you don't do those things, you will have no reputation. If you do them poorly, you will have a bad one. But you can't just manage the cart; it goes nowhere by itself.

Paster: It may be that you do instinctively in your business what others aren't doing. It may be that this looks awfully simplistic, but there are a large number of businesses that aren't reacting the same.

Amos McMullian (Flowers Industries): In our business, we sell people 200 times a year. You've got to have a pretty good program to do that. You've got to have outstanding quality, outrageous service, and you've got to be the least cost producer so you can give good value. You can trick people every once in a while, but you're not going to trick them 200 times a year.

And that comes back then to leadership by example. Your philosophy has to permeate an organization. And when you've got 25,000 jobs and plants all over the country, how do you communicate with that? That comes from the character of the management team. I maintain there's no difference between business ethics and personal ethics. I don't think business ethics are something you put on like your suit when you go to work. You either have an ethical code or you don't.

Barry Naft (Environmental International): I hate to be a contrarian - it's almost like arguing against motherhood here, because we all believe in reputation. But it's clear that this faster, better, cheaper part of the equation, especially with increasing global competitiveness, is becoming more important to a company's success. There are lots of examples of companies that had good reputations for a century or more that haven't been paying attention to the faster, better, cheaper part of the equation and have fallen by the wayside. So it's a matter of balance.

Clarke: I headed a trade association in Washington, with 100 members, fast growing mid-size U.S. companies. Our membership dropped off dramatically; we found that CEOs in their 40s aren't interested in going to Washington. We tried to recruit a high-tech guy and he said, "I couldn't possibly come to your meetings. I don't own a necktie."

I wonder, as time goes on, whether this kind of informality of CEOs is going to put more emphasis on just running the business. That's just really part of the CEO's job. That's why you have a high-level stag to do the day-to-day things, to get the orders. The CEO sets the pace; he's the company's No. 1 salesman.

LESSONS IN TURNAROUND

Steve Miller (Waste Management): On every front, from sales to customers, dealings with suppliers, recruitment, retention of employees, fending off regulators, and pleasing your financial stakeholders, it's infinitely more difficult if you don't have a reputation behind you.

In early '92, after nearly a quarter century in the car business, I thought I'd try my hand as an investment banker. I partnered up with Paul Volker and Jim Wilkinson; we were a small boutique firm, only lasted a year, and I basically spent it all with one client dealing with the world's biggest real estate collapse, Olympia & York. O&Y was owned by Toronto's Reichman brothers, and for years they enjoyed and deserved a fabulous reputation for the Midas touch. Their "bridge too far" was the project called Canary Wharf in London. And when the weight of that $4 billion investment sank their financial empire, their reputation was ruined overnight, and they became pariahs. Instead of dining with kings and princes and bank chairmen, they were hounded by the work-out gangs of bankers and lawyers. Their achievements over the years were forgotten.

In early '95, I got a call from the general counsel of Morrison Knudson, an engineering and construction firm in Boise. He explained that the CEO, Bill Agee, had just been fired and that the board's acting chief executive had quit. The company had only two weeks of cash left before its next payroll, and was deeply mired in litigation - and how would I like to be chairman? [Laughter] A week later, I was chairman of Morrison Knudson. That was a tense battle for 18 months for survival, always hanging on the edge of extinction. Fortunately, Bill Agee had been so visible as its leader, and so hated in the community, that he was the devil incarnate. Once he was ousted, the people could direct their anger and hostility at him. The reputation of MK's engineering and construction cadres was essentially undiminished, and the organization today is again flourishing.

What have I learned? First, a reputation is an incredible asset, one you can't appreciate until you lose it. And when you do, every aspect of business gets harder and more costly.

Second, you're never as good or as bad as your reputation. The press can only deal in black and white, so you have to deal with the volatility of reputation. And it's frustrating how rapidly it can change. Third, the easiest way to restore a corporate reputation is new leadership. The new guy doesn't have to defend the past, so he can focus on the future. In truth, I'm not actually that good; I just have easy acts to follow.

One way to help your reputation is to deal effectively with the media. You've got to respond while the news is breaking, while it's hot, and not after you've had time to sort out what you're going to say. Sullivan: The press can kill you in one day. I'm the chair of a Georgetown program for ambassadors in Washington, and one of the things we tell them is that the fourth branch of government is the press. Your country's reputation can be killed in one day, and the best way to handle it is to have a unified spokesman for your embassy, and, if there's a bad story, face it right away, tell the truth, and get it out.

Michael Bailey (Compass Group): A couple of weeks ago, at one of our universities, we had an alleged food poisoning incident, which is clearly the worst thing to blow your reputation really quickly.

In this instance, it was a little bit of a classic sensationalism where it's nice to blow things out of proportion. Twenty-five kids went down with food poisoning, and, needless to say, we were blamed immediately. As it happened, it had nothing to do with the food, but with the water on the side, which wasn't within our domain. But there was a situation where initially we were in trouble. We took some pounding in the press for a day or two, until we got fairly clear results from the local sanitation department. It was sheer responsiveness that won the day for us. We've actually renewed that account for a five-year term.

I don't see anything different here in the States than in the U.K. in terms of how one reacts in those situations. Frankly, I think the gutter press in England is a bit more harsh than the U.S. But from a business perspective, probably the reverse is true; it's tougher here than it is there.

Mebane: The same standards apply in Europe that apply here. If you do your job well, communicate with your people, supply a superior product with good service, you're going to win in both places.

A Who's Who of Roundtable Participants

Michael J. Bailey is president and chief executive of the Charlotte, NC-based $2.5 billion North American Division of London-based Compass Group, a contract food service provider.

John K. Binswanger, of Chesterton Blumenauer Binswanger, is chairman of Binswanger, a commercial and industrial real estate company based in Philadelphia, Frankfurt, and London.

Richard M. Clarke is chairman of Norwalk, CT-based Yankelovich Partners, a market research and public opinion survey firm,

Peter C. Forster is chairman and chief executive of Bethesda, MD-based Clark Construction Group, an approximately $1.5 billion construction services company.

Harry E. Gould, Jr., is chairman, president, and chief executive of New York City-based Gould Paper Corp., an almost $1 billion distributor of printing and business papers.

William R. Hill is president and chief executive of Greenbelt, MD-based OAO Technology Solutions, a provider of information technology solutions and services.

Clark A. Johnson is chairman and chief executive of Fort Worth, TX-based Pier 1 Imports, a $1.1 billion specialty retailer of decorative home furnishings, gifts, and related items.

Joseph T. Lynaugh is president and chief executive of New York City-based NYLCare Health Plans, a $2.5 billion health and related employee benefits organization.

Amos R. McMullian is chairman and chief executive of Thomasville, GA-based Flowers Industries, a $1.4 billion maker and marketer of fresh and frozen foods.

G. Allen Mebane is chairman of Greensboro, NC based Unifi, a $1.7 billion producer and processor of textile yams.

Bernard Mermelstein is chief executive of Long Island, NY-based M.Z, Berger & Co., a $250 million watch manufacturer.

Brian L. Merriman is chief executive of Irvine, CA-based TOPAC USA, the dealer acquisition division of Toshiba America Information Systems.

Robert S. "Steve" Miller is chairman and chief executive of Oak Brook, IL-based Waste Management, an approximately $9 billion environmental waste management and related storage company.

Sidney A. Miller is chairman of Woodbury, NY-based Delta Financial Corp., a specialty consumer finance company with assets of approximately $1 billion.

William F. Murdy is chairman, president, and chief executive of Houston, TX-based LandCARE USA, a consolidation of landscape and tree service providers.

Barry N. Naft is president and chief executive of Potomac, MD-based Environmental International, a private company engaged in the manufacturing of products from recycled waste materials.

Howard G. Paster is chairman and chief executive of New York City-based Hill and Knowlton, a $189 million public relations firm.

Michael I. Roth is chairman and chief executive of The Mutual Life Insurance Co, of New York (MONY), a New York City-based mutual life insurance company with assets under management of $22 billion.

John J. Smith is chairman and chief executive of Jackson, MI-based Sparton Corp., an electronics contract manufacturer.

Douglas J. Stanard is president and chief executive of Richmond, VA-based AMF Bowling, a $714 million bowling center operator and manufacturer of bowling equipment,

Judge Eugene R. Sullivan serves on the United States Court of Appeals for the Armed Forces in Washington, DC.

Reverend Hugh A. Westbrook is chairman and chief executive of Miami, FL-based VITAS Healthcare Corp., a $240 million hospice services provider.

RELATED ARTICLE: Your reputation is worth more than you think

What is your reputation as an employer worth? What sort of things should you be doing to maintain and enhance that reputation? Organizations that don't measure up tend to be viewed as an employer of last resort; nobody with any brains, ability, or motivation wants to work there. When this occurs, only two things can happen: Either the organization is forced to pay market-premium wages and salaries in an attempt to secure better applicants, or it must accept the lower quality applicants - or do both. And, while the impact of bad hiring won't show up in the earnings for this quarter or next, rest assured, it will show up.

One very capitalistic organization that has taken this lesson to heart is GE. At one time, GE had a somewhat less-than-sterling reputation as an employer, and the company suffered because of it. However, due in large part to Jack Welch's leadership, the company has steadily worked its way back. Having reestablished its reputation as an excellent place to work, GE has become a targeted destination for some of the very best and brightest folks in business. They've managed to recruit one of the "deepest benches" anywhere in the corporate world. To those who might say "so what?" consider these questions: If GE, and others like them, have talented people begging and practically fighting to go to work there, do you suppose their managers find the task of recruiting easier or harder? Do they have to pay people relatively more or less to work there? Now contrast that with your own situation, and a 1996 Conference Board study reflecting that 43 percent of companies surveyed reported problems finding and keeping high quality workers.

- from Contented Cows Give Better Milk, by Bill Catlette and Richard Hadden (Saltillo Press)