How Successful Companies Build Winning Reputations
Author: Charles J. Fombrun,C. B. M. van Riel
Publisher: FT Press
Category: Business & Economics
Preface Knee Deep in the Reputation Bog As we go to press, corporate reputations are very much in the news around the world. Sadly, much of the reporting is negative and involves allegations of fraudulent behavior by senior executives accused of misleading investors and consumers. Witness the following news items from spring 2003: Ten of Wall Street's biggest financial firms agreed to pay about $1.4 billion and adopt reforms to resolve allegations that they issued biased ratings on stocks to lure investment-banking business.The unprecedented industrywide settlement called for one of the largest penalties ever levied by securities regulators. The settlement will change the way major investment firms do business, and focused particularly on Citigroup, Merrill Lynch. J.P. Morgan Chase, and Credit Suisse First Boston. Most significantly, the brokerage firms agreed to sever the troublesome links between financial analysts' research and investment banking, to pay a total $432.5 million over five years for independent stock research for their customers, and to fund an $80 million investor education program. A fund of $387.5 million is intended to compensate customers of the ten firms; $487.5 million in fines will go to states according to their population. The U.S. Securities and Exchange Commission announced that it planned to file civil-fraud charges against accounting giant KPMG LLP for its role in auditing Xerox Corporation, which last year settled SEC accusations of accounting fraud amounting to some $6.4 billion, one of the largest restatements in corporate history. At the heart of the SEC's investigation of KPMG's role as auditor of Xerox was an examination of whether the auditor had become so closely aligned with Xerox that its role as public watchdog had became largely secondary. KPMG is already a target of shareholder lawsuits involving drugstore chain Rite Aid Corporation, which admitted overstating income by more than $1 billion over a two-year period, as well as Lernout and Hauspie Speech Products NV, which collapsed after admitting to massive fraud, including fabricating 70 percent of the sales in its largest unit. The SEC charged US healthcare provider HealthSouth Corporation and its Chairman and CEO Richard M Scrushy with substantial accounting fraud. The Commission's complaint alleges that since 1999 HealthSouth systematically overstated its earnings by at least $1.4 billion in order to meet or exceed Wall Street earnings expectations. The false increases in earnings were matched by false increases in HealthSouth's assets. By the third quarter of 2002, HealthSouth's assets were overstated by at least $800 million. Weston L Smith, HealthSouth's chief financial officer pleaded guilty on March 20 to criminal charges of securities fraud, and conspiracy to commit securities and wire fraud. He also pleaded guilty to criminal charges of certifying false financial records designed to inflate the company's revenues and earnings by hundreds of millions of dollars. Eight senior HealthSouthexecutives to date have admitted guilt in the fraud. The world's number two communications giant Interpublic demoted its chairman and CEO John Dooner following Interpublic's disclosure that the company would have to restate its earnings downward by $181.3 million because of accounting irregularities in its ad agency McCann-Erickson, spurring a federal investigation. In previous weeks, ratings services had downgraded its corporate debt numerous times, reducing it to one level above junk status. Email records appeared to demonstrate that Credit Suisse First Boston's star banker Frank Quattrone knew that the firm was under various regulatory inquiries and a criminal probe for its IPO practices when he urged colleagues to purge files and dispose of notes, valuation analyses, and other internal memos to protect the firm against lawsuits. Such destruction is strictly forbidden once a lawsuit or investigation has begun. Mr. Quattrone had gained fame as one of the most powerful investment bankers during the tech-stock boom when he and a cadre of investment bankers in Silicon Valley brought some of the era's biggest and most profitable IPOs to market, including those of Netscape, Amazon, and Linux. Ahold's chief executive officer Cees van der Hoeven and chief financial officer Michael Meurs resigned over assumed accounting irregularities at the Dutch grocery giant's U.S. operations. Ahold said the accounting problems caused it to overstate operating earnings by $500 million for 2001 and 2002. Its shares plunged 67 percent and are now worth only a tenth of their value at the peak of the company's fortunes in mid-2001. Ahold is now under investigation by the U.S. attorney's office in New York, the Securities and Exchange Commission, and the Euronext stock exchange in Amsterdam. On May 8, 2003 the company reported that earnings at its U.S. Foodservice unit had actually been overstated by $880 million through the actions of two of its executives. That figure was $380 million more than the Dutch retailer had initially estimated. The German giant of chemicals and drugs Bayer A.G. announced continued efforts to settle over 7,200 lawsuits filed against the company because of its anticholesterol drug Baycol. Baycol was withdrawn in August 2001 after hundreds of deaths worldwide. Company documents, including email messages, memorandums, and sworn depositions, suggest that some Bayer executives were aware of the possible dangers of Baycol long before the company withdrew it from the market. If negligence is proven, the lawsuits are expected to expose the company to claims of over $5.4 billion. As a result, the company's shares have been on a downward spiral as investors flee the uncertain liabilities. German prosecutors confirmed charges against Deutsche Bank's chief executive, Josef Ackermann, charging breach of trust stemming from his approval of more than $100 million in payments to executives of Mannesmann in the final days of its takeover battle with the Vodafone Group of Britain. Mr. Ackermann is one of six former board members of Mannesmann accused of improperly using the conglomerate's funds to pay severance and bonuses to top managers. If the defendants are found guilty, they could face up to 10 years in prison. The list goes on, each one more damaging than the next. Reports of these alleged corporate crimes come on the heels of an avalanche of revelations throughout 2002 about executive excess and fraud that led to the demise of major corporate names such as Enron, Andersen, and Adelphia, jeopardized the continued existence of others such as WorldCom and Martha Stewart's Omnimedia, and produced a serious crisis of confidence in the corporate sector. Yet not all the news has been bad. In February 2003 the latest ratings of companies by a representative sample of American consumers were developed by Harris Interactive and the Reputation Institute. The results revealed some interesting findings. For one, despite awesome turmoil, a downbeat economy, corporate financial scandals, and growing prospects of war in Iraq, the American public continued to show confidence in many of its largest companies. Major corporate names such as Johnson and Johnson--the perennial leader on these surveys--as well as Coca-Cola, Maytag, Dell, Sony, PandG, FedEx, Disney, Wal-Mart, Anheuser-Busch, and Southwest Airlines maintained their strong reputations. Not surprisingly, as this book shows, these are also the companies that know the value of their reputations and manage them accordingly. Reputation is proving to be a resilient asset to some companies in a difficult marketplace. A second finding involved recognition of exemplary customer service. At a time when corporate focus and product reliability are being questioned by many corporate customers across sectors, who better to join the list of the highest rated companies in the United States than Harley-Davidson, a company whose single-minded devotion to customers brought it back from the brink of bankruptcy to reclaim an exemplary and dominant position in the motorcycle business. UPS's climb into the top 10 as well as Home Depot's upward surge to number eight also pointed to the company's success at pleasing the customer, whether in the reliable delivery of packages or in providing quality goods at an affordable price. General Mills also joined the list for its consistent and persistent emphasis on delivering quality products to happy consumers. Finally, despite a turbulent economic climate, some companies still managed to make gains in reputation in2002. They were Bridgestone/Firestone, DaimlerChrysler, Home Depot, Sears, UPS, and Xerox. Bridgestone/Firestone edged out of the tire debacle in slightly better form than its one-time partner Ford. Though still weak, the tire-maker gained ground since last year, whereas Ford did not. Retailers Home Depot and Sears both inched ahead, buoyed by cost-conscious consumers. Luxury automaker Daimler Chrysler got a boost from smoothing out its internal rifts between the United States and Germany. UPS successfully navigated past the threat of an employee strike, and Xerox settled its huge accounting irregularities with the government. Both got favorable and significant upward bumps in reputation. The electronic content analysis of media coverage of top U.S. companies in 2002 shows how the media (both print and broadcast) portrayed the corporate reputations of the top-rated companies in the consumer survey. The companies that topped the media ratings were Microsoft and Wal-Mart, with General Motors and Coca-Cola not far behind. The two sets of rankings obtained from consumers and from the media indicate that: Microsoft, Wal-Mart, and General Motors get better media coverage than consumers think they deserve. Assuming media have a better grasp of a company's real situation, it suggests that these three companies could improve their public standing by more carefully and effectively framing their communications with consumers. Coca-Cola, Home Depot, Dell Computer, Procter and Gamble, FedEx and PepsiCo earn more balanced reputations from consumers and the media. It suggests that their communications strategies are being consistently implemented across channels. Johnson and Johnson and UPS get relatively weaker media ratings than consumers think they deserve. It suggests the potential gains for these companies of focusing on improved media relations to reinforce the stronger perceptions in which they are held by consumers. They face significant reputational risk of losing ground with the public over time from not generating better media coverage. The combined analysis provides useful insights. It suggests the point of view we uphold in this book: That reputations reflect how companies are perceived across a broad spectrum of stakeholders,. And that's a function of how companies communicate both with the media and with the public. When authenticity, consistency, and transparency come through from a company, it earns kudos from both the public and the media. If Johnson and Johnson gets top marks from the public, it's because of powerful messaging that bring out emotions of customer care and emotional attachment -features that appear less relevant to the media. If Coca-Cola earns high marks from both the media and the public, it's for persuasive messaging that conveys its ubiquity and refreshment and appeals to both the public and the media. If FedEx earns balanced grades from both the public and the media, it's because of consistent and credible messaging that conveys the company's consistency, reliability, and service. That's the thesis we demonstrate inFame and Fortune: How the World's Top Companies Develop Winning Reputations.We hope you enjoy it.