Does Reputation Impact the Bottom Line? (1992)
Charting the future of public relations
Holmes Report

Does Reputation Impact the Bottom Line? (1992)

The difficulties involved in evaluating the role that reputation plays in corporate suc­cess mean that many CEOs are prepared to sacrifice long-term goodwill to short-term gain, while others apparently ignore the reputational consequences of their decisio

Paul Holmes


When it comes to the recognition and management of reputation as a strategic asset, CEOs fall into one of three broad categories. There are those who understand the concept and manage their organizations' reputation aggressively to maximize its value; there are those who understand the concept and do everything right, until it becomes expedient not to; and there are those who simply cannot comprehend the value of an abstract that cannot be measured, or reduced to a row of digits on the bottom line of the balance sheet.

The difficulties involved in evaluating the role that reputation plays in corporate suc­cess mean that many CEOs are prepared to sacrifice long-term goodwill to short-term gain, while others apparently ignore the reputational consequences of their decisions entirely, justifying their decisions with phrases like: "We're not in business to be liked."

To a certain extent, the role public relations professionals are assigned to perform within the organizations for which they work, and the value they are permitted to add, depends on which of these three categories their CEO falls into. Only those in the first category are likely to encourage public relations people to play a decisive role in formulating policy.

The cover story in the 1992 Fortune Most Admired Corporations issues summed up the problem: "You won't find it on the balance sheet, and it's not listed in a 10K or a proxy. If you ask the wizards on Wall Street exactly how it figures into a company's net worth, be prepared for some mighty blank stares. But more and more companies are now coming to realize that when managed correctly, a good name can be their most valuable and enduring asset."

In talking with senior public relations professionals at those companies at the top of the Corporate Reputation Survey ranking, it was surprising to find that none had come up with any groundbreaking means of analyzing the contribution their department made to meeting corporate objectives. Most bad never been asked. They were simply fortunate enough to work within an environment where the value of a good reputation is an accepted fact.

"The bottom line is intuitive," says Bob Kniffen, director of public relations at Johnson & Johnson. "A lot of the evidence we rely on is anecdotal in nature. If we are achieving our objectives as an organization, and the good relationships we have with out­side audiences seem to be playing a part, that's what we look for. Management here has a real grasp of the importance of reputa­tion. They just believe."

An increasing number of CEOs also rec­ognize the value of reputation. David Glass of Wal-Mart is one: "It helps you with your customers, suppliers, and employees. Your reputation is everything, and should be pro­tected at any cost."

Roy Larsen of Johnson & Johnson is another. He uses his own experience to stress J&J's commitment to protecting its reputation. While he was a trainee he attended a meeting at which managers were discussing whether to ship a large batch of shampoo that was safe by every government and medical standard but did not meet the company's "no tears" standard. Eventually, the group turned to the company's Credo for guidance and decided to take the loss.

"Reputations reflect the behavior you exhibit day in and day out through a hundred small things," Larsen says. "The way you manage your reputation is by always thinking and trying to do the right thing, every day. I tell employees they have to be prepared to take the short hit. In the end they'll prosper."

Clearly, this view is not yet universally accepted. While public relations people may point to high-profile cases such as the Exxon Valdez disaster of three years ago as examples of what dreadful fate awaits companies that seemingly care little for what others think of them, many CEOs mayhave drawn quite the opposite lesson: that no matter how badly an organization screws up in public relations terms, there is likely to be little impact on the bottom line.

"Within a few days of the incident the price of gasoline in the United States rose 10¢ a gallon, ostensibly due to the impact of the spill and the potential tie-up of the port in Valdez," Jim Lukaszewski, president of The Lukaszewski Group, points out. "Even though shipments of oil from Valdez resumed their normal level quickly, this 10¢ per gallon cost has yet to be removed from the price of a gallon of gasoline.

"One could specu­late that Exxon and, in fact, the entire oil industry financed the cost of the clean-up together with the costs of the 1990 Oil Spill Recovery Act through this special assessment on the American public."

Lukaszewski also cites efforts by a minority of shareholders to remove Lawrence Rawl as chairman of Exxon in the wake of the spill, pointing out that Rawl "remains the robust chairman of Exxon... Mr Rawl's longevity is a lesson not lost on the chairmen of other major corporations." And he points to the similar failure of the campaign to boy­cott the company and cut up company credit cards: 40,000 cards out of customer base of seven million were eventually returned to the company.

"Despite the enormous pressure placed on the oil industry as a whole, it has proven to be extraordinarily resilient. While it did suffer the enactment of the Oil Spill Recovery Act, the baseline industry remains extremely viable, as competitive as it chooses to be, and by-and-large unencumbered in America's industrial economy."

Within months of the Valdez disaster, and despite clean-up and legal costs, Exxon declared record profits.

On the other hand, Salamon Brothers is an example of a company that clearly suf­fered because of reputational problems, both in terms of legal costs and its position on Wall Street, where trust is a vital asset. Warren Buffet, who took over as chair­man of Salamon when that reputation was at a low ebb, clearly believed in its value. "If you lose money for the firm," he told employees, "I will be very understanding. If you lose reputation for the firm, I will be ruthless."

Taking the argument one step further, many business failures of recent years can be traced to failures of public relations: Eastern Airlines ultimately collapsed because of its inability to deal with employees; Manville and A.H. Robins were forced into Chapter 11 by ethical failures; many of Macy's problems can be traced to poor customer relations.

"Examples of reputational erosion are legion, even among successful companies," says Stephen Greyser of Harvard Business School. "Procter & Gamble's foolish and futile foray into com­mandeering telephone records in an effort to find the leak to a Wall Street journal reporter is a notable recent example. As for reputation explosion, the self-generated bursting of Perrier's bubbles remains vivid. Conversely, can reputation be a long-term building block in company strategy?"

As evidence that it can, he cites Mazda's history in the United States. When Mazda first started shipping automobiles into the U.S., Greyser argues, its public relations efforts were "naive, reactive and focused pri­marily on consumer marketing types of publics" such as car buyers and owners. However, Mazda evolved to the employment of public relations as a two-way process, com­municating to wider audiences and listening to the reaction of those audiences so that they might better understand the U.S. market.

Extensive research was used to track both product and company reputation, and progress was measured in an interesting way. Says Mazda North America president Muneo Kishimoto: "In the late '70s we worked to achieve a goal of acceptability in the U.S. That has been accomplished. We may now have gained respectability, although I am not sure. We are striving for desirability and are looking to the Mazda Miata to take us that next step."

Merck, which has topped the Fortune poll for six consecutive years and the inside PR Corporate Reputation Survey both years it has been held, can point to some tangible benefits. Company vice president of corporate public affairs Albert Angel says the most important benefit has been in the area of recruitment.

"We used to go to college campuses and there would be long lines of people to see the guys from IBM or Xerox, but no-one knew us, because we were a prescription drug only company, our name was just not out there," he says. "Now we go back and we interview 100,000 college kids for every job. It's made an incredible difference."

Similarly, analysts say Merck's careful reputation management and emphasis on open and honest communication has helped it bring products to market faster than competi­tors. "I've marveled at Merck speakers in front of the hot lights at FDA advisory com­mittee meetings," says Ron Nordmann of Paine Webber. "If they are asked a really tough or obscure question they tell someone in the back of the room to put up slide 268 and it's the perfect response."

Alan Towers, president of Alan Towers Associates, a New York consultant and spe­cialist in reputation management, believes that corporate reputation will become increasingly important as a competitive tool in the future.

"Most products and services are com­modities," he says. "Purchase decisions, par­ticularly from first-time buyers, can be influenced as much by attitudes toward the com­pany making the product as by the product itself And beyond increasing sales, reputation can reward every sector of a business where employee pride plays a role."

Towers points to companies such as McDonald's to demonstrate how reputation can add value and insulate the company against crisis. McDonald's, Towers points out, is among the largest producers of com­mercial waste and its major product is consid­ered a health hazard, and yet the company's reputation is among the strongest in the world.

One of the pioneers in evaluating the impact of corporate reputation on perfor­mance was Walter Barlow, president of New Jersey's Research Strategies Corp., whose work has examined the impact of reputation on individual companies and their ability to achieve business objectives.

"Every corporation has a reputation, whether it knows or really cares what it is suf­ficiently to capitalize it or not," says Barlow. "A corporate reputation is the distillation of ideas, feelings, and above all hands-on experi­ence with employees, products services, of all the people touched by the corporation. It exists out there, among real people."

Barlow's work indicates several useful facts:

that people who are more familiar with a company will generally regard it more favorably;

that those whose familiarity comes from several sources, or through several media, will regard it more favorably than those with only one source of information;

that those who view a company favor­ably are more likely to purchase its products and recommend its products to others;

that product experience alone is not sufficient to make people think more favor­ably of a company.

On similar lines, Opinion Research Corp. of Princeton, NJ, has shown that price/earnings ratios are higher in companies "considered to have imaginative and forward­looking managers and superior product and service quality" and that 89% of the public agreed in 1989 that the reputation of a com­pany will often determine the product or ser­vices they buy (up from 81 % in 1986).

Corporate advertising and public rela­tions agency Brouillard has taken this research one step further through research conducted with Yankelovich Clancy Shuhnan in the late '80s. The study separated companies into "winners" and "non-winners" based on the way they were regarded by three key audiences—affluent consumers, business executives and the financial community—and found that "winners" enjoyed a considerable competitive edge.

"The study found that these `winners' could introduce new products with greater success, command higher stock prices, attract better talent and testify in Washington with greater authority," says Brouillard president James Foster. "It also found that they were better communicators. Companies scoring above the mean on `winning' generally scored above the mean on doing a good job of com­municating."

Asked whether they were likely to buy or recommend the products of companies, 58% of affluent consumers said they would buy or recommend the products of "winning" com­panies, compared to 18% for "non-winning" companies; portfolio managers were almost twice as likely to invest a $75,000 portfolio in winning companies; corporate executives were three times more likely to recommend a winning company as a place to work.

The study also assessed the factors that contribute to a "winning" reputation, a wel­come step forward since many corporations apparently continue to believe that a good reputation results from simply making good quality products and selling them at a fair price. Brouillard's findings indicate that while product quality is important, "soft" attributes are perhaps more important.

For consumers, the key attributes were quality service, honesty and ethics, quality products, good value and high-caliber management; for corporate executives they were honesty and ethics, high-caliber management, quality service, quality products and flexibil­ity; for portfolio managers, they were high­ caliber management, flexibility, financial per­formance, quality service and honesty and ethics.

This research is compelling evidence of the value public relations can add to reputa­tion. By guiding a company to deal honestly and ethically with its key constituencies, PR can have an important impact on reputation. "The best reputations are the result of more than running a good business," says Alan Towers. "They are carefully managed to take away sales and talented employees from competitors. At the most respected compa­nies, reputation is treated as a valued asset and managed to product profit."

Finally, a new study by UCLA business professor David Lewin suggests that corpo­rate philanthropy can drive corporate performance. The study examined 188 companies and shows, according to Lewin, that "compa­nies that increased their community involve­ment were more likely to show an improved financial picture over a two-year period [mea­sured by return on investment and other widely accepted measures] than those that did not increase their community involvement."

But perhaps the most sophisticated anal­ysis of the contribution of reputation to cor­porate success comes from Harvard Business School professor John Kotter in his 1992 book Corporate Culture and Performance. Kotter takes his work several steps beyond the typical and simplistic examination of culture to identify cultures that were effective in help­ing organizations compete and outperform their competitors.

His conclusion is that while so-called "strong" cultures are not of themselves help­ful—he identifies several companies with historically strong cultures that have actually been harmful, such as General Motors, Coors and Sears—a strong culture can measurable help an organization out-perform its competi­tors, but it must be an appropriate culture and it must emphasize several key elements. "Corporate culture can have a significant positive impact on a firm's long-term eco­nomic performance," Kotter says. "We found the firms with cultures that emphasized all the key managerial constituencies (customers, stockholders and employees) and leadership from managers at all levels outperformed firms that did not have these cultural traits by a huge margin."

While public relations professionals might like to expand the lost of key con­stituencies to include communities, regulators and legislators, and even the media, they will be encouraged by the conclusion: the good relations with three key publics can drive per­formance. Indeed, Kotter says, over an 11­year period, firms that emphasized those con­stituencies increased revenues by 682% versus 166% for those that did not, grew their stock prices by 901% versus 74% and improved their net incomes by 756% versus one per cent.

The strength of culture was evaluated through study of articles in the business media, on-site visits and interviews with 75 analysts following the companies in the survey. Surprisingly, only one of the 75 ana­lysts, chosen because they are people who are believed to ignore "soft" data, said he thought the culture of one firm had little or no impact on its performance.

Asked to grade the firms on the value that their cultures placed on customers (on a scale of one to seven, seven being the highest mark) analysts gave the high-performing companies an average score of 6.0 compared to an average score of 4.6 for the lower-per­forming companies. On value placed on stockholders, high performers scored an aver­age of 5.7, low performers 3.9. On value placed on employees, high performers scored 5.8, low performers 4.1.

"In two cases, lower-performing firms outscored their higher-performing counter­parts on the `values customers' scale," Kotter reports. "But in no case did a lower performer receive a higher combined score. In other words, valuing all key constituencies differen­tiates the better performers from the others."

(When Kotter asked the obvious ques­tion—"If low performing firms do not value their customers, their stockholders or their employees, what do they value?"—he received a surprising answer: "Themselves.")

"The implicit logic is this," he says. "Only when managers care about the legitimate interests of stockholders do they strive to perform well economically over time, and in a competitive industry that is only possible when they take care of their customers, and in a competitive labor market, that is only possible when they take care of those who serve customers, employ­ees."

Kotter even concludes that the articulation of this philosophy—a written commitment to maintaining good relations with key publics—is a factor in determining per­formance.

"At Albertson's, there was a Corporate Creed stating the firm's responsibility to customers, employees, com­munity, shareholders and society," he says. "At Con Agra, something similar was written in four inch high let­ters on a wall near the execu­tive offices. At Dayton Hudson, we found the same proclamation in its statement of philosophy. At Anheuser­Busch, the commitment to constituencies was in its mis­sion statement.

"Although a few of the lower performers had somewhat similar state­ments, these tended to be more recent and list fewer key constituencies. Often they seemed artificial, as though they were the product of a single individual or a single meeting, and not the real priorities of most managers."

Kate Ballen, the Fortune reporter who wrote the 1992 Most Admired Corporations story, says she too was struck by the fact that every one of the CEOsof the top-ranked com­panies had a clear vision of what his company stood for and where it was going. Not only did he articulate this vision, but every execu­tive she talked to from the same company said virtually the same thing.

"The most admired companies have mis­sion statements," says Fortune's assistant managing editor, Ann Morrison. "These were not pieces of paper pulled out of desk drawers or end sheets on the annual report. They were vital, organic declarations of corporate priorities. Foremost among these priorities: a commitment to quality, customers, share­holders, community and employees. Every CEO mentioned that training and developing people was vitally important to developing an excellent corporate reputation and keeping it.”

Albert Angel of Merck references that company's credo, which has been in place since the days of George Merck, frequently as a guiding light in its public relations efforts. The credo comments that "medicine is for the people, not for the profits."

"That belief has always been good to Merck," Angel says. "I have been in many meetings where there has been deadlock over a particular decision and someone has pulled out the credo and it was immediately clear what should be done. Merck believes that its reputation is as important as anything, and it lives by it every day."

Economists have also been spending an increasing amount of time examining the impact of human relations factors on economic theories, with many of them question­ing the classical notion that firms maximize profits by charging whatever the market will allow, and letting their behavior be guided only by legal constraints.

Writing in the American Economic Review in 1986, Richard Thaler of the Johnson School of Management, Cornell University, and others suggested that just as elementary mechanics often neglected the effect of fric­tion, elementary economic theory might also ignore constraints placed upon companies by public opinion.

"The rules of fairness define the terms of an enforceable implicit contract: firms that behave unfairly will be punished in the long run," according to Thaler. "A more radical assumption is that some firms apply fair poli­cies even in situations that preclude enforce­ment. This is the view of the lay public. Therefore, the rules that govern public per­ceptions of fairness should identify situations in which some firms will fail to exploit appar­ent opportunities to increase their profits."

One area in which Thaler has concen­trated research is pricing. He points out that conventional economic analysis assumes that excess demand for a product creates an opportunity for suppliers to raise prices, and that such increases will indeed occur.

"The profit seeking adjustments that clear the market are, in this view, as natural as water finding its level, and as ethically neu tral," Thaler says. "The public does not share this indifference. Community standards of fairness require the firm to absorb an oppor­tunity cost in the presence of excess demand, by charging less than the clearing price or paying more than the clearing wage."

Thaler's findings indicate that history or reputation of unfair dealing may persuade customers and employees to take their busi ness elsewhere, and that they may even avoid transactions with firms they perceive as unfair even at some cost to themselves. In one tele­phone survey, 68% of respondents said they would switch their patronage to a drugstore five minutes further away if one closer to them raised prices unfairly, and a similar number indicated they would switch if the drugstore discriminated against older workers.

George Akerlof, professor of economics at the University of California at Berkeley, has conducted similar research into employees, concluding that companies do invest heavily in morale, and receive a payback. "The basic idea is that if you do not invest in good morale among your employees they will retaliate in various ways," Akerloff says. "If you believe in social psychology and equity theory, if people believe they are being treated unfairly they will withdraw their input, and in a work environment that can be damaging. It usually means they are less pro­ductive, but it can mean actual sabotage. The net result is that it makes sense to give people what they think is fair."

While research such as that conducted by Harvard's John Kotter and the economic theories of Thaler and others show that reputation has a value, a movement that originated within the corporate identity business is actu­ally striving to attach a dollar amount to that value. Although the movement started with, and concentrates on, brand valuation, its pro­ponents say it can apply equally well to corpo­rate brands.

The most rigorous technique for brand valuing has been developed by the U.K. based Interbrand Group. Interbrand calculates total brand sales, then subtracts the cost of goods sold, general and administrative expenses, and depreciation, to arrive at the operating profit. Then the amount that could have been earned on a basic, generic version of the product is deducted, and a provision for taxes is made.

Then Interbrand applies a multiple based on brand strength using a model that takes into account the brand's leadership, stability, market, internationality, trend (grow­ing or shrinking), support and protection. The stronger the brand, the higher the multi­ple applied to earnings.

Michael Birkin, group CEO of Interbrand, says there are many alternative means of assessing brand value: "Some people like to look at the amount spent supporting the brand, but that becomes a self-fulfilling prophecy: the more you spend the more the brand is worth. That is clearly not the case. The premium profit approach—how much you can charge over and above a generic brand—is another, but it does not take into account brands that may be valuable because they have a reputation for quality at a lower price.

One of the senior corporate PR people we interviewed came up with another method of forcing companies to consider the bottom line value of their reputation, one that related directly to his negative experience with attor­neys.

"We were considering environmental policy," he says, "and I was arguing for spend­ing a few million extra dollars on environ mental protection. The lawyer argued it was not necessary under the law. Finally, I asked him what he would do if we took the steps I recommended, and if someone then falsely accused us of negligence. Would he want to sue for libel? How much would he demand for the damage to our good name? Then I argued that we ought to be able to spend at least that much to protect our name."

Financial World magazine recently worked with Trademark & Licensing Associates of La Jolla, Cal., to measure cor porate brands. TLA measures the value of a brand on what another party will pay to rent the brand name in the real world, using a database of consumer brands based on valua­tions of comparable licensing and royalty agreements.

TLA takes into account factors such as margins, consumer recognition, line exten­sion potential and market share growth to rank corporate brands on a scale of one to five. That score determines the royalty rate a brand could command if it were rented or licensed out.

The leader in the Financial World rank­ing was Kodak, followed by Johnson & Johnson, Michelin, Gillette, L'Oreal, Goodyear, Avon, Estee Lauder and Nike.

While all of this research attempts to prove and even quantify the value of a gooc' name, the emphasis at most of the companies at the top of our Corporate Reputatioi Survey continues to be on defining the contri button public relations activities can make t the good name. Two approaches appear to 1 achieving widespread acceptance, one close tied to the total quality movement; the other rooted in the concept of benchmarking.

The quality approach is typified by a process being introduced at 3M. Executive director of public relations Donald Frenette says the approach borrows two dominant themes from total quality management: it is customer focused, and it seeks to measure continuous improvement.

"The first step is determining with as much precision as possible what our various constituencies expectations of the company are. We take a segmented approach, looking at what all of our stakeholders—employees, shareholders, customers, the communities in which we operate—believe to be important. That's the customer-focused aspect of the process.

"Then we look at how we are meeting those expectations. If we are meeting them and the audience recognizes we are meeting them, we make sure we continue to meet them. If we are meeting them and the audi­ence does not recognize the fact, we improve communication. If we are not meeting them, PR takes on a traditional senior management-counseling role to improve the company's performance. If we are not meeting them because they cannot be met, then we work to explain that fact."

As time goes by, Frenette says, the com­pany's scores among the various audiences will be monitored and the efforts of the public relations department judged on whether those scores go up. Frenette says scores will not be evaluated by comparison to competi­tors: "If you're behind, that may drive you to work harder," he says, "but if you're ahead of your competitors there's always a danger of complacency."

A similar approach is being taken by DuPont, according to svp and special counsel Jack Malloy. He says the chemical company does continual surveys of the communities in which they operate, asking a series of ques­tions about the company's reputation and performance to determine whether it is meet­ing expectations in areas such as environmen­tal record, community contributions and hiring practices.

"We started that process about two years ago and put it into action at a dozen plants," says Malloy. "We hope to take it worldwide eventually. We have to make it clear to people that we are willing to listen and willing to change."

Unlike 3M, DuPont also measures itself against 12 competitors as part of a national survey, a technique Malloy believes will act as an early warning system if the company ever slips in its com­mitment to maintaining a good reputation.

Those kinds of comparisons are growing in acceptance within corporate America, not only for public relations departments but for all aspects of a company's operations. Benchmarking, a process that identifies the attributes a company needs for success and then attempts to learn from companies—often in unrelated business sectors—consid­ered the best in terms of those attributes, has clear applications in public relations.

"It's perhaps the best way for corporate public relations departments to evaluate their performance and to find ways of improving that performance," says Al Geduldig, presi­dent of New York consulting firm Geduldig Communications Management. "While it has always been done one way or another, but it has being formalized and defined now in a much more serious way."

Xerox is considered by many to the leading exponent of benchmark ing in the United States, yet its shift from process to strategic benchmark­ing is relatively recent. Process benchmarking involves finding those companies that are the best in particular practice areas and imple­menting similar practices; strategic bench­marking ties those processes to the strategic priorities and direction of the corporation.

When Financial World magazine set out to identify "best practice" companies for a recent issue on benchmarking, its writers searched through trade magazines and man­agement journals, contacted trade associa­tions, gathered intelligence at trade shows and consulted industry experts and former employees. That's the same process most cor­porate benchmarkers employ, although there are now consultants marketing their expertise at finding best practice companies.

Kaiser Associates' Lawrence Pryor is one. He suggests companies select at least three world-class organizations for each benchmarking study, and that four to six is an ideal number. He says the companies selected should come from diverse arenas, and that looking outside your own industry is essential.

Geduldig suggests a similar approach, identifying companies based on their perfor­mance in strategic areas—companies that have successfully accomplished cultural change, fended off legislation, motivated employees, built public support for contro­versial issues—and the attempting to under­stand the role public relations played in that process.

"There are three phases in benchmark­ing," Geduldig says. "The first is executional, it measures in terms of press clippings or media equivalency or some similarly quantita­tive way, and most companies have moved beyond that. The second looks at processes, identifying best practice companies and figur­ing out what makes them good at internal communications or media relations. The third, and the most sophisticated, looks at achievements, genuine strategic accomplish­ments, and how they are achieved."

This method, Geduldig suggests, helps public relations prove its value by working backwards: once a strate­gic goal is accomplished, the organization can examine those elements that helped it accomplish its goal, and will hope­fully be able to isolate certain areas in which public relations or repu­tation was valuable.

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