How (32 page)

MISMANAGING REPUTATION MANAGEMENT

In late 1983, in a conference room at brokerage house Drexel Burnham, five members of their high-yield bond department, including its head, Michael Milken, brainstormed an idea that would land on the global business community like a cluster bomb. Drexel decided to finance hostile takeovers of corporations using so-called junk bonds, low-rated, high-yield promissory notes, secured by the assets of the target company.
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At that time in business history, hostile buyouts were rare and treated delicately. To take over a company against the wishes of the people who ran it was a highly aggressive play that, in fortress capitalism days, made you many enemies. The barriers to do so were commensurately high. Financing such deals was the province of conservative, white-shoe investment banks. Aggressors were usually large companies that used bank loans to take over smaller ones. Drexel’s idea turned this model on its ear. Under their plan, many more companies and creditworthy investors, no matter how large or small, could take over another company, even one much larger than themselves, using the target company’s assets as collateral for the high-yield bonds Drexel would sell to raise the money.

When they announced this new deal, in early 1984, it dramatically altered the structure of corporate endeavor forever. Suddenly, old-line, established corporations built on sound value over time saw their own assets used against them. Value was no longer the play; instead, short-term shareholder value became the dipstick by which every company was measured. Many of the prevailing attitudes in business (and many corporate downfalls) derive from this single, fateful action.

When the enormous fees that playing this new junk bond game could earn became clear, many rushed into the game, including most of the major brokerages and many corporations, large and small. But there were two noticeable exceptions to this orgy of short-term profit taking: investment bank Goldman Sachs announced it would not fund hostile takeovers, and Johnson & Johnson (J&J) decided it would never do one.
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The reason for both decisions?

Reputation.

“Our CEO and president, Jim Burke, decided J&J would never do a hostile takeover,” Roger Fine of Johnson & Johnson told me when we caught up one day in New York. Fine is a truly admired leader and someone with whom I have had the privilege to work closely since the early days of LRN. “He wanted us to have the reputation of never giving anyone else a bear hug, and never doing anything that the management of another company that we coveted didn’t want to do. Now don’t think we were pussycats; J&J is an aggressive acquisitive company that wants to benefit from the opportunities of the marketplace as much as the next company. But Burke’s theory was that if we established our reputation for never pursuing this kind of transaction, people would come negotiate with us as a matter of preference versus people they couldn’t trust.”
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Though reputation, like trust, is not a new concept in business, there has been an explosion of interest around the subject since the mid-1990s. Companies now see what J&J and Goldman Sachs recognized back then: Reputation is a competitive advantage. Their reputations for straight dealing and respect for the companies they sought to acquire closed the Certainty Gap between them and their negotiating partners and allowed the deals to close more quickly, with less friction and more cooperation. Now these advantages are becoming plain to all. In 1998, Harris Interactive, a major corporate and public interest research firm, in association with Charles Fombrun, executive director of the Reputation Institute at the Stern School of Business at New York University, designed something they called the Reputation Quotient (RQ), a research tool that captures perceptions of corporate reputations. Since then, they have published the results of their evaluations as an annual list of the 60 “most visible companies in America,” ranked by their reputation. Achieving and maintaining a great corporate reputation is an increasing preoccupation with visionary corporate leaders. Jeffrey Immelt, chairman of the board and CEO of General Electric (GE), in his letter accompanying GE’s 2002 Annual Report, made no bones about it. “We spend billions each year on improving our training, enforcing our compliance with ethical norms, and reinforcing our values,” he said, “all to preserve our culture and protect one of our most valuable assets—our reputation.”
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When financier Warren Buffett took over troubled brokerage firm Salomon Brothers after securities violations threatened to wreck the company, he went before the U.S. Congress, apologized for the employees’ transgressions, and issued a stern warning to any that might think of following in their footsteps. “Lose money for the firm,” he told them, “and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.”
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Unfortunately, a fair amount of the recent interest in reputation revolves around creating and managing corporate reputation as an extension of brand awareness in the marketplace, an effort colonized by public relations and corporate communications departments and consultants. When I recently Googled “reputation management,” I got 68 million hits and 16 or so paid ads. Communication strategists, research companies, law firms, and consultants of all stripes and hues have sprung up to deal with managing and repairing reputation. Fine minds and strategic thinkers have broken it all down into “6 Dimensions,” “18 Immutable Laws,” and “Communication Gaps” that must be learned, mastered, adhered to, or filled.

Certainly, business in a hypermediated world has a place for reputation and crisis management. Kryptonite learned that lesson the hard way. Let us not forget that companies are the by-product of a lot of blood, sweat, and tears. When things go bad, a lot of human effort and resources are dissipated: real loss, real dissipation, degradation of value that was built on the backs of real people. Reputation, to the degree that stakeholders see it as an external surface representing all this effort, is an extension of brand, and the building of reputation in the marketplace is an essential component of any business strategy. But reputation is not the same as brand, and does not equate automatically with brand awareness. Think of the brand awareness built up in the marketplace by companies such as ExxonMobil, J&J, GE, and Microsoft. Each of these companies is known by everyone. All of these companies have achieved almost total brand saturation in their markets, but not all of them share the same reputations.

The problem with external approaches to corporate reputation, and by extension trust, is that they look at reputation as a silo to be managed, a story to be spun. The mentality of much of this thought seems to go like this:
The corporation is under siege from the marauding forces of information and transparency, and every company should be armed with a plan and a phalanx of experts ready to go to war on the great battlefield of public opinion, both proactively to extend the brand and reactively in times of PR crisis. Whoever can gain control of the message can prevail
. This thinking, with its roots in fortress capitalism, stands little chance of success today. To truly thrive in the internetworked world, business and the people who labor in business need to find a way to operate
within
the new conditions of transparency and interconnectedness that define the playing field of economic endeavor, to thrive
because of
and not
in spite of
these new conditions. Even a company like fast-food restaurateur McDonald’s, which grew up in the pretransparent world to become a formidable and globally recognized brand, has embraced this new relationship with its stakeholders. “We welcome transparency,” CEO Jim Skinner told me. “Transparency means that people have a very clear look at your behavior. They now make their own determination of whether or not your behavior adds value or whether it is significant relative to your success, and whether or not the behaviors are part of the integrity and ongoing culture of a company. That doesn’t mean it comes without conflict or issues regarding how you behave as an organization. Someone might determine now, for any number of reasons, that they don’t want to have anything to do with us or our brand. But I don’t want them to think that what manifests our success was done in a way that would not have survived transparency earlier. The difference is that we now actively welcome people to see that.”
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Great companies and leaders today know that their reputational capital is as valuable to their success as their physical capital. A recent LRN study of purchasing behavior revealed that half of Americans who own stocks independent of a 401(k) say they decided not to purchase stock in a company because they questioned its reputation.
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Positive reputation binds you more closely to your stakeholders, be they customers, employees, or, most critically, recruits.

Joie Gregor is vice chairman of one of America’s top executive recruiting firms, Heidrick & Struggles. Gregor recruits executives, CEOs, COOs, and board members for major corporations, and many consider her an expert in building global leadership teams. I worked closely with Joie on a recruiting assignment for LRN. She knows, before she takes on clients, that their reputations precede them into the marketplace for talent. “The great candidates or top talent look at companies and ask, ‘Are they a great company?’ ” she says. “And it’s almost never about just making the numbers. It is about the culture. I don’t know that I’ve ever met any great executives who would go to a company that doesn’t value their people, that lives on the edge of ‘is it right or is it wrong.’ They will ask those questions. They will investigate the reputation. And if they can’t align, they don’t join.”
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In the working world today, most of us see ourselves as freelancers. We stay with a job or an organization as long as its goals—and the benefits we can accrue in the pursuit of them—remain tightly aligned with our own. It’s harder to keep the best people solely by means of salaries and perquisites; there’s often a better package just over the horizon. In this way “carrots” like compensation packages become very expensive to maintain. You can pay someone $20 to participate in your Wave, but they’ll do so only as long as it seems worth it. The best people, as Gregor made clear, are looking for something more, a relationship built on stronger values than money and success.

“Reputation is who you are,” Jeff Kindler, CEO of Pfizer, told me. “It’s your character, it’s your brand, it’s your identity. Why work for one company versus another company? Really talented people who have lots of opportunities are not, in my experience, ultimately moved by an incremental difference in their paycheck. They are inspired by a couple of fairly simple things: (1) working in a place that gives them ample opportunity and resources with which to grow and develop as a person and make meaningful contributions; (2) working for and with people who share their belief system, their professional aspirations, and their objectives for what the enterprise can accomplish; and (3) working in an enterprise that is somehow making the world a better place in some dimension that is important to them. That is what inspires them to go the extra mile. To create such a place, you have to have a distinct culture, a distinct character, and a distinct set of values and objectives that resonate against that spectrum of motivations.”
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Paul Robert came up through the ranks to become associate general counsel and director of contracts and compliance at United Technologies Corporation (UTC). In an age where talented executives like him are in high demand, Paul has spent nearly 20 years working at UTC. Mindful of what Jeff Kindler had said, I asked Paul what inspires him to go to work every day. “Every morning, like everyone else, I drag myself out of bed to go to work,” he said. “Sometimes it’s cold, and sometimes it’s dark. What makes me do it is that I work for a company that makes skyscrapers possible. I work for a company that still powers 50 percent of the passenger aircraft on earth, that delivers people to Grandma during Thanksgiving at the rate of one take-off and four landings every 12 seconds. I work for a company that adopted a business ethics code in 1932, and if you look at that code, written by Willis Carrier, who was chairman of the board of Carrier Corporation, there is nothing new there. It has the same values we have today.”
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Reputation is as important to recruiting at the entry level as it is at the top. David B. Montgomery of Stanford Graduate School of Business and Catherine A. Ramus of University of California, Santa Barbara, surveyed more than 800 MBAs from 11 leading North American and European schools. Amazingly, more than 97 percent said they were willing to forgo financial benefits to work for an organization with a better reputation for getting its HOWS right. How much would they forgo? On average, 14 percent of their expected income. A reputation for doing it right and for caring about employees both rose to the top third of the list of 14 attributes these MBAs most valued in a prospective employer, proving to be about 77 percent as important as the top criterion of intellectual challenge and only slightly below financial package in relative importance. “We were quite surprised by these results,” said Montgomery, the Sebastian S. Kresge Professor of Marketing Strategy, Emeritus, and dean of the School of Business at Singapore Management University. “There were no previous empirical studies that indicated how important these additional job choice-related factors might be.”
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Goran Lindahl, former CEO of Swiss industrial giant ABB, put it simply: “In the end,” he said, “managers are not loyal to a particular boss or even to a company, but to a set of values they believe in and find satisfying.”
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Those values, manifested as behavior and performance throughout every facet of an enterprise’s activity, provide the building blocks and mortar of reputation. They are the invisible added
something
that binds people together more powerfully than short-term gain. Instead of thinking of reputation and trust as just shiny surfaces on the walls of the fortress, we need to understand them as assets that provide the engine of our achievement.