Realizing

Value
from the
Corporate
Image

20TH ANNIVERSARY
EDITION

CHARLES J. FOMBRUN
H A R V A R D B U S I N E S S S C H O O L P R E S S
 REPUTATION

REALIZING VALUE FROM THE

CORPORATE IMAGE

__________

Dr. Charles J. Fombrun

Reputation: Realizing Value from the Corporate Image
Copyright © 2018 by Dr. Charles J. Fombrun

All rights reserved. No part of this book may be reproduced or transmitted

in any form or by any means without written permission from the author.
 What they said about REPUTATION then:

“For years we’ve been saying that intangibles have value. Here’s a lucid
book that tells us precisely how much and why. Reputation is an absolute must
read for executives who need to understand the hidden value of a company’s
identity and reputation, and who want to learn how to
exploit them.”
Clive Chajet, Chairman, Lippincott & Margulies

“In a commercial world characterized by formula marketing of

undifferentiated products, Reputation provides an insightful look at companies
that understand how action translates to reputation –and that good
reputation yields marketplace advantage.”
Dwight C. Minton, Chairman/CEO, Church & Dwight Co.

◆◆◆

What they are saying now:

“Our understanding of how to build, protect, and sustain reputation

over time has surpassed anything I could have imagined so many years ago as
a doctoral student. To say our research on reputation has built a lasting
positive reputation in the eyes of our key stakeholders would be a
great understatement.”
Suzanne Carter, Director, Exec. MBA Prog.,
Texas Christian University

“Our own work in Manchester has shown clear links between reputation
and sales growth and there is no doubt in my mind that reputation is both a
cause of financial performance and is influenced by it.”

Gary Davies, Professor, University of Manchester

“Over the past 10 years alone, mentions of the term ‘reputation’ increased
2,600%... All this was foreshadowed by Charles’ seminal work… The field of
corporate reputation now demands our undivided attention.”

Leslie Gaines-Ross, Chief Reputation Strategist,

Weber-Shandwick
Welcome to the
20th Anniversary Edition!
“Great things in business are never done by one person.
They're done by a team of people.”

Steve Jobs

T
HE 1ST edition of Reputation: Realizing Value from the
Corporate Image was released by Harvard Business School
Press in 1996. I was at that time a professor of management
at New York University’s Stern School of Business. The book
crystallized from questions I had posed about the economic value
of the images and brands that seemed to be creating a very
tangible competitive advantage for some companies over others. I
traced that advantage to the perceptions that people have about
companies, and I traced those perceptions to people’s personal
experiences with the company, to what companies were saying in
their communications, and to what the world was writing about
them in the media. Welcome to reputation thinking!

What is Reputation-Thinking?
In fact, my reputation journey started long before, back in
1982. Aged 24, I was then among the youngest professors ever to
teach at The Wharton School in Philadelphia, and recall lecturing to
a group of starting MBAs in a mega-classroom. During class, I
caught sight of a student leafing through a magazine that seemed
more absorbing to him than my lecture. I recall looking over his
shoulder at an issue of Fortune magazine and I asked him to hold
up the magazine for the class to see and read the story title — it
was about a ranking of Fortune 500 companies. Looking more
closely, I saw that it was a list based, not on size or profits, but one
based on ‘admiration,’ and the featured company atop those
rankings was IBM. In a show of relevance, I invited the student to

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tell us what he found so interesting about the article. He replied
that it was ‘fun’, and so I invited others in the class to add their
thoughts. Before long, we were caught up in a spirited discussion
of what it might mean for a company like IBM to be admired, and
why we — or anyone at all — should care.

Intrigued by the class discussion, later that day I went out to

buy that Fortune issue myself. I recall pondering whether
‘admiration’ might have a place in what we taught our business
school students. Should a company care about being admired?
How does one earn admiration? I also remember thinking at the
time that this might be an interesting area to examine. After all, I
was teaching at one of the world’s most prestigious business
schools, a setting where the faculty presumably believed the view
best expressed by economist Milton Friedman “…that there is one
and only one social responsibility of business — to use its resources
and engage in activities designed to increase its profits..."

Wouldn't it be blasphemous and distracting to the

fundamental purpose of business, therefore, to suggest that
managers worry about building admirable companies? Would it
have anything to do with profitability? Might there be a hidden
economic benefit or cost to becoming well regarded? Little did I
realize then that these thoughts would set me on a very long
journey indeed! In no time at all, I seemed to be hearing similar
debates about the value of being well-regarded everywhere:

• I attended a faculty meeting at which our department

chair pulled out various rankings of departments
across schools, deplored our low ranking, and invited
us to publish more aggressively to improve our ratings;

• I read of a CEO who had fired his communications

director because his company had been given a ranking
in that fateful Fortune article that was lower than his
CEO colleague from a rival firm with whom he
played golf;

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 • I counted over 25 universities who claimed to be
among 'the top 10' in their promotional materials.

• I heard of a business school that had not been well

positioned in a ranking released by Business Week who
then retained a PR agency to help promote the school.

These all seemed to be issues connected to that intangible

factor of 'admiration.' So I began to think of ‘admiration’ as a
‘social force,’ similar to the ones I had worked on during my
graduate years at Columbia University. There I had completed
my doctorate under the guidance of three young academics
(Noel Tichy, Michael Tushman, and David Nadler) who had
encouraged me to pursue an interest in social networks and
introduced me to sociologist Charles Kadushin, a passionate
student of social elites. I applied some of his network methods
in my dissertation project to examine data about the
communications among scientists in an industrial research
lab. In that study, I predicted and found that researchers in the
lab earned celebrity from who they talked to: The most
respected scientists were those who were also the most central
in the lab’s social network. Centrality got them more power,
better projects, access to money and staff, and not
coincidentally these scientists were thought to have the ‘best
teams’ in the lab.

That’s precisely the logic of reputation thinking: Networks

influence how perceptions develop. In turn, favorable
perceptions crystallize as reputations that help attract support
from others, from which come more of whatever ‘goodies’ are
available! It’s the kind of thinking that sustains what
marketers call 'brand building' — and drive a pop-star’s
album sales or those of a corporate giant selling oil, cereal,
clothing, or cars. Celebrity is attractive to everyone and
generates sales. It’s the same logic that compels companies to
invest behind initiatives that build visibility, familiarity, and
reputation.1 Supporting a popular cause creates favorable
impressions with people who then support you in return: They

3
buy more of your products, invest more in your shares, and
recommend you more to others. Those actions all work in your
favor: they boost revenues, profits, and market value. From
fame comes fortune, to quote the title of a book I wrote in 1984
with my colleague Cees van Riel.2

Another parallel struck me then as well. That ‘reputation’

was not unlike electro-magnetism, one of nature’s
fundamental physical forces — the one that attracts or repels
metallic objects. In fact, my first published academic work had
been a paper I co-wrote in 1973 when I was a junior physicist
at Queen's University in Canada. It described the results of lab-
work I had carried out with a research team of physicists led by
David Atherton. The project involved studying what came to be
known as MAGLEV (it stands for MAGnetic LEVitation) — a set
of lift and drag forces created by small electrical currents
(called ‘eddy currents’) that are induced in a sheet of metal
when a motor is placed above it and creates an electric field.
Those eddy currents generate a countervailing force that
repels the motor, and our team imagined applying them to
levitate a car or train with minimal friction. Many years later, I
recall feeling a tinge of pride when I boarded my first
commercial high-speed MAGLEV train from Shangai airport.
It glided smoothly and magically on a magnetic cushion
created by those lift and drag forces of levitation I had
calibrated in my lab work some 30 years earlier!

4
 Reputation, like magnetism, generates action at a distance.
Just as objects can be levitated by invisible magnetic forces, so are
people moved by invisible perceptions. This kind of thinking
applies not only to people like you and me, but to companies,
institutions, cities and countries. Attraction begets favor: Leaders
get followers, politicians draw votes, companies lure customers,
cities appeal to tourists, and countries entice investors. They do
so to a greater or lesser extent based on the invisible reputations
that surround them, and their attraction puts money in the bank.

I got to apply those ideas in an article I wrote in 1990 with my

doctoral assistant Mark Shanley. We titled it ‘What’s in a Name?
Reputation Building and Corporate Strategy.’ It showed
quantitatively that those Fortune corporate ratings we had
discussed in my classback in 1982 could be predicted from two
main variables: (1) the budgets companies spent on advertising
and social programs, and (2) the unpaid coverage they received in
mainstream media. In other words, companies who spent money

5
on advertising and on social programs and earned positive
coverage in the media, made themselves more appealing.

We have proven this repeatedly since then in annual consumer

surveys I launched in 1999 to measure reputations by aggregating
people’s perceptions of companies, cities and countries. Watch-
maker Rolex, online retailer Amazon, electronics giant SONY, and
the toy company LEGO are among the companies who regularly
top our consumer ratings around the world. Clearly they have
magnetic appeal. It proves true also of cities like Sydney and
Vancouver, and of countries like Canada and Australia: Their
names create positive sentiment and attract tourists and investors
who perceive them as being scenic, having great people, great
infrastructure, good security, and stable governments. What’s not
to love!

And so with this 20th anniversary edition of Reputation:

Realizing Value from the Corporate Image, I say to you: Welcome to
the Reputation Economy!

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What is the Reputation Economy?
The 'reputation economy' is a brave new world of magical
thinking that we all inhabit now, one dominated and moved willy-
nilly by the forces of attention, perception, and reputation. It owes
its existence to the exponential growth, reach, and spread of the
internet over the last twenty years, a social force that has had two
powerful effects on our lives:

1) Increasing Social Connection: The internet has shrunk social

distance. People are now connected to one another in ways
they never dreamed they would be — paupers to princes,
janitors to CEOs, voters to politicians and, as customers,
employees, and investors, to the companies they buy from,
invest in, and work for.

2) Increasing Emotional Connection: The internet has

accelerated transmission of opinions and emotions between
people who are actually tethered to one another by little
more than computers, tablets, or phones — and who now
easily convey those opinions and emotions to many more
people based on a whim or an impression.

As such, the internet has fueled the rise of the reputation

economy: Because of global connectedness, anyone and everyone
can now be rapidly informed and misinformed, guided and
misguided, moved and alienated, intentionally and
unintentionally, by others. This is the stuff of populist movements
and revolutions, of the Arab Spring and the terrorist agenda. It is
also the everyday reality that politicians, executives, cities,
countries — dare I say all institutions — are now living with on a
daily basis.

As I write this in April 2018, Mark Zuckerberg, the founder and

CEO of social media giant Facebook is being forced to testify before
the U.S. Congress about his company’s failure to adequately
safeguard the profiles and personal data of people who shared
information on his company’s social media platform. The issue is

7
not the privacy of information that people chose to release. It’s the
far more potent fact that by aggregating personal information,
social media platforms like Facebook have enabled targeting
specific types of people with highly tailored influence campaigns.
Which is what the consultancy Cambridge Analytica was accused of
doing when it purchased data from Facebook that were then sold
to various U.S. presidential campaign candidates (including that of
Donald Trump) for purposes of influencing voters in the 2016
election. In early May 2018, Cambridge Analytica discontinued all
operations as a result of its own reputation crisis from the media-
fed scandal.

What the Facebook scandal brought to light is the fact that

reputations crystallize from social webs: People become friends or
foes, companies get typed as angels or devils, places seem
appealing or not, all from exchanges of information, impressions,
and imagery that propagate ever faster across both traditional
media and the now ubiquitous social media that connect us as
‘friends’ on Facebook, Twitter, and Instagram to public figures and
global celebrities.

The reason these reputations are important — and ultimately

valuable — is that they channel our attention. We pay attention to
people and companies who stand out be cause they are distinctive.
As Nobel laureate Herb Simon put it:

"...in an information-rich world, the wealth of

information means a dearth of something else: a scarcity of
whatever it is that information consumes. What information
consumes is rather obvious: it consumes the attention of its
recipients. Hence a wealth of information creates a poverty of
attention and a need to allocate that attention efficiently
among the overabundance of information sources that might
consume it."3

8
 When there are countless books, songs, movies, apps, cars,
products, companies, and vacation options, millions of messages
requesting our attention — most of it free — getting found is
worth a lot. That’s why attention-getting has become so valuable
— and has made reputation a powerful force in driving our
purchases, job choices, and investments. It’s also fueled by an
industry of online ‘reputation’ companies whose job it is to
improve our visibility in online media, and to pump up the
visibility of our ‘positives’ while they reduce our apparent
‘negatives.’

Today, marketers and political analysts regularly hire

psychologists and data scientists to mine our online activity and
figure out how to capture and retain our attention. When you’re on
the web, the ads we encounter are increasingly sophisticated
messages that target our desires, insecurities and fears. The more
familiar you are with the companies putting out those ads, the
more you find yourself paying attention to them. The more you
respect them, the more likely you are to buy the products and
services they proffer.

That’s why reputations are proving so immensely valuable in

the marketplace. It’s also why search engines like Google have
developed such outsized financial valuations —they help us sort
through the otherwise chaotic marketplace for information and
earn profits because of their success at presenting advertisers with
captive audiences. When you run a Google search on a keyword
such as ‘golf’, for instance, Google’s algorithms qualify you as
someone with an interest in the sport — and immediately present
you, not only with the results of your search, but with a sidebar
filled with advertisers of golf-related options and paraphernalia.
Those golf-related promoters now pay Google for the opportunity
to get your attention because you are a prime target for their
offerings. It explains the four-fold increase in Google’s stock price
in the last four years: In April 2018 investors were valuing the
company at over $700 Billion. It’s also why Facebook claimed

9
advertising revenues of some $35 billion in 2017 and why
investors bid up its market value to over $500 billion in 2018.

The ubiquity and pervasiveness of the internet has also led to

the emergence of a ‘sharing marketplace’:

• Sharing Transportation: Uber & Lyft are two companies

revolutionizing car service in major cities around the world
by connecting passengers to local transportation more
conveniently and cheaply;

• Sharing Cars: Getaround is changing the car rental industry

by enabling individuals to rent their own cars directly to
others...

• Sharing Homes: AirBnB is disrupting the hotel industry by

enabling people to rent out all or portions of their own
homes;

• Sharing Knowledge: Skillshare and Udemy are transforming

education by enabling anyone with specialized skills to
teach an online class and make money at it.

But what makes it possible for these startups to compete in the

sharing marketplace is a sophisticated process behind the scenes
that standardizes and packages reputation ratings compiled from
actual customer experiences. Why is that? Because the rapidly
growing sharing economy, like all markets, requires, at its core,
trust. After all, how can the hosts of an Airbnb apartment trust that
their guests won’t ransack them? How can Getaround owners trust
that users will return their cars? What compels Uber riders to get
into a total stranger’s car unless they trust the driver won’t
rob them?

All of these companies rely on a bedrock of reputation to build

trust with customers. Those reputations crystallize from
stockpiling information about people at the point of sale — right
where the transaction happens. And it's only become possible
because of rapid advances in digital technology that have enabled

10
companies and individuals alike to aggregate data with lightning
speed, accuracy, and sophistication.

Hence the arrival of another recent startup called TrustCloud.

The company’s ambition is to create a portable measure of ‘trust’
that can be used anywhere to ‘guarantee’ the integrity of a
transaction. In a word: Their aim is to crystallize and
communicate a universal measure of our own personal
reputations. Much as a financial ‘credit rating’ is supposed to
signal to a potential lender our creditworthiness as a borrower, so
could a credible trust score establish and convey our
trustworthiness and reputation to a potential business partner.

Online auctioneer eBay pioneered reputation scoring of sellers

based on client satisfaction ratings given by buyers in their online
auctions. Uber relies on feedback from riders to construct
reputation ratings of their drivers. Airbnb allows guests to rate the
homes and landlords from whom they rent — and thereby
influence future prospects. Zagat aggregates diner experiences to
product restaurant ratings on a 30-point scale. Trip Advisor sums
up traveller ratings to tell us the best cities to visit, sites to tour,
and hotels and restaurants to experience. We find them more
credible than expert ratings because they capture people's direct
experiences.

Welcome to the Reputation Economy indeed! As research

shows, it is a brave new world in which who you are as a company
matters at least as much to your success as the characteristics of
the products you sell. Consumers look at online product reviews
before making a purchasing decision, and some 90% say they're
influenced by those reviews.4 Another 64% say their purchasing
decisions are influenced by social content.5 And some 91% of
recruiters contend they check out candidates' social profiles
before they call them for an interview. The digital footprint you
create is increasingly impacting your personal reputation — and
vice-versa.6

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 In the reputation economy, the attention-getting role of
‘reputation’ creates a capital asset. People and companies now
have to understand its value, invest in growing it, and defend it
from attack. For companies, it means the teams of employees
entrusted to build, protect, and defend corporate reputation
should be at least as competent and experienced as the C-suite
financial guns hired to grow and protect the company’s financial
assets. My point of view — and that of Reputation Institute, the
company I imagined back in 1997, is that reputation is fast
becoming the dominant currency of the physical economy. In this
brave new world, winners will be those who appreciate the ins and
outs of a marketplace ruled by information, attention, and
perception — by reputation.

Building ‘Reputation Institute’

Following the release of the 1st edition of Reputation, I hosted a
conference at New York University’s Stern School in January 1997 to
discuss corporate reputations and their value. From that
conference a reputation community of academics and
practitioners formed, and I began to imagine a company that
would devote itself to delivering reputation insights to clients. I
called it Reputation Institute to convey its rigorous orientation.

At its inception, Reputation Institute was an academic network

involved in conferencing, networking, and researching reputation
topics linked to images, corporate brands, and their economic
value. In 1999, I incorporated that company and partnered with
Harris Interactive to develop the ‘Reputation Quotient’, a
reputation measure calibrated from answers to twenty simple
questions. Reputation Institute would focus on merchandising data
obtained from those studies in the form of reports, and I recruited
active members of our conferencing network to join me in
building it out. That strategy enabled us to grow Reputation
Institute into a global business from 2000-2004 that was mainly
involved in selling reputation reports to clients based on
consumer surveys.

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 By the time we opened a New York office in 2005, Reputation
Institute had evolved into a consultancy rooted in statistical
analysis of stakeholder perceptions. In the ensuing years, it
blossomed further into a leading provider of reputation guidance
to global institutions, assessing, tracking, and analyzing the
reputations of thousands of the world’s largest companies,
countries, and cities, with a team of researchers and analysts
based in a dozen countries, and with associates and suppliers on
five continents.

Developing Reputation Institute was far from a solitary under-

taking, and I corralled many to join my quest to evolve reputation
thinking. My earliest colleague on the journey was Cees van Riel, a
fellow scholar who taught marketing communications at Erasmus
University in the Netherlands. I recall meeting Cees as far back as
1996 at NYU. He had read my 1990 article, and had just finished
reading the first edition of this book, in which I had put forth the
idea that ‘reputation’ was an undervalued and undermanaged
economic asset. He had also recently published a book of his own
examining how companies communicate. We clicked around the
idea that the core purpose of corporate communication might well
be to build and protect reputation.7 So we committed to pursuing
that point of view by doing what academics do: Coordinating a
conference, writing articles, and launching a journal.

Phase 1: Reputation Institute as an Academic Network (1997-

2000). We held our first ‘Conference on Corporate Reputation,
Image, and Identity’ on January 13-14, 1997 and hosted it at NYU's
Stern School of Business. By then, I had developed a good
relationship with Royal Dutch Shell, the world’s largest company,
and persuaded them to sponsor our conference. Shell did so as part
of a commitment its Board had made to examine the world’s
changing expectations of multinational firms. I had been working
with a team of managers from Shell led by Pauline van der Meer
Mohr to frame how Shell could improve its practices and transmit
them to future managers. That project happened thanks to an
introduction to Shell by my Columbia University mentor Noel Tichy.

13
He had been working on a change effort to ‘move the dot’ at Shell
— shorthand for improving the company’s financial return-on-
assets. I recall interviewing Shell’s Chief Financial Officer at the
time in London, and hearing him state that Shell’s reputation was
a material factor in driving the company’s market performance.
It’s a theme we have returned to at Reputation Institute again and
again.

In fact, the Shell project (which got labeled WOMAC — an

acronym for the company’s aspiration to become the ‘World’s
Most Admired Company’) was Reputation Institute’s first
consulting project — and became a blueprint of sorts for
subsequent work. It was born of a deep concern at Shell for the raw
deal they felt they had received from consumers who had
boycotted their operations. The boycott could be traced to a
controversial decision the company had made to sink an outdated
oil platform called the Brent Spar into the deep waters of the North

14
Sea in 1995. That decision had prompted the activist group
Greenpeace to mount one of the first massive campaigns designed
to bring attention to the ‘evil empire’ they considered Shell to be.
Using small powerboats, Greenpeace die-hards occupied the
decommissioned platform in early 1995 that forced widespread
debate and a decision by Shell on 21 May 1995 to remove the
activists by force. Anticipating the move, the astute protestors had
secured widespread video coverage from hovering helicopters, and
the media portrayed the event as a heroic battle with tiny
Greenpeace as David fighting giant Goliath Shell to defend the
well-being of planet Earth.

Shell's Reputation Under Attack (1995)

Shell’s sponsorship of our 1st Reputation Conference enabled us

to craft a provocative program that attracted a diverse, vocal, and
enthusiastic group of researchers, practitioners, journalists, and
consultants that Leslie Gaines Ross and I would later call
'reputation groupies’. Leslie was an ex-Fortune researcher who
had worked on the ‘most admired company’ study that was first
featured in that 1982 issue. She has since become Chief Knowledge
Officer and Strategist at Weber-Shandwick, the global PR firm
owned by InterPublic Group.

15
 We edited the papers submitted to the conference for
publication in the inaugural issue of a new journal that Cees and I
launched in September 1997, the Corporate Reputation Review. Over
the next few years, we ran these annual conferences in Puerto
Rico, Amsterdam, Copenhagen, and Paris, and were pleased that
our reputation groupies returned, that international friendships
formed, and that joint research programs developed around it.

Not long after, I made a presentation at a Conference Board

forum in New York attended by a large group of market
researchers. There I spoke about the need to create a more
scientific and standardized measure of reputation. After the well-
attended talk, I was approached by many researchers asking to
work with me. Among them was Joy Sever, a researcher at Harris
Interactive — the firm that traced its origins to the pollster Lou
Harris and the consumer surveys he created to predict presidential
elections. Joy was enthusiastic about the idea of measuring
corporate reputations, and got me excited about capitalizing on
Harris’ technology for online polling using large panels of
respondents. I proposed a joint venture to create public profiles of
companies, and suggested we do exactly what Fortune had done
before us: publish rankings based on those consumer polls. We
approached The Wall Street Journal about doing it with us. They
thought those ratings would be newsworthy and OK’d the project.
Off we went.

I set up and ran focus groups and interviews internationally to

explore what people in different cultures thought about
companies. The basic question I asked was whether people would
think of a ‘good company’ in the same way across countries.
Drawing on Harris’ online panels, we set up online discussions,
conducted personal interviews, and ran polls to test the ideas that
were bubbling up. We boiled it down to a final set of standardized
questions that could be asked around the world about any familiar
company, from anyone, and from which we could create a
reputation rating — we called the final set of 20 questions the
'Harris-Fombrun Reputation Quotient' — or RQsm for short. It

16
built on the framework for reputation measurement I had first
described in Chapter 5 of this book.

To fund initial studies, I made a pitch to some large

communications agencies and management consulting firms
suggesting that they should be interested in developing a
standardized measure of intangible wealth. After a presentation
to the World Congress of the International Public Relations
Association’s in mid-1999 at a global meeting of CEOs in
Switzerland, I got the go ahead from PriceWaterhouseCoopers
(PwC) and from Manning, Selvage & Lee (now MSL Group, a unit of
Publicis). Both welcomed the idea and provided seed funding for
our project.

Phase 2: Reputation Institute as a Research Reports Network

(2000-2004). In fall 1999, thanks to those initial sponsors, I
commissioned Harris Interactive to run a poll to measure public
perceptions of America’s most visible companies using the RQsm.
The Wall Street Journal published that first list in an article written
by Ron Alsop, a feature journalist who would become a reputation
groupie in his own right. After that article was released, we never
looked back. Cees and I agreed to consolidate our conferencing
activities and journal under the banner of Reputation Institute and
we began marketing RQsm reports around the world.

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 Our 1st Study of the Reputations of
America’s Most Visible Companies (1999)

Orders quickly came flooding in. The first to call on us were

companies unhappy with their rating, General Electric among
them. GE was displeased it had not been rated #1 and claimed
our methodology must be flawed. After all, GE was always #1
or #2 in all rankings — and GE managers were bonused on it.
So we had to explain and defend the fact that our rating was
uniquely based on public perceptions and that people were not
as universally favorably inclined to GE as they thought. From
that premise came many other insights about differences
between ‘perceptions’ and ‘reality’, and Reputation Institute
took flight. I recall many late nights with Joy Sever and Oliver
Freedman at Harris’ offices on lower 5th Avenue in New York
writing those first reputation reports for clients who wanted to
understand what the general public thought of them!

Another constituency that came calling were the

communication agencies — those whose job it is to make sure
a client company gets presented positively in the media. I was
intrigued by an invitation from Shandwick, an agency of

18
Interpublic Group, one of the world’s largest communications
groups. Their motto was “We build the world’s best reputations.”
When I asked them how they did that, they lacked a coherent
response — so I agreed to help them develop one. I had fun
trying to make that happen as we entered the new millennium.
Scott Meyer, Shandwick’s CEO was a great supporter, and we
did some interesting work trying to embed reputation-
thinking in a PR agency. Unfortunately it proved difficult to
achieve since project-based consulting goes against the grain
in a retainer-oriented media-trained agency environment.

While I pushed forward in the Americas, Cees did so in

Europe through the Corporate Communication Center that he
had set up at Erasmus University to deliver executive training in
communications. We spent many evenings in the charming
village of Arendshoeve outside Rotterdam where I recall
testing some of my early thinking about rooting reputations in
culture and strategy. I found that those ideas had a receptive
audience with people working on the front lines of measuring
and managing stakeholder relationships.

Harris Interactive ran our reputation polls annually from

2000-2004. Joy Sever and Oliver Freedman conducted the
analyses8, Reputation Institute worked on the reports, and Ron
Alsop wrote about our findings in the Wall Street Journal.9 With
Shandwick on board in the US and Euro RSCG in Europe, Harris
ran polls in the Netherlands, Denmark, Italy, France,
Germany, and Spain. In each country, we set up a three-way
alliance between a local communications office of Shandwick
or Euro-RSCG who helped promote the results a local media
partner who disseminated them and a University professor
who helped guide our local relationships with the rated
companies. The university endorsement confirmed the rigor
of our research — and enabled us to approach the rated
companies who were interested in working on public
perceptions of their activities. Often we were hosted by one of

19
the rated companies whose interest had been sparked by the
survey results.

Among the first entrepreneurial academics to help drive

our international networking was Majken Schultz, a professor
of communication at Copenhagen Business School. Majken had
participated in our first conference in New York, and
subsequently hosted our 4th Conference in Copenhagen in
2000, a meeting that proved pivotal in evolving Reputation
Institute since it set the model for launching our commercial
activities internationally. I met two convivial students of
Majken’s at that conference, Kasper Ulf Nielsen and Nicolas
Georges Trad. That encounter proved fortuitous since I would
later persuade both of them to partner with Cees and I to
expand Reputation Institute’s activities globally, first by
focusing their entrepreneurial efforts to build our business in
Denmark and the Nordics as Associate Partners, and then by
joining forces with Majken and the Copenhagen Business School
to open our first office in Copenhagen.

Launching Reputation Institute in Sweden (2003):

Vikings Nicolas Trad & Kasper Nielsen

During this report-writing phase, Cees and I had the good

fortune to befriend and entice many interesting people to join
us on our reputation journey. Among the entrepreneurial
academics who joined us were Davide Ravasi of Bocconi (Italy),
Klaus-Peter Wiedmann of Hannover (Germany), David
Deephouse from the University of Alberta (Canada), Dominik

20
Heil of Wits Business School (South Africa), Peggy Bronn of BI
(Norway), and Ana-Luisa de Castro Almeida of PUC Minas
(Brazil). Keith McMillan was an early enthusiast at Henley
(UK). Though Keith died an untimely death in 2003, his
student Kevin Money has kept the fire of reputation thinking
alive since then. In some countries, we also partnered with
practitioners who were passionate evangelists for reputation
thinking and had strong local ties. Chief among them were
Fernando Prado (Spain), William Pullen (Chile), and Brian Fine
(Australia).

I traveled incessantly in those years, evangelizing,

proselytizing, and championing the efforts of our local allies in
running reputation audits around the world. In 2000, I moved
to Paris in order to promote our activities in Europe (OK, yes,
also to enjoy a taste of the old world!). That's where I met
Anthony Johndrow, the point person of a strategy unit created
by Coca-Cola's CEO at its 5th Avenue offices in New York, a unit
whose vague mission was to act as a think-tank for Coke.10
Reputation Institute later did a consulting project that
examined Coke’s global reputation. That team would include
Brian Craig, an ad agency alum who was also a reputation
enthusiast. Brian had worked for me on a freelance basis on
those early reputation reports I did with Harris Interactive in
2000-2002, as well as on the Coca-Cola project in New York
and on another project with tech giant Intel in Palo Alto.

Brian was also with me on 9-11, the fateful day that

changed the course of history. After running a reputation
workshop for South African Breweries (SAB) in Johannesburg,
we were sitting in the office of SAB’s President discussing
reputation-building strategies when his secretary rushed in to
turn on a live video feed of planes hurtling into the World
Trade Center in NY. Incredulous, we sat in stunned silence
watching the unfathomable sight of privileged New Yorkers
jumping from the Twin Towers some 120 floors high above
Manhattan. It would take us many weeks to return to a very

21
changed city, and many years for us and New York to recover
from the psychological and reputational damage it had done.

Fast forward to 2003 and another event tied to New York

that marked the evolution of Reputation Institute. On August
15th, Anthony Johndrow and I approached a variety of New
York communications firms that included Publicis and Grey
Advertising. I had tried this before with Shandwick and that
hadn’t worked out so well, largely because public relations did
not have the necessary traction to talk about ‘business
strategy’ with large corporate clients. I had tried it also with
management consultants like PricewaterhouseCoopers, Deloitte,
and Ernst & Young — they’re known for having corporate clout
— but they were more drawn to the areas of corporate
governance and ethical audits than to concrete reputation
analysis. So we gave it a shot with the ad agencies — to no
avail. As a week of meetings came to a close, we walked out of
the offices of Grey's G2 agency shortly after 6pm on August 15,
2003, right into the largest citywide blackout in American
history. Surely this was a sign, and I concluded that the U.S.
just wasn’t ready for reputation consulting — and turned my
attention instead to expanding our European footprint.

Since I was living in Europe, in fall 2003, I organized a

seminar at one of Spain’s leading business schools, Instituto de
Empresa in Madrid, sponsored by Telefonica’s Alberto Andreu
Pinillos and BBVA’s Angel Alloza, two early champions of
reputation management in Spain. Their enthusiasm was
infectious, and they were instrumental in putting Reputation
Institute on the map in Spain. In 2004, our Madrid office
became a reality when Fernando Prado, who had been leading
our efforts in Spain as an Associate, left his employer J. Walter
Thompson to join us full-time. The success of that office was
virtually assured by our close ties with the member companies
of the Foro de Reputacion Corporativa, a unique consortium that
Angel and Alberto had created to promote the collective
reputation of Spain’s leading companies.

22
 By the end of 2004, our office in Copenhagen was a hotbed
of activity, and Kasper and Nicolas were beginning to staff up
to address the growing demand for our services. Cees was busy
building out our activities in the Netherlands from his home
base at the Rotterdam School of Management. His research
shifted from a pure communication focus to one energized by
reputation thinking. It was further stimulated by projects with
large Dutch companies that included Philips, ING, Akzo Nobel,
and ABN-Amro, ones that focused on measuring employee
support for a company’s strategy using a survey instrument
we now call the Alignment Monitor.

Publication of Fame and Fortune (2004)

With reputation work in Europe well under way, I decided to

shift my focus back to the U.S. After all, how could it be that we
were not involved in promoting reputation thinking in the world’s
largest market! Surely those large American companies whose
reputations are so valuable would want us to be involved deeply
with them! In 2004, Cees and I published a new book we called
Fame and Fortune that examined why some companies appeared to

23
fare better than others in our international reputation studies. It
would be our calling card for entering the consulting space.

Phase 3: Reputation Institute as a Consulting Firm (2005-

2012). The business took flight in 2005 when we decided to open a
U.S. office. Rather than settle into a midtown location in New York
(where most communications firms are based), we signaled our
belief in the financial value of reputation by taking offices in the
Wall Street area near the New York Stock Exchange. Kasper agreed
to move from Copenhagen to do what would turn out to be a five-
year stint to build out our offering in the U.S. Our other Viking
Nicolas joined us for a year, a time during which we also recruited
Leonard Ponzi, a well-trained quantitative researcher who began
helping me to articulate and crystallize the reputation models we
would later adopt as our standard measurement methodology
worldwide. Len brought in a junior team of quantitative zealots to
build out our applied methods.

2005 was also a turning point in the lifecycle of Reputation

Institute because that’s the year I opted to sell the intellectual
property behind the RQsm methodology to Harris Interactive. I did
so because I believed the time had come for Reputation Institute to
fly under its own power and with its own proprietary methods. Joy
Sever had left Harris Interactive, and there was considerable
turmoil in the world of market research. With Len on board, and
with the support of our international network, we tested and
developed an improved way of measuring and analyzing
reputations that I called The RepTrak® System. Its value lay in our
ability to deliver rigorous research-based insights to clients about
ways to improve stakeholder perceptions and build support that
went significantly beyond what the RQsm methodology allowed. By
representing reputation as an emotional reaction based on
stakeholder perceptions of a company, the instrument enabled
identifying the underlying drivers that in formed those
perceptions — and so the levers companies should pull to drive
reputation improvements.

24
 In 2005, I recruited Anthony Johndrow and Brian Craig into
our newly formed New York team, where another young media
consultant Rob Jekielek joined us a bit later. Rob was an analyst I
had met at Publicis when I was looking at ways to incorporate
media content into our reputation intelligence. He brought
experience from Media Tenor, a German-based media research
house. I was hopeful that with him on board we could bring to
market the media analysis tool I had developed many years before
at Delahaye-Medialink, a media analytics company I had
collaborated with since 2002 to code media content into the RQsm
scorecard. Delahaye had gotten sidetracked and later merged into
Cision.

Between 2005 and 2013, from our humble offices in downtown

Manhattan, a small team of analysts and consultants at Reputation
Institute got to deliver some high-powered and impactful
engagements with an impressive array of global companies that
included FedEx, Johnson & Johnson, Mars Inc., Procter & Gamble.

In 2006, Nicolas joined me on a trip to China to check out that

unfathomably huge and complex market, a market that continues
to challenge us over a decade later, despite having run a large
Conference there in 2008 sponsored by China’s huge development
company CITIC, despite bringing on an Associate Partner, and
despite holding many meetings with China’s top-rated
companies, Haier and Lenovo among them. No doubt about it —
China is a daunting place to build business around the very
sensitive topics of image and reputation. In May 2018, we felt

25
vindicated: We released the results of our most recent survey of
the reputations of companies in China to a very receptive
audience, confirming the existence of a huge market for
reputation intelligence in Asia.

Between 2006 and 2013, I worked with Cees, Kasper, and

Nicolas as a 4-person leadership team to focus Reputation Institute
in six key areas:

1 The RepTrak® System: We routinized our measurement and

analytics around our core RepTrak® models — they became
the basis on which we assess all reputation risks and
opportunities, and we attracted many large companies to
adopt our approach as a result of systematic marketing led by
our executive team.

2 The RepTrak® Database: We invested in building a global

database of annual consumer ratings of companies, cities, and
countries using our RepTrak® models. Later, these databases
would enable us to develop a Knowledge Center and to create a
membership network to share best practices.

3 Advisory Services: We formalized our consulting

methodology through extensive internal training, culture-
building, and knowledge creation. It enabled us to expand our
reach through a global group of consulting partners who
became enthusiastic evangelists for our reputation models.

26
4 Global Staffing: We recruited staff, both in the U.S. and
internationally. We tasked Loren Christopher Schneid with
helping to grow and systematize our outreach. But you can’t
really grow a business like ours without adding offices, hiring
ever more qualified (and expensive) staff, and investing in
materials, marketing, and support. So we also staffed up
extensively to enhance our local presence in Spain, Brazil,
South Africa, and Chile.

5 Associate Partner Network: We built a global network of

Associate Partners. A leading PR agency in Norway, led by
Viking brothers Nils and Ole Apeland, was eager to join forces
with us, as were Associates we signed up in Colombia, Ireland,
Italy, Portugal, and Puerto Rico.

6 Knowledge Center: We continued to support our annual

conferences, academic research based on our RepTrak®
databases, and created a practitioner publication we called
"Reputation Intelligence", as well as a series of online
educational seminars designed to enhance understanding and
appreciation for reputation management.

Reputation Institute (2010): Our New-York Head Office

27
 Considerable time and acumen went into stitching together
our far-flung offices and associates. I credit much of the drive and
stamina for doing so to my executive partners Cees, Kasper, and
Nicolas — they traveled around at least as much as I had done
earlier. I viewed my role as that of a team leader for our rapidly
growing company, and encouraged broad-based involvement of
our entire senior team in its management. As we grew, we agreed
to cohere behind a One-RI philosophy and to develop a more
homogeneous set of systems and procedures. By necessity, we
recruited administrative staff to support it. For a time, that
strategy worked well, and by 2010, our small company had grown
into a multi-million dollar consultancy with a global footprint. We
chose to signal that fact by moving into elegant new offices we
built next to the NY Stock Exchange.

28
 Our growth was rapid, but remained entirely self-funded. To
deliver on our global growth ambitions, we realized that we would
need access to capital. In 2010 we began exploring ways to
facilitate Reputation Institute’s expansion by raising external
financing. Spurred by conversations with various investment
bankers we hired Michael Solomon as our first Chief Financial
Officer to help prepare us for the demanding process of meeting
with potential partners. Mike brought with him Rosaline Wang, a
former Goldman Sachs controller who proved a well-qualified
member of our team as well as a warm but strong-willed figure
who took on the challenge of herding our unruly team.

Phase 4: Reputation Institute as an Intelligence Platform

(2013-Present). The challenges of growth financing have been
well documented elsewhere, so I won’t review them here. After
some spirited encounters with potential lenders and equity
partners, one fateful afternoon I was happy to welcome a cheerful
Jonathan Ewert into our New York offices when he came calling as
a representative of Catalyst Investors, a private equity firm.
Jonathan was an enthusiastic advocate of Catalyst’s investment
philosophy of making long-term bets on companies holding
unique market positions that they believed had high growth
potential in the technology-enabled space of communications. So
I met with Catalyst’s partners a few times, drank the cool-aid, and
ultimately persuaded our team of the merits of foregoing
independence to join Catalyst's investment group. After a few
meetings in Copenhagen and New York, we inked a deal with
Catalyst Investors in May 2013 that would enable us to finance
growth, build out Reputation Institute as a technology solution, and
do it faster than we ever could alone.

29
 Since coming aboard, Catalyst has helped Reputation Institute
impose the kind of organizational and financial discipline needed
to create growth and satisfy a more diverse shareholder structure.
In 2015, we moved our main office to the Boston area to gain
access to the intellectual capital in the area and facilitate hiring.
We also grew more sophisticated by adding a team of technology
and media specialists who are now helping to forge the next
chapter in the company’s growth. In July 2018, we recruited Kylie
Wright-Ford (an alum of Gerson Lehrman Group and World 50) to
take on the CEO role at RI and guide the company's next phase of
evolution as a platform solution for delivering reputation
intelligence.

Today, Reputation Institute sits squarely on four legs that

recognize its origins and position it for the future. Research and
analysis remain the company's core strength. The company's
thought leaders draw on that research to identify learnings and
best practices in reputation thinking that informs our advisory
work, and gets disseminated through our global membership
network.

30
 The Reputation Institute Platform

In August 2018, I visited some of our international offices in

Boston, Copenhagen, and Milan. I must admit to feeling no small
measure of pride about what the company I imagined in 1997 has
become. Not only in stimulating research and analysis, but in
delivering advice and execution. Not only in helping companies to
generate upside gains from reputation improvements, but also to
anticipate the ever-present downside risks of reputation losses. In
doing so, I feel confident that Reputation Institute has given voice
and focus to the practitioner concerns of the ‘Reputation
Community’ that Cees, Kasper, Nicolas and I worked hard to
create over the years.

31
 Reputation Institute's Founding Team:
Kasper Nielsen, Cees van Riel, Nicolas Trad, Charles Fombrun

The Reputation Community

For our 20th anniversary, I asked some colleagues to reflect on
the evolution of the reputation community that crystallized since
publishing the first edition of this book. They all pointed to the
important role played by the annual conferences we organized
around the world from 1997-2014. Those conferences, though
always challenging to organize and deliver, were a centerpiece of
our evolution from the academic network that we were born as
into the reputation intelligence company that Reputation Institute
has become.

Annual Reputation Conferences (1997-2014)

Guido Berens and Klaus-Peter Wiedmann took charge of

editing a special issue of Corporate Reputation Review (CRR) to
feature those comments. As they put it:

32
 “RI’s annual conference and the quarterly publication of
CRR… brought together a diversity of academics and
committed practitioners involved in active management of
corporate reputations. Over the years, the conference was
held in a wide range of locations, such as Puerto Rico, China,
Brazil, the US, the UK, the Netherlands, Denmark, France,
Spain, and Norway, which also opened up opportunities to
develop a mutual understanding between different cultures.
Furthermore, the conference’s doctoral consortium, which
was held for 15 consecutive years, helped junior scholars
interested in the field to develop and grow, and to submit
excellent work on reputation to academic journals.”

David Deephouse, now Associate Dean at the University of

Alberta, remembers the founding of the reputation community in
this way:

“In fall of 1996, an event happened that changed my life

— forever: I received a call for papers to ‘A Conference on
Corporate Reputation,’ to be hosted at New York University in
January 1997 by Charles Fombrun and Cees van Riel... I
needed to find a way to contribute to research on reputation…
Much has changed since. Scholarly interest in reputation has
grown immensely since the early studies of the Fortune
ratings... New conceptualizations and theories have been
proffered, new measures developed, and extensive reviews
published… The first conference on corporate reputation
changed my life. Thank you for getting this going 20 years
ago. Congratulations, everyone, for what we have
accomplished so far. I look forward to the next 20 years.”

Suzanne Carter, Executive Director of Texas Christian

University’s Executive MBA program, is among the friends we

33
connected with along the way — and she writes of the influence
we had on her own research and teaching from emphasizing the
link between reputation and shared value creation.

“The field of reputation has come a long way from its

early days... We have progressed to a place where we add
tremendous value to strategic decision making, to board
meetings and discussions, to community engagement, and to
sustainable business practices. That I can teach these complex
and dynamic issues today is a testament to the field’s growth.
One of the most rewarding classroom discussions involves the
notion of creating value through reputation-enhancing
activities that generate positive outcomes for all stakeholders.
The discussion in the board room and in the executive suite is
moving from that of doing what’s in the best interests of only
the shareholder, to doing what’s in the best interests of
multiple stakeholders and the resultant impact not only on
the community, but on the employees, customers, the
reputation of the company, and, yes, the bottom line as well.”

Craig Carroll, now a Professor at the University of Texas

(Austin), described various chance encounters that began at our
3rd conference in Puerto Rico and how that led him to frame his
own research agenda:

“For me, perhaps the most important outcome of the

annual conferences was the meeting of the minds involved in
making my own reputation project happen. Max McCombs
was one of the mass communication discipline’s most
prolific, central, and historical researchers and theorists.
Charles Fombrun was the management scholar who
launched the corporate reputation agenda and was the
creator of the first multi-stakeholder measures of corporate
reputation. Cees van Riel was one of the first scholars and

34
 authors in corporate communication… Charles arranged for
Max and I to give separate conference plenary addresses on
agenda-setting theory and the media’s influence on changes
in corporate reputation at the 2001 conference he organized
in Paris. Cees arranged for the four of us to meet again at a
nice Italian restaurant in Washington DC later that summer...
I dedicated my first book to these three men, because without
the meeting of the minds at that table, and the reputation
community formed around Reputation Institute, my career
would not have been what it has been.”

Majken Schultz, our colleague from the Copenhagen Business

School, also recalled how she got pulled into the reputation
community at our first global meeting.

“The event that dragged me into the world of reputation

was no doubt Reputation Institute's first conference in New
York in 1997. The conference was a source of inspiration, new
ideas, and not least the beginning of new relationships.
Although the conference was small, it foreshadowed the
innovativeness, engagement, and challenges that in my
experience characterize the reputation community.”

As Majken points out, early on it was invaluable for the

community to push for improved measurement of reputation in
order to demonstrate its ability to impact concrete outcomes such
as profitability and morale. That led to a widening field of
influence as others saw interest in studying and researching about
something that was be coming more tangible. As she concludes:

“The reputation construct is still very much alive and

well. We have witnessed the emergence of other academic
communities focused on reputation... In business, reputation

35
 thinking has been adopted by multiple corporate functions
from risk management to marketing and corporate
communication practices — enhanced by the development of
still more sophisticated ways of measuring and tracking
reputation. Last, but not least, the fundamental issue of how
organizations operate and are perceived in a larger eco-
system of stakeholders is more important than ever and holds
lots of promise for the future of reputation thinking.”

Gary Davies holds the Chair in Reputation Management at the

University of Manchester. He is among the British scholars who
contributed heavily to stimulating early interest in measuring
corporate reputations. He and his former student Rosa Chung
came to defend a view that reputations play a powerful role in
building support from both employees and customers — and,
when they dovetail, can enhance financial performance. As he
recalls:

“There have been two challenges that I’ve had to face as

a researcher in reputation. First, how reputation should be
measured, because quite simply what is measured gets
addressed by managers... The second and more practical
problem is how a large service organization can
simultaneously manage the associations made with the
corporate brand, while ensuring that what happens locally is
compatible with those associations... Successful reputation
management is about ensuring that all employees
understand the company values and that these values are not
just corporate wallpaper, designed to look good... Ryanair,
British Airways and Virgin are all prominent airlines. They all
do the same thing, albeit with different geographical
footprints, yet their values and cultures are different. This
makes them more or less attractive to potential employees
and customers. This for me is central to both the relevance of

36
 reputation and its links to performance... Our own work in
Manchester has shown clear links to sales growth and there is
no doubt in my mind that reputation is both a cause of
financial performance and is influenced by it.”

Leslie Gaines-Ross, now Chief Reputation Strategist at the

communications firm Weber-Shandwick, stressed the practical
benefits created by the community’s commitment to developing a
multi-stakeholder measure of reputation. It gave added credibility
and legitimacy to practitioners whose work had long been viewed
as "more of an art form.’’

“I first met Charles Fombrun in 1997 at a conference he

was organizing. After the conference, we had a spirited
conversation about what drives reputation. Charles was
going to develop a better way to measure reputation than
had Fortune. He intended to measure corporate reputation
from the consumer point of view unlike Fortune’s Most
Admired, which was a survey developed from the
management point of view. Business leaders, we believed at
Fortune, had the inside track on which companies deserved to
be highly regarded... To us, the views of business leaders were
all that really mattered when it came to corporate reputation.
Charles’ determination to expand our understanding of the
determinants of corporate reputation beyond the traditional
survey of management executives was revolutionary and
eventually led to the multifaceted concept of reputation that
we have today. All stakeholders’ points of views, we now
realize, impact company reputations — be it those of
consumers, executives, financial analysts, NGOs, employees,
regulators, the media, academics, and so on. They all
matter… And the field of corporate reputation now demands
our undivided attention.”

37
Trends in Reputation Research
The first edition of this book influenced a generation of
scholars to conduct research about corporate reputations. It
helped spark discussions exploring the link between reputation
and cognition, strategy, marketing, organization, accounting, and
finance. It also raised questions about management practice —
about how to encourage ethical conduct, how to assess the merits
of social responsibility programs, how to measure the financial
impact of reputation gains and losses. Companies like Shell and
FedEx were early adopters of these ideas.

Reputation research has matured since then. Many articles

have been written, research projects conducted, conferences held.
I won’t review them here — it’s a job better done in the rigorous
journals and publications of our field. For this edition of
Reputation, however, I asked members of our reputation
community to share some thoughts about research trends.

Naomi Gardberg (now at CUNY's Baruch College) asked the

pointed question whether reputation research might have just
been a fad, as some naysayers predicted in the late 1990s. Bringing
data to bear on the question, her conclusion is that reputation
research is not only growing in volume, but in its influence on two
related disciplines: marketing and ethics. Her analysis indicates
how valuable reputation thinking has become to both researchers
and practitioners:

“If corporate reputation was a fad, then we would see a

sharp increase and subsequent sharp decrease in research. I
performed a content analysis exploring the way in which
authors described their work in leading management and
business and society journals. I focused on four corporate
associations (corporate celebrity, corporate identity,
corporate image, and corporate reputation) to operationalize
a fashion to which corporate reputation research may belong.
Following prior research on fads and fashions, I counted the

38
 incidence of these four constructs in article titles, abstracts
and key words from 1997 through 2016. I observed a steady
increase in the number of articles about corporate celebrity,
corporate identity, corporate image, and corporate
reputation over twenty years rejecting the old assertions that
research about corporate reputation and related corporate
associations was a fad. The number of articles on corporate
reputation equaled the number of articles about the other
three corporate associations. I found no evidence of a
fashion… Surprisingly I also observed that the number of
articles on corporate reputation published in the two Business
and Society journals was twice the number of articles
published in the six general management journals. I
therefore find evidence that corporate reputation research
has become a phenomenon especially in the business &
society and ethics field.”

Violina Rindova, now a chaired professor at the University of

California, described how her own thinking evolved from writing
papers with me that linked reputation and strategy. Getting them
published wasn’t easy — but it helped build out the current multi-
disciplinary reputation paradigm that many management scholars
have since adopted.

“There is hardly a scholar in the field of reputation

management who has not read the Fombrun & Shanley
article of 1990 ‘What’s in a Name?’...As soon as I had finished
reading the article, I knew that I wanted to focus my
dissertation work on the topic... I found the topic
intellectually exciting because it brought within a single area
economic concerns about evaluating unobservable quality
under conditions of asymmetric information, strategic
concerns about the role of intangible assets in the creation
and protection of competitive advantage, and stakeholder

39
 concerns about ‘‘doing good’’ on multiple criteria of
organizational effectiveness... In subsequent years, Charles
and I worked on several papers intended to articulate a
multidisciplinary integrative perspective on reputation and
its role in the construction of competitive positions and
advantage in markets. We faced considerable push-back
from the top management journals.... In the two decades
since the launch of Corporate Reputation Review, reputation
research has exploded, and a rich stream of related work on
the role of the media in markets and the differentiation of
related but different social approval assets, such as
legitimacy, status, and celebrity, has been generated..."

Bill Newburry, another NYU graduate, now a professor at

Florida International University, points to the benefits of
developments we made in establishing the RepTrak® Pulse
measure and dimensions. He also notes the benefits created by our
efforts to extend the reputation construct beyond companies to
encompass institutions, cities and countries.

In the 20 years since Corporate Reputation Review (CRR)

published its first issue in 1997, the reputation field has
flourished along multiple dimensions... The development of
the RepTrak® Pulse gave real structure to the discussion of
reputation dimensions by allowing for a comprehensive
measurement system that could simultaneously capture a
firm’s overall reputation along with its reputation along
seven dimensions... For corporate managers, the ability to
target specific stakeholder groups based on the relative
importance of these dimensions to a company allows for a
more sophisticated approach to reputation management…
along with the related task of corporate communication…”

40
 Klement Podnar and Ursa Golob (University of Ljubljana)
deplore the continuing discord and confusion that exists from
those who speak interchangeably about reputation, image, and
identity. When these concepts are not distinguished, research
findings cannot cumulate and learning from our research cannot
be maximized.

Corporate reputation is a latent (unobservable) construct

existing in the minds of organizational stakeholders or
observers... By acknowledging that corporate reputation is
closely interwoven with both identity and image, we
recognize the importance of defining these two concepts as
well… Identity characteristics are real, central, and relatively
constant attributes that distinguish one entity from another.
As such, corporate identity is concerned with what the
organization is and what it seeks to be… Corporate image,
however, like reputation, is in the eye of the beholder, and
refers to a personal impression or mental picture of the
perceived entity... Images are an individual’s perceptions or
sets of beliefs, attitudes, and impressions of an object, which
are created in the mind when the individual thinks about a
particular organization or its products and services… In
similar ways… reputation captures the set of corporate
associations that individuals outside an organization believe
are central, enduring, and distinctive to the organization.

A team at Henley Business School led by Kevin Money and Carola

Hillenbrand, proposed a useful framework for reputation thinking
that positions reputation as a key intangible asset created from
wide-ranging strategic initiatives and stakeholder experiences.
The consequences of reputation are its far-reaching effects on the
actions companies take as well as the tangible and behavioral
outcomes derived from those actions, particularly financial
performance.

41
 Finally, my former NYU colleague Irv Schenkler reminded us
how strategy guru Michael Porter brought social responsibility
into the strategic conversation with his recommendation that
companies align their social responsibility messaging with their
competitive strategies. This is a theme that ties reputation-
building directly to value creation and economic performance.
The notion of 'shared value' is entirely consistent with the multi-
stakeholder reputation paradigm.

“Two articles published by Michael Porter and Mark

Kramer in the Harvard Business Review may have influenced
high-level corporate readers. The first, ‘Strategy and Society:
The Link between Competitive Advantage and Social
Responsibility’ (2006), proposed shifting the concept of
corporate social responsibility from a cost, constraint, or
‘desirable deed’ to a source of competitive advantage by
more closely aligning social efforts with the organization’s
core ‘value proposition.’ The effect was to heighten the
added-value of enhanced corporate reputation… In 2011,
Porter and Kramer wrote the second article, ‘The Big Idea:

42
 Creating Shared Value,’ which provided an additional
pathway for companies to invest in efforts that would benefit
both corporate shareholders as much as it would society as a
whole… The article relied on this underlying theoretical
substructure to construct a tangible means toward both an
economic end and social good.”

To Conclude this Preface...

In 2015, Cees and I persuaded Erasmus University’s Rotterdam
School of Management to create a Reputation Research Center
(RRC). The mission of the RRC is to stimulate continued academic
focus on reputation thinking. To help fund the center, in 2018
Reputation Institute gifted its ownership stake in Corporate
Reputation Review to the school, and the Center and the journal
began a new lease on life under the guidance of Guido Berens as
Executive Director and Editor-in-Chief. In doing so, we hope to
have created a sustainable structure that will continue to
stimulate research in the reputation community.

Erasmus University President Pauline van der Meer Mohr accepts a

pledge from RI Chair Charles Fombrun to create the Reputation
Research Center

Cees van Riel is Knighted by the Mayor of Amsterdam

on behalf of King Wilhem of the Netherlands

43
 As I wrote to our global reputation community in
September 2014:

“Creation of the RCC confirms RI's deep commitment to

further the rigorous study of reputation. Receiving RI's grant
was the President of Erasmus University, Pauline van der
Meer Mohr. It was particularly poignant and apt to have
Pauline as our formal grant recipient as she helped sponsor
our 1st Reputation Conference back in 1997 when she was an
attorney at Shell as well as our first efforts in building
Reputation Institute.”

Thanks to Pauline, on that day Cees was honored by King

Wilhem of the Netherlands for his help in orchestrating the
creation of the Reputation Research Center at Erasmus.

And so the journey that began for me with the kernel of an idea
that ‘reputation’ might be viewed as an economic asset has gone
far indeed. It spawned academic articles, laid the foundation for
the first edition of this book, led to a peer-reviewed academic
journal, fostered a suite of intellectual products, built many
research relationships, developed a global company — and an
active reputation community was born from it. I am grateful to
everyone who has helped make my personal journey fulfilling in
every way, most particularly my earliest partners Cees van Riel,
Kasper Nielsen, and Nicolas Trad, but also the many of who joined
us since. I’ve mentioned some of you here, but I overlooked many

44
others. You have been fellow travelers on an exciting trip,
sometimes contentious, occasionally combative, but always
convivial, challenging and fun.

Reputation thinking…. The Reputation Economy... Reputation

Institute… The Reputation Community… This 20th anniversary
edition of Reputation: Realizing Value from the Corporate Image
celebrates us all.

Dr. Charles J. Fombrun

Founder & Chairman Emeritus
Reputation Institute
August 2018

45
46
REPUTATION
Realizing Value
from the Corporate Image
C H A R L E S J. F O M B R U N

For Michael, Carole, and Marie-Alice,

in a league of their own

(c) 1996, Charles J. Fombrun — all rights reserved

47
48
 CONTENTS
Acknowledgments 51

Introduction: Why Reputations Matter 53

PART ONE: THE HIDDEN VALUE OF A GOOD REPUTATION 71

1 As Good as Gold 73
2 What's in a Name? 95
3 Enlightened Self-Interest 125
4 Reputational Capital 155
5 Identity Traits 187
6 Shaping Consistent Images 224
7 Of Pageants and Horse Races 261
8 The Reputational Audit 293

PART TWO: THE UPS AND DOWNS OF REPUTATION 317

9 Fashion's Ins and Outs 319
10 The MBA Academics under Siege 351
11 So You Want a New Identity 389
12 Pitching Arm & Hammer 421
13 The Deal Makers 453
14 Doing Good, the Morgan Way 484
15 Song of Salomon 515

Conclusion: The Burden of Celebrity 549

Notes 569
About the Author 591

49
50
 ACKNOWLEDGEMENTS (1996)

P
art of the research I report in this book was supported by
a grant from the Bank Financial Analysts Association in
1990-91. The grant provided me with that most
luxurious of commodities, time-time to think, time to do, time
to write. I am grateful to the association and to my colleagues
lngo Walter and Ed Altman for their patience in seeing some of
the reputational returns from that investment.

Naturally, I have benefited from the assistance of many

people in putting together the ideas presented here. The initial
spark for this work came from creative interactions with Mark
Shanley, the former Wharton student, now a colleague at
Northwestern University, with whom I carried out the first
quantitative analyses of Fortune magazine's reputational data. I
hope we'll get to work together again in the future.

At New York University, Violina Rindova quickly moved

from research assistant to able colleague, coauthor, and critic.
Her enthusiasm for the material was energizing, and I expect
her to extend the study of corporate reputations in valuable
ways. Luis Martins has also proved his mettle as a reader and
astute commentator here and elsewhere. John Mezias made
writing the Salomon chapter easier thanks to his prep work.
Maxine Garvey stimulated me to put pen to paper about some
of my experiences in the fashion industry and spared me
painful legwork by sharing some of her research. Batt
Vadlamani's occasional interest in investment banks and law
firms periodically stimulated my own. Various other students
also helped along the way, including Santosh Kump and
Lawton Harper. Marc Murray was instrumental in getting me to
spend time at Goldman Sachs.

51
 The "citizenship" team that Noel Tichy formed in the fall of
1990 got me to think more about the relationship between
reputation and "doing good." Special thanks to Charles
Kadushin for starting things off and to Laurie Richardson for
keeping the project alive.

Finally, a special note of gratitude to the many executives who

made time to talk to me about the reputations of their companies
and about the work they do. They include Hildy Simmons, Oliver
Wesson, and their staffs at J. P. Morgan; Clive Chajet, Connie
Birdsall, and Kate Moran at Lippincott & Margulies; Susan Black at
the Dilenschneider Group; Jim Taylor and John Berard at Hill &
Knowlton; Tom Schick at American Express; Frank Zarb at Smith
Barney (Primerica ); Herb Allen at Allen & Company; Larry Zicklin
at Neuberger & Berman; Jim Butler at Spear, Leeds; Johaness Frey
at UBS Securities; and Ed Markiewicz at Goldman Sachs. Along the
way, I gained much from Bryan Thomlison's (Church & Dwight)
infectious enthusiasm. Thanks also to Harold Goldberg at
Moody's, Ralph Dickerson at the United Way, Meena
Pachapakesan at Financial World, Nancy Hass at Newsweek, and
many others who spoke to me without attribution.

I am indebted to all of these colleagues, associates, and

friends for insight and inspiration. Sadly, however, I must
insist on being the only one whose reputation is in any way
tarnished by whatever improper interpretations were made.

52
 INTRODUCTION:
WHY REPUTATIONS MATTER

“The purest treasure mortal times afford

ls spotless reputation; that away,
Men are but gilded loam or painted clay.”

William Shakespeare

D
o you recall the last time you hired a contractor to make
improvements to your house or apartment? Or the last
time you called on a travel agent for assistance in planning
a trip? Or those less than happy times when you required the
advice of a lawyer, accountant, dentist, or doctor? Think about
how you came to choose that particular contractor, travel agent,
lawyer, accountant, dentist, or doctor.

If you're like most people, chances are you didn't just pick
their names out of a phone book. You probably went to them
because they were recommended to you by a family member,
friend, or someone else you trust. If so, you hired them based on
their reputation.

Consider Fischer Travel Enterprise, a small premier travel

agency on worlds of business and entertainment. They include TV
journalist Diane Sawyer and her director husband, Mike Nichols;
record mogul Quincy Jones and composer Marvin Hamlisch;
insurance tycoons Saul Steinberg and Sandy Weill; celebrity
bankers Bruce Wasserstein and Joe Perella; fashion designer
Donna Karan; basketball legend Magic Johnson; hotelier Jonathan
Tisch; society figure Anne Bass; and artist Brice Marden — not to

53
mention numerous scions of the Vanderbilt, Johnson, and
Rockefeller fortunes. According to Mr. Fischer, that's because
"we've got the reputation that when it's impossible, we make it
possible." The agency obviously relies on that reputation to
generate business.1

Or consider the Connaught Hotel in London, thought by many

to be the world's most exclusive. So successful is the Connaught
that it never advertises for customers and its managers go out of
their way to avoid the press. Why? Because the hotel relies on its
reputation for delivering unique and thorough service. As one
journalist reports:

If the Connaught is about nothing else, it is indeed

about tradition and a genteel way of life that, in many
quarters, has become only a memory. You sense it
everywhere-from the size of the hotel (only ninety rooms
and twenty four suites) and the conservative dress of the
staff (and clientele) to the tranquility of the small lobby
and public areas and chef Michel Bourdin's ultraclassic
French and English menu, served in the majestic
restaurant and cozy Grill Room. Here one finds no footmen
in k nee breeches, no shops or dazzling display cases, no
tinkling piano, no pool or health spa, no minibars, no
mints on the pillows, no special weekend rates, nobody
milling about in jeans or jogging suits-nothing, in fact, to
suggest the larger more commercial hotels where tourists
and businessmen have a different set of expectations.2

London's Connaught hotel and New York's Fischer Travel

are just two of many businesses that rely on their reputations
to compete. Companies like them are generally the first to tell
you that friends and relatives provide the best kind of
advertising for their products and services. In fact, just ask any

54
lawyer, doctor, dentist, chiropractor, accountant, or travel
agent: Each one will probably confirm that word-of-mouth
referrals are the sine qua nons of success; that a solid
reputation is worth its weight in gold.

In private life, most of us regularly solicit

recommendations for the people we hire, whether to build our
shelves, to organize our vacations, to do our taxes, to treat our
illnesses, or to defend us in court. Given a choice between
someone who is well regarded and one about whom we know
nothing, most of us opt to do business with the more reputable
professional. A reputation embodies the history of other
peoples' experiences with that service provider. Good
reputations increase credibility, making us more confident that
we'll really get what we're promised.

I have often observed how much weight a board of directors

will put on "reputation" in determining which supplier to pick.
Whereas to pick the low bidder was once common practice, now
the inclination is to rely on word of mouth and reputation as
the basis for selecting a service provider. In part, it's because a
supplier's reputation acts as an equalizer. A good reputation
substitutes for differences among board members in personal
experience with contractors and reduces the ever-present fear
of a shareholder suit should things go wrong. In other words,
the contractor's reputation acts as a warranty. It signals the
likelihood that our dealings with them will be up to snuff —
that they will meet our expectations.

In similar ways, managers often rely on the personal

reputations of their employees to make personnel decisions. To
avoid the subjectivity of a supervisor's evaluations, for
instance, some top companies judge an employee's value by
culling information from a wide range of informed observers. A
case in point is the industrial giant General Electric. The

55
company has become well known for conducting "360-degree
appraisals" — investigative reports based on data obtained not
only from an employee's supervisors but from subordinates,
clients, suppliers, and others who have had contact with the
employee. Similarly, prestigious universities regularly poll
peers and professionals in rival colleges before granting
lifetime tenure to a member of the faculty. In essence, they
create reputational profiles of their employees and base crucial
promotion and compensation decisions on those profiles.

Marketers and advertisers are well aware that the reputations

of individuals can cast a long shadow over the products they want
to promote. Some ads rely on explicit endorsements by well-
known personalities like basketball's Michael Jordan or tennis's
Andre Agassi. Others rely on the implicit endorsements of
supermodels like Cindy Crawford, Naomi Campbell, or Christy
Turlington. These endorsements cast a halo over products that
increases sales. Psychologically, we create a mental bond between
the product, the famous face, and the company that justifies
higher prices. Often we willingly pay more money for endorsed
products because they promise us both quality and status and ease
our fears of a negative experience. Which is why Jordan and Agassi
earn millions of dollars in endorsements every year. It's also why
superstar models are paid upward of $6,000 a day, or more than
$1.5 million a year. In economic terms, such a per diem represents
the rental value of the model's fame. It means that a model's
reputation is roughly equivalent to having about $22 million in the
bank on which you earn a 7 percent rate of interest.

The process of building a reputation is obviously central to the

marketing of everyday products like soap, cereal, clothing, cars,
and cosmetics. Makers of consumer goods, like Unilever or Procter
& Gamble, are experts at converting ordinary products into
recognizable "brands" through advertising and promotion. By
differentiating products, they create what marketers call "brand

56
equity"-a hidden asset for the company that generally goes
unrecorded on its balance sheet.3 Implicitly, then, a company's
reputation embodies the hidden wealth in its portfolio of brands.

In fact, reputations are useful earmarks not only for

individuals and products but even for the largest companies.
Corporate reputations influence the products we choose to buy,
the securities in which we invest our savings, and the job offers we
accept. In part, it's because fame is an intoxicating lure; it attracts
us to those who have achieved it. That's why so many of us readily
lay out bigger bucks to eat in French restaurants, to sleep in
Marriott's top-of-the-line hotels, to drive a BMW, to wear
designer clothes, to carry an American Express Platinum Card, and
to live in Paris or New York. A good reputation is a drawing card. It
brings in customers and investors; it commands our respect.

Just as we prefer to hire better-regarded professionals, so too

do we favor working for better-regarded companies. After all, for
equal pay, why work for a company that gets a bad rap for the
products it makes, for the plants it operates, or for the way it
treats its people? In the health-conscious, environmentally aware,
and civic-minded decade of the 1990s, companies heavily involved
in the so-called sinful industries (tobacco, liquor, and gaming), in
businesses that unduly pollute the environment or that exploit
employees and local communities, are increasingly hard-pressed
to defend their dubious reputations to investors, creditors, and
prospective hires. But occasionally even a "bad" reputation can act
to a company's strategic advantage. In a study of the Mafia-
controlled garbage industry in New York, for instance, one
researcher showed how the investigation and prosecution of
racketeers actually helped to strengthen the unsavory reputation
of the industry, thereby deterring entry by honest entrepreneurs
and increasing the market power and profitability of organized
crime.4 A perverse outcome, to be sure, but one that supports the
view of reputation as a source of competitive advantage.

57
 In most competitive situations, of course, the lack of a good
reputation can mean lost sales. After all, for similarly priced
products, which company would you choose to buy from: company
X or the better-regarded company Y? Surely your choice would be
Y. That's why there's not a computer hacker in sight who isn't
slightly apprehensive of ordering a computer clone from a little-
known company rather than one from a well-regarded company
like IBM, Apple, Compaq, Dell, Hewlett-Packard, or Sun
Microsystems. Who knows how good the unknown company's
product is? Can we trust its warranty claims? Will the company be
around if something goes wrong with the machine? These are
natural concerns that drive us to favor branded products. The
well-known companies that make them have built up a reservoir
of credibility and reliability that we trust.

But a reputation is not indestructible. In truth, even among

computer companies, few of us could deny not having become
slightly suspicious of IBM's computer products after the public
knocks the company took for falling behind the times in the late
1980s. You'd better offer large discounts, many buyers told IBM, if
you want us to buy your products. Not surprisingly, the large
volume of bad press meant not only a down turn in the company's
reputation and sales but a nosedive for its stock — one measure of
its reputational capital. In 1992 alone, IBM's market value dropped
by more than 50 percent.

The point is this: A reputation is valuable because it informs us

about what products to buy, what companies to work for, or what
stocks to invest in. At the same time, a reputation is of
considerable strategic value because it calls attention to a
company's attractive features and widens the options available to
its managers, for instance, whether to charge higher or lower
prices for products and services or to implement innovative
programs.

58
BUILDING REPUTATION
Long ignored, intangible assets are now gaining increased
notice. In the last few years, those of us who study corporate
strategies have begun to recognize that intangible assets may
well provide companies with a more enduring source of
competitive advantage than even patents and technologies; the
venerable names of companies like 3M, Procter & Gamble,
McKinsey & Company, and Johnson & Johnson are, quite literally,
as good as gold.

Although many managers today are willing to admit that

intangible assets like reputations do have value, most still
demonstrate inconsistent attention to the practices necessary
to sustain corporate reputations. In this book, I demonstrate
how great the economic returns to reputation really are. I also
show that in companies where reputation is valued, managers
take great pains to build, sustain, and defend that reputation by
following practices that (1) shape a unique identity and (2)
project a coherent and consistent set of images to the public.
Examples of these practices include:

• designing advertising campaigns that promote the

company as a whole, not just its products and brands.

• carrying out ambitious programs that champion

product quality and customer service with an eye to
keeping consumers happy.

• maintaining control systems that carefully screen

employee activities for their possible reputational side
effects.

• demonstrating sensitivity to the environment, not only

because it's socially responsible but because actions that
safeguard the environment also dovetail with marketing
programs to generate sales.

• hiring internal staff and retaining specialized public

59
 relations agencies to safeguard communications
through the media.

• demonstrating "corporate citizenship" through

philanthropy, pro bono activities, and community
involvement.

These efforts are "enlightened" investments. They reflect a

commitment to long-term reputation building as well as
short-term self-interest. They create economic value because
they reinforce a company's competitive position and improve
its long-run chances of achieving and maintaining success.

The proliferation of such subjective rankings as "best

managed," "most innovative," and "most admired" attests to
the growing popularity of reputation as a tool for assessing
companies. Every year since 1983, for instance, the widely read
business magazine Fortune has published a survey of analysts
and managers that ranks the top 10 firms in each of 32
industries on various dimensions. The annual issue describing
the most admired companies in the United States is
consistently a best-seller. It indicates the widespread, almost
voyeuristic interest that we take in such corporate pageants
and horse races. Operating as most of us do in a cloud of
uncertainty about what the "true" performance of a company
is, we find ourselves eagerly drawn to these summary
appraisals. The rankings crystallize for us on the outside what
everybody else thinks about the "net" performance of the
company. As Fortune writer Rahul Jacob notes, "There's a neat
circular logic at work here: CEOs value reputation because it
defines a company and motivates its people."5 In turn, it creates
a yardstick that makes CEOs like Jamie Houghton of Corning
claim that winning a place among the top 10 companies in
Fortune's survey is one of the company's goals.

Questions of reputation are of particular concern to

knowledge-based institutions like consulting firms, law firms,
investment banks, hospitals, and universities; their most

60
valuable assets-the services they provide­ are largely
intangible. Economists call the services of these groups
"credence goods" — goods that are bought on faith, that is to
say, on reputation. In the late 1980s, growing rivalry and
declining economic conditions forced service groups to
compete for clients. They began to recognize that they relied on
their reputations to attract customers and market their
services; that their reputations were a significant form of
capital that went unrecorded on their balance sheets. In the last
few years, professional service firms have come to see
exploiting, sustaining, and defending reputation as more vital
strategic concerns.

A case in point is the scrambling for position now under

way at graduate schools of business in the United States. For
years, an accepted ranking distinguished business schools
based in the older Ivy League universities from those in lesser
schools. In the late 1980s, however, demographics hit hard.
Increased rivalry for a declining population of students
heightened interest in what those business degrees were really
worth. When Business Week published its first ranking of
business schools in November 1988, the issue was an instant
best-seller. As chapter 10 shows, these rankings created
unprecedented turmoil in the country's leading business
schools.

In part, business schools were caught by surprise because

prior ratings had gauged schools' relative performance
primarily from assessments made by deans-truth be told, not
an unbiased group. Instead, Business Week offered a ranking of
schools based on surveys of former students and recruiters,
two constituencies whose opinions had never before been
solicited systematically. For the first time, schools could be
ranked on client perceptions, that is, on reputation. The scores
proved influential. They had a marked effect on the number of
applications received by schools in the following year, and so lit
a fire under previously complacent faculties and

61
administrators. In turn, savvy business school deans slowly
turned their attention to the underlying factors that build,
sustain, and defend reputation. Concerned schools like the
University of Chicago, University of Maryland, and New York
University actually hired public relations firms to help them
strategize.

In recent years, many prominent companies also found

their reputations sullied, and so called attention to the
importance of protecting and defending reputational capital.
Consider the icon of modern business, IBM, a company with a
computer franchise that once seemed impregnable and
management practices that appeared beyond reproach. For
much of this century, IBM consistently ranked among the best-
managed companies in the world, a place employees were
enormously proud to work. In the late 1980s, however, much
changed: The reputation of the company affectionately known
as "Big Blue" took a nosedive; in Fortune's survey of America's
most admired companies, IBM fell from number 1 in 1986 to
number 7 in 1987 to 32 in 1988. By 1994, IBM was ranked a
pedestrian 354 in the magazine's annual survey, and
connection to the company had become a source more of
embarrassment than pride to customers, suppliers, and
employees as the press repeatedly detailed the company's
mishaps.

Or look closely at auto behemoth General Motors, a

company with a far-flung empire that once seemed
invulnerable; or even retail king Sears Roebuck, with a
stranglehold on the American shopper that once seemed
unbreakable. In 1972, all three companies-IBM, GM, and
Sears-had sterling reputations and were among the world's six
most valuable companies. Twenty years later, the three of them
were ranked a lowly 206, 268, and 300, respectively, in Fortune's
survey of corporate reputations. The decline of these once
heroic companies suggests how important it is for managers to
learn not only how to sustain competitiveness through

62
strategic positioning but also how to preserve reputational
capital.

Various accidents and scandals have also helped to magnify

the hidden value of a company's reputation and called attention to
its defense. One example is investment banker Salomon
Brothers. In 1991, Salomon was struck by a scandal that
threatened the bank's hard-won franchise in trading
government bonds — and, indeed, its very existence. It took
considerable savvy on the part of Salomon's board of
directors to shore up the bank's reputation with regulators,
clients, and employees. Exactly how the bank's adroit
strategy of self-defense ultimately preserved its
reputational capital is described in chapter 15. If top
executives are to sustain their companies' intangible wealth,
they will have to master just such judo-like skills.

FROM FAME TO FORTUNE

Reputation: Realizing Value from the Corporate Image examines
how managers and companies compete-not only for market share
through classic strategic positioning but also for the esteem of
their key constituents — for reputation. To achieve prestige
requires a long-term outlook toward building competitive
advantage. Companies develop winning reputations by both
creating and projecting a set of skills that their constituents
recognize as unique. For some companies, that means
differentiating themselves through innovation-nurturing good
ideas, translating them into products, and marketing them well.
In other companies, uniqueness comes from developing
operational excellence — a low-cost position with excellent
distribution systems — or closeness to the customer-distinct
strength in servicing customers and solving problems.6 Whatever
form differentiation takes, achieving uniqueness requires routine
actions that demonstrate credibility and earn the trust of key
constituents.

63
 This book shows that better-regarded companies build
their reputations by developing practices that integrate
economic and social considerations into their competitive
strategies. They not only do things right — they do the right
things. In so doing, they act like good citizens. They initiate
policies that reflect their core values; that consider the joint
welfare of investors, customers, and employees; that invoke
concern for the development of local communities; and that
ensure the quality and environmental soundness of their
technologies, products, and services. Reputation confers clear-
cut advantages and privileges on companies.

We trust those companies that we respect, so we grant them

the benefit of the doubt in ambiguous situations. Often we
willingly pay handsomely for their products, believing those
products are more likely to fulfill our expectations than the
products of lesser-known companies. A good reputation builds
a competitive advantage against rivals. It proves difficult to
imitate, and it limits what rivals can do. Which makes
Reputation a book about why companies come to be highly
regarded, about the factors that build favorable word of mouth
about a company, its products, and its practices.

At the same time, reputations create responsibilities. The

raised expectations of a company's many audiences constrain the
actions of its managers. To be held in high esteem creates
obligations that managers and companies must live up to,
whether in meeting the personal standards of employees, the
quality standards of customers, the ethical standards of the
community, or the profitability standards of investors. Companies
that become well regarded sustain their reputations by building
strong and supportive relationships with all of their constituents.

Most important, this book makes clear that every company

has a greater or lesser amount of reputational capital. A
company's reputation is a fragile, intangible asset that we must
learn to exploit at least as well as we do the more tangible

64
assets of financial capital or plant and equipment. Indeed,
learning to actively manage reputational capital­ and the
human and intellectual assets it encompasses-may be the most
crucial and strategic task that our executives face as they
struggle to compete in today's increasingly competitive,
information-rich business environment.

A focus on corporate reputation stimulates us to rethink the

traditional fragmentation of activities that now separates line
from staff in most companies, be it advertising from marketing
or public relations from specialists in community relations,
investor relations, and government relations. To "manage"
reputation is to insist on building closer ties between staff
groups and to exploit the latent commonalities of interest that
they share. After all, a common thread links these segmented
functions: a core commitment to capitalize on a company's
hidden store of reputational capital.

MANAGING REPUTATION: A FRAMEWORK

This book is divided into two parts. The first part explains how
companies compete for reputation. Much like athletes in Olympic
competition, their success rests on their ability to develop and
project a unique set of skills — a unique identity. A company's
name is one component of its identity. It conveys to us the
company's most distinctive traits and influences our behavior.
When a company serves its constituents well, its name becomes a
valuable asset. It creates reputational capital — a form of intangible
wealth that is closely related to what accountants call "goodwill"
and marketers term "brand equity." A company with a large stock
of reputational capital actually gains a competitive advantage
against rivals because its reputation enables it to charge premium
prices for its products, to achieve lower marketing costs, and to
benefit from greater freedom in decision making. In other words,
reputation building is a form of "enlightened self-interest."

65
 At heart, a company's reputation therefore derives from its
identity. It can be traced to managerial practices that make a
company a good workplace for its employees, a good provider
of products and services for its customers, a good investment
for its shareholders, and a good citizen in its local
communities. Because traits like these build reputational
capital, they give a company the Midas touch. At number 3 in
Fortune's 1995 survey of corporate reputations, Coca-Cola is
among the few companies to have developed the Midas touch.
Coca-Cola's top man, Roberto Goizueta, recognizes the link
between identity and reputation: "A CEO is ultimately
responsible for the growth of a company as evidenced by its
financial performance, its capacity for self­renewal, and its
character. The only way you can measure character is by
7
reputation."

But reputations also develop as companies try to build up

favorable images of themselves. It's obvious, for instance, that
managers regularly manipulate their presentations to
reporters and financial analysts-they put a spin on things.
They also try to control the propagation of rumors and
innuendo that invariably takes place throughout the business
community. Reputations are therefore partly a reflection of a
company's identity, partly a result of managers' efforts to
persuade us of their excellence.

When managers do a good job of safeguarding the

reputations of their companies, their efforts can often pay
off with prizes and awards. Favorable ranking in
reputational surveys like Fortune's is one tool companies rely
on to confirm their status. Such a ranking creates intangible
barriers to competition that lesser rivals find difficult to
overcome. The first part of the book concludes with a
chapter describing the "reputational audit" — a systematic
process designed to help managers identify, assess, and
exploit their reputational capital. The audit is a powerful
tool that can help a company to confront its reputational

66
strengths and weaknesses, to unify its diverse images, and to
more closely relate its identity to its reputation. The last
chapter in part 1 also emphasizes the importance of a strong
executive role in managing reputation, and makes
recommendations as to how companies can better capitalize on
their intangible assets. Particularly critical to building,
sustaining, and defending a company's reputation, I suggest
here, is a closer coordination of traditional fiefdoms: employee
relations, public relations, customer relations, investor
relations, and media relations. Because most companies have
historically allowed these functions to be ruled by separate
chieftains, linking them is no simple task.

The second part of the book discusses how reputations are

actually managed in practice, exploring how companies try to
fuse their multiple images in ways that build reputational
capital. Six case studies detail how a mix of companies and
industries actually build, sustain, and/or defend their
reputations through a variety of identity-shaping and image­
making practices.

One case study looks at the fashion industry, a world that

brings together a large number of companies, each of which is
heavily concerned with reputation. We'll closely examine the
persistent efforts of these enterprises to build and maintain
prestige, the fountain of wealth that strong reputations bring to
exclusive designer labels.

A second case study focuses on the reputation-building

efforts of U.S. business schools. As just mentioned, declining
enrollments and increased competitive pressure have forced
leading MBA academies to recognize that their success depends
heavily on how well alumni and recruiters perceive and rate
them. In the 1990s, we find business schools actively
strategizing to enhance their reputations. Most of them are
hard at work reinventing themselves, placing greater emphasis
on teaching and on outreach activities to strengthen the

67
esteem with which students and employers regard their alma
maters.

Wherever money is to be made, consultants appear, and

reputation building is no exception. We therefore examine at
length the segment of the consulting industry that calls
attention to corporate identity — a key element in the
construction of favorable corporate images. In particular, we
discuss the operations of Lippincott & Margulies — the
original consultancy that has helped to shape the identities of
many of our largest companies.

Turning to consumer goods, where reputation is at the heart of

creating successful brands, I focus on Church & Dwight. In recent
years, the well-known maker of Arm & Hammer products has
taken great strides to exploit its famous brand name and
build a reputation as an environ­ mentally friendly
producer, despite the aggressive tactics of its far larger
rivals Procter & Gamble and Unilever. Church & Dwight's
success in this uphill battle testifies to the marketing
benefits that can derive from actively managing reputation.

Much as fashion businesses, business schools, and

consumer goods companies are hard at work building
reputations for their institutions, so too are professional
groups. Their performance depends heavily on their clients'
perceptions of their services. The final chapters of the book
examine investment banking, a knowledge-based industry
with features common to many other professional services.
Investment banks are particularly interesting because their
core activities expose them not only to high levels of credit and
capital risk but also to extraordinary reputational risk s that
threaten their very existence. I therefore examine how top
bankers conceive, monitor, and control the reputational risks
to which they are open on a daily basis. Later, I also show how a
large bank like J. P. Morgan participates in a portfolio of external
practices that help to broaden its visibility in New York City. In

68
addition to its philanthropic gifts, a program of active support for
nonprofit groups involves employees of the highly regarded bank
in volunteer activities that project Morgan's polished image out to
its constituents and help the bank sustain its reputation. The
second part of the book ends with a detailed analysis of the
scandal that plagued prominent banker Salomon Brothers in 1991.
Salomon's example provides a valuable lesson in the defensive art
of corporate judo.

Ultimately, fame places its own constraints on those firms that

achieve it. In 1994, Intel, the highly regarded maker of silicon
chips, experienced these constraints firsthand when a design flaw
was uncovered in its top product, the Pentium processor. Intel's
managers responded to the crisis with typical engineering
arrogance; they initially denied that a flaw existed and, when
confronted with mounting criticism, minimized its significance to
the average user. They thereby failed to recognize the reputational
damage that the perceived flaw in the chip was inflicting on the
company. Not only did the debacle cost the company money in lost
sales, but it temporarily eroded valuable reputational capital. The
market value of the company fell by close to 15 percent. I therefore
conclude the book with a closer look at the burden that being well
regarded imposes on companies and their managers.

69
70
 PART ONE

THE HIDDEN VALUE OF A GOOD REPUTATION

71
72
CHAPTER 1:
AS GOOD AS GOLD
“If one's reputation is a possession, then of all my possessions, my
reputation means most to me. . . . I can no more easily renounce my
concern with what other people think of me
than I can will myself to stop breathing.”

Arthur Ashe

O
URS IS an age that celebrates greatness. We value aptitude,
worship talent, exalt brilliance, and revere genius. We bask
in the reflected radiance of our idols, and for that we gladly
confer on them not only transient fame but lasting fortune. Those
few people lucky enough to earn such acclaim, be they musicians,
artists, writers, athletes, or actors, we endow with inordinate
status-stardom and superstardom. Not content that they should
merely display their talents, we often assign to them near
mythical, demigod status and expect perfection in return.

So it is with our best companies. As producers of the products

we consume, as investors of our capital, as employers of our labor,
large companies have become the modern icons of our mass
society. Not only do we dance to the tune of their decisions, but we
increasingly worship at the high altar of their fame.

The pivotal role such companies play in the economy has

raised their public profile to levels ordinarily reserved for movie
stars. Everywhere we look, whether on billboards, on television,
on T-shirts, or on food cartons, we are bombarded with their
logos, their jingles, their ads. So much so that we recognize many
of them by convenient shorthands, acronyms like IBM, GE, AT&T,

73
GM, and J&J. They are as familiar to us as members of our own
families.

In turn, heightened visibility has made a company's every

move increasingly subject to the scrutiny of a demanding
audience. More than ever before, they are in the limelight. Like the
traveling artists, troubadours, and musicians of earlier times,
modern-day companies perform for the attention and support of
patrons. They compete not only for the approval of consumers but
also for that of investors, suppliers, distributors, politicians, and
local communities.

In our time, competition for reputation operates as never

before. The rise of a mass market for information has made
possible ever greater levels of prestige and wealth for the
exceptional artist, the exceptional athlete, and the exceptional
company. For the individual, perhaps nowhere are the wealth-
generating effects of reputation more apparent than in athletic
competition, and nowhere more so than at the Olympics. In 776
B.C., the Greeks held the first Olympic Games. Hordes of
spectators converged on the city of Olympia from every part of
Greece, Asia, and Africa. Athletes came to compete in five sports:
running, leaping, wrestling, javelin throwing, and boxing. Poets,
musicians, and playwrights also took advantage of the games to
present their productions to a public hungry for entertainment.
Following the games, the fame of victorious athletes and favored
artists spread far and wide. The tradition continues. Today
athletes from around the world gather every four years amid much
fanfare for all-out competition. When the dust settles, three
Olympians are left standing in each sport. For this achievement,
each gets a medal: gold for the winner, silver for the runner-up,
and bronze for third place.

As in the games of ancient Greece, contemporary Olympians

receive no monetary awards. To receive a medal, however, is to

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take home a far more valuable, albeit intangible, asset-a
reputation. Once established, a reputation brings publicity, and
that's one thing all shrewd marketers know how to convert to
cash, and lots of it. Indeed, when fame comes calling, fortune is
seldom far behind. Today an Olympic gold medal can be worth
many millions of dollars in licensing and commercial fees. And the
Olympic motto-Cittius, Altius, Fortius, or faster, higher,
stronger­ although intended for athletes, could just as well
describe the flow of money that swirls around them.

Ask speed skater Dan Jansen. Having faltered in two previous

Olympic tries, his heartwarming gold medal win at the 1994
winter Olympics was expected to bring him more than $2 million
in endorsement deals. Or speak to figure skater Nancy Kerrigan.
After receiving a blow to the knee in early 1994 in an attack that
turned out to have been master­ minded by the camp of rival
skater Tonya Harding, Kerrigan's earning power grew
dramatically. Win or lose, Kerrigan's highly publicized plight
virtually guaranteed that she would obtain lucrative endorsement
deals with prominent corporate sponsors like Walt Disney and
Revlon. After her silver-medal finish, market hounds estimated
that the publicity surrounding her ordeal would bring her upward
of $10 million.1

Much as athletic competition crowns champions and builds

wealth, so too do fame and fortune accrue to companies skillful at
winning in the highly contested terrain of business. After all, in
the twentieth century's market economies, business is probably
the biggest sport of all. Companies try to outdo rivals on a daily
basis by being the first to market new products, to hire the best job
candidates, to win customers, and to show profitability. As in
competitive sports, the losers in the economic arena far
outnumber the winners, and the corporate landscape is littered
with the remains of those outdone in the epic struggle for market
share and profitability.

75
 Consider CBS, the network that broadcast the 1994 winter
Olympics. In 1993, the network's reputation was severely bruised
by defecting shows, loss of its football franchise to archrival ABC,
and lackluster programming. Many critics claimed that CBS had
overbid for the right to broadcast the Olympics. The critics were
proved wrong. In January 1994, the Kerrigan-Harding figure-
skating saga drew such large audiences that the ratings helped to
reinvigorate CBS's sagging fortunes and repair its reputation.
Indeed, in the aftermath of Olympic coverage, many CBS shows
gained market share-and the trend held: In March 1994, the CBS
Evening News, for one, took away the top spot in the ratings from
ABC's newscast for the first time in 76 weeks — a side benefit the
company attributed directly to the Olympic broadcast.
Unfortunately the advantage was short-lived; lacking strong
programming, CBS soon deteriorated in the ratings.

The battle to make and market products and services confers

on winning companies — as it does on Olympians — a heady dose
of fame. Partly because of their products, partly because of their
practices, we come to regard winners as being somehow "better"
than others. These are the companies we come to know best. They
are frequently cited in surveys of the best companies in America to
work for: Campbell Soup, Eastman Kodak, H. J. Heinz, Procter &
Gamble, Sara Lee, Wal-Mart, Xerox-these names are recognizable
across America and even around the world. These companies
exhibit their reputations much as gladiators once displayed their
laurels. In logos, ads, jingles, labels, and commercials, they
proclaim their hard-earned record of victories in the economic
arena.

Who among us could fail to associate the Walt Disney

Company with Mickey Mouse, family movies, and theme parks? Or
the American Express Company with its prestigious credit card? Or
Avon with the home selling of women's cosmetics? Over the years,
each of these companies has developed a distinct reputation, one

76
that crystallizes for us the essence of what the company does and
what it stands for. We probably would be surprised and profoundly
shocked were Disney to suddenly produce X-rated films, American
Express to buy a discount retailer, or Avon to make farm
equipment. And such initiatives would likely fail. In fact, Avon
tried its hand at prestige retailing in 1979 by purchasing
Manhattan's famed Tiffany store, only to resell it five years later
at a loss. American Express tried its hand at broad-based financial
services with the purchase of investment bankers Lehman
Brothers and brokers

F. Hutton and Shearson, only to find itself extended into

ventures worlds apart from its traditional business. In part, both
Avon and American Express failed in their diversification efforts
not only because they entered businesses they did not know how
to manage but because those businesses projected images
incompatible with their established reputations. Managers,
customers, employees, and investors were never able to bridge the
reputational gap.

LET THE GAMES BEGIN

We generally describe companies in mundane terms-as rivals
struggling to improve their market shares and profitability levels.
In fact, companies are actually engaged in mortal combat for the
respect and trust of consumers, investors, employees, and the
public at large. Respect and trust build reputation, and that's what
creates a competitive advantage. By attracting investors to a
company's securities, customers to its products, and employees to
its jobs, a favorable reputation improves a company's profitability
and enhances its chances of surviving the competitive fray.

Where then do corporate reputations come from? Why do

some companies regularly capture the gold in corporate
olympiads? What kinds of management practices produce first-

77
rate corporate reputations? And how do highly regarded
companies like Merck, Coca-Cola, and Walt Disney manage not
only to scale Olympic heights but to stay on top?

Before we look at companies, it may be instructive to look at

individuals. Similar questions are often asked of them. What
brings some athletes a gold medal while others struggle in vain to
make a mark? How do some writers and their publishers come to
win a Pulitzer Prize while others get only passing mention? Why
do so few painters, sculptors, or musicians achieve reknown while
most toil in near total obscurity? And what earns one person a
Nobel prize, an Oscar, a Tony, or a Grammy while other hopefuls
are overlooked?

Most of us adhere to an individualistic view of success.

Whether speaking of athletes, artists, performers, writers,
political leaders, or scientists, we like to ascribe their success to a
God-given talent or "natural gift." Since we can't change what
we're born with, this view absolves most of us of any real
responsibility for failing to achieve greatness. You are what you
are; don't try to become what you are not. Great leaders, we seem
to think, whether Olympians or Nobelists, are born, not made. To
hold an individualistic view, however, is to ignore the social world
that helps some people to succeed and thereby gain reputation. It
disregards the contributions to success that a collectivity of
constituents — peers, patrons, and audience-makes to a work or a
performance, and so to the reputation of the artist, the actor, or
the athlete. As one observer of the world of art put it:

The artist . . . works in the center of a network of

cooperating people, all of whose work is essential to the final
outcomes. . . . Works of art, from this point of view, are not the
products of individual makers, "artists" who possess a rare
and special gift. They are, rather, joint products of all the

78
 people who cooperate via an art world's characteristic
conventions to bring works like that into existence. . . . All
these participants in art worlds produce the circumstances in
which artists define the problems they work on and find the
solutions, embodied in works, which contribute, for good or
bad, to their reputations.2

Or take Olympic athletes. Consistent with an individualistic

bias, most people marvel at the athletic prowess of medal
contenders and ascribe to medalists a combination of innate
ability and hard work. We assume that star contestants
outperform everybody else because they're endowed with that
elusive something we call "talent." While talent is critical, it's not
everything. Detailed studies of Olympians show that they are
unique not in what they are but in what they do.3 For one, they
compete in a world different from that of the run-of-the-mill
athlete. For another, they develop a style and technique that is
uniquely theirs.

Watch Olympic swimmers at close range, doing, say, the

breaststroke. Ordinary athletes generally pull their arms back too
far beneath the body, kick their legs out too wide without bringing
them together at the finish, and lift themselves too high out of the
water. They fail to take a long pull underwater after turning, and
often touch the edge of the pool at the finish with only one hand.
In contrast, Olympic swimmers scull their arms out to the side and
sweep back in (never actually pulling back), kick narrowly with
their feet finishing together, stay low on the turns, take a long
underwater pull after the turn, and always touch at the finish with
both hands. As one observer puts it: "Not only are the strokes
different, they are so different that the 'C' swimmer may be
amazed to see how the 'AAAN swimmer looks when swimming.
The appearance alone is dramatically different, as is the speed
with which they swim."4 It's true of champion downhill skiers,

79
speed skaters, tennis players, and figure skaters as well. Their
competitive success derives from having developed unique,
qualitatively different combinations of style and technique.

Just as "C" athletes differ in style and technique from "AAAN'

athletes, so do individual Olympians competing in the same sport.
Faced with the same downhill course, tennis court, or skating
rink, champions take dramatically different approaches to
performance. Which helps explain our fascination with these
competitive events. Winners achieve their lofty levels of excellence
through widely differing original means. And winners and losers
are separated by negligible differences, a few points here and
there in tennis, basketball, or baseball, hundredths of a second in
speed sports, and hundredths of a rating point in judged sports
like gymnastics or figure skating.

To achieve Olympic success also requires absorbing the points

of view, strategies, and lifestyles of top rivals. Listen to top
athletes and performers. They invariably compare themselves
with their chief competitors. When asked to recollect the factors
that spurred them to achieve, they allude to a great rivalry. In
professional tennis, for instance, longtime champion Chris Evert
invariably speaks of her career-long jousts with Martina
Navratilova; John McEnroe recalls how his tense struggles with
Bjorn Borg and Jimmy Connors forced him to new heights; Pete
Sampras and Andre Agassi fuel each other's success. In basketball,
the decade­ long rivalry between Magic Johnson and Larry Bird
spurred these players to greater feats on the court. Similar
contests are the stuff of lore in baseball and football; they make
for vivid theatricality in the volatile world of professional sports.
Top guns in every field compare themselves with the very best and
then continue at great effort to distinguish themselves from their
chief rivals. In corporate-speak, they benchmark their activities
against their toughest peers.5

80
 Moreover, what seems extraordinary to us about Olympic
athletes turns out to be quite mundane to them. That's because
Olympians demonstrate excellence by doing systematically a host
of quite ordinary things. For instance, if Olympic swimmers swim
faster than everyone else, that's because they've mastered the flip
turn, they know how to streamline their push-off by squeezing
their arms together over their heads, and they know how to place
their hands in the water so no air is cupped in them. They also
know how to lift weights to properly build strength, what are the
right foods to eat, and what are the best suits to wear in a race. And
on and on. Each of these bits of knowledge, small in itself, allows
the athlete to do things just a little bit better, a little bit faster, a
little bit longer. Having learned and consistently practiced all of
them together, that athlete becomes top-notch and gets to
compete at the Olympic Games. Winning a medal involves the
synthesis of a countless number of little things, each one done
very well indeed.6

In short, fame-like a sterling reputation-is hard-earned. It

derives from developing a unique style; from comparing oneself
with "the best" in a particular field of endeavor; from sustaining
ingrained habits that consistently produce high-quality
performances. Few can put it together "just right," which is why
there are so few stars, so many unknown hopefuls. 7

As in athletic competition, so it is in business. Our best-

regarded companies rise above the rest in prestige, status, and
fame because they prize, pursue, and achieve uniqueness.8 They
do so by developing management practices that reinforce their
uniqueness and foster consistent images of the company as
credible, reliable, responsive, and trustworthy. Insofar as those
images are benchmarked against top peers, communicated
persuasively to a company's constituents, perceived by those
constituents to cohere, and maintained over time, they enhance
the company's reputation and build competitive advantage.

81
 Reputations are therefore both products and by-products of
competition. They rest on the foundation of a company's
uniqueness-its ability to chart a course that separates it from the
pack. The best-regarded companies love to proclaim their
uniqueness. They actively rate themselves against a prominent
peer group of rivals. They also practice assiduously some relatively
mundane routines that help their products and services stand out,
even in crowded and competitive industries.

CREATING UNIQUENESS
The Morgan Motor Company is the world's oldest privately
owned car maker. Since its founding in 1909, the British company
has built open­topped sports cars with a vintage 1930s look on
hand-built frames made of 100-year-old ash. Every year, the
company's 130 employees put out just 480 cars, half of which are
sold abroad. Every Morgan is unique and reflects a particular
customer's personal choices from among 35,000 body colors, with
matching leather upholstery, and from options on such things as
door handles and hood straps. Despite customization, the
company's flagship Plus Eight model sells for a relatively
affordable £26,000 (under $30,000) and is known to hold its value
well.9

The company's reputation derives from its unique product. In

turn, the product's uniqueness calls for management practices
that stress product quality and customer service. One such practice
is Morgan Motor's standing invitation to customers to visit the
factory and watch their car being made, a process that can take up
to seven weeks. Recognizing the motivational benefits of pride in
and ownership of one's work, the Morgan Motor factory eschews
specialization and delegates responsibility to individual workers
for large parts of each car; the wooden frame is assembled entirely
by one person, while the body is fully paneled by another. The

82
reputational effects are crystal clear. Demand far outstrips supply,
and there's a six-year waiting list of buyers. Pretax profits for
1992 were close to £1 million on sales of £7.8 million. Obviously,
Morgan Motor's uniqueness serves it well.

In similar ways to Morgan Motor, the reputations of large

companies like Eastman Kodak in photography, Xerox in
photocopying, Wal-Mart in retail, Coca-Cola in soft drinks, and
Boeing in aircraft also derive from their success in developing,
producing, and marketing a unique product or service that suits
many consumers. Of the 50 largest companies in the United
States, for instance, more than half are easily identified with the
products they originated. Their reputations are product based, and
their celebrity rests on a distinctive innovation, frequently
traceable to a single founder: Henry Ford at Ford Motor Company,
Thomas Edison at General Electric, Edwin Land at Polaroid.

If a reputation delineates the uniqueness of a company to

outside observers, it also personifies the singular identity of the
company to its employees. Strong founders imprint their
companies with their personal characteristics. Over time, founders
force their companies to adopt distinctive practices that make
each look different from the other. For many years, IBM's
formality in dress, control of office decor and architecture, work
manner, and ceremonial style stood in stark contrast to Apple's
laid-back street smarts and informality. Each company is uniquely
itself, and its evolving identity has reinforced its external image.
Which is why IBM's announcement in February 1995 came as such
a surprise: To convey an image of competitiveness with Apple,
IBM decided to abandon its dress code of white shirts and dark
suits in favor of a more informal, casual look.

Uniqueness is also key to reputation building and competitive

advantage among professional service firms. Investment banker
Salomon Brothers, for instance, is a company that has carved its

83
reputation in its trading franchise, which it maintains through a
plethora of corporate practices that fuel individual
competitiveness. In contrast, the mystique of banking's premier
firm Goldman Sachs is built around a core set of values that
emphasize customer service, team-based interactions, and a
strong culture of checks and balances.

Likewise, McKinsey & Company stands out from the field of

management consultants. It commands a pristine reputation for
delivering expert advice to senior executives from a host of
Business Week's Global 1000 firms. To do so, the firm tries hard to
recruit the best. It's populated by talented people with big salaries
and even bigger egos. With 62 offices in 31 countries, the 3,000-
member firm's reputation rests on its ability to bring unparalleled
analytic power to bear on a client's problems. That reputation is
reinforced by a set of image-making practices that sustain the
McKinsey "mystique" in the business schools where the company
recruits (principally Harvard) and in the press (which it avoids).

Or consider law firms. Many people think that all law firms
look alike. As it turns out, they don't. A group of former Harvard
law students interviewed lawyers working in their first jobs as
junior associates around the country and compiled profiles of
leading law practices. Their book, The Insider's Guide to Law
Firms, presents a dramatically different account of law firms as
extraordinarily diverse in character and reputation.10 Some are
depicted as starchy and traditional, others more relaxed and
friendly; some highly conservative, others downright radical.

To what, then, do these law firms ascribe their reputations? In

1989, attorney Erwin Cherovsky pointed out that "one should
never confuse the outward similarities of firms with their inner
reality which, in fact, determines their culture, reputation, and
destiny."11 He later wrote in his Guide to New York Law Firms that
"anyone who truly knows these firms-their personnel, tradition,

84
governance, expertise, and clients­ appreciates that they are in
key respects very different institutions from the ways in which
they have been portrayed."12

In periodic surveys sponsored by the American Lawyer, junior

lawyers regularly describe their law firms on various dimensions.
A few years ago, I studied their responses and found that young
attorneys make a twofold distinction: one between law practices
where reputations are built on a unique competence in more or
less specialized areas of corporate law; another between law firms
where enduring character is regarded as more or less work driven
or collegial. The law practice of Wachtell, Lipton, Rosen & Katz is a
case in point. The Park Avenue firm is well known for its
profitability. During the merger boom of the 1980s, the firm built a
reputation as a skilled specialist with strong technical expertise in
the design of innovative instruments to finance takeovers. In
doing so, it also developed a reputation for maintaining an
internal climate where only the smartest, fittest, workaholic
associates could survive. Bill Starbuck, a professor at NYU,
explored the factors that made Wachtell so successful and
concluded-like Cherovsky and the junior lawyers surveyed in The
Insider's Guide to Law Firms — that the firm owes much of its
reputation to its idiosyncratic character:

Wachtell's extraordinary success derives from its

individuality. Not only does [it] differ in important ways from
all organizations, it differs in important ways from the mass
of law firms and . . . from other highly successful law firms.
Wachtell is quite distinctive, and other law firms have not
imitated its distinctive properties.... Wachtell's success with
M&A cases arose partly from its ability to innovate, partly
from its use of team-work, partly from its willingness to
practice law 168 hours a week, partly from its self-

85
 confidence, and partly from the personalities and abilities of
its founders. 13

In short, Wachtell's homegrown characteristics have made it

unique, and the firm's uniqueness is the heart and soul of its hardy
reputation. These comments reinforce the point that in law firms
and consulting firms — as in all companies — uniqueness is a
prized commodity that builds reputation.

BENCHMARKING THE BEST

Being unique, credible, and consistent breeds imitators and
spurs competition. That's why most managers of well-regarded
companies are quite self-conscious about how they are seen on
the outside — especially by customers and investors — and
rightly so. Like athletes, they too gauge their results against other
Olympian companies. In his 1990 book New and Improved,
Harvard historian Richard Tedlow recounts how the evolution of
business in this century involved dynamic rivalries between a
handful of players: for soft-drink maker Coca-Cola, the rival was
Pepsi; for Ford, it was General Motors; for Sears, it was
Montgomery Ward. Managers made comparisons between them to
justify not only strategic investments but also decisions about
advertising budgets, charitable contributions, bonuses, and other
resources that could improve a company's public image. Each
benchmarked the other in its struggle to gain prestige or to retain
parity.14

Benchmarking has become popular in recent years as a

powerful tool for encouraging change. It helps companies imitate
good management practices as well as build valuable reputational
capital. Comparisons with rivals explain how deeply managers
commit their companies to investments in plant and equipment or
to research and development. Anyone who has ever received

86
multiple job offers can testify to the comparability of their pay
packages; companies generally tie their offers to those of their
principal rivals. Managers also do it in new product development,
in facilities planning, in manufacturing, and in philanthropic
initiatives. Take highly regarded banker J. P. Morgan, a company
we examine more closely in chapter 14. In deciding how much to
contribute to charitable causes, bank officers could look to a wide
range of financial institutions that includes brokers like Merrill
Lynch or investment bankers like Goldman Sachs. As J. P.
Morgan's head of community relations suggests, however, the
bank's donations are typically bench­ marked against the efforts
of Bankers Trust, a rival that Morgan more closely resembles as it
diversifies into investment-banking services.

Whenever a company becomes known for being "good" at

something, it becomes an especially attractive target for imitators.
Take companies best known for the quality of their products —
say Xerox in photocopiers, Caterpillar in farm equipment, Home
Depot in home improvement, the Marriott Corporation in hotel
services. Rivals benchmark their activities against these high-
fliers by ( a) observing their administrative practices; ( b)
identifying the kinds of relationships they maintain with
employees, suppliers, distributors, and the business media; and
(c) imitating their best practices. Imitation fuels an ever-
tightening spiral of competitive rivalry as companies vie for
attention, that is, as they compete for reputation.

In recent years, various popular prizes and awards have

provided managers with even more visible symbols to target-
benchmarks to rate themselves against. The Malcolm Baldrige
National Quality Award, for instance, provides one of the more
prominent reference points for assessing the internal quality of a
company's management programs. Although participation is
costly, competition for such awards is intense; the payoff for the
winner is enormous publicity. Companies benefit from ensuing

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gains in reputation, as attested by past winners Motorola, Xerox,
and GM. Awards bring visibility to outstanding companies and
encourage managers to benchmark their companies against
better-regarded rivals, fostering an upward spiral of
achievement.15

A reputation develops from a company's uniqueness and from

identity­shaping practices-maintained over time-that lead
constituents to perceive the company as credible, reliable,
trustworthy, and responsible. In turn, a company's established
reputation helps to protect it from rivals trying hard to imitate its
practices. Reputation builds strategic value for a company by
granting it a competitive advantage that rivals have trouble
overcoming. To achieve that advantage, however, a company must
develop appropriate practices, or character traits, as it were, that
rivals find difficult to imitate.

PRACTICING MUNDANE MANAGEMENT

A strong reputation may originate in a unique product, but it is
either reinforced or negated by an array of managerial practices
that project image and identity. In combination, these practices
signal the company's relative merits to observers and build up or
deflate the reputational halo around a company's products and
activities.

Long ago, management guru Peter Drucker recognized the

simple artfulness of corporate excellence. He concluded that
success in business "does not require special gifts, special
aptitude, or special training. Effectiveness as an executive
demands doing certain — and fairly simple — things. It consists
of a small number of practices."16

He was right. Our best-regarded companies achieve their

reputations by systematically practicing mundane management.

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They adhere rigorously to practices that consistently and reliably
produce decisions that the rest of us approve of and respect. Faced
with crises or accidents, their actions are governed by values,
systems, and processes that sanction justifiable responses. By
increasing our faith and confidence in the company's actions,
credibility and reliability create economic value.

Few large firms have built as much reputation in the last

decade as pharmaceutical giant Johnson & Johnson. Most of the
company's reputation derives from the reactions of its managers
to seven cases of cyanide poisoning attributed to ingestion of the
company's number 1 pain reliever, Tylenol, in 1982 and 1986. After
one victim died, the company immediately recalled all outstanding
Tylenol inventory, set up hotlines, launched an advertising
campaign, and offered rewards for information leading to the
arrest of the murderer. These active steps earned the company
enormous public sympathy and consumer trust, enabling
recapture of more than 90 percent of its former customers. J&J's
actions set a model for the industry in its social responsiveness,
creating virtually overnight a favorable reputation for the
company. It was, in fact, a seemingly miraculous comeback for a
brand that analysts and investors had all but condemned. When
asked, managers later explained their decisive actions on the basis
of the company's core values, enshrined in "The Credo," a set of
widely shared principles that specify the company's obligations to
consumers, employees, local communities, and stockholders and
that form the core of the company's identity.17

Contrast J&J's actions with those of the Exxon Corporation

following its 11-million-gallon spill of North Slope crude oil into
Prince William Sound, off the shores of Valdez, Alaska, in March
1989. After the spill, investors depreciated Exxon's stock by 10
percent, or some $6 billion. Since then, the company has been
castigated on multiple fronts, especially for its ( a) failure to take
quick and decisive action, (b) lack of credible concern for victims,

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(c) reluctance to take responsibility, and (d) poor communication
with the media.18 Probing below the surface, one can easily trace
these reactions to the "Exxon Way," a ponderous, insular culture
that champions analysis over action and so moves slowly; that
centralizes decision making and so constrains local
responsiveness; that eschews visibility and so shuns publicity.

The differences between J&J and Exxon are stark. They call our
attention to the everyday practices that compel managerial
decisions that we either applaud or condemn. As is the case for
individual athletes, details are what separate Olympian companies
from mere mortals. By doing the little things well on a consistent
basis, companies like J&J improve the likelihood that they will act
responsibly when faced with a crisis and so will earn a favorable
reputation.

In its heyday, Sears Roebuck was a company known for its

effortless ability to perform. But a rash effort to diversify out of
hard-goods retailing and into fashion merchandising and
financial services in the 1970s and 1980s destroyed much of the
valuable reputational capital Sears had created in its proud
history, placing it well behind Wal-Mart in most reputational
rankings of retailers. By 1994, Sears had divested itself of many of
those unrelated businesses and was busily returning to its roots.
Today, with its reputation resurging, it seems entirely possible
that the 1990s could replicate the 1960s. Its managers might want
to note that in 1964 a Fortune article praised Sears in these terms:
"How did Sears do it? In a way, the most arresting aspect of its
story is that there was no gimmick. Sears opened no big bag of
tricks, shot off no skyrockets. Instead, it looked as though
everybody in its organization did the right thing, easily and
naturally."19 When you come down to it, building reputation is
downright mundane.

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GOING FOR THE GOLD
When delegates to the International Olympic Committee
gathered in Monte Carlo in September 1993, they faced an
important decision: who would host the games in the year 2000.
The vigorous campaign pitted five cities against one another for
the honor: Istanbul, Berlin, Manchester, Sydney, and Beijing.
None competed more aggressively than China's capital city of
Beijing. Its bid took on political priority as Communist Party
leaders saw symbolic meaning in the start of a new millennium.

Hosting the games in 2000 would return China to the

international stage after years of isolation following the events in
Tiananmen Square, where in June 1989 the government crushed
the student-led democratic movement.

Throughout the first three rounds of balloting, Beijing led the

way, eliminating in quick succession Istanbul, then Berlin, then
Manchester. In the final round, only Sydney and Beijing remained.
In both cities, crowds stood poised, with bated breath, waiting for
the announcement. Suddenly, miscued by the speech of the
committee president, millions of Chinese standing in auditoriums
and by their television sets exploded into cheer-only to fall into
despair as seconds later they realized their error: Sydney had beat
out Beijing by a close vote of 45 to 43.

Like the Olympics itself, the contest to host the games builds
reputation. In the short run, the Olympic Games are always a
financial loss for the host country and city. In the long run,
however, enormous visibility, prestige, and recognition accrue to
a host, attracting tourism, business, and capital. Just as individual
athletes become famous from their victories in competition, so too
do cities and states gain a competitive edge on the global stage
from hosting the games. After winning the bid for the 1996
Olympics, the city of Atlanta acknowledged its lack of a clear

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identity and embarked on a massive effort to define itself to the
outside world. The hope? To shape a stronger sense of the city's
values-its sense of self-for the purpose of highlighting key traits
that might form the basis of a full-blown publicity campaign.

Similar concerns fuel rivalry among the four TV networks ABC,

CBS, NBC, and Fox for the contract to broadcast the Olympic
Games. In the past, CBS has consistently won out for the winter
Olympics, while ABC has held out for the summer Olympics.
Economics explains a good part of the value CBS and ABC attach to
winning the contract, but not all of it. For instance, at every
auction, observers like to proclaim that the winning network has
overbid for the deal and will lose money-the so­ called winner's
curse.20 In fact, they are probably not overbidding at all. Prior
experience gives the winning network marginally more
information and better estimates than any rival about the benefits
to be derived from coverage. For another, the winner's higher bid
incorporates the greater reputation-building side effects that it
attaches to its broadcast role. The strong ratings CBS obtained for
broadcasting the 1994 winter Olympics, for instance, cast a
welcome halo over the network's other programs and brought in
unanticipated revenues. Obviously, the bids are risky. But because
of the hidden reputational gains, winners have higher expected
returns on their investments than might be apparent.

In recent years, managers and researchers have begun to

recognize that competitive advantages based on reputation can
prove even more enduring than those that result from traditional
strategic positioning or from the development of proprietary
standards. Reputation is both a product and a by-product of
competition. It is produced directly as a firm builds competitive
advantage in pursuing uniqueness, as it differentiates itself from
rivals. At the same time, reputation is a signal. It informs
investors, employees, and customers, and so has real economic
value for the firm. In many companies, reputation is a hidden

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asset. It complements — and sometimes surpasses — the value of
the more tangible material and financial assets that managers
routinely worry about.

Different companies will deploy different strategies to build a

strong reputation. Some companies want to make their presence
known-they seem ever present in the public eye. Others prefer to
hide from the press-they keep a low profile. Either strategy can
help produce a resilient reputation and build economic value.
Those firms that favor low profiles generally want to avoid the
downside of prestige and fame. Much as star athletes and
performers complain of the rigorous demands of popularity, so do
some companies worry about performing in the spotlight, their
actions a constant source of commentary. As the late tennis great
Arthur Ashe put it, "No matter what I do, or where or when I do it,
I feel the eyes of others on me, judging me."21

The eyes of the world gaze steadfastly on Olympian companies.

With fame also come grave responsibilities: the duty to respond to
the demands not only of shareholders but of all constituents. And
that requires a closer look at the roots of reputation in the
company's identity.

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94
CHAPTER 2:
WHAT’S IN A NAME?
Our names are labels, plainly printed on the
bottled essence of our past behavior.

Logan P. Smith

N
AMES GIVE us legal status and distinguish us from one
another. In time, some names gain greater visibility and
prestige. In the United States, a Kennedy or Rockefeller
gets instant recognition, as does a Churchill or Thatcher in
England. Advertisers spend a wealth of energy gauging the
drawing power of individual names as well as of product names
and corporate names. Various consultants specialize in
nomenclature and offer naming services to companies struggling
to come up with identifying names for new products, divisions, or
businesses. Ultimately, a name crystallizes reputation: It anchors
public perceptions about a company and its products and
activities. This chapter examines the relationship between names
and reputations and explores the ways in which they reflect a
company's character, its sense of identity.

MARQUEE NAMES
In June 1989, the well-known industrialist J. B. Fuqua sold his
1.3 million shares in Atlanta-based Fuqua Industries and retired.
The old-line conglomerate's reputation was at an all-time high,
as was the company's market value of $600 million. By 1993,
however, the company's stock had plummeted to less than $175
million. Charged with mismanagement, its reputation tarnished,
Fuqua Industries was forced to withdraw a bond offering in the

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summer of 1992. In July 1993, the 75-year-old entrepreneur
offered the company a cool $1 million to retrieve his name. As Mr.
Fuqua put it, "I'm doing it to protect my name and reputation."
Starved for capital, Fuqua Industries accepted and was soon
reborn as the Actava Group.

Fuqua's attachment to his name is understandable. In pursuit

of immortality, he had given nearly $20 million to Duke
University's business school in 1980, in exchange for which it was
promptly renamed the Fuqua School of Business. In 1993, within
weeks of retrieving his name from the company he had founded,
he announced a donation of $10 million to the Prince Edward
Academy in Farmville, Virginia, a private school. In turn, the
school was renamed-you guessed it-the Fuqua School. As he said:
"If a school has my name on it, you can be assured that my family
and I will always be interested in it."

Schools are not the only institutions to play the name game.
Increasingly they find themselves competing with libraries,
concert halls, and museums. At New York's Metropolitan Opera,
for instance, patrons who donate $10,000 can get their name
inscribed on a plaque on the back of an orchestra seat. But that's
small potatoes when you consider what fashion designer Bill
Blass's $10 million donation to the New York Public Library got
him in January 1994. Within days of announcing the gift, the
library emblazoned his name in gilt over the entrance to its public
catalogue room. If value is measured by size, however, New York
real estate developer Samuel LeFrak may have gotten an even
better deal. For the same $10 million bequest he made that month,
the Guggenheim Museum named the entire building after him and
his wife, Ethel.

Why these gifts in the name of the giver? Because names have
great psychological value. Having our name on an enduring
structure appeals to us because it buys a piece of immortality.

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Being themselves in the business of money making, it's probably
safe to presume that J. B. Fuqua, Bill Blass, and Samuel LeFrak
hope to benefit from the indirect reputational gains that will result
from having their names associated with high-profile institutions.
In shifting their names from the business sphere to the social
sphere, they follow in a long tradition of U.S. philanthropists like
Andrew Carnegie, J. Pierpont Morgan, Henry Ford, and John
Rockefeller, whose enlightened worldviews admitted no
incompatibility between altruism and self-interest. Like their
forebears, the Fuqua, Blass, and LeFrak names now adorn
monuments and institutions in ways that will reinforce the value
of the companies owned by their descendants. Names are
important because they convey tacit information. They create
initial impressions in the minds of consumers and investors that
predispose us to feel better or worse. If you've ever tried to come
up with a name for a new product or a new business, you'll know
how agonizing it can be to pick just the "right" name. Names
evoke images, convey personality, and impart identity. They are
powerful symbols that define for others who we are and what we
can become. All parents know this. That's why they fret and fuss
so much before deciding on names for their offspring. For
children, names often pack a tremendous punch. They convey to
strangers important cues about their family's religion, race, and
origins.

In a market society like ours, it's clear that names-and the

reputations we associate with them-have economic value. Having
a "good" name can be worth big bucks. Ask Michael Jordan. In
1992, the basketball legend was named first in a survey of the 10
most wanted corporate spokespersons. Even after he unexpectedly
left basketball in 1993 and took up a lackluster baseball career,
Jordan continued to bring in top endorsement income from
companies like Nike, Hanes, General Mills, and Quaker Oats, who
pay him an estimated $13 million a year. When he returned to

97
basketball in March 1995, the CBS network, which broadcast his
first game, drew its highest rating of all time. Other athletes
whose names have the Midas touch include golfers Jack Nicklaus,
Arnold Palmer, and Greg Norman; quarterback Joe Montana;
hockey player Wayne Gretzky; and the colorful tennis pro Andre
Agassi. In 1994, it's estimated that each collected well over $5
million in annual income from lending their names to corporate
products-far more than their yearly earnings from their sport
itself.

If celebrity endorsements cast a welcome halo over corporate

products and generate sales, the reverse is also true: Celebrity
scandals can depress sales. Much fuss was made over media giant
Time Warner's decision not to renew the record contract of rap
performer Ice-T after his controversial song "Cop Killer" spurred
calls for a boycott of Time Warner products. Similarly, when
singer Madonna's hit song "Like a Virgin" was attacked for its
blasphemous use of religious symbols, PepsiCo dropped its
planned multimillion dollar advertising campaign with the pop
icon. And most visibly, despite 10 years of endorsements from
superstar Michael Jackson, the company severed its lucrative ties
with the entertainer in August 1993 following allegations that he
had sexually abused a child­ even though no legal charges had
been filed. As Nightline newscaster Ted Koppel put it at the time,
"Often it's not the reality but the perceptions that count most." By
dropping Michael Jackson, PepsiCo recognized the need to
minimize the impact of the scandal on the company's reputation.
As Clive Chajet, chairman of the identity consulting firm Lippicott
& Margulies, told us: "I really admire Pepsi's handling of Michael
Jackson. They have always recognized that the brand is the real
star. Nobody goes into a store to ask for a Michael Jackson drink.
They ask for a Pepsi. Just as it does for Coke, the brand name
overwhelms the name of the spokesperson, and that's hitting a
home run."

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 Names obviously convey images. When a name is popular, it
can stimulate product sales. When a name becomes controversial,
it can hurt a company and its products. Recall the sad saga of the
Helmsley Palace Hotel, the crown jewel in the Helmsley real estate
empire. Throughout the 1980s, the hotel enjoyed an enviable
reputation for luxury, quality, and service, fanned by a national
advertising campaign that featured Leona Helmsley as the self-
styled "queen" of New York's hotel industry. In 1989, after
Helmsley had been arrested, tried, and sentenced to a four-year
prison term for tax evasion, the hotel's reputation was severely
tarnished. Occupancy rates fell below 30 percent, to less than half
the industry average. In 1992, the hotel went into receivership and
was rechristened the New York Palace. In November 1993, the
royal family of Brunei purchased the troubled property for what
was widely considered a bargain price of $202 million. 1

SOME DEFINITIONS
Figure 2-1 shows the relationship between a company's
identity and its name, image, and reputation. Corporate identity
describes the set of values and principles employees and managers
associate with a company. Whether widely shared or not, a
corporate identity captures the commonly understood features
that employees themselves use to characterize how a company
approaches the work it does, the products it makes, and the
customers and investors it serves. Corporate identity derives from
a company's experiences since its founding, its cumulative record
of successes and failures. It describes the features of the company
that appear to be central and enduring to employees. 2 On a day-
to-day basis, corporate identity appears in the managerial
practices managers employ in their dealings internally with
employees and externally with other constituents.

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 Every one of us, however, regularly recognizes a company by
its name and by the many presentations it makes to describe its
actions, its plans, and intentions. We interpret those self-
presentations more or less favorably and form mental images of
the company. Sometimes a corporate image accurately mirrors the
company's identity; more often than not, the image is distorted (a
) as the company tries to manipulate its public through
advertising and other forms of self-presentation, or (b) as rumors
develop from the unofficial statements of employees to peers,
analysts, and reporters. In due course, different images form,
some consistent, some less so.

As evaluators rate a company against a peer group of others,

an overarching reputation crystallizes from the plethora of images
produced. Based on the American Heritage Dictionary's description
of the word "reputation," we define a corporate reputation as the
overall estimation in which a company is held by its constituents.

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A corporate reputation represents the "net" affective or emotional
reaction-good or bad, weak or strong-of customers, investors,
employees, and the general public to the company's name.

THE NAME GAME

Marketing Evaluations is a small Long Island outfit that
consults to the entertainment industry. Seven times a year, the
company surveys a nationwide panel of respondents and asks
them to rate some 1,500 public personalities. Each performer is
assigned a Q(uotient)-rating that gauges his or her mass appeal.
The rating divides an individual's popularity-how much a
performer is liked-by familiarity-how widely the person is
recognized. Table 2-1 lists the top 10 stars of 1991 and 1992 based
on their Q-ratings. Obviously, the list is dominated by star
performers on hit television series. Although he didn't make it
into the top 10 in 1992, basketball's Michael Jordan remains the
highest Q-rated athlete. In the movie industry, similar ratings are
used to distinguish so-called superstars from run-of-the-mill
stars in their ability to bring in larger audiences-their marquee
value, their box off ice draw. The salaries of those performers are
commensurate with their popular appeal. Across both the TV and
movie industries, a horde of reporters, agents, and publicists work
hard to build and sustain the ratings and economic value of those
individual names. When actors win prestigious industry awards
like Oscars or Emmies, their ratings rise, as do their clout and
income. In the 1980s, many corporate chieftains starred in
television commercials in an attempt to personalize their
companies. Chrysler's Lee Iacocca, Remington's Victor Kiam, and
Wendy's Dave Thomas were among the decade's more visible
media personalities. In recent years, the Q-ratings of these
executives have dropped precipitously, leading some to speculate
as to whether overexposure of corporate spokesmen breeds
contempt.3

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PRODUCT NAMES
Like individuals, product names have legal standing. In the
United States, trademarks and patents provide their owners with
virtual monopoly protection for some 17years. When products go
off patent, they become "generics," at which point it's a free-for-
all in the marketplace as competitors spring up from nowhere.
Many companies manage a stable of trademarks, especially in the
consumer goods industries and the chemical and pharmaceuticals
industries. For instance, ask giant Du Pont about the value of its
trademarks. The company invests aggressively in building up its
product names, even after imitators enter the marketplace. Nylon
and Lycra are among the trademarked products the chemical
company has made famous. Despite rivalry from substitute
products, Du Pont still controls the lion's share of the market for
synthetic fibers. Or take the company's famous Lycra, the original
fiber whose generic name is spandex. Although the 31-year-old
product's patent has long since expired, savvy marketing has
enabled Du Pont to retain its hold over two thirds of the world
market for spandex.

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 Most consumer products, however, are difficult to protect
from imitation. Maintaining the value of a product's name
requires aggressive action. A case in point is Rollerblade, the
Minnesota company that virtually invented in-line skating. Since
its founding in 1981, the company has seen its name become
virtually synonymous with the sport. When that happens, a
company can lose its competitive advantage to rivals who simply
copy the product and offer it at a lower price. To defend itself
against the influx of lower-priced generics, Rollerblade has been
extremely aggressive in the courts, most recently suing some 33
competitors in February 1993 for undermining the company's
high-profile brand name. Clearly, this is a company that
recognizes the dollar value of the intangible equity hidden behind
its brand name.

Preventing imitation of brand names requires extensive

advertising and promotion. Makers of consumer products are
among the largest advertisers, and their aim is not only to attract
customers to their branded products but to shut out rivals. The
cereal industry, for instance, is dominated by the Big Four:
General Mills, Kellogg, Post, and Quaker Oats. Through intensive
advertising and coupon promotions, the Big Four maintain the
visibility of their brands and prevent rivals from acquiring shelf
space in supermarkets. Branding sustains market share and
enhances profitability. As most shoppers know, it enables the Big
Four to charge premium prices for their cereals.

In 1978, noted packaged foods manufacturer H. J. Heinz spent

$120 million to buy Weight Watchers, the frozen-dinner business.
Heinz managers took the next decade to improve the quality of
Weight Watchers' offerings and the reputation of the brand-just
in time to capitalize on the health-conscious 1980s. By 1989,
Heinz had put the Weight Watchers name on more than 200 of its
food products, and the brand boasted annual sales of more than
$1.3 billion. As Heinz showed, a name and reputation like Weight

103
Watchers, if well managed, can be quickly converted into
revenues.

Most companies involved in selling prestige products worry

about diluting their brand names. When credit card giant
American Express introduced its lower-status revolving charge
card Optima in 1987, it was heavily criticized for having damaged
the company's "exclusive" franchise. The card subsequently
failed, got pulled, and was reintroduced in 1994.

In the fashion industry, apparel designer Halston sent out a

warning signal when he sold his name to mass distributor J. C.
Penney. The designer name lost prestige in the eyes of consumers
and virtually disappeared from the marketplace. Rivals learned
from Halston's mistake.

Most are now careful to retain ownership of their names and

sell off only the right to attach that name to a narrow category of
products. For instance, in January 1994, designer Calvin Klein sold
his underwear business for $64 million to retailer Warnaco. The
fragrance, jeans, and apparel businesses, however, are still under
his control.

Many products carry protected names that they license for use.
In 1980, retail sales of all licensed products totaled $10 billion. By
1990, licensing revenues had grown astronomically to $66.5
billion. Of these, well-known corporate trademarks accounted for
the lion's share of royal­ ties, with cartoon characters like Mickey
Mouse and Teenage Mutant Ninja Turtles taking second place, and
sports figures third. Table 2-2 indicates the enormous revenues
generated when well-known names are put on consumer
products. It helps explain the considerable interest that consumer
products companies have in associating with high-profile
entertainers and sports figures. Celebrity endorsements and
other tie-ins invariably fuel sales.

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CORPORATE NAMES
In recent years, many food and consumer goods companies
have introduced lower-priced generic versions that are of
comparable quality to the more expensive, branded products sold
by high-end firms. These generic products have heightened
popular concern with the costs of branded products and reduced
their appeal. They've led managers to ponder the possible value of
investing, not only in their product names, but also in their
corporate names. After all, companies themselves are granted
names and afforded legal protection. A company's name
symbolizes its reputation. Good names become more valuable; bad
names lose value. Increasingly, managers wonder if the
company's overall reputation might not prove more valuable than
owning a stable of brand names in building reputational capital.

It's a question that might be asked of the makers of Arm &

Hammer baking soda. Most of us know the product well for its
many uses in the kitchen. Recently, the multipurpose product has

105
also found its way into detergents and toothpaste. Yet few people
would recognize the company that makes Arm & Hammer brand
products. Should they? Well, consider this: The trademark is
owned by Princeton-based Church & Dwight. With about $800
million in annual sales, the company just about makes it onto lists
of the 1,000 most valuable firms in the United States. As rival
products and brands attack the company's core market, however,
one wonders whether Church & Dwight might not capitalize even
further by building its corporate identity around its trademark
name. Perhaps a corporate name change? Adopt the Arm &
Hammer label and logo company-wide? Explore ways of more
systematically projecting a positive image to constituents? Give to
charitable causes? Create a foundation? These are some of the
upside possibilities that Church & Dwight could explore to boost
its reputational capital. Chapter 12 examines how the company is
currently exploiting the A&H logo.

The downside of associating a product with a company name,

of course, is that a corporate name can also detract from a
company's success at promoting itself and its products. Consider
Delaware State College of Dover, Delaware. For the first 50 years of
its 102-year existence, the school was known as the State College
for Colored Students. As cultural values changed, the college's
name got in the way of student recruitment. Recognizing this, the
college opted for a name change in the 1940s. In August 1993, the
state legislature approved yet another costly change of name, this
time to Delaware State University. Why? The hope that as a full-
fledged university the school would increase its stature, thereby
gaining greater recognition, better financing, and more corporate
grants and private donations.

A name essentially describes how a company is perceived on

the outside. It signals to outside observers what a company stands
for, the quality of its products. When the value-priced cosmetics
maker Avon tried to improve its reputation by purchasing the

106
prestige retailer Tiffany's in 1979, most doubted the wisdom of
the move. That's why it came as no surprise when five years later
Avon sold off the operation. Not only did owning Tiffany's fail to
add luster to Avon, but negative publicity about Avon ownership
was rapidly tarnishing Tiffany's reputation. To consumers,
Tiffany's operates in a world of privilege and prestige far removed
from the one Avon trades in.

By raising or lowering expectations about what a company

stands for, a corporate name can also make or break a new
business. Healthcare giant Pfizer recognized that fact when in May
1993 the company announced a name change for its Specialty
Chemicals Division. The division would henceforth be known as
the more consumer friendly Food Science Group, a move designed
to refocus the division on new and healthful foods and to back its
newest product, a fat substitute called Dairy-Lo. The name change
was effective in building reputation. Soon thereafter, Food
Engineering magazine gave the division an award for excellence in
marketing.

Established companies worry about whether their names

convey the right impression to potential customers. In September
1993, three operating companies of the investment bank First
Boston announced a worldwide name consolidation to convey the
strategic integration of the company. Exhibit 2-1 reproduces the
announcement sent to clients, displaying the firm's new title and
its new logo: "One Firm . . . One Name . . . One Mission."4 The logo
clearly signals a desire to project a stronger, more coherent
identity to customers and to capitalize on the marquee value of the
bank's name.

107
 The same thing happened in January 1994 when two Bell
companies announced that they were retiring the names of their
telephone subsidiaries New Jersey Bell and New York Telephone.
Both companies launched cheerful ad campaigns that affirmed
their new identities under their respective parents' names and
logos: Bell Atlantic and NYNEX.

And it happened to financial services behemoth Primerica.

Scarcely had Primerica completed its acquisition of Shearson-the
American Express brokerage subsidiary-when it announced a deal
with Travelers, the insurance giant, in fall 1993. After the merger,
Primerica adopted the Travelers name to capitalize on the
strength of the established insurance franchise. The decision
reflected CEO Sandy Weill's awareness of the minima l stock of
reputational capital tied to the old Primerica name. Before the

108
merger, the company's two principal subsidiaries had operated
under their own monikers as Smith Barney Shearson in the
brokerage business and as Commercial Credit Corporation in
consumer finance. In contrast, the Travelers name and trademark
red umbrella were high­ visibility imprints. Weill clearly intends
to make the Travelers umbrella at least as familiar to consumers
as Merrill Lynch's bull and Prudential's rock.

Meanwhile, American Express, has been actively consolidating

its remaining businesses in an effort to become, according to the
company's latest vision statement, "the world's most respected
service brand." Having divested Shearson and Lehman Brothers,
among others, the firm sent out this announcement to customers
in January 1995 about the name change of its IDS subsidiary:

For years . . . you've known us as IDS Financial

Services. Today, I'm writing to share some important and
exciting news: On January 1, IDS will be renamed
American Express Financial Advisors . . . . The reason for
the name change is basically a business one. . . . We've
been part of the American Express family for over a
decade. Therefore, we decided that it would be appropriate
for us to start using the same name. In addition, because
American Express is among the nation's most well-known
and respected companies, we think the name will increase
recognition of our business throughout the United States.

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 The familiarity, visibility, and cachet of a corporate name send
a signal to consumers, investors, and other constituents about the
likely credibility and reliability of the company and its products.
By allaying fears of a bad experience, a corporate name — and the
reputation it implies — breeds loyalty and fuels sales.

REGIONAL NAMES
Like companies, regions benefit from a good name. Wine
enthusiasts like me, for instance, regularly pay premium prices
for French wines.

We shell out larger sums for an aged Cabernet Sauvignon from

Bordeaux, for a Riesling from Alsace, for the sparkling wines of
Champagne, and for the dessert wines of Sauternes.

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 Realizing the value of its regional names, France exercises
close control over affiliated products. Since 1935, the French
Institute National des Appellations d'Origine des Vins et Eaux-de-
Vie (National Institute of Place-Names of Wines and Spirits) has
governed name usage among French wine producers. Strict laws
control every factor that contributes to the wine's flavor,
including the geographical composition of the soil, the
permissible grapevines, the minimum alcoholic content, the
viticultural practices for handling the vines, the amount of
permissible harvest, and the wine-making practices. Control
prevents dilution of the name and improves the reputation of all
producers associated with it. As noted enologist Alexis Lichine
points out: "In the case of every Appellation Controlee that has
gone into effect, the result has been an immediate and marked
increase in quality. Passage of a control law cut out the lesser
wines and the grower — conscious that his efforts would be
reimbursed — strove for high quality."5

Not only are wine producers strictly controlled, but they hold
assigned status rankings. To this day, France recognizes an official
hierarchy of wine makers that dates back to 1855. It identifies five
principal tiers of producers, ranked from first to fifth growth.
Producers Chateau Margaux and Chateau Lafoe Rothschild are
among the five top-ranked names of Bordeaux. Chateau d'Yquem
makes what is probably the world's most famous dessert wine.
Table 2-3 describes the major wineries rated in the original
classification.

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 As consumers, we pay a premium for the better-rated wines.
Although dated in its ability to signal the true quality of a wine, the
first-growth rating of the producers in the Pauillac or Margaux
regions still commands higher market prices at retail than the cru
bourgeois wines of lesser­ ranked producers. A 1991 bottle of
Burgundy's fabled Domaine de la Romanee-Conti was priced at
$500 in January 1995. In essence, established reputations are
effective barriers that differentiate producers in the marketplace
and deter rivals.

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 Even in the United States, a hierarchy of region and producer
conveys a winery's status. Enophiles invariably impute greater
prestige to California's wineries than to those of upstate New York
or Long Island. Among California wines, those produced in Napa
Valley are more highly prized than those from other regions. Much
as their Pauillac location confers to first-growth French wines like
those of Chateau Latour and Chateau Lafoe-Rothschild a top
ranking among France's elite wineries, so does location in the
Rutherford-Oakville region of Napa Valley confer celebrity on
wine producers Robert Mondavi, Heitz Cellar, and Beaulieu
Vineyard. Not coincidentally, they are among the wine labels that
regularly fetch the highest market prices, both at auction and
at retail.

Wine making aside, a given locale can have greater or lesser

appeal for numerous reasons. In 1992, Fortune sponsored a survey
of more than 900 executives across the United States to rate cities
on various criteria. The magazine used these data to rank urban
areas according to their attractiveness to business. Topping the
list were Seattle, Houston, San Francisco, and Atlanta. At about the
same time, Business Week countered with a review of the nation's
fastest growing regions, corridors of innovation like Silicon Hills
around Austin, Optics Valley near Tucson, the Golden Triangle
around San Diego, Laser Lane near Orlando, and the Princeton
Corridor. Each region is earning a reputation as a hotbed of
entrepreneurship in specific industries, with vast consequences
for the well-being of the region — its ability to attract talent, to
generate tax revenues, and to build wealth.

Some products benefit from being associated with particular

regions, others lose. Consider a survey of the hottest food products
of 1991. Some 47 new food products chose to identify with Texas,
while Dakota appeared on 13 brands; two products took the name
of New York State, while five adopted New York City. None bore
the name New Jersey — and for a very good reason. According to

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Ira N. Bachrach, president of Namelab, the San Francisco-based
consulting firm that helped to name products like Honda's Accord,
and the Compaq computer: "I can't imagine ever naming any
foodstuff or life-style product like clothing or per­ fume after
New Jersey because the general impression outside New Jersey is
that it is a crowded, crime-ridden state. The general impression of
New Jersey isn't that it is the sort of place that is the paragon of
bucolic splendor."6

Sadly, it seems that New Jersey's slumping reputation won't

even sell cranberries. According to the New York Times, New
Jersey is second only to Massachusetts in producing cranberries.
Yet while Massachusetts sends much of its fresh cranberry crop to
market under the name Cape Cod, New Jersey's fresh cranberries
are sold generically and at a lower price. Clearly the state's
reputation doesn't help sell its products.

Or attract students. Take Rutgers, the well-known university.

Few people know that the school's official name is actually
Rutgers, the State University of New Jersey. Upset at its inability to
capitalize on the strong reputation of Rutgers, in February 1994
the state's senate considered a proposal to drop the Rutgers name
entirely. By more closely identifying the university with New
Jersey, politicians hoped to boost the state's reputation.
Predictably, the proposal "touched off a minor firestorm among
Rutgers students and alumni, who say changing the name would
diminish prestige, erase national name recognition and wipe out
227 years of the school's history."7 In the long run, New Jersey
would probably gain from the name change. In the short run,
however, the new name would surely wreak havoc with the
university's identity and reputation, discouraging alumni
donations and alienating student and faculty applicants.

Cities, states, and countries regularly contend for reputation

and status as they try to attract prestigious companies that

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promise tax revenues and good jobs. A city such as New York
dreads the departure of a company's headquarters, not just
because it means lost jobs and tax revenues but because it signals
a loss of reputation for the city as a business hub. The frenzied
efforts of local mayors to retain companies sometimes appear
irrational to the public, particularly when a city gives more in tax
breaks than it receives in terms of revenues and jobs. Here too,
however, the city's reputational capital remains unaccounted for.
Presumably, the city's reputational gain from retaining a large
company generates returns from other sources that more than
compensate for the tax breaks it provides.

Consider an ad for the state of Pennsylvania, published in

Fortune magazine in 1993. The ad's explicit purpose was to cast on
Pennsylvania the prestige of Merck, Rubbermaid, and Wal-Mart,
the top three companies praised in the magazine's annual survey
of companies in 1992. It also served to associate Fortune magazine
itself, a prominent symbol of corporate America, with the
Commonwealth of Pennsylvania-and to attract more prestigious
companies.

People who bought Japanese products before the 1970s

remember well that the label Made in Japan signaled low prices
and poor quality. How quickly the country's reputation changed.
Much of Japan's turn­around can be traced to the systematic
reputation-building efforts of MITI, Japan's activist Ministry of
Trade and Industry. In the United States, the massive publicity
campaign of the mid-1980s in support of the Pride in America
label was a concerted effort to rebuild America's sagging
reputation and to promote pride, morale, and credibility among
American consumers and workers.

As with a country's name, so goes its economic burden.

Investment banks regularly assess the value of a country's debt
offerings (especially in developing nations) based on subjective

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views of the country's political and social stability-its reputation.
At Salomon Brothers, for instance, the group researching
emerging markets routinely travels the world to collect
information about political and economic developments. They
then use those data to make predictions about the value of that
country's debt, both for Salomon's traders and it's clients. In
1992, Salomon traded about $40 billion in Third World debt.
Clearly, a country's name value has economic consequences for
that country's ability to marshal financial resources.

In fact, names, like flags, are symbols that convey identity.

Much as national identification can inspire intensely patriotic
feelings, so in the corporate world can a company's name stir a
sense of commitment in employees. Those who identify strongly
with a company's objectives work harder, better, and longer. A
company's name can also inspire trust in consumers and investors
insofar as it connotes integrity and signals credibility. Watchdog
groups like the Better Business Bureau actively monitor the
trustworthiness of companies and the credibility of their claims.
In its published ads, the bureau put it well:

When times are uncertain, people need to be even more

certain about the companies they do business with. They
need to be certain about the honesty and integrity of a
company. And that business will be conducted to the highest
standards. The Better Business Bureau is a symbol of those
high standards. And this is why the undersigned members
support it. Please join these and other fine companies in the
Better Business Bureau. Because today, it's not just your
business reputation at stake. It could be your business.8

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NAMES AND IMAGES CONVEY IDENTITY
The reputation we associate with a name communicates a
company's core traits to customers and patrons; it defines the
company's identity for its employees. In early 1994, the former Ma
Bell-the American Telephone and Telegraph Company-
announced that it was seeking approval from its shareholders for a
name change to its initials­ AT&T. The move reflected an
awareness that the company's 109-year-old name was
technologically outdated. Nonetheless, many of the company's
directors and employees expressed considerable feelings of
nostalgia for the old name, seeing the change as a symbolic break
with the past.

Or consider the giant entertainment company Walt Disney.

The company's commitment to family values is deeply anchored
in its internal systems as well as its marketing practices. When a
stagnant Disney Studios sought to apply its movie-making
expertise to more adult fare in the early 1980s, it was terribly
worried about the negative impact on its reputation as a provider
of family-based entertainment. To avoid diluting the Disney
name, the company distanced itself from its R-rated movies by
introducing them under a new label, Touchstone Pictures. The
strategy worked: Touchstone's hit movies allowed the division to
blossom, and Disney's involvement went largely unnoticed.

To change names is a complex matter. It requires a complete

reassessment, not only of the image a company presents to the
outside world but, more critically, of its core objectives and
character traits. Consider the plight of the National Audubon
Society. In 1991, the 105-year-old naturalist group was worried
about its image. It hired the consulting firm of Landor Associates
to find out what people associated with its name. The bad news
came back: "Birds." Moreover, the consultants added, the society
was regarded as old-fashioned and exclusive, and its mission less

117
than compelling. This, despite the fact that the society's $42
million annual budget was spent on causes ranging from
preserving wildlife to controlling pesticides use to promoting
alternative energy sources. Concerned about the society's ability
to compete with other environmentalist organizations for money
and support, Audubon's president chose not to change the group's
name but to embark on a campaign to alter its image. First to go
was the egret, traditional centerpiece of the society's logo. In its
place, a plain blue flag. Next, the group censored the corporate
lingo of bird-based imagery. Instead, it called for a younger,
fresher writing style in memos as well as in the society's famed
Audubon magazine. The result: an identity crisis within the
society as staff members feared the demise of a long tradition of
nature writing, not to mention the loss of their jobs.9

As consumers, corporate names have value to us because they

provide lots of tacit information about a company and its
products. The retail business is a case in point. In mid-1993, the
advertising agency BBDO wondered about the reputations of
various Manhattan retail stores. It asked 100 female Manhattan
residents with household incomes exceeding $35,000 per year
what psychological factors compelled them to shop at a particular
store. Figure 2-2 diagrams the perceptual map inferred from the
interviews. It suggests that each store has a distinct reputation
and that customers differentiate very well between them on two
key dimensions: (1) luxury-thriftiness and (2) tradition-
innovation. According to BBDO's director of research, "The thing
that I found most interesting was the distinctiveness of the images
of the stores in consumers' minds."10

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 Bergdorf Goodman's reputation for luxury and sophistication
contrasts sharply with the reputation of A&S and Macy's for
stocking affordable, family-oriented merchandise. Similarly, Lord
& Taylor's image as a stodgy, traditional store stands opposed to
Barney's carefully cultivated reputation for creativity and
innovativeness. Although deceptively simple, the map suggests to
marketers that established reputations act as a competitive barrier
between stores. It's not necessarily differences in merchandise
that influence the ability of a store to attract a clientele; rather it's
the reputation of the store that determines its ultimate profit­
ability. In a world where stores increasingly carry the same
merchandise, where designer lines like Calvin Klein, Donna Karan,
and Anne Klein are equally available, product no longer
differentiates the stores; it's the reputation of the stores that
distinguishes them to customers and brings them in to shop. The
onus is therefore put increasingly on managing reputation. For
stores, that means asking the all important identity­defining
questions: Who are we? What do we want to be?

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 Wal-Mart is well known for both its discount prices and its
unique identity. With strong sales and profitability, the company
has built up more reputational capital than any other Fortune 500
firm. If you go inside the company, the reason is obvious:
Employees are about as involved as it's possible to be, whether
through family-style picnics, grassroots meetings, weekly store
meetings, employee newsletters, or extensive training offered at
the Walton Institute of Retailing and through in-store seminars.
Wal­Mart's reputation and its identity are closely related.

The link between identity and reputation extends well beyond

the retail sector.11 Managers rely on their grasp of a company's
identity to justify decisions. Being "on top of things," for instance,
seems to be a desirable character trait for many U.S.-based
companies. In annual reports, managers regularly use language
that tries to convey to investors that they are in control of
environmental forces-even when it's clear that they are not. 12
Research also suggests that managers try to influence prospective
employees' perception of their companies by putting a positive
spin on compensation and human resource policies as presented
in employment brochures.13 These studies tell us that actively
projecting image is a key concern when you want to build
reputation with employees, investors, and other constituents. It's
the choice of which images to project that reflects a company's
identity-the common theme that crystallizes from the many faces
a company intentionally and inadvertently presents.

Moreover, a company's identity and reputation compel

managers to make decisions and take action in ways that are
mutually consistent. Consider the New York Port Authority, a large
private organization that manages some of New York's most
prominent real estate, including its midtown bus terminal, its
three airports, and the famed World Trade Center. The Port
Authority has a solid reputation for being a can-do, high-quality,
problem solver. Over the last decade, its managers have struggled

120
to cope with the rising tide of homeless people that threatens to
overwhelm its facilities. A few years ago, two of my colleagues,
Jane Dutton and Janet Dukerich, studied the actions taken by the
Port Authority to deal with the problem in the late 1980s. As they
reported, managers had grown extremely distressed over the
growing inconsistency between the Port Authority's reputation for
problem solving and its inaction vis-a-vis the homeless: "The
resigned admission that the organization had to take action on the
issue was accompanied by a great deal of emotion about the
unfavorable image the Port Authority had in the press, a sense of
outrage that those responsible were not doing their job, and a
sense of embarrassment and anger generated by negative press
coverage of Port Authority actions on homelessness."14

In time, managers of the Port Authority mobilized to tackle the

unpleasant problem. Organizationally, they recognized that the
problem was larger than they could handle on their own. So they
sought local and regional partnerships with companies facing
similar problems. Financially, they provided $2.5 million to
renovate two drop-in centers. By 1989, Port Authority managers
were aggressively involved in providing information about
homelessness to many in the transportation industry and to the
press as part of an active effort to minimize the negative publicity
surrounding the issue. In the end, managers increasingly acted in
ways that confirmed the organization's reputation as a humane
and first rate problem solver. The Port Authority's reputation
reflected its core character traits and drove managers to comport
themselves accordingly.

Recent hoaxes perpetrated on soft-drink maker PepsiCo

present a high-profile illustration of the link between reputation
and identity. In June 1993, a dozen or so complaints of needles and
other objects in cans of Pepsi-Cola suddenly swept the country.
The Associated Press identified at least 50 reports of tampering in
23 states. Nearly all involved cans of Diet Pepsi, and objects

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claimed to have been found in the cans included syringes, a crack
vial, a bullet, and a glob of glue as well as needles.

To PepsiCo managers, this was no laughing matter. Product

tampering had nearly destroyed Johnson & Johnson's Tylenol
brand in 1982 and 1986. Whereas J&J managers reacted with an
extensive show of concern for consumers, followed by a quick and
costly product recall, PepsiCo managers responded harshly and
bluntly. Consistent with their reputation for contentiousness (who
could forget the cola wars?), PepsiCo took to the media and
aggressively denied the possibility of tampering in its production
process. Top managers insisted that a national recall of Diet Pepsi
cans was unwarranted. The company prepared video footage for
news broadcasts to demonstrate the impossibility of inserting a
syringe into cans. Craig Weatherup, Pepsi's president of North
American operations was selected to make six personal
appearances on morning and evening news programs to showcase
the company's position: that tampering was impossible-even
inconceivable. Despite initial public protest, Pepsi stood its
ground.

Days later, the federal commissioner of the Food and Drug

Administration — an active partner in presenting Pepsi's case to
the public-proved the company right. The complaints of
tampering had been entirely fabricated. Some 20 arrests were
quickly made. Vindicated by the outcome, Weatherup claimed:
"This development reinforces what we've believed all along: that
this is not a manufacturing problem and that consumers should
not be alarmed about any alleged problems with Pepsi products."15

The point is this: Reputation and identity go hand in hand.

Pepsi's top brass responded to the crisis in ways that were entirely
consistent with its corporate identity. All companies should do the
same. For one, it's no good projecting attractive images of yourself
that you can't live up to. Sooner or later, someone out there will

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refuse to judge the book by its cover and will call you on the gap
between reality and perception. At the same time, if you've
invested in creating and maintaining a successful brand name,
why not find ways to capitalize on that name with your company's
different constituencies?

NAMES M A T T E R
As you may recall, the question "What's in a name?" prompted
William Shakespeare to reply, "that which we call a rose by any
other name would smell as sweet." He was right. A name conveys
the essence of a company to observers — its reputation. In turn,
the sweet smell of a good reputation is what we associate with its
name. As many companies have found, you can easily change your
name, but the company's identity, and so its reputation, generally
remain.

Names matter because they convey information to people

inside and outside of a company. Savvy managers know how to
exploit the names of their products and companies to build
enduring competitive advantage against rivals. In the final
analysis, whether in retail or wholesale, in manufacturing or
services, companies earn their reputations because of what they
are and how they present themselves — their identity and image.

When asked, most managers acknowledge the importance of a

good name. They consider how best to create and maintain
favorable assessments of their companies; they want to know how
better to exploit these intangible assets. Although the economic
benefits of a name are often implicit and difficult to quantify, a
good name gives substance to a company's reputation. In turn, a
reputation comes to have economic value because its effects are
functional. A good reputation generates consistent, shared, and
favorable impressions among observers about what a company is,
what a company does, what a company stands for. In this way, a

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company's reputation is itself identity defining. It helps us assess
our understandings of the companies with which we do business.

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CHAPTER 3:
ENLIGHTENED
SELF-INTEREST
The strength of a man's virtue should not
be measured by his special exertions,
but by his habitual acts.

Blaise Pascal

C
ORPORATE REPUTATIONS are perceptions held by people
inside and outside a company. To acquire a reputation that
is positive, enduring, and resilient requires managers to
invest heavily in building and maintaining good relationships with
their company's constituents. It calls for practices that measure
and monitor how the company is doing with its four top
constituencies: employees, investors, customers, and
communities. Doing so pays off in the long run because favorable
reputations produce tangible benefits: premium prices for
products, lower costs of capital and labor, improved loyalty from
employees, greater latitude in decision making, and a cushion of
goodwill when crises hit.1 Simply put, this chapter suggests that
reputation building is a form of enlightened self-interest.

THE LONG RUN

In March 1993, business students at New York University's
Stern School hosted the tenth annual Graduate Business
Conference. The theme? To identify emerging value systems in
corporate America. Discussion centered on well-regarded

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companies that have woven social and environmental concerns
into their decision-making practices. The keynote speaker was
Anita Roddick, founder of the Body Shop, the 900-store chain of
personal-care products with an enviable reputation for being both
environmentally conscious and highly profitable. Indeed, at the
Body Shop, "No animals are used to test products, bottles are
refilled for customers who choose to bring them back, and most of
the ingredients are gathered from natural sources. The stores are
encouraged to participate in company-backed political programs,
like a recent one in the United States to register voters." 2 The Body
Shop's profits rose to $34 million on sales of $266 million in 1992,
making Roddick one of the wealthiest women in England and
amply justifying her contention that "you don't have to lose your
soul to succeed in business."

She's right. For many years, business schools have

championed the shareholder over the stakeholder, and scorned
those concerned with more than the financial implications of
corporate decisions. Strengthened by free-market advocates, MBA
programs have encouraged narrow­minded, short-run thinking
about self-interest that has led to the design of reward systems
that support individualism rather than teamwork, fragmentation
rather than integration — with the attendant collapse of both
ethics and community.

Today we pay the piper as we tally the sorry record of

corporate wrongdoings, infractions, and white-collar crimes, all
of which can be traced to a diminishing interest in standards,
controls, integrity, and that nineteenth-century commodity
known as a good reputation. Yet as a society, we define ourselves
by the values we choose to emphasize. "Democracy means paying
attention," the sociologist Robert Bellah concludes in his
insightful book The Good Society. In the 1980s, a frenzied quest
for efficiency led to the endorsement of individualism over
community. The resulting stress on short-term returns

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encouraged a speculative frenzy in the stock markets and merger
mania on Wall Street, variously described as "the casino society"3
and a "circus of ambition,"4 attacked in the Oliver Stone film Wall
Street, and satirized in Tom Wolfe's popular book The Bonfire of
the Vanities. The reputation of the business community as a whole
fell to an all-time low. In the process, companies like E. Hutton
and Drexel Burnham Lambert lost their good names entirely while
others saw their reputations become seriously tarnished. The
corporate world squandered much of its reputational capital.

Most managers now deplore the substantial losses occasioned

by that short-term outlook. They contemplate how we might
better affirm the value of a company's intangible assets, especially
its reputation. To focus on a company's reputation is to put the
spotlight squarely on the long run; on the ways in which
constituents influence its values; on an appraisal of the company
not only as an economic engine or money machine but as a social
institution.

EMPOWERED CONSTITUENTS
A corporate reputation embodies the general estimation in
which a company is held by employees, customers, suppliers,
distributors, competitors, and the public. The key point, of course,
is that reputation consists of perceptions — how others see you.
Because a reputation is not directly under anyone's control, it is
difficult to manipulate. Try as we might to manage other people's
impressions — to put on a good face, as it were — it's not easy to
achieve.

Consider some of Lee Iacocca's parting experiences as

chairman of Chrysler, the carmaker he saved from bankruptcy in
the early 1980s. In 1992, Mr. Iacocca repeatedly took to the
airwaves to describe his frustration with Chrysler's reputation.
Specifically, he decried his inability to overcome Chrysler's

127
reputation for producing cars of quality inferior to Japanese cars
— a reputation that was entirely unjustified. In various television
ads and public speeches, the vocal spokesman told the public
about survey data the company had gathered that showed how
American consumers were more likely to buy a Subaru than a
Chrysler even though both cars were in fact identical and were
manufactured by joint venture in the same Chrysler plant in the
United States. Clearly, the Japanese brand name capitalized on
Japan's reputation for manufacturing excellence and quality. It
created a perceptual barrier that Chrysler's dealers found difficult
to surmount.

lacocca's experience reminds us that a company's reputation

actually derives from several things:

• its ability to directly manage impressions,

• its ability to build strong relationships with key

constituents, and

• the indirect rumor mongering engaged in by

interested observers, such as analysts and reporters.

Marketers, advertisers, and public relations specialists help to

create attractive images of a company.5 Indeed, many companies
rely quite heavily on PR professionals to shape the perceptions of
those looking in from outside — principally the customers. But
unless those images are anchored in core characteristics of the
company and its products or services, they will decay. In general,
what companies want and need are reputations that are both
enduring and resilient: able to withstand scandal and attack, to
overcome crisis and assault. This is not the stuff that traditional
public relations is made of. What is needed to sustain reputation is
a strong and supportive infrastructure of interwoven managerial
practices.

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 Many companies today are beginning to recognize the
difference between image and reputation. They go beyond mere
mass marketing and traditional image management by trying to
build strong relationships with customers. Motorcycle maker
Harley-Davidson is a case in point. The company-run Harley
Owners Group (HOG) boasts 200,000 members worldwide.
Charging a nominal $35 annual membership, the club provides
members with a variety of services that include insurance, travel,
and emergency assistance as well as magazines, competitions, and
access to 750 local chapters. HOG has been remarkably successful
for Harley­Davidson in fostering intense loyalty to the company's
products. Its success goes to the heart of Harley-Davidson's
identity.

That's fine in terms of marketing. To build an enduring and

resilient reputation, however, a company must establish strong
relationships not only with customers but with other key
constituents. After all, serving the customer goes only so far. A
company also has to meet the expectations of its employees,
investors, as well as the communities it serves. Although
attending to these four key constituencies is work enough,
companies cannot afford to ignore certain other specialized and
highly influential groups. These specialized groups include
government agencies that look at company compliance with
regulatory standards, financial-ratings agencies that monitor
economic performance, corporate-conscience agencies that
evaluate social performance, and consumer agencies that assess
product quality. Such groups enjoy lots of analytic resources and
often have access to better information than ordinary constituents
like you or me. Their opinions significantly affect the way a
company is regarded by its less-informed observers. Indeed, a
whole performance assessment and reputation-building industry
has evolved that scrutinizes, evaluates, and champions
companies. (See Figure 3-1.)

129
 Most of these specialized agencies become skilled at
articulating and defending the interests of a particular
constituency. For instance, government agencies devote public
resources to assessing how well companies comply with health
and environmental standards. A small community of financial
analysts including the likes of Moody's Investors Services, Dun &
Bradstreet, and Standard & Poor's regularly monitor and assess
the performance of companies with publically traded securities.
Various consumer advocates collect, summarize, and verify
information about the products companies make. In recent years,
assorted public-interest monitors have also gained visibility as
watchdogs for a company's products and its ethical conduct. The
focused ratings that these specialized groups produce draw
attention to different aspects of a company's performance and
affect its various images and its overall reputation.

130
 Herbert Baum, president of Campbell Soup, keys into the vital
importance of constituents to a company's reputation:

"What goes into a brand image? A number of things. How

the consumer perceives the product, of course. Also the
attitudes of the retailers and wholesalers who may buy more
of your product because they know it will sell. Then there is
the critical corporate image to our shareholders and the
financial community. And I would add a fourth element to
that, a sense of pride among the people who work here, their
understanding that Campbell Soup is a company that makes
quality products consistently."6

CUSTOMERS EXPECT RELIABILITY

As customers, we want companies to be reliable. We want their
claims for their products to prove true. We demand that the
products of companies we respect be of better quality and
reliability than those of lesser-known competitors, even if sold at
the same price. The effects of reputation on customers are
arguably strongest in the service sector, where judgments of
quality are especially difficult to make. Lacking any objective
measure of performance, service providers rely heavily on their
reputations to attract clients, and they must deliver the quality
they lay claim to if they are to retain those clients.

Consider the plight of Sears Roebuck. In June 1992, serious

allegations were made that various Sears Auto Centers in
California and New Jersey had sold customers unnecessary parts
and services. Aware of the potential damage to the company's
strong reputation for service, its managers quickly took action.
Exhibit 3-1 reproduces the open letter Sears published in daily
newspapers across the country to signal its concern and to outline
the aggressive steps being taken to remedy the situation.

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 Like other service-based businesses, individual lawyers,
accountants, consultants, doctors, realtors, insurance agents, and
investment counselors survive largely by word-of-mouth
advertising — personal referrals that convey trust and credibility.
That's also why law firms, auditors, consulting firms, and
investment banks struggle to build a reputation for scrupulous
honesty and integrity. Once established, these reputations can be
relied on to attract other corporate clients. In effect, client
companies rent the reputations of their lawyers, accountants,
bankers, and consultants as a means of signaling their own
credibility and integrity to key constituents.7

Most Fortune 500 companies rely heavily on the services of

one of the highly regarded Big Six auditors. By renting the potent
reputations of Coopers & Lybrand, Ernst & Young, KPMG Peat
Marwick, Arthur Andersen, Price Waterhouse, or Deloitte &
Touche, they reduce the risk that customers or investors will find
fault with their actions; they appear more reliable. As the financial
deals of the 1980s have unwound, however, accountants
themselves have faced a spate of nasty lawsuits that have both
eroded their profitability and damaged their perceived reliability,
leading some to question the viability of a profession shorn of its
principal asset. This state of affairs calls to mind what could be
called:

• The Reliability Principle: The more reliable a company

appears to its key constituents, the better regarded the
company will be.

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 Exhibit 3-1 SEARS DEFENDS ITSELF

An Open Letter to Sears Customers:

You may have heard recent allegations that some Sears Auto Centers
in California and New Jersey have sold customers parts and services they
didn't need. We take such charges very seriously, because they strike at
the core of our company-our reputation for trust and integrity.

We are confident that our Auto Center customer satisfaction rate is

among the highest in the industry. But after an extensive review, we have
concluded that our incentive compensation and goal-setting program
inadvertently created an environment in which mistakes have occurred.
We are moving quickly and aggressively to eliminate that environment.

To guard against such things happening in the future, we're taking

significant action:

• We have eliminated incentive compensation and goal-setting

systems for automotive service advisors-the folks who diagnose
problems and recommend repairs to you. We have replaced these
practices with a new non-commission program designed to achieve
even higher levels of customer satisfaction. Rewards will now be
based on customer satisfaction.

• We're augmenting our own quality control efforts by retaining an

independent organization to conduct ongoing, unannounced
"shopping audits" of our automotive services to ensure that
company policies are being met.

• We have written to all state attorneys general, inviting them to

compare our auto repair standards and practices with those of
their states in order to determine whether differences exist.

• And we are helping to organize and fund a joint industry-

consumer-government effort to review current auto repair
practices and recommend uniform industry standards.

We're taking these actions so you'll continue to come to Sears with

complete confidence. However, one thing we will never change is our

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commitment to customer safety. Our policy of preventive maintenance —
recommending replacement of worn parts before they fail-has been
criticized by the California Bureau of Automotive Repair as constituting
unneeded repairs. We don't see it that way. We recommend preventive
maintenance because that's what our customers want, and because it
makes for safer cars on the road. In fact, 75 percent of the consumers we
talked to in a nationwide survey last weekend told us that auto repair
centers should recommend replacement parts for preventive
maintenance. As always, no work will ever be performed without your
approval.

We understand that when your car needs service, you look for, above
all, someone you can trust. And when trust is at stake, we can't merely
react, we must overreact.

We at Sears are totally committed to maintaining your confidence.

You have my word on it.

Ed Brennan
Chairman and Chief Executive Officer

Reprinted by permission.

INVESTORS AND SUPPLIERS DEMAND CREDIBILITY

As investors, we expect companies to be credible. We ask that
managers live up to the claims and commitments they make in
press releases, annual reports, and other communications. Having
entrusted them with our hard-earned savings, we demand that
they show good faith in their dealings with us. We want them to
accurately convey the risks of their strategies, warn us of
impending problems, and disclose material facts that might
influence our assessment of their performance.

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 Consider how the financial monitor Moody's Investors
Services rates companies. Its ratings depend heavily on how
analysts interpret the company's future prospects, the quality of
its management, and especially the credibility of its plans:

The rating process itself is . . . an opportunity for

management to explain its business and its strategies to
specialists who are trained to listen and to evaluate critically
what they hear. . . . Typically, Moody's ask s to meet and
spend some time with four to five senior representatives of
the company's executive, financial, and operating
management. A meeting with the chief executive officer is
also desirable. We believe that management is critical to
credit quality; therefore, Moody's likes to be briefed on
management's philosophy and plans for the future.8

To investors, then, the currency of exchange is credibility. And

for companies to project credibility is no easy task. Indeed,
companies take great pains to maintain good relationships with
financial analysts, especially with those who toil in ratings
agencies. They spend considerable sums to promote themselves to
those analysts and try hard to build good will.

Few analysts, however, are fooled by glossy PR. Their job is to

explore the underpinnings of the company's actions and
projections-its credibility. Most will therefore keep detailed
records of a company's past claims and make a systematic effort
to assess how well managers have lived up to them. Those who do
gain credibility; those who don't suffer. I asked a senior analyst at
Moody's how the organization rates firms. He put it this way: "We
don't rate companies on their morality; we rate them on the
credibility of their claims. We have to believe that they will do
what they say they're going to do; that they will fulfill their
commitments."

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 Investors are in fact only suppliers of capital. Credibility turns
out to be the currency of exchange with parts suppliers as well.
Like investors, they ask that companies make credible claims, that
they act in good faith when they place orders. The nightmare of
suppliers is the cancelled order. Often it irreparably damages the
reputation of the company that placed the order.

Accordingly, a focus on creditors, investors, and other

suppliers suggests:

• The Credibility Principle: The more credible a company

appears to its key constituents, the better regarded the
company will be.

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EMPLOYEES EXPECT TRUSTWORTHINESS
As employees, we ask that the companies we work for be
trustworthy. While we demand that explicit contracts be honored,
we also expect implicit contracts to be respected. We count on
being treated fairly and honorably in job assignments, salary
decisions, and promotions. We ask of companies that they respect
our fundamental rights as individuals and as citizens.

These expectations place tremendous pressure on companies

to develop policies and programs that support the well-being of
all their employees, not just top management. Humane treatment
involves not only concerns for health and safety but a growing
regard for employees as partners in the work process. In many
well-regarded companies, employees are fast becoming part-
owners through their pension funds or stock-purchase plans. At a
minimum, these employee-owners have earned the right to
participate in the strategic decisions of the companies they work
for — and are demanding it.

Rapid developments in information technology are also

opening up channels of communication and decision making and
thereby enhancing employee involvement. Progressive companies
are recognizing this opportunity by creating programs that
support employee endeavors (see chapter 5). The commitment to
the self-realization of all employees, including minorities, the
handicapped, and other disenfranchised groups, represents a
genuine effort toward relationship-building with employees in
better-regarded companies. Well-regarded companies work hard
to establish trust with employees, whether those employees are
unionized or not. By establishing trust with employees, those
companies sustain their reputations.

In many ways, trust is a sign of rising professionalism in the

managerial ranks. Traditionally, companies have been managed

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inside and out by the utilitarian logic embodied in the dictum
caveat emptor-buyer beware. For those qualities of life we value
highly-such as personal health and freedom — we far and away
prefer to deal with so-called professionals like doctors and
lawyers whose integrity is (supposedly) ensured by their
adherence to sacred oaths and codes of conduct. As employees
invest themselves in their companies, they too demand a
reciprocating bond of trust from their employers in exchange for
their commitment. When they get it, loyalty follows. Which is why
I propose:

• The Trust Principle: The more trustworthy a company

appears to its key constituents, the better regarded the
company will be.

COMMUNITIES EXPECT RESPONSIBILITY

Finally, communities ask that companies recognize their
responsibility to participate in the social and environmental fabric
of their neighborhoods. Most employees live in the communities
in which they work. They benefit from the local infrastructure. The
popular concept of sustainability proposes that companies should
at least put back as much as they take from their social and
physical environments. Companies that ignore the well being of
their local communities demonstrate a glaring disregard for its
residents.

In the past decade, many companies have stepped in where

government has failed: in education, in the inner city, in the
environment. Environmentally conscious leaders like U.S. Vice
President Al Gore ask that companies incorporate so-called
externalities into their strategic decisions — that they internalize
the cleanup costs of industrial waste and of air, water, and land
pollution. Beyond asking that companies pay economic penalties,
however, they voice a clear expectation that companies be

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responsible citizens of the communities in which they operate.
Much as a population of a prey can be wiped out by overconsuming
predators, so is the human species threatened, they point out, by
irresponsible companies that overconsume our natural and
human resources. For these leaders, citizenship means favoring
sustainable business activities that take out of society and the
environment no more than they put back.

Consider the comments of David Kearns, Xerox's longtime

chairman and CEO:

“The name Xerox has a very high value, and it is well-

earned. In addition to an exciting product and our
technological leadership in the early years of the company,
the Xerox image was carefully nurtured. The idea of socially
conscious company didn't just happen. As Xerox began to
make money, it put some back into the community. The
saying was: You've got to do well to do good .It was part of
the corporate strategy and the corporate culture. Support
of such things as quality television helped enhance the
early image of the company and made it seem bigger than
it actually was.”9

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 Companies pledged to a mindset that identifies good
citizenship as a core value recognize the importance of enabling
closer integration of work and leisure, of individual and
organization, of individual and community, of company and
community. Like Xerox, pharmaceutical giant Johnson & Johnson
is well known for its community orientation. As its chairman and
CEO Ralph Larsen puts it: "Our image is that of a caring company.
It is shaped not by great acts or great decisions, but rather by the
sum total of all behavior and actions of the company over a long
period of time."10

The trend toward company-supported volunteerism,

community networking, environmentalism, employee
participation, and workplace equity is a practical one that many
top companies like Xerox and Johnson & Johnson are joining to
reduce employee alienation, to achieve social integration, to
improve their reputations, and so to sustain their long-term

140
viability. They go beyond simple philanthropy. Adopt-a-school
programs, for instance, are a form of enlightened self-interest. By
supporting the local community, these corporate sponsored
programs help to upgrade the workforce and to increase a
company's competitiveness. It's the challenge of the future.

An awareness of reputational effects encourages us to manage

our companies according to:

• The Responsibility Principle: The more responsible a

company appears to its key constituents, the better
regarded the company will be.

UNDER THE MAGNIFYING GLASS

All of a company's actions are not equally visible; nor are they
equally appreciated by observers. The business media regularly
magnify what some companies do and ignore others. Reporters
routinely evaluate the prospects of certain firms and communicate
their opinions. In general, studies of the media show that
reporters like to highlight the unusual. They are drawn to
innovative, unexpected, and deviant practices and products.
Larger and better-performing firms also get a disproportionate
share of media coverage. It explains why many managers are wary
of being scrutinized by the press and often prefer to keep an arm's
length relationship with reporters.

Additionally, in every industry the moves that companies

make are quickly communicated through a network of friendships
and acquaintances, board contacts, and informal social ties among
managers. Not all of the information conveyed is accurate. These
social networks selectively magnify, interpret, and distort a
company's actions. Various studies suggest that managers'
actions naturally generate gossip and innuendo that get quickly
passed on as more and more people get on the bandwagon.

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Because a company's relationships are so diverse, strategic efforts
to create attractive images are unlikely to be entirely successful in
determining the judgments external groups make of a company's
actions. Not only are external groups somewhat remote from the
company, they also rely on other sources of information and apply
criteria that may be at odds with managers' goals. That's why, for
instance, utilities that commit to nuclear power often find
themselves the unwitting targets of public­interest groups, media
exposes, or community boycotts, no matter how extensively they
invest in managing external impressions.

Often a company will develop inconsistent images with

different constituent groups-some more favorable, some less so.
In the short run, the expectations of some groups can run counter
to the expectations of others. For instance, investors tend to prefer
high earnings. But consumer demands for quality and service are
generally a drain on earnings, as are supplier attempts to get
higher prices, employee petitions for higher wages and benefits,
and community requests for charitable donations and
environmental support.

These seemingly divergent agendas put forward by a

company's different constituents actually mask a mutuality of
interests. After all, each of a company's constituents has an
interest in its long-term viability. A company's survival obviously
depends on its ability to generate strong and stable earnings,
which it can then:

• reinvest in innovative research,

• channel toward quality-improvement programs

and supplier relationship building to outperform
competitors,

• pay out as dividends to safeguard the returns of

investors,

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 • allocate to internal programs that enhance the well-
being of employees, or

• invest in programs that tackle social problems in

the local communities in which it operates.

To satisfy all constituents, then, a company must necessarily

maintain solid long-term economic performance. On that, we all
agree.

Figure 3-2 summarizes the reinforcing network of factors that

helps companies build strong and favorable reputations with their
principal constituencies: credibility, reliability, trustworthiness,
and responsibility; these speak legions about the difference
between simply managing a company's tangible assets and
safeguarding the long-term well-being of its reputational capital,
its intangible wealth.

In sum, a reputation comes into being as constituents struggle

to make sense of a company's past and present actions. The
reputation that constituents ascribe to a company is the aggregate
of many personal judgments about the company's credibility,
reliability, responsibility, and trustworthiness. It also has the
following characteristics:

• A reputation is a cognitive feature of an industry that

crystallizes a company's perceived ranking in a field

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 of other rivals.

• A reputation is created from the bottom up as each of

us applies our own personal combination of
economic and social, selfish and altruistic criteria in
judging a company and its future prospects.

• A reputation is a snapshot that reconciles the

multiple images of a company held by all of its
constituencies. It signals the overall attractiveness
of the company to employees, consumers, investors,
suppliers, and local communities.

And so I offer the following working definition of a corporate

reputation:

• A corporate reputation is a perceptual representation of

a company's past actions and future prospects that
describes the firm's overall appeal to all of its key
constituents when compared with other leading rivals.

WHAT CAPITALIZING ON REPUTATION

GETS THE FIRM
If being perceived by constituents as credible, reliable,
trustworthy, and responsible is the hallmark of a good reputation,
it pays off because well-regarded companies generally:

• command premium prices for their products,

• pay lower prices for purchases,

• entice top recruits to apply for positions,

• experience greater loyalty from consumers

and employees,

• have more stable revenues,

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 • face fewer risks of crisis, and

• are given greater latitude to act by their constituents.

That's why in the long run it's in a company's self-interest to

build a strong reputation by serving all of its constituents. As
Merrill Lynch's William Schreyer recognizes: "We've put a
considerable amount of marketing dollars behind Merrill Lynch's
identity and we closely track the impression that our name and
our over-all corporate image make with the investing public, with
corporations and financial institutions, and with local, national,
and international officials. We do that because as a marketing-
oriented company we believe that the strength of our corporate
identity has a direct effect on how well we can market our
products and services to our customer base."11

PREMIUM PRICES
Whether for wine, food, or clothing, most of us willingly pay
premium prices to buy the products of better-regarded
companies. The meals at New York's Lutece are expensive, but the
high-quality ingredients used and the skills of its owner-chef
justify the cost. Its reputation promises patrons a high standard of
quality and reliability, for which they are prepared to pay. In
similar ways, reputable fashion designers promise customers a
higher standard of quality, cut, fit, and appearance for which they
willingly pay higher prices.12

The fashions of French clothing designers Claude Montana and

Thierry Mugler are well known. Their reputations create a
following among a small coterie of shoppers prepared to pay
extravagant sums for their ready-to-wear garments. In similar
ways, a performer's fame can translate into high prices at the box
office. Concerts by superstar Barbra Streisand come to mind.
Throughout 1994, the singer and actress parlayed her fame into

145
concert ticket prices that soared to $1,500 a seat. Indeed,
performers like Streisand and other celebrated names routinely
attract audiences to events that raise extravagant sums for their
pet projects and foundations.

In February 1994, lured by the publicity surrounding the event,

I attended the Christie's auction of art and home furnishings
owned by Streisand. In the euphoria of the moment, I too bid on
some of the 358 items that were put up, thereby marginally
contributing to the auction's total sale price of $6.2 million-a 37
percent premium over its expected $4.5 million market value. As
Christie's U.S. chairman, Christopher Burge, noted: "An awful lot
of the success of the sale had to do with the fact that this was
Barbra Streisand's collection. . . . People wanted something from
her collection, meaning the smaller lots brought higher prices
than we normally see. The celebrity value means less on the more
important pieces." 13 In other words, reputation inflates economic
value, especially for worthless things. For well-known items, the
reputation of the artists who created them supersedes that of the
endorser.

In like fashion, companies sometimes use the marquee value

of their names for benevolent causes. By sponsoring charitable
events, for instance, they not only do good deeds but publicize
themselves to some constituents. In the end, the heightened
visibility can enable these companies to charge even more for their
products than can their rivals. In a way, the premium prices
celebrated companies exact for their products are a
reimbursement for previous outlays in advertising and promotion
that helped them to build their reputations. After all, to acquire a
strong reputation requires of both individuals and companies
enormous investments in creating public identities and then
publicizing them.

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 Moreover, those reputations are marketable products in and of
themselves. The reputations of auditors, lawyers, and investment
bankers are often rented at a premium. For instance, a new
company ordinarily finds it difficult to raise equity capital. In
order to sell an initial offering, it will offer to pay a premium to
rent the reputation of an established banker. Investors are more
likely to buy a public offering underwritten by a highly regarded
bank like Goldman Sachs than one sponsored by an unknown
bank, a service for which Goldman Sachs naturally charges a
premium price to the company that is going public.14

On the other hand, a company with a pristine and well-

established reputation can attract investors on its own. So it need
not necessarily retain the services of the most highly reputed
bankers or lawyers. In a study of investment banks in the United
States, I actually found that many prestigious clients preferred to
hire less prominent investment banks to do deals. The reputations
of the top banks were extremely advantageous, however, in
signing up less notable clients.

A reputation effect also explains why many initial public

offerings appear to be underpriced after they are issued. Recent
examples include the first offerings of bookseller Barnes & Noble
and fast-food retailer Boston Chicken. Both companies enjoyed
excellent reputations when they went public, which led
speculators and investors to bid up the price of their shares well
beyond the estimated value of the companies' assets-and even
beyond their probable potential.

Consider the Donna Karan Company. In August 1993, the

much­celebrated New York-based high-fashion designer Donna
Karan announced that her company would soon be going public
with an anticipated first offering worth $159 million. The stock
issue was among the most eagerly anticipated. Given the
company's strong reputation, demand for the limited supply of

147
shares was likely to be high, thereby inflating the selling price.
Accordingly, the prospectus showed shares priced at $16, despite
an underlying net worth of only $2.70 a share. Since then,
however, poor economic conditions have delayed the marketing of
the offering at the intended price, and the company has remained
privately held.

Companies that are well regarded can benefit from charging

premium prices for their products and so reimburse themselves
over the long term for the front-end costs of building good
reputations. Alternatively, they can also benefit by undercutting
rivals. The combination of lower prices and a strong reputation
generally attracts the most customers to an offering. Premier
banker Goldman Sachs is feared on the street for just this reason.
The company occasionally uses its reputation to bid even more
aggressively than lesser rivals for a new equity issue, thereby
securing its top standing in the industry.

REDUCED COSTS
Having a good reputation can reduce some of a company's
operating costs. That's because reputation provides leverage in
many negotiations, particularly with suppliers, creditors, and
distributors. Suppliers would prefer to negotiate supply contracts
with credible companies, companies unlikely to renege on orders.
Likewise, before lending money, creditors want to believe that the
company is good for it, that their money won't go down the drain.
Studies show that a good reputation can reduce a company's cost
of capital by improving its ability to raise money in the credit
markets.15

Wal-Mart is well-known for providing customers with quality

goods at discount prices. In part, it keeps prices low by keeping
labor costs below the industry average. Because of its good
reputation, Wal-Mart jobs — which compensate employees with

148
decidedly inferior wages and benefits — are still prized by the
communities in which the company locates its operations.
Andersen Consulting has a reputation for paying junior
consultants far less than do other firms in the industry. Andersen
can get away with it because consultants trained by the firm
anticipate capitalizing on the reputational halo of their training
later in their careers.

THE PICK OF RECRUITS

In looking for jobs, most studies show that people are not a
trusting lot. They prefer an inside view, and so talk to relatives,
friends, and acquaintances in an effort to get a sense of the
company's "real" identity — its reputation.16 In choosing
between comparable offers, these same job seekers are likely to
be swayed heavily by hearsay and rumor-signals that grant one
company a better reputation than another. Just as a top
school's reputation draws the brightest students, so do
esteemed companies more easily recruit the finest candidates
for their jobs, those who can pick and choose among multiple
offers.17 As Xerox's Kearns puts it: "A good image helps you
recruit good people, especially young people coming out of
college who want to join a company they respect."18 In every
industry, one or a few companies are so well regarded that they
serve as a training ground for the rest of the industry. General
Electric, for instance, is well known as a breeding ground for
top managers throughout American industry. The management
consulting firm of McKinsey & Company has many former
employees both in the consulting industry itself and
throughout American industry as its alumni take jobs with
former clients. Chase Manhattan once held that honor in the
banking industry, as IBM once did in the computer industry,
Sears in retailing, and General Motors in manufacturing.
Today, however, the lackluster reputations of these four
companies are more likely to detract from their ability to

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recruit the most talented candidates, forcing them to pay higher
entry-level bonuses to outbid rivals.

IMPROVED MORALE AND LOYALTY

A company's good reputation attracts consumers to its
products because it reduces our insecurity about how well those
products will perform. It signals their implicit quality. Despite its
high prices, try getting a table for dinner at New York's Lutece —
it takes months. The restaurant's star reputation regularly draws
repeat customers who could choose to eat anywhere. Diners keep
coming back because they feel sure that they'll get the culinary
experience they expect.19

Not only does a good reputation attract loyal customers, it also

makes for loyal employees: it acts as a morale booster. Who
wouldn't feel better about working for a company that's well
respected? As Intel's CEO Andrew Grove points out: "The human
element of reputation is that it gives people extra energy. It gives
you that extra lift to do the tough stuff our life consists of day in
and day out."20

To salespeople, a company's reputation acts like a calling card.

It draws a warm reception and a welcoming nod that often opens
doors and grants access to otherwise unreachable people. As a
junior professor at the Wharton School in the late 1970s, I can
recall many instances in which the school's top-flight reputation
opened doors for research in corporate America that I could not
have opened alone. In retrospect, Wharton's reputation also
provided the faculty with "psychic income," presumably enough
to compensate for the dungeon-like offices and primitive
classrooms in which we did our work in those days.

A good reputation builds employee loyalty by increasing the

willingness of employees to cooperate with unusual requests and

150
by fostering teamwork and a sense of shared destiny. Take the
once high-flying People Express. In its glory days, the discount
airline enjoyed a glowing reputation as a company on a mission.
Its gung-ho employees accepted lower wages to join the family-
like environment the company had created. For a time, the
combination of cooperative staff, high morale, and low pay
enabled People Express to maintain its low-cost strategy-at least
until it ran into aggressive competition from larger carriers and its
own overly ambitious growth by merger.

Primerica's chairman Sandy Weill puts it this way: "In the

service industries, you must not forget that brand reputations are
built by people. And so, much of the assets of the brand go down in
the elevator every night. It's the job of management to make sure
those people are kept to the highest standards and also to make
sure that the business is managed so well, that they come back up
in the elevator the next day."21

INCREASED STABILITY
A good reputation helps to smooth customer demand for a
company's products. In a sluggish economy, they are the last
purchases we cut. Reputation breeds customer loyalty, repeat
business, and so dampens the effects of business downturns. The
result is stability: Better rated companies tend to have less volatile
stock prices and more stable operations.

Of course, a good reputation is no guarantee against dramatic

market changes. So-called blue-chip companies like IBM and
General Motors are cases in point. They were once widely
recommended by analysts as safe harbors for retirees and pension
funds. No more. As both companies have demonstrated, dramatic
changes in technology and competitive conditions can destabilize
even the best-regarded companies, fostering wild fluctuations in
sales revenues and the price at which their shares trade. With their

151
reputations in the gutter, IBM and GM have demonstrated greater
sales volatility and instability than ever before, with
corresponding fluctuations in investment forecasts, analyst
ratings, and shareholder expectations. As graduating MBA
students now point out, these are no longer the companies they
look to for work.

REDUCED RISK
Companies with strong reputations tend to develop solid
internal control systems to monitor their employees and
anticipate problems. If being prepared reduces the catastrophic
potential of a crisis, it's entirely plausible that better-regarded
companies are less risky.

Consider Goldman Sachs. The company is well known for

building close relationships with clients. It is also famous for its
strong team­ based identity and elaborate control systems. It
seems unlikely that Goldman Sachs could ever be hit by a scandal
like the one faced by rivals Salomon Brothers in 1991 and Kidder
Peabody in 1994. At both firms, rogue employees broke rules that
seriously jeopardized their banks' reputation and put their
survival in doubt. Much of the blame has been placed on the
extremely individualistic orientations of Salomon and Kidder,
reinforced by weak controls. Since then, both firms have been hard
at work rethinking their internal practices in order to safeguard
against future infractions. Even Goldman Sachs launched a
program to reexamine its own controls and practices after the
Kidder Peabody scandal broke in 1994. Increasingly, these firms
recognize that their reputations are constantly on the line and are
inextricably tied to the ethics of individual traders and bankers.
Hence the importance of strong internal cultures that minimize
reputational risk.

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INCREASED LATITUDE
A good reputation creates a halo around a company; willy-nilly
it becomes the standard-bearer of an industry, the one against
which rivals benchmark their actions and strategies. Intense
scrutiny by rivals and the press creates enormous pressure.
Performing in the constant glare of publicity can be inhibiting,
which is why so many high-profile companies shy away from the
media and maintain an introverted posture (see chapter 6).

At the same time, however, a reputational halo can soften the

blow when a crisis or scandal hits. We give the well-regarded
company the benefit of the doubt. A case in point is the degree of
latitude and forbearance Johnson & Johnson received from
consumers and regulators when faced with its second case of
product tampering with Tylenol in 1986. The company that
regularly neglects constituents won't fare so well. When charges
of insider trading were leveled at Drexel in the late 1980s, the
company had little reputational credit to draw from in its time of
need. Similarly, for years the tobacco industry led by Philip Morris
and R. J. Reynolds was extremely successful in using public
relations to attract new smokers and maintain their core business.
But in the last decade, despite extraordinary efforts to placate
constituents with charitable contributions and other promotional
strategies, the industry has been losing ground as antismoking
groups have grown more vocal. They use aggressive promotional
strategies of their own to tarnish the reputations of the tobacco
manufacturers. Under the barrage of unfavorable legislative and
media attention, managers of tobacco companies may well be at
their wits' end in trying to sustain the reputation of their core
tobacco business. The reputations of the food subsidiaries of these
diversified companies are also beginning to suffer by association.

Reputational factors can also help a company emerge from bad

times. A study at Dartmouth's Tuck School of Business shows that

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among companies facing bankruptcy, creditors are more lenient
and flexible with companies that have more prestigious managers
at the helm.22 Put differently, companies with more reputational
capital are less likely to go under. Reputation buys a company
greater freedom of movement, more time to recover from
difficulty.

A GOOD REPUTATION IS A STRATEGIC ASSET

Although the benefits of having a good reputation are many
and varied, they come down to one thing: A strong reputation
creates a strategic advantage. Since companies are constantly
competing for the support of customers, investors, suppliers,
employees, and local communities, a good reputation creates an
intangible obstacle that lesser rivals will have a tough time
overcoming. That competitive advantage alone is enough to
guarantee stronger long-run returns to better-regarded
companies.23 Just as individuals build human capital by investing
in their own skills through training and education,24 so too do
companies create value by investing in a wide range of activities
that induce constituents to perceive them as reliable, credible,
trustworthy, and responsible. In fact, the economic benefits of a
good reputation materialize in the excess value investors are
willing to pay for the company's shares — that is, its
reputational capital.

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CHAPTER 4:
REPUTATIONAL CAPITAL

Good name in man or woman, dear my lord,

Is the immediate jewel of their souls:
Who steals my purse steals trash; 'tis something, nothing:
'Twas mine, 'tis his, and has been slave to thousands;
But he that filches from me my good name
Robs me of that which not enriches him,
And makes me poor indeed.

William Shakespeare

C
ORPORATE REPUTATIONS have bottom-line effects. A good
reputation enhances profitability because it attracts
customers to the company's products, investors to its
securities, and employees to its jobs. In turn, esteem inflates the
price at which a public company's securities trade. The economic
value of a corporate reputation can therefore be gauged by the
excess market value of its securities. This chapter explores
different ways of quantifying the economic value of corporate
reputation and examines more closely a market-based measure of
reputational capital.

VALUING IMAGE
When consummate image maker Andy Warhol died in 1987,
the value of his estate was estimated at some $700 million. By
1993, that estimate had been revised by Sotheby's to a lowly $220
million. What happened to the other $480 million between 1987
and 1993? Over the last few years, that exact question has slowly

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wound its way through the court system. Warhol's former estate
lawyers filed suit against the Warhol Foundation, claiming that
the higher value was more accurate. To them, of course, this was
vitally important; their fee was tied to the "true" value of the
estate.

The value of art depends heavily on two familiar factors:

demand and supply. A dead artist's work generally increases in
value because, while supply remains fixed, demand for the artist's
work increases. Demand also depends heavily on the reputation of
the artist at the time of death. A strong reputation inflates demand
and raises subsequent auction prices for the artist's work. As one
art observer put it: "The reputation of the artist and the work
reinforce one another: we value more a work done by an artist we
respect, just as we respect more an artist whose work we have
admired." 1

In the years since Warhol's death, not only did an economic

downturn reduce overall demand for art, but Warhol's reputation
itself suffered vilification. Not surprisingly, then, pieces of his art
have fetched far lower prices at auction. In itself, this was an
ironic outcome, given that few artists since the Dutch painter
Rembrandt have proved quite so skillful as Warhol at projecting an
image and sustaining a reputation during their lifetime. As one art
critic puts it, Rembrandt was an "entrepreneur of the self,"
someone "who invented the work of art most characteristic of our
culture — a commodity distinguished among others by not being
factory produced, but produced in limited numbers and creating
its market, whose special claim to the aura of individuality and to
high market value bind it to basic aspects of an entrepreneurial
(capitalist) enterprise."2

Like Rembrandt, Warhol deftly manipulated the media in a

quest to secure for himself more than the 15 minutes of fame to
which he claimed everyone else was entitled. He was an

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accomplished poseur, endlessly staging himself in a bid for the
world's attention. A man of very, very few words, he took to
hosting a television talk show. The magazine he edited —Interview
— published amidst outsized photographs a mere scattering of
words, few of them his. The dialogue in the films he directed was
entirely improvised. All in all, Warhol probably represents one of
our era's most artful social constructions and would be sorely
disappointed in the managers of his estate for having so poorly
handled the reputation he consigned to them.

In contrast with Warhol's art, Pablo Picasso's paintings have

fared rather well at auction. Works that sold for $500,000-
$800,000 in the early 1980s fetched $2-$3 million in 1993, despite
the recession. Why up for Picasso but down for Warhol ? If
Picasso's paintings have proved more successful at auction, it's
partly because more systematic efforts were made to prop up his
reputation. For instance, soon after Sotheby's was retained by a
Picasso collector to engineer a sale of 88 pieces, the auction house
systematically pursued prospective collectors and dealers around
the world. All the pieces were sent on a tour of major art capitals.
By the time the auction was held in November 1993, adroit
promotion had created pent-up demand. Spirited bidding at the
auction racked up a total of $32 million for the collection. Contrast
that with a similar auction of 16 Warhol paintings held 6 months
earlier at which only 2 pieces were sold.

A recent study by the Economist found that prestige products

hold their value well over the years. Table 4-1 contrasts the
current and historical prices of some top products from five high-
reputation companies: a top-of-the-line Jaguar two-seater, a
Parker Duofold fountain pen, a Dunhill silver-plated "Rollagas"
lighter, a Louis Vuitton suitcase, and a Cartier Tank watch. In real
terms, the prices of these companies' products have grown
systematically over the years, averaging an increase close to 2

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percent per year after controlling for inflation, a remarkable rate
of growth.

Much as some branded products hold their value well, so have

managers begun to recognize that there is enduring economic
value in a strong corporate-level reputation. In part, recognition
of this fact has come from service providers who are particularly
hard put to identify other assets of note in their portfolios. In fact,
all companies — whether in services or in manufacturing — rely
not only on people and plant and equipment but also on intangible
assets such as pa tents, trademarks, copyrights, brand names, and
reputation. Lacking material products, service companies arc
especially dependent on their reputations to stay in business. In
conversation, investment bankers love to remind listeners that
their principal assets go down the elevator every night. Don't take
that to mean "we care about our people." It simply reflects
appreciation for the fact that employees carry with them the
capacity to make or break the company's most valuable asset: its
reputation. Well-known investor Warren Buffett made a
celebrated remark to a group of Salomon Brothers managers in the
aftermath of the trading scandal that shook the bank in 1991. "If

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you lose dollars for the firm by bad decisions, I will be very
understanding. If you lose reputation for the firm, I will be
ruthless."'

The same concern naturally extends to providers of accounting

and legal services. In 1992 and 1993, top accountants Arthur
Andersen and Ernst & Young agreed to pay $65 million and $128
million, respectively, to settle federal charges that their audits of
failed savings and loan banks were negligent or misleading.
Joining them with penalties of $41 million, $50 million, and $45
million, respectively, were the blue-chip law firms of Kay Scholer;
Jones, Day; and Paul, Weiss. Although assenting to the fines, none
of these service firms admitted guilt. Their reasoning: It's cheaper
to pay a fine than to risk deflating a firm's economic value in a
court battle. Settling avoids protracted litigation and publicity that
would only further sully the firm's good name and lower the
underlying value of its most prized intangible asset, its reputation.

Despite its obvious worth, the dollar value of a company's

reputation proves difficult to quantify. In essence, it derives from
the profits a company can expect to generate from its intangible
assets, only a small part of which are embodied in patents and
other forms of intellectual property. That makes most future
revenue streams uncertain. Where patented products are the
principal source of value, however, we can estimate the revenue
stream that might obtain over the patent's 17-year life, assuming
no rival brings out a substitute product to cannibalize sales. Since
the costs directly associated with obtaining the patent are easily
identified, the task of compiling, capitalizing, and amortizing
them on a company's balance sheet is straightforward. So the
economic value of a corporate reputation that depends heavily on
the patents the firm owns can be calculated in some detail. In
essence, the company's reputation merely reflects the value of the
firm's intellectual capital.4

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 Not as much can be said for companies with reputations that
do not derive from patents. Take companies like 3M or Procter &
Gamble, which have a stable full of brand names. If we try to
estimate the overall value of these brands using the same logic
applied to patents, things get difficult. On the revenue side,
although the U.S. Patent Office provides indefinite legal protection
for a trademark, who knows how strong a brand will remain, how
long it will attract customers, and what future revenues it will
earn? Moreover, on the cost side, American accounting rules allow
companies to capitalize and depreciate only the administrative
costs directly associated with securing a name. They do not allow
companies to capitalize the indirect costs associated with building
and maintaining a name. In other words, the advertising, service,
and support costs that actually create brand equity — the key
ingredients of those companies' reputations — never show up on
the books.

This is problematic. Although everyone recognizes that the

reputation of a company with a stable of brands generates
bottom-line returns, no one can agree on how to gauge its worth.
Accountants debate how to record goodwill, marketers ponder the
hidden equity in the company's brands, financial analysts muse
about the strength of the company's franchise. Lacking
consensus, the value of the company's reputation goes entirely
unrecorded as an asset because, as accountants put it, "Measuring
the components of goodwill . . . is simply too complex and
associating any costs with future benefits too difficult."5 Two
ongoing controversies reveal how unsystematic our approach is
for valuing corporate reputations and what pitfalls we encounter
when we do try to quantify them.

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GOODWILL: WHAT'S IT WORTH ?
Between 1980 and 1990, the total value of intangible assets in
the United States increased nearly tenfold from $45 billion to an
estimated $400 billion.6 Conservative U.S. accounting rules
prohibit recognizing the value of these hidden assets, and tax
authorities prevent a company from capitalizing costs incurred to
project an image or to protect a name. This means that advertising
as well as research and development costs — outlays that
contribute heavily to building a company's reputation — are
therefore merely expensed and regularly disappear without
a trace.

The consequence of immediately expensing costs that build

reputation is that balance sheets routinely undervalue companies.
They open to outright conjecture estimates of a company's true
worth. Take an independent insurance agency, for instance. Most
of its assets are intangible. They consist of customer lists and
client contacts-that is, of reputation. On paper, it's worth next to
nothing. Nonetheless, such an agency typically sells on the open
market for about $200,000. Clearly, its reputation is worth
something, and we are left to speculate about its value. Many
battles for corporate control in the go-go decade of the 1980s
involved just such speculative assessments of the hidden value in a
company's balance sheets, what accountants like to call goodwill.

To stay on the safe side, U.S. accountants have agreed to

recognize goodwill only when a firm is sold. They measure the
value of goodwill as the excess of the company's purchase price
over the fair market value of its tangible assets. Goodwill typically
incorporates the value of all intangibles, including brand names
and reputation. Two questions arise:

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1. Should goodwill be capitalized on the balance sheet and
depreciated, or immediately charged off against the
merged company's retained earnings?

2. In valuing two companies, why deflate the company whose

goodwill is generated entirely from within against the
company whose goodwill comes from a merger?

In the interests of comparability across companies, industries,

and countries, it would seem desirable to maintain a common way
of accounting for goodwill. U.S. accounting rules, however, differ
from those of other countries, and critics contend that they place
American firms at a disadvantage. Here's why.

When a merger takes place in the United States, accountants

recognize goodwill as an asset and depreciate it over some
arbitrary period, not to exceed 40 years. In turn, the company
takes an annual depreciation charge against earnings. On one
hand, the company's total assets increase; on the other, so do its
expenses. In combination, the net effect is to deflate the merged
company's return on assets. Contrast this practice with
accounting rules in the United Kingdom, which forcibly write off
goodwill against equity. Under these conditions, goodwill has no
effect on measures of the company's return ratios. So, in a contest
between a British and an American company to buy a third
company, the British company's returns invariably look better to
investors. When Britain's Grand Metropolitan purchased Pillsbury
for $5.7 billion in 1989, for instance, it immediately posted a total
of $2 billion in goodwill to equity, with no effect on Grand Met's
subsequent earnings. Had an American company bought Pillsbury,
it would have been forced to deflate its earnings by about $50
million a year for the next 40 years, an unattractive prospect.
Concerned observers contend that foreign purchasers may well be
outbidding American companies because of U.S. accounting rules
that extort high goodwill charges and penalize a purchaser's stock

162
price.7 Discussions about reputation hit center stage in late 1993 as
President Bill Clinton presented his economic package to a divided
U.S. Congress. Debate raged over forcing a 14-year depreciation
schedule on purchased intangibles and over allowing write-offs of
those intangibles to only 75 percent of their value. A shorter
schedule would mean a company could claim higher annual tax
deductions, and so higher short-term profitability. The
marginally positive vote in Congress means that the government
now recognizes that some intangibles are short-lived. Film
companies buy distribution rights to movies whose useful lives are
measured in weekends; software companies invest millions in
programs that often becomes obsolete in a few years.
Unfortunately, recognizing intangibles also reduces the
government's tax revenues, something most administrations in
Washington are loathe to do.

Whatever the rule, the accounting controversy over

intangibles is likely to rage until a reliable and comparative
estimate of reputational capital is developed that can be accounted
for somewhere in a company's financial statements, if not directly
on the balance sheet. As one observer comments in Financial World
magazine: "Why charge earnings or take a write-off on retained
earnings for an asset whose value is generally increasing? Mark
brand values to market each year and capitalize advertising
expenditures that support it. If the brand declines in value, then
advertising expenditures become an expense."8

BATTERED BRANDS
In September 1992, Bermuda-based Bacardi agreed to pay $1.4
billion for a 51 percent stake in Martini & Rossi, the European
spirits company. That same week, RJR Nabisco put up $100 million
to buy the Stella D'Oro Biscuit Company, one of the largest U.S.
cookie makers, while it sold off its Shredded Wheat division to

163
General Mills for $450 million. Not to be left behind, Gillette put
up $423 million for Britain's Parker Pen Holdings, making Gillette
the world's largest producer of pens, with 41 percent of the
American market for upscale pens.

These transactions symbolize the enduring value of brands. In

most industries, brands are easier to buy than to create because a
crowded field of established brands puts up high barriers to entry
that prove difficult to overcome. To launch a brand from scratch
requires pumping massive amounts of advertising dollars into the
media with unpredictable results. Buying a brand, on the other
hand, guarantees immediate access to shelf space, to consumers,
and so to market share.

On April 2, 1993, name brands came under attack from

unexpected quarters. Without warning, cigarette maker Philip
Morris announced that it would slash the price of its wildly
profitable Marlboro brand by 20 percent. Suddenly, the company
that had long ago persuaded smokers not just to remain loyal but
to accept average annual price hikes of 10 percent seemed to be
capitulating to competition from discount brands. To investors,
this was bad news indeed. Individual shares of Philip Morris
dropped by some $14.75 on what came to be known as "Marlboro
Friday," and the company lost more than $13 billion in market
value.

The bad news didn't stop there. Investors interpreted the

unexpected vulnerability of perennially profitable Marlboro as a
warning bell that all brands were suspicious, their value
questionable. A name-brand sell­off began. Within two weeks,
other consumer goods companies that had long enjoyed brand-
based reputations — companies like Gillette, RJR Nabisco, Coca-
Cola, Anheuser Busch, Heinz, and Procter & Gamble — saw their
market value fall precipitously by nearly 20 percent.

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 In fact, Philip Morris's decision to drop its price reflects what
critics claim to be a widespread decline of brand loyalty among
consumers. In an inclement environment of low growth,
persistent unemployment, and increased value shopping,
consumers have welcomed lower-priced alternatives to premium
products, and sales of private-label merchandise and store-
branded products have grown dramatically. Take cigarettes. In
1981, premium brands like Marlboro and Camel accounted for the
whole market; by 1992, discount brands had taken over some 30
percent of the $44 billion U.S. market. According to one survey,
nearly $26 billion worth of private-label items were sold in
supermarkets in 1992, accounting for 18 percent of sales. In
categories with traditionally strong brand sales, private-label
products have made serious inroads; they now claim 16 percent of
the market for bottled water, 7 percent of the market for soft
drinks, and 15 percent of the market for disposable diapers.9
These trends point to the rising quality of private-label goods that
has made consumers more confident in discount brands. As savvy
buyers, we are not blind to the fact that in many categories it's the
same manufacturers of premium-priced products that are making
and distributing the value-priced brands. So why pay more?

The turmoil that began on Marlboro Friday appears to be

polarizing other industries into high-priced "megabrands" at one
extreme and dis­ count brands at the other. A recent decision by
Procter & Gamble exemplifies the trend. In May 1993, P&G
announced that it would discontinue its number 2 brand of
bathroom tissue, White Cloud, to build up its number 1 brand,
Charmin. The strategy hints at the likely consolidation of brand
names in categories like paper products, soft drinks, cigarettes,
and beer in favor of fewer but more visible mega brands that claim
larger market shares. When P&G disclosed in July 1993 that it
would reduce its 106,000-member workforce by 12 percent over
the next four years, the company appeared to explicitly recognize

165
the suddenly depreciated value of all brand names, even dominant
ones like Tide detergent, Pampers diapers, and Crest toothpaste.

How valuable, then, is a highly recognizable brand name? Ask

Herbert Baum, President of Campbell Soup. "When you look at our
balance sheet, you should see right through the cash, accounts
receivable, plants and equipment on the asset side, to our brands.
Our brands are the real assets we own. Without them, we have
nothing."10 Recently, some companies in the United Kingdom have
sought to assign a specific value to their brand names and list
them as assets on their balance sheets. Part of their motivation to
value intangibles derives from those British accounting rules that
compel an acquiring company to write off all goodwill
immediately against equity. Because doing so can leave an
acquirer with no equity at all, to value acquired brands as assets
and place them on the balance sheet is a tool for restoring equity.11

VALUING CORPORATE REPUTATION

Experts in marketing have proposed various methods for
assessing the value of a company's brands — its brand equity.
None has had universal appeal.12 One of the more prominent
methods for estimating a brand's value involves asking, How
much of a royalty on sales would a third party have to pay to
obtain the right to use the name?13 For instance, the ubiquitous
Pierre Cardin claims 840 licensees in 98 countries. In 1988, Cardin
products grossed some $2 billion, and the House of Cardin
collected more than $75 million in royalties-7-10 percent on
clothing sales, and 3-5 percent of sales on other consumer goods.
It suggests that the Pierre Cardin brand is worth a good deal
of money.

Licensing agreements, then, are actually royalty rates for

corporate names and so provide a rough ordering of a brand's
value. The more a licensee is prepared to pay to rent a name, the

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greater must be the drawing power of the brand. Every August, the
editors of Financial World obtain data about corporate royalty
rates. They report that fashion companies generally charge higher
royalty rates than do consumer goods companies. Topping their
list are top-tier houses Chanel and Christian Dior at 12 percent; a
second-tier set of companies that includes Yves Saint Laurent,
Nike, Reebok, Estee Lauder, Avon, Johnson & Johnson, and Gillette
at 6 percent; and a third tier of brand names charging lower rates
and including companies like Eastman Kodak, Michelin,
Goodyear, Adidas, and Polaroid. 14

Although licensing arrangements vary wildly, royalty

percentages generally range between 1 percent and 10 percent of
projected sales. A brand's value could be calculated as the present
value of these expected royalty payments over some arbitrary
period, say the next 20 years. Such a calculation, however, simply
suggests that "bigger is better." Brands with more sales are
always more valuable. So the measure does not account for
consumers' relative satisfaction with a brand and so does not
really gauge its reputation. Most brand assessments rely on just
such arbitrary estimates of a brand's "strength."

Financial World uses these royalty rates to estimate and publish

the implicit brand value of corporate names each August. To do so,
the magazine relies on subjective assessments of the "strength"
of a brand prepared by Interbrand, a marketing consulting firm.
These assessments incorporate 20 factors, including perceived
consumer recognition, line­extension potential, and the name's
transferability to other products. Based on an additional estimate
of the expected life of the company's trademark, and on various
assumptions about sales growth and the discount rate to apply to
future revenue streams, Financial World arrives at estimates of the
brand values of 15 companies.

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 Take consumer goods giant Gillette, visible most recently for
the successful launch of its line of Sensor shaving products. In
1993, the subjective strength score for Gillette calculated by
Interbrand (Fortune's list quantifying company intellectual assets)
suggested that an 8 percent royalty rate might be expected.
Applied to Gillette's $4.7 billion in sales, it meant potential royalty
revenues of $375 million in the first year. Assuming sales growth
of 5 percent per year over 20 years (the expected minimum life of
Gillette's name) and discounting the royalty revenues back to the
present at Gillette's own cost of capital of 10.12 percent produced
an estimate for Gillette's corporate name of about $4.5 billion. An
alternative approach to estimating a brand's relative value and, by
extension, a company's reputation is to assume what finance
scholars tell us is the gospel truth: That stock market prices
incorporate all known information about a brand and fully reflect
a company's future prospects. If we make that assumption, we can
define the value of a brand simply as its market value over and
above the liquidation value of the net assets involved in
producing and selling the brand. A small hitch, here:
Accountants normally carry a company's assets at book value. The
excess market value therefore incorporates not only the value of
the company's reputation but also the market's best guess about
the current market value of those historical assets.15

One way out of this conundrum is to recognize that, when

assessing a company, most investors don't look at its liquidation
value. Rather, they probe its ability to generate future profits as a
going concern. The market value of a public company should
therefore reflect its value as an operating enterprise. It makes the
excess market value correspond roughly to the overall regard in
which the company is held by its constituents — a gauge of its
reputation.16 Gauging reputational capital provides a simple way of
quantifying the dollar value of a company's reputation.

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 • What Is Reputational Capital? A company's reputational
capital is the excess market value of its shares — the
amount by which the company's market value exceeds
the liquidation value of its assets.

Consider five brands that have dominated their product

categories since 1923 and proven to be among the most durable of
all time: Coca-Cola ( soft drinks), Gillette (pens and razors),
Kodak (film and cameras), Campbell (soup), and Wrigley (chewing
gum).17 Since these five brand names are the foundations on which
their companies' reputations were built, we can calculate a rough
dollar estimate of the value of these names by taking the
difference between each company's market value and its book
value. For Coca-Cola, that number came to about $52 billion in
March 1993, placing Coke among the world's most valuable
corporate brands. A similar calculation put Gillette's reputation at
$12 billion, Eastman Kodak's at $11 billion, Campbell's at $9
billion, Colgate's at $8 billion, and Wrigley's at $4 billion. These
numbers provide us with a rough estimate of each company's
store of reputational capital.

By extension, we can calculate the reputational capital of all

public companies. As before, the additional worth of these
companies comes from both undervalued historical assets and
from goodwill. Taken together, they add up to investor confidence
in a company's future prospects — in its reputation. Much as the
value of a Van Gogh painting or a vintage Chateau Margaux
fluctuates in auction markets, so too does a company's
reputational capital — the value of its brands and other intangible
assets-rise and fall in the marketplace. Market prices reflect an
instantaneous estimate of market value, a balancing of supply
and demand.

Averaged over the longer term, a market-based measure of

reputational capital has some merits. For one, it's simple to

169
derive; for another, it enables comparisons of companies across
industries and over time; for a third, it recognizes the reputations
of companies involved in both the manufacturing and service
sectors; and finally, the measure enables comparisons of
companies with more than a single product line or business.18

LOSING FACE: IT'S COSTLY

Deriving numerical estimates of reputation from the market
price of a company's shares also makes it possible to cost out
unexpected incidents that damage a company's franchise. When
companies face crises, they generally lose market value. To some
extent, the loss constitutes the stock market's best guess about
the damage done to the company's future profitability — that is,
to its credibility and reputation. Exxon and Johnson & Johnson can
attest to that.

A few minutes into March 24, 1989, the supertanker Exxon

Valdez struck Bligh Reef in Alaska's Prince William Sound, tearing
a huge hole in the ship's hull. Within hours, more than 10 million
gallons of crude oil had spewn out of the freighter, ravaging 1,200
miles of shoreline and putting Exxon in the way of a media blitz
that quickly turned into a public relations nightmare. Besides
having to pay an estimated $1.38 billion in cleanup costs, the
company was indicted on five criminal counts and faced more
than 150 separate civil lawsuits resulting from the spill. Two years
later, the courts approved a settlement between Exxon, the federal
government, and the state of Alaska to resolve civil and criminal
claims, according to which the company would pay $900 million
in 11 annual payments. Given the comparatively small fine
imposed, the major harm to Exxon from the spill may well have
been its loss of reputation.

One way to estimate the reputational loss to Exxon from the

accident is to look at the short-term drop in the company's

170
market value, or its loss of reputational capital. The average value
of Exxon's shares in the 14 trading days before the spill was
$57.64 billion. In the 14 days following the spill, the company's
average market value had dropped to $54.64 billion. Investors
therefore recognized a loss of reputational capital totaling $3
billion, or 5 percent of Exxon's market value. Figure 4-1 depicts
the decline in Exxon's market value-and so in its short-term
reputation — during that 28-day window.

A similar analysis can be done for Johnson & Johnson, which

faced product tampering with its Tylenol brand in 1982 and 1986.
As previously explained, on September 30, 1982, reports of five
deaths from cyanide ingestion were traced to a production lot of
Tylenol capsules. Worried about losing its reputation for
gentleness and safety, J&J's McNeil Consumer Products division
promptly pulled all Tylenol capsules from retail shelves. Within
days, the company took aggressive action to block reputational
loss: ( 1) All capsules were scrapped and the safe tablet version
offered as a replacement; (2) an intensive ad campaign was
launched portraying J&J as a victim of sabotage; (3) tamper-
resistant packaging was introduced, and more than 80 million
new samples were distributed free of charge at a cost to J&J of

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some $30 million. The actions would prove remarkably effective in
rebuilding Tylenol's premier position in the marketplace as well as
J&J's long-term stock of reputational capital.

In the short run, however, J&J lost value. Consider the 1982
crisis. In the 14 trading days before the tampering, J&J shares were
worth an average $8.262 billion. In the 14 trading days after the
incidents, J&J's market value dropped to $7.132 billion for a loss of
$1.13 billion, equivalent to a 14 percent drop in the company's
reputational capital in 1982. In 1986, ]&J's market value fell from
its prior 14-day average value of $9.1 billion to $8.1 billion for a
loss of $1 billion, equivalent to an 11percent drop in the value of
the company's reputational capital. Figure 4-2 shows ]&J's short-
term reputational losses during those two crisis periods.

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 Clearly, accidents and crises can seriously damage a
company's franchise and reputation. For public companies,
changes in the market value of a firm provide a reasonable
estimate of the anticipated losses to a company from attacks on its
integrity and credibility; they also provide a gauge of how much of
a company's reputational capital is put at risk from such events.

HOT COMPANIES
Table 4-2 sorts American firms into three tiers according to
their average stock of reputational capital between 1990 and 1993.
While Exxon dominates the list with an estimated $69 billion in
reputational capital, other top-10 companies include familiar
icons like General Electric, AT&T, Wal-Mart, and Coca-Cola.

A second tier of companies with strong reputations includes

pharmaceutical giants Johnson & Johnson and Merck and
consumer barons Procter & Gamble and American Home Products.
Many of the second­tier companies actually control individual

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brands that are better known than their corporate logos. For
instance, American Home Products owns Dristan and Anacin,
products in nearly every bathroom in America. Minnesota-based
3M is better-known as the maker of Scotch tape and Post-It notes.
The total value of their reputations is clearly built up from the sum
of their individual brands.

Or take Philip Morris. The company is far more familiar to us

as the maker of Marlboro cigarettes, Kraft cheese, and Miller beer.
In July 1993, Financial World estimated the value of the company's
stable of brands using subjective estimates of the "strength" of
the company's principal brands. It put individual brand equity at
$39.5 billion for Marlboro, $2.3 billion for Kraft, and $1 billion for
Miller. Omitting lesser brands, that puts Philip Morris's overall
brand value at a total of $42.8 billion.19 Compare that with our
estimated $45.5 billion in reputational capital derived from the
company's market value; the two figures are remarkably similar.

Table 4-3 compares in greater detail the brand estimates of

Financial World derived from royalty rates and the stock market
estimates of each company's reputation that we calculated from
long-term share prices.

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 Remarkably comparable numbers obtain for single-product
companies like Intel and Goodyear. Discrepancies arise principally
because of omitted assets in the estimates made by Financial
World. For instance, the market valuation of Coca-Cola also
includes its distribution arm, something that investors clearly
appreciate but that is not included in the magazine's estimate.
Similarly, the smaller value for PepsiCo results because the
magazine does not include the value of the company's diversified
portfolio of food chains (Pizza Hut, Taco Bell, Kentucky Fried
Chicken) or of snack-food maker Frito-Lay. Finally, the subjective
estimate of the Kodak brand ignores the company's Sterling Drug
division. The analysis supports the use of stock market values to
make company­ wide assessments of reputation. Subjective
estimates of brand strength incorporate many "unknowns" and
seem to add little to estimates that are more simply derived from
market information about a company.

Table 4-4 provides a more complete listing of the leading

companies in each of 30 industries. The table contrasts two sets of
numbers:

1. Short-term reputational capital, a company's reputational

capital calculated on the basis of its current market
value.

2. Long-term reputational capital, a company's reputational

capital calculated on the basis of its average market value
and book value over many years.

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176
177
178
179
180
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 Short-term reputation reflects the current, often temporary
regard in which a company is held by investors. It fluctuates with
the daily ups and downs in the price of a company's shares. Long-
term reputation focuses on the average stock of reputation over a
time span-in this case, three years, March 1990 to March 1993.
Like any moving average, it discounts short-term changes in a
company's fortunes and better represents the company's true
standing in the corporate world.

Big companies tend to have better long-term reputations.

They're more heavily capitalized, attract more investors, and so
tend to be more visible. In the short run, however, size turns out
not to be a major predictor of reputation. It's clear, for instance,
that many of our largest companies have dramatically lost
reputational capital in recent years — companies like IBM in
computers, General Motors in motor vehicles, Citicorp in banking,
and Sears Roebuck in retail. Investors have recognized the
declining values of the historical franchises of these once
venerable names and depreciated their stock prices.

Long-term reputations are obviously more stable. Despite its

recent troubles, GM continues to enjoy a premiere reputation in
the auto industry, as does Sears in retail, despite its poor short-
term showing in table 4-4. Among all industrials, IBM still ranks
fourth in long-term reputation and tops in the computer industry,
despite its dismal performance in the last two years. But IBM's
future reputation is in jeopardy. Unless the new management
team led by Lou Gerstner regains the investors' confidence, the
stock price will continue to drop and do inexorable damage to
IBM's long-term reputation.

In the computer industry, while IBM is busy singing the blues,

Hewlett­Packard in hardware and Microsoft in software are
investors' darling. Du Pont dominates the chemical industry,
much as Coca-Cola's reputation dwarfs that of its larger archrival,

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PepsiCo. In the aftermath of the Cold War, aerospace and defense
companies fare poorly, with Boeing the only bright star. In
financial services, American Express and J. P. Morgan top the
long-term list, and aggressive AIG holds a commanding lead as
the only insurance company with lots of reputational capital. In
the short term, however, Amex has clearly fallen on hard times,
landing just behind first­ place Morgan. For pharmaceutical
companies, both short-term and long­ term reputational capital
agree: They all look impressive as they continue to enjoy their
bloated prestige among investors, with Merck, the perennial
favorite, leading the way. We can expect the ongoing national
debate about health care to depreciate the short-term reputational
capital of these companies, especially those of prescription drug
companies like Merck and Pfizer.

GLITZY INDUSTRIES
At any point in time, some industries enjoy greater popularity
than others and so amass more reputational capital; they are the
"hot" industries of the day. Biotech is a case in point. Since 1988,
investors have sunk more than $4 billion into biotech companies,
although few have shown a profit. Clearly, reputation drives
biotech research. Much like the motion-picture industry, biotech
companies make large, up-front gambles on a product long before
they know whether the product can recover its costs; both
therefore rely on "blockbusters" to recoup investments lost on
hundreds of failures. To fund these gambles, investors bank on the
reputations of the players. Movies, for instance, are packaged for
investors with known directors and stars. Increasingly, the script
derives from a best-selling novel, assuring audience interest. The
combination is expected to make for better box-office draw. In
similar ways, biotech companies have taken to partnering with
reputable drug companies like Merck or Hoffman-La Roche,
creating packages of players, products, and marketing rights. As

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with movie packages, here it's the combined reputations of the
companies that attracts investors.

Table 4-5 presents a snapshot of the hot industries in March

1993. Dominating the ranking are the retail, beverage, and
telecommunications industries. The pharmaceutical industry is
also flying high, despite prospects of regulatory reform of health
care that could eat into corporate profits. The global dependence
on oil means favorable prospects for the energy industry, and
that's reflected in its high stocks of reputational capital.

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 In contrast, competitive and retrenching industries are faring
poorly. Automakers are still struggling to assert themselves
against Japanese rivals, and the market still doubts their
prospects. Racked by price wars, the airline industry has obviously
fallen into disfavor, as has aerospace since the end of the Cold
War. Still reeling from the savings and loan crisis, from South
American loans gone sour, from insider-trading scandals, and
from global rivalry, the banking, insurance, and financial services
industries have lost much of the reputational capital they
accumulated in the 1980s.

Because some industries claim larger companies than others,

the second column in table 4-5 lists reputational capital after
controlling for companies' total sales revenues. Given relative
industry size, investors are clearly most impressed by the
prospects of the computer industry (owing principally to
powerhouse software companies like Microsoft and Novell),
pharmaceuticals, beverages, and chemicals. The computer
industry boasts $5 in reputational capital for every $1 of sales it
generates, while the others claim some $2 in reputational capital
for $1 of sales they produce — clearly a sign of appreciation. At the
opposite end are floundering industries-auto, farm equipment,
aerospace, airline — with little reputational capital to back up
their sales.

VALUING INTANGIBLES
Sometime in the summer of 1993 I attended a sports auction to
benefit AIDS research. Among the items auctioned off to the 1,000
or so part1c1pants was a used tennis racquet donated by veteran
champion Martina Navratilova. The racquet was a well-worn,
ordinary Yonex model, still selling in sporting goods stores
around the world for about $250. As I recall, the bidding started at
$500. Quickly it went into the thousands. When the gavel finally

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came down, the second-hand racquet had been auctioned off for
the startling sum of $27,000. How valuable is a reputation, you
ask? I'll say this much: No one there would have paid much more
than $100 for anybody else's marked-up frame.

Even though people who try to evaluate companies invariably

disagree on how best to systematically measure the dollar value of
a reputation, no matter how we assess it, a reputation is valuable.
A strong reputation enhances the value of a company's potential
licenses, products, and services, and so raises revenues. In turn,
better revenues translate into superior market value over time. As
I argue in subsequent chapters, learning to manage that
reputational capital is a critical activity that senior managers must
call attention to and support.

In fact, the reputational capital that our most celebrated

companies have amassed over the years reflects core beliefs that
have made their products dear, their capabilities reliable, their
actions dependable, their practices distinctive, and their cultures
unique. Insofar as these core beliefs reflect a company's identity,
they are the bedrock on which every company's reputation sits —
a subject to which we now turn.

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CHAPTER 5:
IDENTITY TRAITS

We are what we repeatedly do.

Excellence, then, is not an act, but a habit.

Aristotle

I
N 1982, Tom Peters and Robert Waterman, Jr., two
consultants from McKinsey & Company, penned a book
distilling their experiences and titled it In Search of
Excellence. The tome became a runaway best-seller, spawning
numerous imitators. It would also turn Tom Peters, its lead
author, into a new-age management guru, with fame and fortune
to rival that of the legendary Peter Drucker.

The message of the "excellence" team was as simple as it was

profound: Good companies do everything better. Like Midas, the
Phrygian king of Greek mythology, everything they touch turns to
gold. They innovate more quickly, make better products, deliver
better service, and, naturally, produce better results for investors.
Peters and his colleagues praised the dexterity with which
prominent companies like Marriott, 3M, and Disney ran their
operations; commended the sound visions that corporate founders
had instilled in employees; celebrated the care with which their
managers engineered products and serviced customers. These
companies were excellent, they claimed, because they were
exceptionally good at managing the "soft" side of their
performance — the values that drive employees and the
capabilities that enable them to make the company's products and
sell its services.

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 Reviewers of the new movement were not all kind. Many
belittled the methods used to identify the 43 "excellent"
companies. Follow-up articles in popular magazines like Business
Week tracked the economic performance of the companies and
jubilantly showed how poorly many of them had fared in the stock
market — as if "excellent" companies by definition were always
supposed to outperform everyone else. Of course, that's not so.
Numerous factors other than a company's managerial skills affect
performance, things like new technologies, demographics,
changing tastes, business cycles, and competitive conditions. Not
everything can be anticipated or controlled. Moreover, even the
best companies occasionally hire managers who make mistakes.

In fact, the "excellence" fad hinted not at the ingredients that

guarantee peak economic performance but rather at those
"identity traits" that combine to build enduring institutions,
those attributes that build strong reputations. Although Peters
and company rightly called attention to practices embraced by
some companies that happened to be financially successful, they
failed to recognize the more credible link between those traits and
the reputational capital that they nurture over time. They also
stopped short of asking probing questions about the internal
character and identity of those companies.

NOT EXCELLENCE… IDENTITY!

In May 1983, a team of reporters first published The 100 Best
Companies to Work for in America.1 From random interviews
obtained by crisscrossing America, the authors generated a list of
companies that employees claimed were great to work for. Like In
Search of Excellence, The 100 Best Companies also became a best-
seller and soon sired its own progeny of imitators, each one
purporting to identify the companies that were the best run, best
to work for, best for women, best for African Americans, best for

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Hispanics, best for the environment, and so on. Each fulfilled a
useful function in calling attention to the particular features that
made a company attractive to at least one of its interest groups.

The problem with every one of these books was that a

company could very well be good in one area and entirely deficient
in another. It might provide employees with a pleasant working
environment but not necessarily perform well for its
shareholders; it might offer great opportunities to women or
minorities and yet pollute the environment. It turned out, for
instance, that only 15 of the 43 companies judged excellent by
Peters and Waterman were also judged to be good workplaces.

During the 1980s, it became quite evident that managers could

easily squander a company's resources to benefit one constituency
at another's expense. Among Tom Peters' favorite examples of
well-managed companies, one recently joined the list of fallen
angels: Stew Leonard's Dairy in Norfolk, Connecticut. In July 1993,
the store's founder and three company executives pleaded guilty
to skimming more than $17 million from sales in an elaborate tax-
fraud scheme. Shortly thereafter, they averred that the store-
widely touted by Peters for its entrepreneurial genius-had been
practicing short-weighting on its customers. In October 1993,
Leonard was sentenced to more than four years in prison and
fined $947,000 for his role in the tax fraud. Should the company
ever have been thought admirable? The case calls to mind the old
dictum, "You can fool some of the people some of the time, but
you can't fool all of the people all the time."

To focus on a company's reputation is to determine how it

deals with all of its constituents; it is to focus on a company's
character, or identity. Identity constrains what actions a company
takes, how it makes decisions, how it treats its employees, how it
reacts to crises. Managers and employees tend to act in ways
consistent with the company's identity. Identity is therefore the

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backbone of reputation. Identity develops from within and limits a
company's long-run actions and its performance as benchmarked
against rivals'. Identity explains the kinds of relationships
companies establish with their four most critical constituencies:
employees, consumers, investors, and local communities.2

In the past, most companies built their reputations around one

dominant trait, be it operational excellence, innovativeness,
product quality, financial growth, or customer service.3
Increasingly, however, companies find themselves being
pressured into achieving a more balanced posture. Much as the
rising tide lifts all boats, so is competitive pressure forcing
companies to achieve excellence in at least one trait while
maintaining strong competence across all the others. In the end, I
argue, it's the companies with the most widely respected identity
traits that will build enduring reputational capital. They'll develop
a kind of Midas touch.

GREAT WORKPLACES
What traits build a golden reputation among employees? The
authors of The 100 Best Companies to Work for in America, now in its
third edition, relied heavily on word of mouth to generate a list of
companies that are great places to work. After extensive
discussions with employees, they concluded, "Despite the
diversity, almost every one of the 100 Best has something
distinctive to offer its employees." But although "each company is
unique . . . there were certain themes we heard over and over
again." They then rated each company on five basic features that
appeared to build employee satisfaction and morale: relative pay
levels, benefits programs, job security, equal opportunity, and
"ambience"-the company's elusive work style. If we decant their
comments, employees favor companies with three dominant
traits:

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 • They promote trust.

• They empower employees.

• They inspire pride.

TRAIT #1: PROMOTE TRUST

Every good relationship — whether between husband and
wife, between friends, or between employer and employee — is
built on a foundation of trust. Trust allays our fears of betrayal by
people we depend on, whether at home or at work. Odds are we'll
be well treated by people we trust. They'll stand up for us if we're
under attack and defend our interests if we're not present. As one
corporate observer puts it: "Trust does not exist naturally in the
workplace. Where it does take root and grow, it is a highly
perishable commodity, requiring constant attention and care. Part
of the reason for this difficulty in establishing trust is that human
beings naturally question the motives and intentions of others. We
are all afraid of being taken advantage of. So we are very careful
about whom we trust. Managements of good workplaces seem to
acknowledge the fact that everyone inevitably has doubts about
the company's credibility and reliability."4

Well-regarded companies appear to make systematic efforts to

demonstrate their trustworthiness by acting evenhandedly toward
all employees. They encourage a freer flow of and more equal
access to information; often they opt to share broadly the rewards
of good work by involving employees in profit-sharing plans or by
promoting direct employee ownership of company stock.

Consider W. L. Gore, the company noted for developing Gore-

Tex, the synthetic fiber now used to make breathable yet
waterproof outerwear, space suits, synthetic arteries, and
industrial filters. In the early 1980s, the 3,000-employee
Delaware-based outfit was getting a lot of press for its innovative

191
practices. Once I visited there, I quickly saw why: Gore seems to
operate with an alarming lack of structure. Plants are kept small in
size (to a maximum of 200 people) to enable direct contact among
employees, or "associates," as they're called at Gore. To say that
people work in a trusting environment would be an
understatement. Although they didn't have to, everyone I talked to
spoke highly of the company, of founder Bill Gore's open, fair, and
forthright policies. The fact that Gore distributes about 15 percent
of the company's annual profits to associates doesn't hurt. Nor
does the company retirement plan, through which each associate
receives the Gore stock equivalent of 15 percent of annual income,
which is placed in an ASOP, or Associates' Stock Ownership Plan.
It's a lot easier to put your trust in a company that treats you like a
family member and a lifelong partner, even if it smacks a little of
paternalism.

Also in the early 1980s, another company then being touted as

a member of a new breed was Publix Supermarkets in Florida.
Curious to know more about them, I visited the company
headquarters in Lakeland and spoke with its founder, George
Jenkins. Although far more structured than W. L. Gore, Publix
conveys a similarly paternalistic attitude. One dominant trait is
that the Jenkins family and the supermarket chain's employees
are its only shareholders. Publix distributes 20 percent of all
annual profits to store employees, and it also funds a profit-
sharing plan into which go another 10 percent of profits. As you
might expect, everyone I spoke with considered Publix a godsend

TRAIT #2: EMPOWER EMPLOYEES

It's not only in smaller companies like W. L. Gore or Publix that
opportunities for involvement and participation take place. At
Avis, employees are not only shareholders but active participants
in decision making. Or take giant IBM, long the darling of

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reputational surveys. In its training manuals, the company speaks
of five levels of freedom. At the lowest level is the subservient
employee, waiting to be told what to do; at the highest is the
"empowered" employee, the one who embraces the highest
degree of freedom and autonomy on the job.5 Since IBM's debacle
of the late 1980s, the company has been struggling to push greater
levels of autonomy into the corporate structure. Increasingly,
managers are being paid on bonus and commission and told to
make the sale no matter what it takes. Empowered at last.

In fact, mountains of research confirm that when we are

empowered, committed, and involved in making decisions, good
things happen. For one, we feel better about our jobs and
companies. Feeling good motivates us to work harder and do
better. Positive attitudes induce trust, encourage teamwork, and
fuel creativity and innovation, all of which can help companies to
act more quickly and so to outdistance rivals. Involvement also
makes good sense because line employees, being closest to the
products, services, and customers of a company, are in a position
to assess the wisdom of key decisions.

One way to involve employees is to set up quality circles. Since

1980, interest in quality circles has exploded, demonstrating the
bottom-line benefits of empowering employees. More than 2,500
U.S. companies use them to generate participation and capitalize
on employees' ideas for improving operations. In the typical
quality circle, groups of employees meet one hour a week on
company time to discuss ways to improve a department's
performance. Westinghouse, for instance, maintains more than
1,600 quality circles in 200 locations, groups that involve both
blue-collar and white-collar employees. In all, about 16,000
employees meet regularly in these groups to focus on product
improvement ideas. Quality circles are only the tip of the iceberg.
Other attempts to incorporate inherently democratic practices
abound. Consider the annual "jobholders' " meetings, at computer

193
maker Pitney Bowes. A direct analog to stockholder meetings,
these gatherings provide a forum for substantive dialogue
between managers and employees. The question-and­ answer
sessions are meant to resolve substantive problems in the
company that no doubt makes 9 out of 10 postage meters in the
United States. But the meetings also signal that managers are
accountable to employees as well as stockholders.

To empower is also to reduce status discrepancies among

employees. A highly regarded company like Hewlett-Packard
maintains an egalitarian environment that enhances morale. In
contrast to the hierarchical practices of its far older rival, IBM,
there is no established, privileged class of managers at Hewlett-
Packard with private parking spaces or corner offices. At specialty
steelmaker Nucor, egalitarianism also pervades.

194
 Neither Ken Iverson, the company's renowned chairman, nor
any of Nucor's other senior managers get perks. They sit in
spartan offices, drive their own cars, and fly coach. Just like
everybody else.

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TRAIT #3: INSPIRE PRIDE
Respected companies elicit from employees a higher degree of
emotional involvement with their jobs. When one's work feels
meaningless, it's difficult to commit to a job, to a product, or to
the company that provides them. When a product is shoddy or
otherwise doesn't deliver what customers expect, it's hard to feel
good about selling it. When a company scorns job safety, shows
favoritism, or mistreats groups of its employees, it's hard to feel
loyal, difficult to stick around. Ultimately, then, a good place to
work inspires pride in employees: pride in their jobs, pride in the
company's products, pride in the way the company operates.

Ask Wal-Mart employees. To work for Wal-Mart is to join a

large extended family, an instant community where getting
together is fun. Pride in their work in outdoing rival retailers
brings them together repeatedly during non-business hours.
Every Saturday morning at 7:30 A.M. Wal-Mart managers meet at
the general office building in Bentonville to review results and
troubleshoot. All employees also participate in a seemingly
endless stream of company-sponsored picnics, canoe trips, golf,
fishing, tennis, and other shared activities.

Or talk to employees of Apple Computer. With the company

flush from a decade of growth that propelled it to prominent
status among the Fortune 500, a rah-rah atmosphere is all-
pervasive. Apple logos proliferate, as does a relaxed,
countercultural, blue-jeans style of dress, a sense of openness,
egalitarianism, teamwork, and commitment to hard work. Pride in
the product and in the company's democratic mission to bring
computer power to the people dominates discussions among
employees.6

Table 5-1 lists the publically traded companies rated as good

workplaces in at least one of the three editions of The 100 Best

196
Companies to Work for in America. The table also shows the long-
term reputational capital of those companies. It suggests that the
average level of reputational capital is higher among companies in
which employees consider the work environment to be attractive.

GREAT INVESTMENTS
What traits build reputation among investors? If it's true that
employees value trust, empowerment, and pride, investors seldom
do. Indeed, most studies show that investors are rather single-
minded and look steadfastly to a company's profitability,
volatility, and indebtedness to gauge its future prospects and
assess its attractiveness. John Whitehead, the former cochairman
of Goldman Sachs once put it this way: "What determines which
companies sell at six times earnings and which companies sell at
sixteen times earnings? It's a complex of factors. But the principal
ingredient is the perception of investors as to the quality of
management, the quality of the people in the company. That is

197
reflected in the record the company has established over a period
of years. It's also reflected in a lot of intangible factors that have to
do with . . . the quality of the company's products, and in a general
perception of how the company comes across."7

TRAIT #4: GENERATE STRONG EARNINGS

What could better predict a company's future than its
profitability? Many studies show that habitual investors pick
stocks based on the current and historical earnings of
companies 8 and favor companies with better and more steady
earnings.9 Following announcements of either strong profits or
actions likely to improve future profits, investors generally bid
up a company's market value and so increase its reputational
capital. Clearly, that's why managers focus so intensely on the
bottom line. Falling profits signal declining prospects to
investors, lowering the company's market value and its
reputational capital.

TRAIT #5: MAINTAIN STABILITY

When we are uncertain about the profitability of a company
we invest in, we naturally expect to be rewarded with above-
average returns.10 One way to appraise the riskiness of a
company is to look at the volatility of its earnings in past years.
The less steady its profits have been, the greater the risk. There
has to be a considerable upside to the risk-and that means
higher potential profits. Over time, companies that don't
deliver what investors expect get downgraded by the market
and so sacrifice some of their reputation.

Debt also reduces the residual value of the firm to investors,

and it is a good predictor of bankruptcy. That's why companies
with comparable total assets but greater debt prove less attractive

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to investors. Who among us wants to invest in a company that's
unlikely to pay us back? All in all, then, earnings and risk are the
principal predictors of how both investors and analysts rate
companies and their reputations.

TRAIT #6: SHOW GOOD PROSPECTS FOR GROWTH

Ratings agencies like Moody's Investors Services and Standard
& Poor's help us to assess the merits of companies as investments.
In essence, ratings are judgments about a company's financial and
business prospects. Although Moody's acknowledges that there is
no fixed formula by which companies get rated, it turns out that
its ratings are also most heavily influenced by a company's
volatility of earnings and its indebtedness. 11 "In arriving at our
conclusion on an issue's rating," states a company brochure,
"Moody's adopts a long-term view that extends beyond a brief
earnings period. The foundation of Moody's rating methodology
rests with one basic question: What is the level of risk associated
with receiving timely payment of principal and interest on this
specific debt security and how does the level of risk compare with
that of all other debt securities?" 12

At Moody's, a ratings committee reviews the ratings of leading

companies. As Harold Goldberg, the chairman of the committee
told me: "A rating indicates the degree of comfort we have in a
company's ability to deliver expected levels of performance . . . .
It's heavily influenced by three factors: the fundamentals of the
business, how the company is managed financially, and the
credibility of the company's management. . . . We don't rate on the
basis of the morality of a company's actions; we rate them based
on their prior record of accomplishments, and on our judgment of
how likely they are to fulfill their future commitments."

Both Moody's Investors Services and Standard & Poor's devote

their resources to assessing the financial strength of public

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companies. They rate companies on a letter scale akin to
classroom report cards, anchored at the top by AAA and at the
bottom by C or D. The triple-A grade from either agency is widely
regarded as a symbol of gilt-edged credit and indicates a low
probability of default under even the worst of circumstances. At
the other extreme, a D rating from Moody's or a C from S&P's
indicates that the company is probably a bad credit risk.

In Table 5-2, the fourth column from the left lists the May
1993 credit ratings of the highest reputation companies in each
industry among the set of industries valued in chapter 4. Table 5-2
shows that companies with higher stocks of reputational capital
tend to be assigned better ratings.

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201
202
 Good prospects are hard to figure out. That's why a whole
industry of "oracles" has come to the fore on Wall Street, the best
of which are canonized annually as the "All America Research
Team" by the industry bible, Institutional Investor. Since
companies know that many investors thrive on the "picks" of
these star analysts, many are granted private audiences to discuss
a company's strategy with its top brass. Which is probably why
those analysts are so highly paid; many earn as much as $1 million
a year.

The power that star analysts have to sway investors gives them
a lot of influence over a company's reputation, even though most
of their predictions don't pan out. A study of 1,950 predictions
performed by Zachs Investment Research showed that only 12
percent came in at exactly the consensus average of analysts'
predictions, while 50 percent came in ahead and 38 percent came
in behind. In other words, on average, following an analyst's
recommendations proves to be no better than tossing a coin.

Another study of 1,221 stocks by Dreman Value Management

found a steady erosion of accuracy in analysts' projections
between 1973 and 1990. As one observer concludes:

When analysts blunder on earnings, it is not just the

marginal player at a no-name firm who is of f the mark. A
surprising number came from the ranks of the "All America
Research Team," a list turned out each year by Institutional
Investor magazine that purports to include only the cream of
the analytical crop. Yet those stars made up a
disproportionate number of those making the worst
estimates. [In part, it's because] too many unpredictable
factors enter into a company's earnings . . . making the
exercise largely a futile one. And even in those cases where an

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 analyst is an expert with perfect estimates on the company, it
doesn't necessarily translate into good stock picks.13

So what real value can we ascribe to analysts if their crystal

balls don't work? Those of us who dabble in the stock market
would probably argue that, individually, analysts play a symbolic,
comforting role that reduces our innate fears of uncertainty.
Collectively, however, their effect is far greater. Their
recommendations influence the movement of funds into and out
of particular stocks, and so affect a company's market value and
reputational capital.

A simple estimate of how optimistic investors are about the

future prospects of a company is given by the ratio of a company's
stock price relative to earnings. Investors generally assign all
companies with high price/earnings (p/e) ratios as better
prospects than rivals. The fifth column from the left in Table 5-2
lists the p/e ratios for the best-regarded companies. In May 1993,
topping the list were Home Depot, Wal-Mart, and Southwest
Airlines — consumer-oriented companies with strong franchises
in home repair, discount merchandise, and air travel-three of the
best-regarded companies in America.

We're also influenced by the moves of pension funds, mutual

funds, insurance funds, university endowments, and foundations
that invest large sums. These institutions have created large pools
of money under the control of professional managers responsible
for making portfolio investments. Two observers of the financial
markets confirm that "the policy preferences of large institutional
holders . . . have become a major force in determining and
directing individual corporate policies."14 Because of their
prominence, institutional investors are important to the building
of reputation. Fund managers act as brokers of information to
smaller investors, who often emulate their moves.

204
 Figure 5-1 indicates how institutions have come to dominate
as investors in the shares of major U.S. companies. By 1990,
institutional investors accounted for 90 percent of all stock traded
on the New York Stock Exchange and some 60 percent of all stocks
held. Studies of these institutions find that they emphasize long-
term returns more so than do individual investors.

The far right column in Table 5-2 shows that in 1993 large
institutions invested more heavily in some high-reputation
companies than others, coming to own more than the average 55
percent of companies like Kellogg, Intel, Dun & Bradstreet, and J.
P. Morgan. Since many smaller investors stay closely attuned to
the expectations of these large investors, they can be expected to
invest accordingly. The result is further demand for the shares of
the better-regarded companies, which fuels higher market prices
and further inflates these companies' reputational capital.

GREAT PRODUCTS
What companies make the best products? What traits
distinguish these companies? These questions dog consumers

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who want to know what products to buy and puzzle managers who
want to know how to make them. Our concerns as consumers are
neither those of employees nor those of investors.

A sure measure of a product's popularity is its ability to ring up

sales. Products that sell have more customers, and so brand
revenues gauge the brand's popularity. Since America was built on
cars and oil, topping the list of the U.S. companies with the highest
revenues (and the most popular products) are General Motors,
Exxon, and Ford. Those companies producing the most popular
consumer products are Philip Morris, Procter & Gamble, and 3M.
Their revenue base assures them of wide­spread product
visibility; these companies routinely battle for the number 1
position in sales in many product categories.

Among auto producers, consider the rivalry between Honda's

Accord and Ford's Taurus. Between 1989 and 1991, the Accord
outsold the Taurus. In the last months of 1992, however, the race
took on epic proportions as Ford's Taurus closed in. At Ford
headquarters in Detroit, sales managers aggressively went after
the top spot. And the company did everything to encourage them,
including sponsoring various contests. Under the Spin to Win
contest, for every Taurus sold a salesperson would dial an 800
number at Ford headquarters to report the sale. An operator would
then spin a wheel and award the salesperson a random bonus of
$75 to $500 over and above the normal commission.

Clearly, to both companies winning was everything. To get

there, each offered deep discounts on their models, scratching and
scraping for every customer. As one commentator said, "beyond
the question of pride, automakers think the sales leadership that
Taurus is seeking can translate into a powerful marketing tool. In
advertising and in dealership sales pitches, the 'America's best-
selling car' mantra is soothing reassurance for shoppers about to
spend up to $20,000."15

206
 By January 1993, Ford's Taurus had edged out Honda's Accord
for first place. Part of it was the hard push. Analysts estimate that
Ford spent more than $50 million on rebates and other incentives
to lure customers into its showrooms. But most also concur that
Ford's success in getting to the number 1 spot can be traced to a
combination of internal traits typical of companies that rate high
in sales and customer satisfaction: (1) a commitment to making
quality products, and (2) a strong service record. The two go
hand-in-hand, as a guide from IBM states: "Quality is real. It is
absolute professionalism. It is single-minded attention to
customer satisfaction . . . perfection in the eyes of the customer . . .
uncompromising dedication to be world-class . . . the sense of
urgency to be first, fast, agile and efficient. Or, as they might say
in the movies, quality means never having to say you're sorry." 16

TRAIT #7: CHAMPION QUALITY

Probably no one in America has been quite as influential in
pushing companies to focus on quality as the late Ed Deming. His
"14 points of quality" have become as omnipresent in classrooms
and on shop floors as have personal computers in offices. Until his
death in 1994, the former professor at New York University
essentially preached the gospel that a commitment to quality
works to a company's advantage; costs decrease owing to less
rework, fewer mistakes and delays, and better use of time and
materials. Consumers prefer quality products, so market share
increases, and that improves profitability and growth potential. 17

Persuaded by Deming's logic, Japan took him on after World

War II. Lumbering under the low-quality reputation of the Made
in Japan label, Japanese companies initiated programs to improve
product quality and to rebuild not only their own reputations but
Japan's. It worked. And Lee Iacocca's cri du coeur about the
relative disadvantage of the Made in America label in the early

207
1990s symbolizes the remarkable turnabout in Japan's reputation
in the last 30 years.

Not until much later did American companies discover the

quality movement that Deming initiated. In 1981, it was Donald
Peterson of Ford Motor Company-the maker, appropriately
enough, of the car that would achieve best-seller status in 1992-
who first took him on. As he reached the end of his life, Deming
became a virtual guru, drawing standing-room crowds to his
business school classes and four-day seminars and influencing
thousands of managers at companies like AT&T, P&G, Xerox, and
General Motors.

The result? At such companies as Ford, Xerox, and Motorola,

management reviews have shifted away from their earlier focus on
financial outcomes to discussions of process problems. Motorola's
obsession with quality drove its defect rate down from 6,000
defects per 1 million components in 1987 to 40 per million in 1992.
Whereas companies like Ford and GM once picked suppliers for
their low-cost bids, since 1980 both have winnowed their base of
suppliers and forged closer relation­ ships with those that remain.
Much as a family member might, a single supplier more likely
identifies with the company. In turn, shared expectations and
stable production runs enable both the manufacturer and the
supplier to reduce costs by maintaining lower inventories,
meeting accurate specifications, and so satisfying customer needs.
18 Once a major manufacturer like Ford, IBM, or Motorola adopts a
quality orientation, it tends to demand the same of its suppliers,
and that further diffuses quality principles throughout the
industry.

The gospel of quality has been actively preached by others, like

Philip Crosby and Joseph Juran. Together with Deming, they have
pushed companies to develop a quality-based identity: a
commitment to reduce defect rates; to continually improve

208
products by empowering employees; and to reduce the cycle time
between identification of a deficiency and its resolution, which
means listening to the customer more closely than ever.19

Xerox's David Kearns puts it this way: "Our basic focus is

customer­oriented. Our description of quality at Xerox is meeting
the customer's requirements and satisfying them 100 percent of
the time. We want our customers to perceive us as providing
quality products and services, and the measurement of that is, do
we meet their requirements? We believe customer satisfaction will
enable us to meet our goals of improved return on assets and
increased market share."20

TRAIT #8: PUT THE CUSTOMER FIRST

Wordsmiths are likely to remember a company by the name of
Wordstar. In the early 1980s, the small company took a solid lead
in selling word­processing software for personal computers.
Today, few of us rely on Wordstar. That's because throughout the
1980s the company developed a reputation for insensitivity to
consumer needs. Its managers communicated poorly with the
public, failed to make 800 numbers available for customer service,
and routinely put out versions of its own software that were
incompatible with previous versions, forcing wholesale retooling
by those eager to keep up. Contrast that with the efforts made by
rival producer Wordperfect to maintain close contact with its
customers. Throughout the 1980s, Wordperfect built a solid
reputation for user friendliness. The result? Wordstar, though still
in business, squandered its lead and gave up most of the word-
processing market to Wordperfect. Companies with products that
rate well with customers rely on a simple and logical strategy:
They keep in touch. Toll-free phone lines mean that customer
concerns are heard quickly and that problems are resolved on a

209
real-time basis. Regular customer surveys enable companies to
analyze sources of dissatisfaction and develop tactical solutions.

Before developing the Taurus in 1985, for instance, Ford spent

four years conducting consumer research that identified a wish
list of some 1,401 features. Company engineers worked hard to
incorporate more than half of them in the design of the Taurus. In
the process, benchmarking against leading rivals proved vital. As
the author of Investing for Good explain, "Ford also listened to
drivers and engineers in determining which of its competitors was
considered 'best in class' across a range of auto characteristics-
seats, dashboard configurations, transmissions, door latches . . .
and set out to match or exceed them."21 The result? The company
reduced by more than 50 percent the labor content required to
assemble a car relative to domestic rivals. By 1989, Ford's profits
dwarfed those of Chrysler and surpassed those of its much larger
rival, GM.

The companies consumers respect constantly look out for both

positive and negative indicators of their success at meeting needs.
On the positive side, they carefully monitor whether they're
getting repeat business. They also tally the complimentary letters
they receive and the customer referrals they get. On the negative
side, they keep a close watch of customer complaints and lost
customers. And they reward employees accordingly. IBM Malaysia
is one example of a company that awards employees a bonus if the
overall customer satisfaction ratings gathered annually improve
by at least two percentage points.

GOOD CITIZENS
Finally, what traits build for a company a good reputation in
the communities in which it does business? Here again, what's
important to the local community will be different from what's

210
important to employees, investors, or consumers. From the
public's point of view, doing good is a precursor to doing well.

The laissez-faire decade of the 1980s demonstrated how

reckless business interests could be when left to their own devices.
Although mergers and leveraged buyouts were widely defended as
strategies to enhance corporate efficiency, most proved to be
motivated more by exploitative managers and raiders eager to
capitalize on market failures, with little concern for the employees
that had to be laid off, for the communities that were frequently
devastated, or for the companies that were themselves
subsequently bankrupted by debt. Many companies and their
executives have concluded that we pay a high price for
disregarding the social implications of corporate decisions and for
endorsing a short-run view of corporate self-interest.

Corporate citizenship is a mindset according to which

managers make decisions, design systems, and initiate programs
that reflect a commitment to ethical principles and encourage
community-wide integration. Consider this statement by
journalists Mary Scott and Howard Rothman, authors of
Companies with a Conscience: "As the '90s wear on, it becomes
increasingly apparent that business in general can no longer
function, and no longer be judged, solely on the basis of nets and
grosses. A positive impact on employees, customers, and the
community at large has assumed an equal or even greater
significance in the overall picture. Today's bottom line
encompasses more than just dollars and cents, and corporations
of all sizes and philosophical orientations are beginning to
recognize this."22

Well-regarded companies make more explicit their

commitment to multiple constituents. At J. P. Morgan, chairman
Dennis Weatherstone asserts, "If you don't serve your clients well
you can't serve your share­holders well; if you don't serve your

211
people well, you can't serve your clients well. To serve your people
well means being effective in the community that they work in and
that they live in, and it's just reductive and tunnel vision to think
of it otherwise. You have to think of the linkages to long-term
shareholder value across all your stakeholder communities."

It shows in all well-regarded companies, whether

symbolically, as in Johnson & Johnson's credo or in Herman
Miller's corporate values booklet; financially, in the contributions
they funnel to local communities or through foundations; or
personally, in the extensive volunteer programs that these
companies conduct. All seem actively, passionately committed to
playing a lead role in upholding moral principles and integrating
themselves and their employees into the fabric of society. Many
support campaigns to enroll voters, others to protect the
environment, some to improve schools, others to help the
homeless. In a very real way, the reputations of these companies
mirror not only their strength of character but also their sense of
duty to act as full-fledged citizens and social participants. The
British-based Body Shop Company made significant and
surprising inroads into the crowded cosmetics industry in the
1980s by redefining the concept of beauty for women-away from
makeup to a more natural look. In the process, the Body Shop built
a reputation as the West's most caring cosmetics company, less
because it produces products much different from those of its
rivals than because founder Anita Roddick is aggressive about
putting the company's social concerns at the forefront.

In similar ways, Tom's of Maine is a small American company

that proudly identifies itself with its natural toothpaste and
deodorant products. At a recent gathering of like-minded identity
researchers in Utah, I recently had the opportunity to hear
founders Tom and Kate Chappell expound on the consistency
between their social vision and their market development. As Tom
put it: "There's a fundamental unity that I see across all spheres of

212
life. I simply don't think in terms of boundaries. Our customers,
investors, and employees are all part of the Tom's of Maine family
— we're all members of the same community."

From small to large, companies become well regarded because

they increasingly recognize the importance of addressing the
interests of all groups affected by a company's actions, decisions,
policies, and practices.23 Since those interests are often
incompatible and costly in the short run, these companies
obviously take a long-run view of profitability. They recognize
that the divergent points of view of employees, consumers,
investors, and local communities can and should be
accommodated in the long term.24 Whether from a morally
principled point of view or from a more utilitarian logic, they
recognize the value of cohering work and play, self, and
community.

Listen to Ben Cohen, cofounder of Ben & Jerry's, the Vermont-

based ice-cream maker with the pristine reputation. He asks
pointedly: "Can a business make a top quality, all-natural
product, be a force for progressive change in its community, and
be financially successful? Yes. Sure. Why not? We're doing it-and
so is a small but growing and (we think) influential group of
socially responsible companies. We call our approach Caring
Capitalism."25

Like Tom's of Maine, Ben & Jerry's, and the Body Shop, some
of our larger companies are also answering these questions in the
affirmative. They pose moral questions that go beyond the
traditional fiduciary role of delivering profits to shareholders.
Besides making ritual donations to charity, they willingly take on
what they see as a responsibility to sustain the infrastructure of
local communities. They encourage volunteerism, adopt troubled
schools, and actively search for ways to sustain the fiber of
comradeship and social support. Often led by visionaries, these

213
companies increasingly question the viability of an economic
system that is not sustainable, that takes more from the
environment than it can provide. Despite some press attacks in the
fall of 1994 (discussed below), the Body Shop remains one of the
most admired companies in the United Kingdom. Anita Roddick
puts forth her views passionately, and in somewhat radical terms:
"The responsibility of business is not to create profits but to create
live, vibrant, honorable organizations with real commitment to
the community. . . . I certainly believe that companies should not
be evaluated solely on their annual report and accounts. . . .
Businesses are the true planetary citizens, they can push frontiers,
they can change society. There hasn't been an ethical or
philosophical code of behavior for any business body ever, and I
think it's going to have to change."

Many of our best-regarded companies now take this message

to heart. It's apparent in their efforts to build a stronger, healthier
relationship with local communities on one hand and with
"spaceship earth" on the other.

TRAIT #9: SERVE THE COMMUNITY

Early in his presidency, Bill Clinton called on Congress to
create a National Service program to rebuild the spirit of
community, to rekindle patriotism, and to act on the eloquent
words of the late U.S. President John F. Kennedy: "Ask not what
your country can do for you; ask what you can do for your
country." The program was successfully implemented with
students benefiting from college funding in return for performing
community service after graduation.

A similar appeal to community spreads out from our most

respected companies. At ARCO, chairman Lod Cook encourages
volunteerism. "I think the CEO has to lead by doing," he says. As a
volunteer, he donates a third of his time to supporting education,

214
to countering drug abuse, and to helping local communities. His
fund-raising efforts have helped build the Hispanic community
center Plaza de La Raza in Los Angeles, the national headquarters
for Junior Achievement in Colorado Springs, and the planned U.S.
Olympic Training Center in San Diego.26

H. B. Atwater is the chairman and CEO of General Mills, an

admired company by all accounts. He had this to say: "General
Mills has built a reputation as a company that cares about people
and about the communities in which we do business. . . . Our
contributions include financial support, product donations, and
the development of innovative social programs. But the
contributions that make us especially proud are those of our
employees and retirees who give of themselves in such a variety of
ways. Their volunteerism helps make this a great company."27

In 1992, the Points of Light Foundation and the Conference

Board jointly sponsored a survey of professionals in 1,800
companies. Of the 454 responses received, 50-60 percent believe
that company-sponsored volunteer programs help companies to
build morale, skills, and loyalty as well as project a favorable
image to the community.28 A set of studies commissioned in 1989
and 1992 by IBM and conducted by UCLA's David Lewin examined
156 companies. The results indicate that employee morale was up
to three times higher in companies actively involved in their
communities. 29 In my own study of well-respected companies
among the Fortune 500, I found the firms most frequently cited
were more likely to have created a foundation and to make larger
contributions to charitable causes.

A number of esteemed companies go well beyond philanthropy

and volunteerism. Take Merck. In 1978, the company developed a
drug that successfully combats "river blindness" — so called
because it is a disease transmitted by insects that principally
affects people who live near rivers, mostly in developing nations.

215
Given the poverty of the affected populations, Merck recognized
that the drug was unlikely to be profitable. In an act of
benevolence, Merck's CEO Roy Vagelos announced in 1987 that the
company would donate its Mectizan drug to all affected
populations free of charge for as long as necessary. As Edward
Scolnick, head of Merck's research laboratories, puts it: "We
should donate Mectizan because we can afford to donate it. We're
fortunate." A May 1990 Merck press release reinforced the point:
"You cannot let a product like this sit on the shelf. With sales of
$6.55 billion and a $750 million budget for research and
development last year, Merck can afford to distribute free
drugs."30

Merck's rival Pfizer stays closer to home. A company founded

in Brooklyn in 1849, Pfizer has committed itself to redeveloping
the decaying neighborhood in which its plant continues to
operate. Through a broad partnership with local nonprofit
organizations, community groups, businesses, and city agencies,
the company spearheads a $28 million program to create
affordable housing, commercial facilities, and jobs in the
Williamsburg community of Brooklyn. In 1992, new residents
moved into the first middle-income housing units of the project.
Soon thereafter, a bilingual school was opened in a building
donated by Pfizer, on which the company spent some $500,000 to
convert to educational use.

TRAIT #10: GO GREEN

In August 1993, five large companies working with the
Environmental Defense Fund formed an alliance to increase their
use of recycled paper. The purpose of the alliance is to reduce the
burden on landfills and to revitalize the moribund market for
recycled paper by creating demand for billions of dollars of second
hand pulp. Only about 6 percent of the 22 million tons of printing

216
and writing paper produced in the United States every year comes
from recycled paper. The participating companies are Johnson &
Johnson, Time Warner, McDonald's, NationsBank, and Duke
University. Clearly, being "green" is in vogue.

Also in August 1993, Fortune magazine published a list of 30

prominent companies that they scored for safeguarding the
environment. All of the companies going green are among those
identified in chapter 4 as having high levels of reputational
capital. The environmental ratings provide a broad sense of
corporate performance in 20 different environ­ mental categories
that range from whether company has reduced emissions of toxic
chemicals to whether it has developed comprehensive written
policies, goals, and incentives.

Consider these highlights of what took place at AT&T, Apple

Computer, and Dow Chemical:

• Between 1988 and 1993, AT&T lowered its air emissions

by 81 percent and cut disposal of manufactured waste
in half. Between 1986 and 1993, the company cut
releases of toxic CFCs by 86 percent. As of 1993 it was
recycling 60 percent of its office paper and using 10
percent less of it by making double-sided copies and
encouraging electronic memos. AT&T offers financial
incentives to employees who come up with ways to
improve the company's environmental performance.

• Apple Computer reduced its toxic emissions by 97

percent between 1988 and 1992. The company works
with its suppliers to end their use of CFCs. With its
Macintosh Color Classic, the company introduced a
"sleep" mode that lowers energy consumption by
nearly 50 percent.

217
 At Dow Chemical, toxic releases declined by 32 percent
between 1988 and 1991, making the company's total releases
among the lowest in the chemical industry. The company is
among the first to put its top environmental officer on the board.
In 1986, the company launched the WRAP (Waste Emission Always
Pays) program. Some 200 teams of workers had by 1993 generated
savings of an estimated $700,000 each by increasing efficiency
and reducing the waste sent to refills.

Many of these improvements were propelled by government-

led programs such as Superfund and the Toxic Release Inventory
(TRI). Superfund was written into law by Congress in 1980
following the Love Canal disaster in upstate New York. The 20,000
tons of chemical wastes buried by the Hooker Chemical Company
were suspected of causing miscarriages, birth defects, and cancer.
Superfund would induce companies to clean up the thousands of
toxic waste dumps they had created across America. For all the
publicity surrounding the program, most experts consider it to
have failed. In 14 years, only 217 of 1,289 seriously toxic sites have
been cleaned up, despite $13 billion spent by governments and
companies.

TRI has been more successful. Started in 1986 by the

Environmental Protection Agency, the TRI program requires that
all U.S. plants report annual releases from their facilities into the
air, ground, and water of some 317 toxic chemicals. By enforcing
tabulation and codification, and by publicizing those numbers
widely, TRI provides a highly visible, public benchmark for
assessing companies.

The Earth Summit held in Rio de Janeiro in June 1992 also

helped. Nearly 180 nations committed themselves to policies that
would enable them to develop their economies while preserving
the environment and the renewable natural resources on which
future prosperity depends — what they termed "sustainable

218
development." They also assembled a broad blueprint for
arresting environmental degradation. Subsequently, the United
Nations constituted a 53-nation Commission on Sustainable
Development to translate the Rio accords into action.

In June 1993, Vice President Al Gore eloquently pledged his

support to the group: "If there is any doubt about the support of
the United States for that commitment, let me lay it to rest here
and now. This administration not only supports that commitment,
we intend to join with all those determined to demonstrate real
leadership."31 Part of that pledge involves reducing emissions of
heat trapping gases like carbon dioxide and further stimulating
companies to enact environmental programs.

Consumer-goods maker Procter & Gamble recognized the

challenge (and opportunities) of environmental protection early
on. Since the early 1980s, the company has been actively working
to promote environmental quality management in its packaging,
marketing, and distribution processes. P&G actively looks for
partnerships with local schools, suppliers, and customers to make
products safer, to reduce waste, and to replenish the vast forest
resources the company saps as one of the world's largest
consumers of wood pulp. In 1990, P&G launched the Global
Environ­ mental Management Initiative (GEMi), a collaborative
effort of 20 leading companies to promote sustainable
development. The purpose of the group is to foster environmental
responsibility among companies throughout the world by
transmitting "best practices." GEMi members now share
environmental codes of conduct and coordinate and support
research from industry and academia on environmental matters.32

The Council on Economic Priorities (CEP) is a not-for-profit

group that regularly rates companies on diverse social criteria (see
chapter 7). Table 5-3 contrasts two groups of companies to which
the CEP has given its highest and lowest environmental ratings.

219
On average, although comparable in size, companies in the
highest rated group claim twice as much reputational capital for
every dollar of revenue they bring in.

220
TRAITS THAT BUILD REPUTATION
The best-regarded companies appear to boast a strong sense
of identity. Johnson & Johnson is widely known for the
conservative but caring convictions that bind its 35,000
employees into a community. Pharmaceutical giant Merck is
admired for providing a paternalistic, caring environment for
employees, with generous benefits for families. Xerox is lauded for
its commitment to innovation, its teamwork, and its high­ quality
products. Wal-Mart takes center stage as retailing's most folksy,
family-oriented, and gung-ho company. And who hasn't heard of
Her­ man Miller's democratic culture, driven by employee
ownership, with its stress on trust, morality, and teams? In these
companies, a set of core and enduring values governs the way
employees relate to one another and to the outside world. Not
surprisingly, these values influence the way outsiders regard them
and shape their lofty reputations.

As employees, consumers, investors, and communities make

more visible their demands of companies, they encourage
managers to become more responsive. Not long ago, no less a
publication than the Economist recognized this:

In many ways economics seems to be moving in the nice

guys' direction. A growing number of consumers now base
their buying decisions on 'non­commercial' concerns. Does a
product harm the environment? Was it tested on animals? Is
it recyclable? Was it made in a Surinam sweatshop? If a firm
can answer 'no' to all of the above, it can make an ethical
killing. Building a reputation as the West's most caring
cosmetics company has helped Britain's Bod y Shop to out-
per form the London share index by a factor of 45 since its
flotation in 1984. Yet Body Shop has done nothing especially
novel (many of its competitors also shun animal testing); it

221
 was simply one of the first firms to realize that wearing its
ethics on its sleeve added greatly to the value of its brand.33

Table 5-4 outlines the principal identity traits of companies

that have amassed goodwill and a good reputation from pursuing
"excellent" practices in each of four domains: for maintaining
good workplaces, producing strong financial results, selling good
products, and acting like good citizens. In the final analysis,
companies build strong reputations by actively demonstrating
excellence in all four domains.

This point was driven home in a scandal-provoking article

written about none other than the Body Shop and titled "Shattered
Image: Is the Body Shop Too Good to Be True?" The investigative
report published in the September-October 1994 issue of Business
Ethics claimed that the company widely reputed for its progressive
humanism and environmentalism did not live up to its claims.
According to the reporter, its products were not all natural,
employee benefits were not egalitarian, and little of real value was
actually returned to the innovators of Body Shop products from

222
developing nations. In other words, the company's reputation was
at odds with the reality.

At this point, the evidence is not all in. Some of the reporter's
attacks do not appear justified. Relatively minor infractions may
have been blown out of proportion, distorting the record of a
company that is, on balance, one with a social record that is far
better than average.

The Body Shop example, however, reminds us how difficult it

is to develop the Midas touch. After all, most companies are lucky
if they achieve top grades in even one of the four domains. The
best practices of these model companies, however, can serve as
valuable benchmarks for companies concerned about meeting the
expectations of all their constituents. To those internal practices,
however, must also correspond a set of external practices designed
to convey a set of images coherently outside the company — our
next topic.

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CHAPTER 6:
SHAPING CONSISTENT IMAGES

“I read somewhere that everyone on this planet is separated by

only six people — six degrees of separation between us and everyone
else on this planet, the President of the United States, a gondolier in
Venice, just fill in the names.”

John Guare

A
COMPANY’S IDENTITY undergirds the reputation it
develops. Ice­cream maker Ben & Jerry's reputation rests
not only on the quality of its ice cream but on the
credibility of its claims to consumers and employees that it
champions a more egalitarian and "caring" form of capitalism.
Were Ben Cohen or Jerry Greenfield to adopt lavish lifestyles, to
draw exorbitant salaries, or to indulge costly whims, surely the
company's reputation would decline. Identity affects not only a
company's internal practices but also its external practices. After
all, most companies prefer to project their more alluring traits and
downplay their less pleasing features. Truth be told, doesn't
everyone?

To figure out what a company is up to, we rely heavily on

information supplied by the company itself, on data audited by
accountants, on the views of investment analysts, on the insights
of journalists, and on hear­ say from the rumor mill. We count on
those auditors, analysts, reporters, friends, and rumor mongers
when we make decisions about where to invest our money, what
products to buy, and which companies to work for. We use their
views to crystallize our own reputational rankings of companies.
The questions we explore in this chapter are the following:

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 How can managers ensure that the judgments we make of
their companies are favorable? And how can they ensure that the
aggregate impressions that form among all constituents remain
favorable?

Different constituents look for different things from

companies: Investors look for growth; bondholders demand cash
flows that are sufficient to meet interest payments and assets that
guarantee reimbursement of their loans; employees look for good
pay and job security; suppliers want repeat business; customers
want reliable products. To assess a company's ability to meet
these objectives, we each evaluate signals that are broadcast not
only by self-interested managers but also by knowledgeable folks
that monitor companies. Since few of us have direct access to
companies' inner workings, we often rely on reporters and
analysts who act as intermediaries. They screen, spin, and
broker information for us; they help us make sense of
companies' complex activities — and so affect company
reputations.

SPIN DOCTORING
In February 1993, the television news journal Dateline N BC
aired a dramatic segment that showed a General Motors pickup
truck bursting into flames after a collision. The program provoked
considerable public outrage. It seemed to prove beyond a shadow
of a doubt that GM's trucks were poorly designed and that the
automaker was disregarding evidence to the contrary. The
program fueled speculation that the lawsuits filed by injured
customers — although settled out of court without admission of
guilt — were actually wellfounded.

GM's top brass was incensed. Incredibly, it turned out that

NBC had tampered with the truck to make sure its gas tank
exploded into flames. Not only had the on-camera experiment

225
been rigged, but NBC had abandoned its obligation to inform
viewers of as much. Smartly, the automaker pounced. It demanded
and obtained from the network an unprecedented on-air public
apology. The company also filed a lawsuit against NBC. Within a
week, the network agreed to a settlement. To seal the victory, GM
proclaimed symbolically that it would pull all of its advertising
from NBC news. By now, a disconcerted NBC was cowering in the
limelight. Less than a day later, GM rescinded its ban on
advertising. As far as GM was concerned, its symbolic purpose had
been achieved: Its reputation was restored.1

Reputation was again the central issue for GM a month later.

When purchasing czar Jose Ignacio Lopez de Arriortua left GM for
a top position with Germany's Volkswagen in March 1993, the
executives in GM's front office were fuming. Not only had they
just promoted him, but they had loudly touted Lopez to the media
as GM's salvation, the masterful cost cutter who would return the
company to profitability. Once again, GM was the laughing stock
of Wall Street — once too often. With surprising vigor, GM turned
the tables on the seemingly victorious Volkswagen by filing
charges in both the United States and Germany alleging that Lopez
had pilfered confidential GM documents. Taken aback,
Volkswagen's top managers fumbled, unable to dispel the charges
of industrial espionage. A poll of 1,000 Germans taken in July 1993
indicated that 65 percent believed there was "something" to GM's
allegations.2 In the battle of perceptions that ensued, GM showed
aggressive­ ness, decisiveness, and credibility, whereas
Volkswagen appeared defensive and weak, in other words, guilty.
The market values of both companies responded accordingly:
GM's improved while Volkswagen's tumbled. As with NBC, it
seems likely that here, too, GM was most concerned about its
image; its aim was to dispel any public perception of having been
"taken." In the media brawl over reputation, GM pulled ahead,
and that was money in the bank.

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 Both incidents call to mind a famous essay by media observer
Daniel Boorstin, in which he points out that "in the last half
century a larger and larger proportion of our experience, of what
we read and see and hear, has come to consist of pseudo-events."
3 Although seemingly spontaneous because they are widely
reported, "pseudo-events" are actually carefully staged for the
express purpose of generating public attention. GM's efforts to
shame both NBC and Volkswagen sound suspiciously like pseudo-
events. Embarrassed by the actions of NBC and Volkswagen, GM
executives portrayed the company as a victim to elicit sympathy in
the court of public opinion. Both companies were bewildered. NBC
didn't have a leg to stand on, while Volkswagen sought in vain to
establish "the truth" of the allegations. By not realizing that GM
was concerned largely with manipulating public perception,
Volkswagen executives played right into GM's hands, making of
the exchange a bona fide pseudo-event, a "happening" in the
international press.

The incidents involving NBC and Volkswagen show GM

striving to reinvigorate a once-glorious reputation that had been
left in tatters by the press. Indeed, throughout 1993 GM came
under heavy fire for inertial management, poor profits, and
outsized strategic errors. The NBC and Volkswagen episodes were
therefore useful distractions from the day­to-day business of
making and selling cars. In Daniel Boorstin's terms: "In
competition for prestige it seems only sensible to try to perfect our
image rather than ourselves. That seems the most economical,
direct way to produce the desired result. Accustomed to live in a
world of pseudo-events, celebrities, dissolving forms, and
shadowy but overshadowing images, we mistake our shadows for
ourselves. To us they seem more real than the reality. Why should
they not seem so to others?"4

In recent years, pseudo-events have become grist for the mills

of the public relations industry. Entire company departments

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devote their energies to creating, orchestrating, and diffusing
pseudo-events, projecting attractive images, and safeguarding the
public personas of their companies. In partnership with outside PR
firms, often hired on retainer, they play a key role in helping
companies to build, maintain, and defend a reputation.

If pseudo-events can fire up attention and generate interest in

a company, the flames are stoked by two processes: media mania
and the rumor mill. By bearing down on events, crises, decisions,
failures, and successes, the media bring a company widespread
notice. Paralleling the news media are the informal people-to-
people networks that sometimes create and invariably propagate
rumors, hearsay, and inuendo. Together, the two often start up a
"bandwagon"-a fad-like process, whether in the product market,
the job market, or the investment market. It spurs potential
employees, customers, and investors to assess an event or a crisis
based not on facts but on gossip.

Bandwagon escalations and declines in reputation are fueled

partly by speculative frenzies. They are also guided by strategic
efforts to project image and construct positive interpretations
about corporate prospects. GM's efforts to thwart Volkswagen, its
nemesis in Europe, are probably in this vein, as are numerous
other pseudo-events that we routinely observe. Ostensibly, these
events communicate facts; in truth, their purpose is to
disseminate interpretations that safeguard the reputation and
prestige of the company in question. In ads, newsletters, and other
PR efforts, managers recognize one certainty: Outside observers
rely heavily on the reputation of the company and on the
reputations of established experts to judge the quality of that
company's products, employment practices, and prospects for
growth. So it is vital to monitor, to understand, and to shape
external perceptions.

228
BEHIND THE LOOKING GLASS
One of the earliest proponents of public relations, Ivy Lee,
recognized that "crowds are led by symbols and phrases. Success
in dealing with crowds . . . rests upon the art of getting believed
in."5 He was right. Companies today try hard to manage
appearances, to build credibility and reputation, by regularly
deploying resources to influence the thinking of key constituents.
Especially influential in shaping the ways we come to judge
companies are:

• the media organizations through which companies

advertise their wares and in which reporters comment
on the activities of companies;

• the investment analysts who assess the prospects of

companies; and

• the informal person-to-person networks that

propagate information, rumors, and inuendo about
companies to important constituents and, through
them, to the rest of the world.

SWAYED BY THE MEDIA

Direct personal experience with a company's products and
initiatives aside, our judgments of it are swayed by how familiar it
is to us from advertisements and promotions. Both take place
through the various ambient media that magnify the actions of
companies and disseminate them far and wide.

General business publications like Business Week, Fortune,

Forbes, the Wall Street journal, and Financial World, as well as more
specialized industry vehicles like PC World in computers, Women's
Wear Daily and Gentlemen's Quarterly in fashion, and Variety in
entertainment, all help to shape our feelings about the companies
they feature. When managers issue press releases and make

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routine presentations to reporters, it's precisely to influence the
"spin" that gets put on published stories.

Reporters also operate in media companies that are political.

Despite claims to the contrary, corporate advertisers, media
owners, and other interests influence what stories reporters
choose to cover. Since advertising budgets represent the lion's
share of revenues in most print and television outlets, there is
some slight evidence that bigger, more profitable companies that
advertise a lot may also get more and better media coverage than
rivals, something that can obviously help to enhance their
reputations.

This is not to say that reporters are necessarily biased in their

reporting; only that they're human. They dwell more heavily on
events that they expect to be more "interesting" to the average
consumer. Often that simply means reporters prefer to feature
attention-getting companies. They favor reporting on companies
facing situations that are rare, new, and dramatic — hence their
reputation for dwelling on the negative.

Edward Bernays —the widely acknowledged founder of

modern public relations — would agree. In 1923, Bernays asked in
his pioneering book, Crystallizing Public Opinion, how a hotel might
increase its prestige and improve its business. Rather than hiring a
chef, improving the plumbing, or painting the rooms, he
suggested that the hotel stage a celebration of its thirtieth
anniversary. A committee was formed that naturally included a
prominent banker, a leading society matron, a well-known
lawyer, and an influential preacher. The purpose of the celebration
was to call attention to the distinguished service the hotel
rendered to the community. The event was duly held, photos were
taken, and the occasion widely reported by the media, with
reputation-enhancing effects and increased business.

230
 The recently deceased Bernays was instrumental in creating
opinion­shaping methods that became widely used by companies
like Procter & Gamble, Celanese, General Electric, General Motors,
Westinghouse, Time, CBS, and NBC. A nephew of Sigmund Freud,
Bernays pioneered the prevailing reliance on endorsements from
opinion leaders, celebrities, doctors, and experts in ads promoting
the arguments of his clients. Among his many campaigns, some
have had lasting impact. As the New York Times reported on the
occasion of his death in spring 1995:

He was instrumental in making it acceptable for women

to smoke in public, sponsoring, on behalf of the American
Tobacco Company's Luck y Strike cigarettes, demonstrations
in which debutantes gathered on street corners to light up.
The cigarettes were even called "torches of freedom." On
behalf of Luck y Strike, Mr. Bernays also undertook to alter
women's fashions. When surveys showed that women
objected to Luckies because the green pack age with its red
bull's-eye clashed with the colors of their clothes, he swung
into action to make green fashionable. There followed a
green fashion luncheon, green balls (at which green gowns
were worn), and window displays of green suits and dresses.
The campaign was a brilliant success, according to sales
figures.6

The strategy of self-promotion Bernays originated has since

become grist for the mill of the public relations industry. As
consultants and advisers to corporate America, PR specialists
spearhead the effort by many extroverted companies to project
themselves aggressively into the media. Of some 6,644 public
relations firms operating in the United States, the top three
dominate the industry with a total of more than 6,000 employees:
London-based Shandwick and New York-based Hill & Knowlton

231
along with Burson-Marsteller. As with much of the PR industry
today, both Hill & Knowlton and Burson-Marsteller are now
subsidiaries of advertising agencies, in these cases J. Walter
Thompson and Young & Rubicam, respectively.

Take the industry's third largest PR firm, Hill & Knowlton. The
company serves more than 1,000 clients worldwide, with 1,281
employees scattered in offices throughout the United States,
Canada, Europe, the Pacific Rim, Australia, and Latin America. The
company describes its work in this way:

How would you teach the cosmopolitan residents of Hong

Kong to become do-it-yourselfers? Defeat a planned
deregulation of the New Zealand taxi industry? Help thwart
the hostile takeover of a major U.S. oil company? Get the
media to include your toys among its Christmas toy stories?
For Hong Kong, our answer was a careful cultural translation
of "do-it-yourself" into an acceptable "proper home and car
maintenance" theme. The kicker that carried the day for the
taxi association was an imaginative cartoon book that
became the talk of Parliament. The key to outwitting the
corporate raider lay in mobilizing employees and members of
the hometown community in a multitudinous and highly
effective cheering section. The hook that wok e the toy writers
was a survey of toy preferences called the North Pole Poll.7

Identity consultants are a niche business within the larger

advertising and public relations industry. In chapter 11, I describe
how identity consulting grew out of packaging design and brand
marketing. Founded in the postwar era by Lippincott & Margulies,
its most visible practitioner, this specialized segment of the
broader public relations industry calls attention to how a company
is perceived by its different constituents. The brunt of the work
done by L&M and its rivals, however, involves instituting

232
coherence in a company's communications with those
constituents, with its most visible work coming in the creation of
corporate names like NYNEX, Primerica, Hartmarx, Ameritrust,
and Amtrak and their attendant logos, symbols, signage, and
packaging — their identities. Some managers entrust PR agents
with the task of gathering information with which to market their
company. Others prefer less aggressive efforts and choose merely
to have PR firms monitor public attitudes and then inform the
company of early warning signals about looming social or political
threats or of possible opportunities. In both cases, however, the
marriage of information with marketing creates diverse images­
sometimes of an introvert, sometimes of an extrovert, sometimes
aloof, sometimes caring-and builds a reputation for the
company with its various constituents. The challenge companies
face is to ensure that the multiple images dispersed through the
media are consistent. Edward Bernays justified opinion making in
this way: "How can you blame the intelligent business who has
millions invested in his industry, and thousands dependent on it
for jobs, if he attempts by intelligent propaganda to give these
shifting tides of taste a direction which he can follow without loss;
to control by means of propaganda what otherwise would be
controlled disastrously by chance?"8

Identifying trends through research has itself become an

industry. Among the better-known information-gathering
companies today is J. D. Powers, a privately held consulting firm
founded in 1968, with revenues of $18 million in 1991. The
company built its reputation among analysts with its automobile-
owner satisfaction studies. In 1992, how­ ever, the firm conducted
its first computer end-user satisfaction study. It provides us with
one example of how PR joins forces with information research to
fuel reputation building. In the computer study, Texas-based Dell
Computer turned up as number 1 for PCs in small to medium-sized
businesses. Dell's PR agency, Goldberg Moser O'Neill of San

233
Francisco, seized on the ranking to put together a media
campaign, creating four print ads and one television spot.
According to Mike Massaro, the agency's COO, "One of the things
we wanted to do, in a non-disparaging way, was to demonstrate
that Dell was number-one, and that a lot of big computer
companies were behind it. . . . Over the past year Dell made a lot of
gains in stature, and the J. D. Powers survey gave us a reason to
catapult Dell against the also-rans by utilizing TV.9

Susan Black is a principal at the Dilenschneider Group, a PR

firm that specializes in strategic counseling. As she pointed out in
a meeting in her office, public relations is a very subtle activity:

In our business, we try to change perceptions and

thoughts, and that can be very difficult. You have to go back
over and over again. For example, one of our clients, an
investment banker, wanted to improve the way they were
covered by a specialized trade newspaper. We offered to
broker a small private dinner with the publisher. What
happened was this: A barrier fell down, they started talking to
each other, pro posed some ideas for a column in the pa per
that was subsequently introduced, and information flowed
more freely between them, reducing the misperceptions that
had been there in the first place.

Over the years, public relations agencies have become masters

at brokering situations and creating pseudo-events to project
image. Nowhere is it more obvious, perhaps, than in sports
marketing, where events are routinely manufactured to promote
tie-ins of star athletes like Michael Jordan or Shaquille O'Neal
with the companies and products they are paid to endorse.

Mark McCormack is the founder of International Management

Group, a global marketing empire for public figures like tennis

234
champions Jim Courier and Monica Seles, football quarterback Joe
Montana, classical violinist Itzhak Perlman, and opera diva Kiri Te
Kanawa. McCormack is also the author of the 1984 best-seller
What They Don't Teach You at Harvard Business School. In 1990,
Sports Illustrated called him the most powerful figure in sports.
Supported by a small team of agents and an organization of fewer
than 1,600 people spread out in 62 offices across 19 countries,
McCormack's IMG generates more than $1 billion in revenues
every year. Even so, it faces intense competition. In tennis, for
instance, IMG squares off regularly against two key challengers:
ProServ and Advantage International. Each of the three
management companies boasts its own stable of international
stars and regularly tries to lure away talent from its rivals. Each is
in business for one reason only: to micromanage the names
and enhance the reputations of their superstar clients.

ADVISED BY ANALYSTS
Although PR companies and agents are at the heart of
promoting information about their clients, investments analysts
are key members of a community of corporate monitors that
interpret and distribute information. They, too, contribute heavily
to shaping corporate reputations, particularly those of public
companies.

Corporate analysts look closely at those regulated disclosures,

especially at a company's financial reports. To ensure that we have
"good" information on which to judge a company, the Securities
and Exchange Commission demands regular reporting of profit-
and-loss statements by certified independent accountants.
Naturally, in their annual reports, senior executives attempt to
influence the way investors will interpret their company's
prospects. Hence their increasingly glitzy appearance.

235
 Susan Black of the Dilenschneider Group emphasized the
importance of analysts: "We rely heavily on analyst surveys to
understand public companies. They are approachable, they have
great access to companies, and they act much like the media in
shaping the opinions of investors. For instance, when I work on an
annual report, I ask them: 'What do you wish you could see in this
report?' I also ask them what they wish never to see again."

Analysts recommend stocks based on the past and present

accounting performance of firms. Empirical studies show that
when companies report their seasonal earnings, investors are
quick to react. High profits and low risk generate upturns in the
price of a company's shares. Analysts also regularly make
recommendations that fuel buying sprees. Take Montgomery
Securities. After one of its research analysts recommended the
stock of Immune Response in July 1993, shares of the biotech
company doubled in price on conjecture about its research into a
therapeutic AIDS vaccine. When the company's findings proved
disappointing, its stock dropped back to its previous level.

To analysts, high earnings signal that managers are doing

things right and that a company's prospects are bright. The logic
is simple. A strong earnings report card inclines investors to bid
up a company's equity and so increases its reputational capital.
Strong earnings also make investors feel more comfortable with a
company's ability to service its outstanding debt, and so increase
its reputational capital.

Analysts also pay attention to debt ratings by companies like

Moody's Investors Services and Standard & Poor's, with the
better-rated companies generally having lower leverage and
higher profitability.10 When managers make strategic decisions
that decrease debt relative to the amount of equity in the
company, they reduce the company's riskiness to investors and so
invite an upgrade by ratings agencies. Take Northwestern Mutual

236
Life Insurance. Its financial position is so strong that it has never
earned less than top rating from all the ratings agencies. Having
such a good rating is a seal of approval that carries enormous
weight on Wall Street, enlarging the market for a firm's securities
and reducing the rate of interest at which its bonds are sold. The
overall effect is to cut the company's interest expense, improving
profitability, market value, and reputational capital-attractive
outcomes, one and all.

Chrysler's experience is a case in point. In February 1991, after

posting a $790 million loss and a blitz of negative assessments by
analysts and reporters concerned about the company's declining
market share, the company lost its investment-grade rating from
Standard & Poor's. Throughout 1992, although Chrysler needed
funds to finance new product development, it had trouble selling
its low-rated bonds in public markets. In February 1993, buoyed
by improved sales and earnings, S&P raised Chrysler's rating to
BB+ , one notch below investment grade. In June 1993, S&P
announced that it was considering a revision of its earlier rating.
As an S&P spokesperson told the New York Times: "Chrysler's
earnings and cash flow are significantly exceeding prior
expectations, due largely to overwhelming success with new
products and steps to enhance operating efficiency."11 Chrysler's
stock price rose with the announcement, improving the
company's reputational capital.

Or consider the plight of commercial banks. In the late 1970s,

Citicorp and Chase were both rated triple-A. They were lowered to
double-A in the early 1980s as ratings agencies recognized
growing competition from financial services firms and foreign
banks. By the late 1980s, things had gotten much worse. The credit
ratings of Citicorp and Chase Manhattan plummeted after 1986
because of bad loans made to Latin American countries and in real
estate.

237
 Low ratings have the predictable effect of raising the cost of
borrowing money. For commercial banks, they also restrict
activities. Many client companies will not buy risky but profitable
services like interest rate swaps from any but the highest-rated
banks. That means many banks have lost lucrative business to
better-rated rivals like J. P. Morgan.

In 1993, all three banks affirmed their intention to improve

their credit ratings. Since its 1991 merger with Manufacturers
Hanover, Chemical has claimed to be pursuing a rating hike from
triple-B to double-A. At the company's annual meeting in April
1993, Citicorp chairman John Reed indicated that the bank was
pursuing a double-A rating. And in early 1993, Chase distributed a
four-page pamphlet to its 34,000 employees, proclaiming the
bank's mission to become a world-class, balanced, and financially
strong institution and to achieve a double-A rating.

238
 When the insurer Travelers was assigned a "weak" rating by
specialist insurance-rating agency Weiss Research in the fall of
1991, its executives were horrified. The rating reflected the
company's portfolio of troubled real estate loans. According to the
New York Times, it touched off a wave of telephone calls to the
company from jittery policyholders and agents, which quickly got
management's attention: "In September [1991], a team of
Travelers executives boarded the company's private jet and flew to

239
Weiss Research's headquarters . . . in an attempt to get the rating
changed. . . . The executives tried to persuade Weiss analysts that
Travelers had ample capital to weather its difficulties. But despite
two hours of tense negotiations, the analysts, who use an A-to-F
grading system, agreed only to raise their rating to C-, from D+."12

Companies aren't the only ones to experience the negative

reputational effects of credit ratings. In November 1992, Moody's
downgraded the debt of the city of Detroit to just barely
investment grade, with potentially damaging consequences for
the city's ability to finance its debt. One observer noted the
subjective but highly influential process involved: "The
downgrading of Detroit sheds vivid light on the polite, behind­
the-scenes pas de deux that is the ratings process . . . . In one
sense, there is no disagreement between the rater and the rated. A
city proposes, Moody's disposes. There is no appeals court or
court of last ratings resort. Complaints are considered bad form
and quite possibly not in the rated's best interests. 'Who is going
to brawl with the ratings agencies?' "11 A lowered credit rating
discouraged private-sector investment in the city. It damaged
Detroit's reputation, with potentially dire implications for
attracting business, tourism, and growth.

I asked Harold Goldberg, chairman of Moody's Corporate

Ratings Committee, to explain the visible role that financial
ratings agencies play. He put it this way: "We're viewed by many
people on the street as a vehicle to communicate with the
investment community. That makes us careful about what we say
and who we talk to. For instance, it would be unthinkable for us to
discuss our rating with another agency like Standard & Poor's. Our
ratings are independent. At the same time, we sometimes talk to
investment bankers as extensions of clients. Some of them have
close relationships with client companies and can speak as
corporate insiders."

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 Examples like these remind us that sustaining a reputation
requires skillful self-promotion with financial monitors like S&P's
and Moody's. It also calls for establishing and maintaining
favorable relations with the professional community of analysts
and regulators working at the stock exchanges and in investment
banks like Goldman Sachs, Morgan Stanley, or Salomon Brothers,
as well as in increasingly influential social conscience monitors
like the Council on Economic Priorities; social investors like
Kinder, Lydenberg and Domini; and public interest groups like the
Business Enterprise Trust. Each of these groups itself struggles to
establish and protect its reputation and participates actively in
efforts to shape its image in the press, with corporate observers,
and with one another.

GRIST FOR THE RUMOR MILL

Legend has it that most business deals get done after hours, on
the golf course. As the saying goes, "It's not what you know, but
who you know." If so, then social networks should constitute an
important vehicle for building reputation. High-powered
networks can quickly convey early signals about a company's
potential, getting favorable word of mouth out into the wider
business community.

Companies live in tightly connected worlds. Managers,

investors, and customers constantly participate in ascribing
features to a company on the basis of rumor, innuendo, hearsay,
and word of mouth. Tales and anecdotes circulate throughout an
industry as employees come and go, and as they interact with
suppliers, distributors, customers, analysts, and reporters who
listen to them recounting their personal experiences with a
company.

Investors listen, too. Although experienced analysts routinely

caution neophyte investors to be wary of rumors, few of us follow

241
their advice. We routinely ascribe to rumors greater status than
they warrant, letting them fuel us with hope or terror. Indeed, for
all their savvy, even investment professionals themselves often
act more on the basis of rumor than analysis, and so encourage
faddish speculation.

In fact, both individual and institutional investors rely heavily

on information supplied by personal contacts when they make
stock purchases. Studies of how Wall Street operates show that an
elite group of 10 investment banks — led by Goldman Sachs,
Morgan Stanley, and Salomon Brothers-has a finger on the pulse
of most financial transactions. These banks shape the deals
negotiated by our best-regarded companies and thereby exert
influence on the prestige and reputations of these companies. In
turn, the reputations of client companies cast a favorable glow on
the reputations of the investment banks. A mutuality of interest is
obvious that understandably encourages corporate managers and
bankers to strengthen their relationships. 14 Appropriately,
bankers use the expression "relationship banking" to characterize
the strong ties that typically develop between an investment bank
and its key clients. In some industries, specialized bankers directly
assess the creditworthiness of customers. In the apparel industry,
for instance, bankers are known as factors. They buy a
manufacturer's receivables at a discount and collect directly from
the retailer. Factors are in sync with the industry. They know
which retailers are in good shape and which ones are in trouble. By
denying or approving a particular retailer's sales order, they
essentially signal to the rest of the industry the credibility of the
retailer. As one industry observer says: "Not only do factors traffic
in valuable industry information, they are also invaluable sources
of news about weddings, bar mitzvahs, golf scores, illnesses and
fashion trends." 15

They play a key role in containing, creating, and influencing

the spread of information, rumor, and innuendo, and so directly

242
influence a company's reputation. According to a senior executive
at Heller Financial, a leading factor in the industry: "This is a
relationship kind of business. . . . We've been with some of our
clients since they started their business, with some through
several different businesses and in some cases, with their children
as they took over the family business. It's a longstanding kind of
thing." 16

In August 1993, the New York Times published an article on

the annual summer conference hosted by investment banker
Herbert Allen of Allen & Company in Sun Valley, Idaho. The
gathering, part conference and part summer camp, the reporter
noted, was oddly reminiscent of the annual High Yield Bond
Conference that Michael Milken presided over in the heady days of
Drexel, Burnham, Lambert. The lineup of guests at the Idaho
conference read like a roster of prominent corporate chieftains:
"Among them were Sumner Redstone and Frank Biondi of Viacom
International, H. Wayne Huizenga of Blockbuster Entertainment,
Michael Ovitz of Creative Artists Agency, Tom Pollock of Universal
Pictures, Jeffrey Katzenberg of Disney, Robert Wright of NBC, John
Malone of Tele-Communications, Barry Diller of QVC and Warren
Buffett of Berkshire Hathaway-not to mention brass from giants
like Coca­Cola, McDonald's, Fidelity Investments and J. P.
Morgan." 17

Clearly, the informal network cements social ties among

executives of leading companies, propagating information about
who's in and who's out, what's hot and what's not, and where the
action is. Insofar as the corporate chieftains and bankers relay
some of that hearsay, rumor, and innuendo through other
informal ties, they surely influence the choices investors make as
to what companies to put their money in, and so contribute to
building or damaging company reputations. It's interesting to
note that within two months of the Allen conference, Viacom,
QVC, Tele-Communications, and Blockbuster found themselves

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on opposite sides of the bitter struggle over the purchase of
Paramount, the giant entertainment company. In this particular
bidding war, QVC's investment advisor was none other than
Herbert Allen.

My point is this: Like all human groups, the corporate world is

a social community constructed from interactions between many
different participants. Those at its core and its periphery convert
information into rumors and hearsay that help to shape how we,
as investors, perceive a company's prospects. That's why so many
Wall Street investors try to get "inside" information by hanging
out in business bars like Harry's. Some investors do trade on
hearsay. If enough of them do, it's bound to affect the market
value of the company's equity, and so its reputational capital.

In a sense, then, a company's reputation builds, grows, and

changes with the flow of information that runs across informal
networks of personal contacts.18 Managing the spread of rumor
and innuendo through these networks is the heart and soul of the
practice of public relations.19 Indeed, by multiplying the indirect
interactions between people, electronic networks like the Internet
play an increasingly central role in propagating rumors. As
discussed in the final chapter, the rising importance of these
electronic networks is evident in the debacle that ensued in late
1994 following allegations of defects in Intel's highly touted
Pentium chip.

In Six Degrees of Separation, playwright John Guare reminds us

how small the world really is. It only takes six people to reach any
person on the planet. A series of well-known experiments in social
psychology actually demonstrates that fact. Imagine being asked
to hand-deliver a package to someone living in a small town,
somewhere far away. Odds are you won't know that person or
anyone else in that town. Nonetheless, it turns out that if you give
the package to someone you know who lives closer, and that

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person gives it to someone else, and so on, the package will soon
reach someone who can hand-deliver it to the addressee; in fact, it
will take an average of only six people to get that package
delivered. But as a character in Guare's play muses, "I find it like
Chinese water torture that we're so close because you have to find
the right six people to make the connection."

Some managers use the small world in which we live to help

them manage the reputations of their companies. Bryan
Thomlison, director of public affairs for Church & Dwight (maker
of Arm & Hammer products) is among them. He recognizes the
critical role a network of contacts can play in helping his company
address strategic issues. A piece of the process he and his
department follow involves ( 1) identifying and maintaining a list
of a few hundred key influentials around the world in specific
issue areas and (2) regularly calling on these influentials to get
factual information and support or to disseminate information or
defend against a rumor. As Thomlison recognizes, "You can get in
touch with the whole world by talking to only a few people. Armed
with phone and fax, I make it a point to be able to reach quickly
just about anyone I need to in order to make appropriate
information available or take action against a rumor about our
company. These people are great in providing early
reconnaissance about problems. They're also the most efficient
way to get the word out that I know." In chapter 12, I describe at
greater length Church & Dwight's network-oriented approach to
building, sustaining, and defending a company's reputation.

RUMORS AND THEIR SIDE EFFECTS

In struggling to manage the complex social process through
which favorable corporate reputations develop, it's important to
realize that rumors often take on a life of their own, with
occasionally favorable and frequently devastating consequences

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for a company's reputation. In the mid-1800s, Charles MacKay
documented some remarkable episodes of mass mania. His
Memoirs of Extraordinary Popular Delusions describes 16 cases of
seemingly irrational speculation by investors. All were fueled by
rumors and innuendo that played into the latent dreams and fears
of hopeful investors. Noted economist John Kenneth Galbraith
recently picked up the theme in a short treatise on financial
euphoria. It typically starts when something that looks new causes
a stir in financial circles. People who have a stake in it become
"blockheads"-they refuse to acknowledge that anything odd is
going on. Those who point out that prices are out of line get
shunned. Sooner or later, a time comes when, suddenly, prices
fall-at which point insiders rush to be the first to sell, fueling a
rapid downward spiral.20

Consider the bizarre episode in the tulip trade in the early

seventeenth century, as described by MacKay:

The first roots planted in England were brought from

Vienna in .1 600. Until the year 1634 the tulip annually
increased in reputation, until it was deemed a proof of bad
taste in any man of fortune to be without a collection of them.
. . . The rage of possessing them soon caught the middle
classes of society, and merchants and shopkeepers, even of
moderate means, began to vie with each other in the rarity of
these flowers and the preposterous prices they paid for them.
A trader at Harlaem was known to pa y one-half of his
fortune for a single root, not with the design of selling it
again at a pro fit, but to keep in his own conservatory for the
admiration of his acquaintance. 21

By 1636, the demand for tulips had increased so much that

they were traded throughout Holland at ever more extravagant
prices. Fortunes rose and fell with the price of tulips, as even the

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richest no longer bought the flowers to keep them in their gardens
but to resell them at a profit. At some point, enough people began
to think that this was sufficiently preposterous that they stopped
buying. With belief in the value of the tulip destroyed, prices
quickly fell to distressingly low levels. "Substantial merchants
were reduced almost to beggary," reports MacKay, "and many a
representative of a noble line saw the fortunes of his house ruined
beyond redemption." 22

Economist John Maynard Keynes recognized the potential for

similar folly in the stock market. He once wrote that the market
was much like a newspaper contest in which readers are asked to
select the six prettiest women from pictures of 100 candidates. The
winning entry, he argued, is the one that most closely matches the
"favorites." To win, you shouldn't choose the ones you think are
the best looking. Instead, you should pick those that you expect
the public to put forward as the prettiest — the ones likely to
garner the most votes.

The same holds not only for corporate stock but also in the
markets for art, wine, and all goods sold at auction. Winning
investors should not select their personal favorites; rather, they
should pick the artist, vintage, or stock that they expect everyone
else to favor. These artists, wines, or companies may or may not
be any good. What counts is that they have that intangible
"something" that draws others to them.

Some time back, the New York Times reported on an apparent

speculative frenzy behind family-run Andrea Electronics
Corporation. In the eight months between November 1992 and July
1993, the stock of the communications company grew to 37 times
its original value. Andrea's sudden popularity with investors
began when the small company announced that it had developed a
product to filter out all the undesirable background street noise
from public pay phones. Of the relatively few investors in Andrea's

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stock, a sufficient number were optimistic enough about the
potentially large market that they drove up the price fourfold. At
this point, however, Andrea had yet to show off the device. Nor
had the sleepy, 60-year-old company made even one sale to a
telephone company. Alerted by the pronounced rise in price and
volume, other investors quickly joined in. Pretty soon, speculation
on the company's future encouraged a feeding frenzy. When the
dust settled, the communications company had seen its stock
price zoom from $7 to $265 a share. Although in 1992 Andrea had
lost $691,000 on sales of $3.4 million, in mid-1993 investors were
valuing the company at a staggering $186 million.23

Rumors are not always to a company's benefit; they can drain

away valuable reputational capital. In 1990, a rumor spread that
Equitable, the nation's third largest insurer, was going bankrupt.
By damaging public confidence, the rumor threatened to send the
company on a downward spiral. Since the company was not public,
Equitable's policy­ holders would have rushed to surrender
policies and annuities had panic spread, causing a cash crunch
similar to a run on a bank. Lacking the ability to pay, Equitable
would have faced bankruptcy. Fortunately for the company, the
rumor was false.

Students of rumor mongering indicate that rumors typically

spread in three stages:

• Simplification: The story shortens and loses detail.

• Exaggeration: Some details become sharper, and the

story increases in dramatic content.

• Interpretation: People reinterpret the rumor in terms of

stereotypes that reflect their worldview. 24

As a rumor gets simplified, exaggerated, and reinterpreted,

it comes to resemble an opportunistic virus, thriving because
of its ability to create fear and anxiety. People are more likely to

248
pass on rumors that they believe, rumors that make them
anxious.

A company's reputation can be seriously damaged by the

persuasive power of innuendo. In the early 1980s, Procter &
Gamble was rumored to be giving part of its profits to
Satanists. As evidence, gossip mongers claimed the company's
logo-which showed the moon with a face in it and 13 stars-was
a demonic symbol. More recently, rumor had it that apparel
giant Liz Claiborne was in cahoots with the Church of Satan. In
most cases, rumors like these lead to product boycotts that can
seriously damage the company's market value and reputation.

The best defense against rumors is (1) to take a rumor

seriously, (2) to deny its veracity vigorously and quickly, (3)
to muster concrete evidence that disproves it, and (4) to
present that evidence convincingly to all constituents.
Equitable's reaction is a case in point. The company's
executives responded aggressively by writing memos to
employees, sending letters to customers, and holding press
conferences. They also enlisted the New York State Insurance
Department to certify that all was well. Their astute actions
averted panic. Similarly, in 1991, when it was rumored that
Entenmann's Bakery was owned by the Reverend Sun
Myung Moon of the Unification Church, the company held a
news conference at which Robert Entenmann, the chairman,
reviewed the history of the family-owned business and
declared that the rumor was untrue. Within 24 hours, the
rumor was dead.25 While P&G did hire private detectives to
track down the origins of the rumor of profit sharing with
Satanists and also sent editorials to news dailies and
threatened lawsuits, its responses were sporadic and
effective only in quieting the rumor for a time; it continues
to surface every now and again.

In 1992, soft-drink maker Snapple also dealt poorly with a

particularly ugly rumor. Word spread in the San Francisco Bay

249
area that the company was surreptitiously supporting the Ku
Klux Klan and the antiabortion group Operation Rescue.
Snapple executives admit that they were far too slow to react.
As the company's president, Leonard Marsh, stated, the
rumors were "so ridiculous we thought they would go away,
but they didn't. It reached the point it was getting out of hand
and we had to address it." After a year in which it was even said
that the small letter k on Snapple labels-short for kosher-
actually stood for the KKK, the company finally launched an
advertising campaign in September 1993. It declared, "We
are not involved in any way whatsoever with the KKK,
Operation Rescue or any other type of pressure group or
organizations, period."26 It is not known how many sales or
how much reputational capital the rumor actually cost the
then privately held company in the meantime.

PUBLIC FACADES: PROS AND CONS

Most companies tend to limit access and to withhold
information. Often managers are frightened by the glare of
publicity and opt to minimize disclosure. It reflects the deep-
seated and widely held belief that openness and disclosure hinder
flexibility and destroy advantage. To seal off boundaries is to
retain an edge.

That's not always true. In fact, there are two main strategies
that companies adopt and that shape the perceptions of
constituents: strategies of extroversion and of introversion. Which
strategy a company follows depends on its clients. A company that
sells at retail tends to benefit from broad-based familiarity with
the public and is likely to adopt an extroverted posture; a company
with a bottom line that depends on fewer transactions, carried out
at wholesale, tends to favor a more introverted posture. Each
presents a distinct facade to the outside world.

250
THE EXTROVERT FACADE
When sales depend on brand recognition, companies regularly
promote themselves to their mass audience of customers.
Managers advertise to signal constituents about important
features of their companies' products. They aggressively advertise
themselves to build visibility and lure customers and investors.
Advertising also helps to stabilize sales. It creates a niche that
competitors find difficult to overcome.

Naturally, companies with portfolios of consumer products

spend a good deal on advertising. Following is a list from
Advertising Age of the top 10 categories of products advertised
across all media in 1991:

• Cars

• Food

• Restaurants

• Nonfood retail products

• Entertainment and media

• Beverages

• Toiletries

• Telephone service

• Beer

• Airlines

Topping the list of big media spenders are the Big Three
automakers, GM, Ford, and Chrysler; tobacco company Philip
Morris through its food subsidiaries General Foods and Kraft;
consumer-goods giants Procter & Gamble and Unilever; soft-

251
drink maker PepsiCo; and retailer Sears. Their constant exposure
through advertising has made them accustomed to public scrutiny
and has encouraged them to develop more extroverted facades.

The pervasive link between apparel, perfume, and other

consumer items invites fashion-based companies to erect
extroverted facades. The highly public persona of a couturier or
designer is often the centerpiece of a fashion house's marketing
strategy, of the image it projects to consumers. Think back to the
success stories of Halston, Anne Klein, and Calvin Klein. Their
products are difficult to untangle from the personal sagas of the
designers who launched these companies. Liz Claiborne was the
entrepreneurial success story of the early 1980s. She built a
fashion empire on the premise of selling designer-label clothing
at a moderate price. Donna Karan conquered the world of high
fashion for the working woman. Like most of fashion's high-
profile designers, Donna Kara n's product is very much herself.
She projects her temperament into the products she designs and
then heavily, aggressively, and personally markets them.

In the 1980s, many companies made similar efforts to reach

out to consumers by harnessing the personalities of their CEOs.
Victor Kiam's ads for Remington come readily to mind, as do Lee
lacocca's ads for Chrysler. Though quite different in size, both
companies were facing turnarounds and sought to personalize
their relationships with consumers and to signal an intimate
familiarity with their company's efforts and prospects. They
reinforced the extroverted postures of their companies through
aggressive advertising and public relations. lacocca became
omnipresent in a blitz of direct mail, media interviews, industry
roundtables, and public functions. As one analyst said, "Even
though he wore a flashy pinky ring and shiny alligator shoes,
Iacocca came off in those ads as a man traditionalists could trust;
he seemed to be one of them-honest, dependable, the salt of the
earth. When he walked through the Chrysler factory in each 30-

252
second pitch, down the assembly line and past the bodyworks, he
projected total command of automobile production. Viewers
believed that they would never get a lemon from Lee, because he
seemed to be on top of things — helping his guys put each and
every vehicle together."27

Companies with extroverted facades tend to spend a lot of

money on public causes. They "do good" by actively contributing
to charities, creating foundations, placing women and minorities
on boards, showing concern for the environment, or proclaiming
their acceptance of industry codes of conduct. Although some
companies (like Anita Roddick's Body Shop, perhaps) do it because
of deeply held core beliefs-an identity trait-most are also aware
that corporate citizenship actions increase public visibility and
can improve long-run returns. For extroverts, "doing good" and
"going green" are a form of corporate "advertising," an
opportunity to project favorable images in the media and to garner
the marketing benefits of a good reputation.

Of course, there are also those companies that are extroverts

by necessity. Companies with a core business in tobacco, oil, or
chemicals are cases in point. Recurring attacks on their leading
products have forced these companies into a defensive posture.
Rather than retreat entirely into introversion, however, they seek
out opportunities to aggressively link up with consumers by
promoting cultural and sporting events. Tobacco companies like
Philip Morris (forbidden by law to advertise their tobacco products
directly) have found other means of gaining exposure. Philip
Morris is a longtime sponsor of tennis, both of the men's tour
(renamed for Kraft/General Foods) and the women's Virginia
Slims events. Notorious polluters like Mobil and Exxon favor
public television, while chemical maker Du Pont actively supports
environmental causes. Their extroverted facades are clearly in the
service of self­defense.

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THE INTROVERTED FACADE
A number of companies opt to minimize their public profile.
They shy away from activities that attract attention, seemingly in
the belief that all press is bad press. Managers whose companies
adopt introverted facades take it as gospel that the best way to
protect their company's reputational capital is to avoid publicity at
all cost.

In fact, their concerns are not unfounded. In a study of the

reputational ratings that Fortune presents every January to its
readers, a colleague and I found a strong negative association
between press visibility and reputation. At best, favorable media
coverage did nothing for a company's reputation; at worse, high
visibility actually depressed a company's rating. The study
seemingly justifies the introverted postures some public
companies favor.

Investment banks like to maintain introverted facades. They

cherish their privacy and prefer to limit their public exposure. As a
leading banker reminded me, until the 1980s most leading
securities firms did no PR whatsoever. For one thing, very few
people really cared what investment bankers did. Before merger-
and-acquisition mania set in, bankers were considered stuffy
white shirts toiling in near obscurity. For another, the introverted
posture of many leading investment banks reflects their clientele.
Premier firms like Morgan Stanley and Goldman Sachs market
their services mostly to large corporations. As wholesale
businesses, investment banks are unlikely to see any direct
bottom-line return from broad-based celebrity. Their reputations
derive from building strong person-to-person networks and from
developing close relation­ ships with current and potential
corporate clients; with important institutional allies like their
regulators (the Federal Reserve, the U.S. Treasury); with
investment service companies like Moody's and Standard & Poor's

254
that rate their clients; and with the leading MBA schools from
which they hire employees. Moreover, many firms like Goldman
Sachs operate as partnerships, and so don't even have to reveal
information about their internal operations to public
shareholders.

Introversion is a feature investment banks share with other

professional service companies. Law firms, accounting firms, and
consulting firms do not need retail visibility to attract clients.
Naturally, then, they do their utmost to minimize activities that
might attract the attention of the press and invite outside scrutiny.
By keeping an arm's length relationship with outsiders, they
discourage the potential for negative assessments that visibility
can attract. You'll see very few lawyers, accountants, or
consultants interviewed in the press. When they are being talked
about, rest assured that it's under duress. Either they're speaking
out in defense of a client or they're facing a crisis of their own.

In introverted companies, donations and other forms of doing

good are not matters of corporate policy; they are a "sacred,"
personal matter for each employee. Many of the senior partners at
Goldman Sachs donate considerable sums of money to charitable
organizations and cultural institutions. They do so individually,
however, and nowhere does the Goldman Sachs name appear as a
donor.

There is some evidence that companies with fewer external

controls favor introversion. For instance, privately held firms, as
well as public firms whose boards are dominated by inside
directors, tend to more actively present false images of
themselves. Introverts can do this because they are less subject to
the close monitoring of independent directors or investors.28

An ironic side effect of all this is that the introverted facade

may actually prove even more vulnerable to rumors. As writer

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Thomas Mann once pointed out, "Speech is civilization itself. The
word, even the most contradictory word, preserves contact — it is
silence which isolates." In private companies and partnerships,
rumors take hold more easily because constituents operate behind
a wall of silence, encouraging speculation. In contrast, companies
that maintain open lines of communication with constituents are
better able to control the spread of rumors. A noted consultant on
corporate identity recognized the significant risk of adopting an
introverted facade: "Although many companies assume that the
safest course is to keep a low profile, this may in fact be a
dangerous tack. If some inadvertent disclosure brings high
visibility or even incidental exposure, an unknown company
maintains little credibility as it moves to counter public
criticism. . . . When people first get acquainted with a company
through an unfortunate disclosure, they often distort what little
they know and make generalizations about missing information.
The less filled out a company's image is, the more subject that
image is to wild distortions."29

PROS AND CONS

In a rapidly changing environment, not only are the opaque
boundaries of introverted companies difficult to maintain, they
are obstacles to overcome. I once studied a slow-moving New York
publisher with a long tradition of making closed-door decisions.
Its managers found it difficult to keep up with changes taking
place in the rapidly converging worlds of publishing and
telecommunications. Faced with declining profits and a
plummeting reputation, the company was forced to rethink its
paternalistic practices and open itself to an influx of ideas,
personnel, and technologies at all levels.30

In contrast, openness creates trust and increases managerial

options. At ice-cream maker Ben & Jerry's, boundaries are so

256
permeable they are difficult to identify. The company projects
itself outward, not only through its products but through its
visible campaigns in support of the environment, the homeless,
and the Third World. The egalitarian philosophy of founders Ben
Cohen and Jerry Greenfield is apparent in the company's
compressed pay scales, which it broadcasts to one and all through
brochures and press releases. Consider this: How many companies
conduct public tours of at least a part of their offices and plants?
Ben & Jerry's does. As does the New York Stock Exchange. Much as
these organizations offer visitors an observation gallery, so do
esteemed companies increasingly welcome closer personal
contact with their local communities.

Permeability, of course, extends far beyond physical access by

outsiders. Companies that develop strong linkages with suppliers,
distributors, wholesalers, and retailers up and down the value
chain improve their ability to gather information about market
and technological trends. Having their ear to the ground enables
them to more quickly anticipate and act on developing threats and
capitalize on opportunities.

Table 6-1 contrasts the assumptions outside observers tend to

make of companies with extroverted and introverted facades.
Lacking information about introverts, outside constituents are
likely to ascribe arrogance and elitism to them. The result may be
an inclination to resent the arm's length relationship and to
deplore the impermeability of the introverted company's
activities. A possible conclusion is that the introverted company
and its managers have something to hide.

257
 In contrast, observers of extroverted companies are more
likely to see the company as trustworthy and above board,
democratic and egalitarian. That's because extroverts bombard
observers with self-serving information, forcing us to applaud the
apparent transparency of their operations. For extroverts,
familiarity seems to breed not contempt but respect.

A STRANGER IN THE MIRROR?

Most managers want their companies to maintain favorable
images among constituents. Projecting those images means
paying close attention to the company's relationships with
consumers, investors, analysts, and the media. Unfortunately,
images are difficult to control. Information competes with rumor,
hearsay, and innuendo to create impressions that influence a
company's net reputation. Efforts to shape reputation can end in a
backlash.

Consider this description of how professional image makers

around the president of the United States try to manipulate the
"pack" of reporters monitoring the White House . . . and how their
efforts can backfire:

Obsessed with the appearances of things, the pack is

perpetually susceptible to the machinations of the image-

258
 makers. It rewards, with glowing praise, triumphs of form
over content: medium-well-turned phrases, smart photo
ops, effective PR stunts. But it is also unhappily aware of its
vulnerability, and exacts a perverse revenge by seizing on
the slightest misstep, the smallest deviation from the
perfect image . . . a metaphoric event that presumes to cut
through the theater to show the true man. A single such
event — Clinton and the haircut, Quayle and the
potato(e), Bush at the checkout counter — its significance
heightened with every retelling, can permanently scar a
public figure, and several in a row can he fatal.'1

It's much the same in corporate life. Public relations

machinery can miscarry and actually damage the reputation and
prestige of a CEO or company. Ultimately, we do well to remember
that the word prestige itself shares a common root with the English
verb prestidigitate, a skill most closely identified with magicians.
Both words come from the Latin praestigium, which means
"illusion" or "delusion." The etymology of these words suggests
how a reputation can be fool's gold when we assess a company
only on the basis of the external images it seeks to project and not
on its inner character. Sooner or later, a discrepancy between a
company's reputation and its identity will discredit the company
and stigmatize it for a long time to come.32

To become well regarded, companies must deserve it. They

must develop coherent images and a consistency of posture
internally and externally. And that's true whether they present
themselves to the world as reclusive introverts or as outgoing
extroverts. Identity and self-presentation beget reputation. As
often as not, a coherent reputation also generates external
recognition in the form of ratings and rankings, prizes and
awards-the subject of our next chapter.

259
260
CHAPTER 7:
OF PAGEANTS
AND HORSE RACES
I don't care what people think of my poetry
so long as they award it prizes.

Robert Frost

C
OMPANIES REGULARLY participate in contests of one kind
or another. Often it's a company's products that compete
for favor in a local or regional forum. When products get
top ratings in these competitions, they are generally awarded a
prize or award that confirms the company's reputation. Prizes can
then be used to expose a brand to a wider audience, and that can
mean money in the bank. Winners get more favorable mentions in
the press, increasing their visibility and, indirectly, their ratings
by constituents. The popularity of Fortune's annual rankings of
admired companies and Business Week's rankings of the best
business schools confirms that reputational standings are of
widespread interest to corporate observers. This chapter examines
the different kinds of contests in which companies participate and
the ways in which the outcomes of these contests influence
corporate reputation.

COMPETING FOR AWARDS

One of the favorite pastimes of American homemakers is to
submit their choice recipes to county and state fairs. Panels of
judges sample and rate all kinds of food products, awarding prizes
to the best of everything from pies to chili. Art Bousel is a

261
Chicago-based licensing attorney. Over the last few years, he has
compiled an interesting database. It consists of some 5,000
recipes for a wide range of products like brownies, jams, and salsa
that have won awards in local contests around the country. In
January 1993, he formed a joint venture with a manufacturer to
market a new supermarket line of products based on these recipes.
Promoted under the label Award-Winning Foods, the packaging
cleverly highlights the contest that the original recipe won. For
instance, one of the products on the market is a macaroni-and-
cheese dish that won the Best Cheese Award at the U.S. Cheese
Championship in Madison, Wisconsin. The 200-item line aims to
capitalize on a food award's implicit guarantee of quality to attract
consumers. Reputation buys valuable shelf space and a chance to
compete against established brand names.

Sometimes it's the company itself that gets rated by a panel of

judges. Take the ongoing rivalry between the Whirlpool
Corporation and Frigidaire Refrigerator Products. Both recently
turned up as finalists in a contest known in the appliance industry
as the Golden Carrot, an award made by 24 utilities to the
company with the best design for a refrigerator that both saves
energy and uses a refrigerant that is gentler on the earth's
protective ozone layer than the once widely used Freon. On June
30, 1993, when the winner was finally announced, Whirlpool took
first prize-along with the whopping $30 million dollar grant that
it came with.

In fact, companies participate in many such contests. The

prizes and awards they win help to build up their names and
crystallize their reputations. Individuals, foundations, and
organizations establish awards to promote causes, to encourage
leadership and creativity, or to memorialize individuals.
Sometimes attractive monetary prizes are attached to awards-the
Golden Carrot being a case in point. Most of the time, however,
awards are merely symbolic. They confirm achievements that

262
might not otherwise get widespread notice in the marketplace. By
drawing attention to these accomplishments, sponsors hope to
inspire imitators. Awards thus help to create standards against
which other contenders can be measured.1

Contests and awards are news in and of themselves and tend to

generate lots of publicity. Since the publicity that surrounds an
award is created by the awarding organization-and so comes from
a third party-it often appears more credible than a company's
self-serving promotions. That's why most companies welcome
awards given by credible judges.

There is also competition for the honor of hosting

competitions. Cities, for instance, regularly compete for the honor
of hosting the Olympics. They do so because they recognize the
future gains in tourist and investment income that their
association with the Olympics will provide. In the music industry,
New York City and Los Angeles have a long-standing rivalry to
host the annual Grammy Awards. In 1993, the ceremony returned
to Los Angeles after two years in the Big Apple — but New York
still hopes to win it back.2 In the end, awards cast a reputational
halo over both prizewinners and sponsoring organizations, which
are themselves competing for status.

As gastronomes know, every year the Michelin Guide

pronounces what's hot and what's not among the more than
10,000 restaurants, bistros, and hotels of France. Receiving a
coveted third star from the Guide is not only a heady experience
for the chef but a virtual guarantee of patronage for the
restaurant. Of the 4,000 restaurants cited in 1991, a mere 19
carried the treasured three-star rating, while just 90 were
awarded two stars.

The honorary degrees granted by universities ostensibly

recognize the achievements of people the university finds

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deserving of attention. Most awards, however, typically applaud
the achievements of already quite prominent citizens. The
principal function of these awards, I suggest, is to annex an
individual's established reputation to that of the university. When
the next graduation season rolls around, note the mad scrambling
that goes on as prominent universities compete to attract high-
profile award recipients to their commencement ceremonies and
then bask in the reflected glory.

CORPORATE CONTESTS
These days corporate awards seem to be handed out in almost
every industry and by every possible constituency. There are
industry-specific supplier awards, distributor awards, client
awards, environmental awards, government awards, and
community awards. Indeed, some 16,000 such awards are given
annually to individuals and organizations by more than 6,000
different donors throughout North America. 3 They highlight the
tangential competitions in which companies regularly face off.
The more prominent the award, the more likely it is to beef up a
company's reputation and so improve its standing in other
competitions. In turn, the awards magnify selected aspects of a
company's identity and can reinforce employees' sense of self.
Four major types of contests and awards contribute to building
corporate reputation:

• product awards,

• process awards,

• social performance awards,

• environmental awards, and

• leadership awards.

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PRODUCT AWARDS
Most companies like to participate in product competitions
because they look forward to the free publicity an award will
generate. Product awards tend to be industry-specific
competitions that force judges to make comparisons between
companies that make similar products.

The best-known product awards are probably those given by

the publishing and entertainment industries. Mention the Pulitzer
Prize, the Academy Award, or the Grammy Award and most people
know what you're talking about. Consider the Pulitzer. This
prestigious award is given annually to journalists, novelists,
poets, and editors and their publishers. Winners invariably enjoy
enhanced clout among their peers. Reporters at smaller
newspapers suddenly find themselves being recruited by more
prestigious newspapers and offered book contracts; authors and
playwrights find the marketability of their subsequent works
dramatically improved.

The Pulitzer Prize also confers reputational advantages to the

sponsoring organization. Significant prestige accrues to the
companies that publish a winner's work. As Douglas Bates, author
of The Pulitzer Prize, points out: "In newspaper journalism, the
prize works a form of magic that defies logic or easy
explanation. . . . Winning it is useful in boosting a newspaper's
circulation and promoting a positive image among readers. The
prize also enhances a paper's relationship with stockholders and
directors. And it polishes a company's industry-wide reputation,
enabling the paper to lure more top-drawer talent to its
newsroom."4 Book publishers often find the sales and associated
shelf life of their books increased.

Columbia University manages and hosts the award. The

university and its journalism school benefit greatly from the

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publicity that surrounds the Pulitzer. In its promotional literature,
the university likes to boast of the number of Pulitzers and Nobel
Prizes that its faculty and graduates have received. In some of its
1994 annual reports, Columbia lays claim to its position as "U.S.
Leader in Nobel Prizes," with 34 Nobelists having graduated from
its various schools.

Every year book publishers submit a selection of their authors'

work for consideration. Of the 590 titles presented for the 1990
competition, publisher Alfred A. Knopf entered 58, continuing an
aggressive strategy that has paid off handsomely for the company.
During the 1980s, Knopf 's books were awarded 11 Pulitzers-more
than any other publishing house-a result that has helped to
crystallize its reputation as a stable for high-quality authors.

If we look not only at the Pulitzer but at the 290 other awards
given out to newspaper publishers, studies show that prize-
winning newspapers owe their reputations to some key traits. A
survey of 125 of the nation's most consistent award-winning
weeklies found that they tend to show greater respect for their
readers, to pay more attention to cultivating staff loyalty, and to
put more emphasis on telling interesting stories.' They support
the view that there is a link between internal practices and success
in producing award-winning products.

The competition for reputation-building prizes in the movie

industry is intense. Film buffs can't fail to have noticed the
growing rivalry between the film awards themselves. Every year,
the Academy Awards now competes with the French Cesars and a
growing number of smaller competitions at festivals to identify
the crop of best films, best performers, and best directors. The
film critics' awards (Golden Globes) have become increasingly
prestigious, as have the awards handed out at the Sundance Film
Festival and at the festivals in Telluride, New York, Toronto, and
Sydney. These awards draw public attention to the merits of

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particular films, actors, and directors, and so enhance their
individual reputations; they also inflate the reputations of the
studios that financed the films. If you doubt the reputational
capital hidden in an award-winning library of films, look at the
battle for Paramount Pictures that pitted Barry Diller's QVC
against Sumner Redstone's Viacom in early 1994. By the time
Viacom won the rights to merge with Paramount, the price had
escalated by $2 billion. Presumably, it was for Paramount's
unrecorded intangibles (among which is its film library) that Mr.
Redstone was prepared to pay so dearly.

Not coincidentally, awards boost film returns. It's estimated

that an Academy Award for best picture is worth an additional $20
million to $35 million at the box office.6 It helps explain why
movie studios, directors, and stars will go to great lengths to
influence the judges' vote. In 1992, after the film Scent of a
Woman starring Al Pacino was awarded a Golden Globe for best
picture, questions were raised about the validity of the award. It
was widely rumored that members of the foreign press had been
illegally flown to New York to meet with Pacino before casting
their ballots.7

Even nominations generate publicity. When the Oscar

nominees for the sixty-sixth annual awards were announced in
February 1994, the reaction was immediate. The most nominated
film, Steven Spielberg's Schindler's List, was quickly made the
subject of a television and newspaper campaign by Universal
Studios. In one week, the film went from being shown in 350
theaters nationwide to 750. As Tom Pollock, chairman of MCA's
Motion Picture Group (and the parent of Universal Studios), put it:
"Certainly what these nominations do is give . . . our pictures a lot
more visibility and validation in the marketplace."8 Even films
that initially fared poorly at the box office are now getting
re-released when they receive an Oscar nomination.

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 What the Pulitzer does for publishers and the Academy Award
does for movie makers, the Grammy Award does for music
producers and the Emmy Award for television producers. These
contests crystallize the reputations of various companies and their
products and solidify their market visibility and profitability.
Before singer Bonnie Raitt's album Nick of Time was awarded the
Grammy in 1989, only 650,000 had been sold; less than two weeks
after the award, sales were up by another 1.1 million copies.

In recent years, and in varying degrees, most industries have

developed product awards of this sort. Consider the advertising
industry. For a time, the Clio Awards dominated the annual
advertising sweepstakes. Conflict and dissent within the
sponsoring group led to the decline of the Clios in 1992, however,
and they have been in turmoil ever since.9 In the meantime, other
competitions have gained visibility. In February 1993, the Leo
Burnett Company swept the twenty-second annual Mobius
Advertising Awards. Later in the month and for the second time in
a row, Ogilvy & Mather took top honors from judges at the
fifteenth John Caples International Awards for Direct Marketing. 10

Even industry segments have their own awards and every year
anoint their stars. The Council of Fashion Designers of America
presents awards to designers and other industry players who
made fashion news during the year.11 Cable programmers have
their CableAce Awards. In 1993, Time-Warner's HBO programs
won 32 CableAce Awards from the National Academy of Cable
Programming, more than four times those given to its closest
competitor, the Disney Channel. 12 Makers of audio equipment-
receivers, CD players, speakers — covet the Grand Prix for
outstanding design awarded annually by an independent jury
convened under the auspices of Audio-Video International, a
leading trade journal. Indeed, most trade magazines give out
annual product awards. Auto industry experts pa y close attention
to the awards presented by Popular Mechanics and Motor Trend. In

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1993, Mazda's RX-7 won the coveted Popular Mechanics 1993
Design and Engineering Award, while Ford's Probe GT was named
Motor Trend Car of the Year.13 Awards from the music magazine
Billboard are said to pack a significant sales punch for retailers,
according to buyers for several leading chains.14 In 1993, R&D
Magazine presented 100 awards to companies making
technologically significant products. Award-winning designs
ranged from the holographs used on credit cards to the photon
tunneling microscope. Inc. magazine presents annual design
awards to companies putting out innovative products. In 1993, the
media gave so much free publicity to award winner OXO
International for its ergonomically designed kitchen utensil
handles that the company got away with an advertising budget of
virtually zero.15 Every year Business Week sponsors and features the
Industrial Design Excellence Awards (IDEA) for best product
designs. The 1993 gold-medal winners were a familiar cast of
high-reputation companies that included Apple, Hewlett-
Packard, Boeing, General Motors, and IBM. The top gold and silver
IDEA award-winning companies between 1980 and 1993 are
tabulated in Table 7-1, which shows the remarkable consistency of
automakers GM and Chrysler and computer companies IBM, NCR,
and Apple.

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 Clearly, these kinds of product awards raise the public profiles
of the companies that win them, which is why award contests are
growing ever more popular inside and outside the corporate
sector. Service organizations like schools and government
agencies that lack concrete measures of performance see
tremendous motivational benefits from awards that recognize
employee efforts to deliver better service. In 1993, for instance,
Pearls Elementary School 32 in Yonkers, New York, was named
one of the country's elite Blue Ribbon Schools of Excellence — a
significant symbolic reward for its underpaid staff .16

PROCESS AWARDS
Occasionally an award is developed that recognizes a company
for its inner workings-its human and organizational processes.
The most prestigious is probably the Malcolm Baldrige Award.
Established by Congress in 1987, the contest is sponsored twice a
year by the U.S. Department of Commerce and the National
Institute of Standards and Technology. It is loosely modeled after
Japan's competition for the Deming Award, a prize given annually
since 1951 to companies such as Ricoh, the maker of copiers and

270
fax machines, that regularly improve the quality of their products.
The Japanese award was named for quality guru W. Edwards
Deming, whose ideas were largely disregarded in the United States
but acclaimed by companies in postwar Japan. In recent years, a
number of cities throughout the United States have also presented
quality­ improvement awards to local companies. The Austin
Quality Award, for instance, was initiated by the Texan city's local
government as a mea ns of attracting new business and
stimulating economic growth.17

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 Quality awards like the Baldrige invite companies to compete
in two areas: customer satisfaction and product quality.
Applications are reviewed by an independent board of 16
examiners that screens each company's detailed responses to 33
questions. The process requires judges to evaluate the company's
internal operations, information systems, and human-resource
practices and to assess its success in sustaining a focus on quality.

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 Baldrige awards are given in three categories: manufacturing
companies, service companies, and small businesses with fewer
than 500 employees. So far, recipients have included GM's Cadillac
division, IBM's Rochester division, air courier Federal Express,
and Xerox's business products and systems unit. Winning has not
been without costs: Xerox admitted to sinking some $800,000 and
14,000 labor hours into the process of completing applications
and preparing employees for site visits by examiners. Winners
contend that the awards pay off in increased employee motivation
and productivity. After all, who isn't proud of working for an
award-winning company? According to John Grettenberger,
general manager of GM's Baldrige-winning Cadillac division,
"The great benefit is to the corporation itself. When you go around
the offices and plants you see people smiling again."18

Various business magazines have also created awards that

recognize companies for internal practices. In December 1992,
Fortune magazine teamed up with the American Center for Design
to announce the Beacon Awards competition for companies that
demonstrate strong, focused, integrated corporate
communications. Thirty-one companies entered. After extensive
deliberation, a group of independent judges finally settled on four
winners: furniture maker Herman Miller, footwear giant Nike,
newcomer Starbucks Coffee Company, and Crown Equipment.

Personnel Journal gives its Optimas Awards to companies for

their innovative human-resource management programs. In 1993,
Hewlett­Packard was among 10 award winners that included such
prestigious companies as Gillette, Textron's Bell Helicopters, and
Steelcase. Hewlett­Packard was cited for its exemplary
restructuring of the company's human-resource management
systems. Gillette won for the quality of its international graduate
trainee program. In the case of Bell Helicopter, judges noted the
valuable role that staffing and training programs had played in
easing the company's move to a Canadian facility. Steelcase won

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for designing an innovative return-to-work program that reduced
worker's compensation costs by nearly $4 million.19

Finally, many companies are participating in award programs

designed to applaud the achievements of public service
organizations like schools, police departments, and government
agencies. In a recent program of this sort, Motorola joined forces
with the International Association of Chiefs of Police to create the
Webber Seavey Quality in Law Enforcement Award.20 Aside from
monetary inducements, the awards confer prestige on winning
groups that can help boost employees' pride and motivate them to
improve the quality of the products and services they provide.
Awards are a form of recognition, something industrial
psychologists often contend is a more motivating influence than
money.

SOCIAL PERFORMANCE AWARDS

A number of awards are given to companies for their so-called
social achievements. Magazines like Business Ethics and Black
Enterprise as well as various foundations regularly announce
awards to companies deemed noteworthy for their progressive
treatment of minorities or for community support. One of these is
the Corporate Conscience Award, presented annually by the
Council on Economic Priorities.

The CEP is one of a growing number of social monitors that

assess companies' social records. It is a not-for-profit group that
was founded in 1969 to explore the role companies play in
resolving some of society's most pressing concerns. In 1987, the
CEP's book Rating America's Conscience was published to wide
acclaim. The volume rated 130 consumer­product companies on
such criteria as their hiring records, charitable contributions,
involvement in South Africa, and defense contracts. The success of
the book led to two further publications. One was the pocket­

274
sized guide Shopping for a Better World, which rated 168 companies
and more than 1,800 products. The other was The Better World
Investment Guide, an investor's guide to large and small companies
(and fund portfolios) reputed for their socially responsible
postures. These books provide consumers and investors with
detailed information about the social practices of various
companies. In particular, they call attention to what many large
and small companies are doing to promote employee well-being,
to reach out to local communities, and to protect the
environment.21

To be eligible, for the CEP's Corporate Conscience Award,

which was established in 1988, a company cannot be a weapons
manufacturer and must demonstrate a credible commitment to
community outreach, responsiveness to employees, charitable
giving, equal employment opportunity, and environmental
preservation.

Awards are given to both small and large companies. Previous

award winners include cereal giants General Mills and Kellogg,
computer maker Pitney Bowes, Xerox, and Herman Miller. Of the
smaller companies, Aveda, Tom's of Maine, and South Shore Bank
of Chicago are among those who have received awards. Aveda is
recognized for its organic line of beauty products and for its
environment-friendly practices in packaging and recycling. Tom's
of Maine, a maker of natural health­ care products, is well known
for its active involvement in community outreach, charitable
giving, and equal employment opportunity. South Shore Bank of
Chicago has the distinction of being the country's first community
development bank with more than $230 million in assets. The
bank is well regarded for its visionary lending practices in
disadvantaged communities.

In December 1993, I joined a panel of 10 judges at the CEP's

headquarters in Manhattan to decide the 1994 Corporate

275
Conscience Awards. After reviewing company-submitted
materials, CEP ratings, and back­ ground research and after
undertaking exhaustive debate, we solidified our nominations for
CEP's Silver Anniversary Awards as well as for the annual awards
to be made in each of six principal categories. Nominees and
winners were subsequently announced to the media and awards
presented at New York's Waldorf-Astoria Hotel. The well-
attended event drew a prominent group of senior executives from
the winning companies and significant attention from the media.
The commonly expressed hope was that these awards would also
interest consumers, investors, and competitors in the merits of
the chosen companies' social practices and so encourage
imitation.

ENVIRONMENTAL AWARDS
Although they constitute a subset of many social performance
screens, environmental awards have become so popular that they
merit special attention. The sponsors of these awards want both to
honor companies that have made an outstanding effort to
promote energy efficiency and minimize pollution and to
encourage others to do the same. Some awards are backed by
government agencies, some by watchdog groups; others are
sponsored by companies themselves. The most prestigious are the
Gold Medal for International Corporate Achievement and the
Global 500 Roll of Honor for Environmental Achievement.

The Gold Medal honors industrial companies that have shown

outstanding, sustained, and well-implemented environmental
management policies in their international operations. The award
was singled out by then President George Bush as an exemplary
and worthwhile competition. The Global 500 is sponsored by the
UN environmental program. Nominations are made by third
parties and awards are given in 27 areas of environmental

276
accomplishment. The awards identify companies that have
demonstrated sustainable development practices; that have
mobilized public attention and support or taken action toward
solving an environmental protection issue; or that have
contributed significantly to intellectual, scientific, or theoretical
approaches to environmental concerns.

Of the growing number of other environmental awards, five

are among the more visible:

1 The Du Pont/Conoco Environmental Leadership Award

relies on nominations from customers of Du Pont or
Conoco Mining Services. It recognizes mining operations
in North America for success in reclaiming mines,
protecting land use and water quality, and demonstrating
local environmental leadership.

2 The Edison Award for Environmental Achievement is

sponsored by the American Marketing Association. It
champions American companies making commercial
products that contribute significantly to source reduction.

3 The Environmental Achievement Award goes to companies

that exceed regulatory requirements on environmental
projects and that develop creative and innovative solutions
with proven economic and environmental benefits. The
award is sponsored by the National Wildlife Federation's
Corporate Conservation Council.

4 The Safety Award for Excellence (SAFE) targets oil

companies and applauds those that achieve the highest
levels of safety and environmental compliance in U.S.
offshore drilling operations. Nominees are selected from
inspection reports, and the award is sponsored by the
Minerals Management Service of the U.S. Department of
the Interior.

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 5 The Searching for Success National Environmental
Achievement Award is sponsored by the not-for-profit
group RENEW America. Awards are made in 20
environmental categories to individuals, community
groups, schools, companies, and government agencies
with outstanding environmental programs.

LEADERSHIP AWARDS
Various awards highlight the role that top business leaders
play as architects and champions of programs that improve a
company's economic and social performance. By far the most
visible award is induction into the National Business Hall of Fame.
In 1993, honorees included Chrysler's former chief Lee lacocca,
the Washington Post's Katharine Graham, S. C. Johnson's founder
Samuel Johnson, retailer L. L. Bean's founder Leon Bean, and
publisher Amory Houghton of Houghton Mifflin.22

In 1989, leading representatives of American business,

academia, labor, and the media founded the Business Enterprise
Trust, a national organization seeking to shine a spotlight on acts
of courage, integrity, and social vision in business. The trust
presents five annual awards to individuals and companies in
recognition of exemplary acts of business responsibility.
Prudential was among the 1992 recipients, lauded for designing
innovative policies that give terminally ill patients early access to
their insurance savings.

RISING IN THE RANKINGS

Talk to any manager about how his or her company ranks
against rivals in the industry and I guarantee you a strong, almost
visceral reaction: piqued interest if the ranking is good,
defensiveness if it's bad. Managers are attentive to such ratings
because they know that a company's reputation matters. They

278
know that a pristine reputation is like a magnet-for employees,
customers, investors, and local observers-whereas a bad one
sends them running to rivals.

In December 1993, for instance, Fortune magazine asked senior

executives to cast their votes in a popularity contest for the most
innovative companies in U.S. industry. Following are the top 10
innovators nominated:

• Microsoft

• General Electric

• 3M

• AT&T

• Motorola

• Apple Computer

• Intel

• Merck

• Wal-Mart

• Chrysler23

The executives rated software giant Microsoft far and away the
most innovative of all companies — no doubt to the considerable
satisfaction of Microsoft's managers.

Less specific but equally meaningful to managers are the many

rankings of companies put out by monitoring agencies. Consider
the airline statistics that are regularly gathered and published by
the Civil Aeronautics Board. One is a record of on-time service.
Northwest Airlines, rated number 1 in on-time service in 1993,

279
quickly took out an ad in the New York Times to publicize its
ranking.

Most companies look hard to find a statistic — any statistic —

that provides them with a number 1 ranking to use for self-
promotion. For instance, the trade journal Institutional Investor
regularly ranks investment banks by the total assets they manage,
the volume of underwriting they do, and the quality of advice they
give. Banks that come out on top in any of these categories are
generally quick to take out ads in the business media to convey
their prominence and remind existing and potential clients about
their relative standing.

The recent proliferation of both general and specialized

rankings attests to the growing popularity of corporate pageants
and horse races. In just about every industry possible, we now
have lists of "the top 10," "the best managed," "the most socially
responsible," "the greenest," or "the most admired" companies.
Magazines expend considerable energy assessing business
schools, hospitals, small businesses, cities, states, and regions.
Every year, for instance, the National Education Standards agency
sponsors The Gourman Report, a ranking of the undergraduate
programs of leading business schools. The business magazine U.S.
News & World Reports, like Business Week, regularly reports
rankings of the country's graduate management programs.

Not only do these published lists help to create best-selling

books and special issues of trade journals and general business
magazines like Institutional Investor, Fortune, Forbes, Inc., and
Business Week, but they also stimulate frenetic activity on the part
of the managers and institutions being appraised. More favorably
rated institutions bask in the reflected glory of their rankings,
while lesser-rated institutions engage in vigorous soul-searching
and rethink their resource deployments. By crystallizing the
relative standings of business schools, the ratings by U.S. News &

280
World Reports and Business Week were instrumental in launching a
virtual revolution in management education that has only
gathered steam since 1988.

PERCEPTUAL RATINGS
Perceptual ratings establish the relative value of one firm's
intangible assets against another's. Just as beauty pageants reduce
the complex construct of "beauty" to a single superficial
dimension, so do reputational ratings simplify the many complex
dimensions of a company's "performance." They supplement
familiar financial statements by telling us how well a company is
doing in other than purely economic terms. By forcing us to
juxtapose rivals on a single dimension, these reputational
rankings help us make decisions about which firm's products to
buy, which firm's stock to invest in, or which firm to work for.

In part, perceptual ratings have grown popular because most

companies prefer to avoid the limelight. Which is why we search
for information. Annual statements provide us only with past
information about how a company did financially; they tell us
little about how clients like the company's products, how skillfully
its employees perform their jobs, how much damage the
company's plants inflict on the environment, or how well the
company supports the local community. They tell us little about
the company's intangibles.

In an attempt to make such information more public, a

number of coalitions have formed over the years to disseminate
ratings of social and ecological performance. The oldest is perhaps
the Motion Picture Association of America's ratings of adult
content in commercial films. Efforts to extend these ratings to the
music and television industries have been fraught with dissent. In
January 1994, however, the U.S. cable industry endorsed a plan to
create a new rating system for television programming. The plan

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approves the hiring of an outside monitoring agency to produce
regular report cards on cable companies. Product ratings of this
sort are disturbing to broadcasters. They stand to significantly
influence not only viewership but advertisers, and so are likely to
alter programming decisions.

The ratings controversy is being extended to many other

industries. The burgeoning field of so-called ethical investing
encourages reliance on social ratings, such as those of the Council
on Economic Priorities, when picking stocks or mutual funds.
Ethical funds act somewhat like monitoring agencies. They
include in their portfolios only those companies which have
passed screens for product quality, customer service,
environmental performance, employee relations, and corporate
citizenship.

Some 290 investment funds now offer social screens of this

sort. One such fund brings together a portfolio of 400 companies.
The resulting Domini 400 Social Index, its founders report,
performed at least as well as the S&P 500 between 1988 and 1992.
It provides not only investors but managers with a potentially
powerful benchmark for targeting activities that might improve
their companies' reputations.24 Social activists estimate that
assets with a collective value of more than $625 billion are
currently screened for ethical considerations through such
investment funds. Although a small pool compared with the
totality of all financial investments, these social funds represent a
rapidly growing source of influence on companies' activities, not
least of which for the media attention that they attract.

Various books rank noneconomic corporate achievements.

They include The 100 Best Companies to Work for in America and The
Best Companies for Women as well as trade magazines and surveys
that document discriminatory practices, investments in South
Africa, pollution levels, and involvement in military expenditures,

282
tobacco, alcohol, or gambling.25 These reputational rankings make
internal operations more transparent to outside observers and
help to crystallize and validate a company's reputation.

FORTUNE' S ALL-STARS
Among the more visible perceptual rankings of large American
companies is the one Fortune has published in its
January/February issue since 1984. Every fall the popular business
magazine asks an independent research firm to develop a ranking
of companies based on a poll of 6,000-8,000 knowledgeable
executives, directors, and analysts. Operationally, the survey gets
respondents to nominate leading companies in an economic
sector and to evaluate each company on eight dimensions:

• the quality of the company's management;

• the quality of its products and services;

• its long-term investment value;

• its innovativeness;

• its financial soundness;

• its ability to attract, develop, and keep talented people;

• its acknowledgment of community and environmental

responsibility; and

• its use of corporate assets.

Table 7-2 summarizes the top 10 firms rated in these surveys

from 1983 to 1995. The turnover in the survey is considerable. Only
three companies can be said to have owned the number 1 slot:
IBM, Merck, and Rubbermaid. Even their reigns have been
periodically challenged by veteran performers like P&G, Coca-
Cola, J. P. Morgan, and 3M, while potent newcomers with strong

283
growth spurts — like Liz Claiborne in apparel, Wal-Mart and
Home Depot in retailing, Intel and Microsoft in computers — are
making strong showings. The timeline presents a bird's-eye view
of the changing landscape of corporate America over the last
decade.

284
 A recurrent theme in discussions of corporate reputation is
one that Fortune's researchers themselves express: "How much of
a company's reputation can be traced to the tangible numbers of
the balance sheet, the income statement, and stock
performance?" Their brief and largely anecdotal conclusion is
simply this: "A lot . . . but far from all."26

To explore this question in detail, Mark Shanley and I

conducted a detailed study of Fortune's rankings.27 What kinds of
information, we wondered, do these ratings embody? To what
extent do Fortune's reputational rankings simply reflect the prior
profitability of rated firms? Or might they also account for aspects
of the social records of these companies? After much statistical
analysis, we were able to show that two sets of factors predicted
why some companies were better regarded than others; one is a
company's performance history — its economic record the other,
the company's commitment to projecting an attractive image to
employees and the local community — its institutional record.

285
 Figure 7-1 depicts the main predictors of a company's
reputation. It suggests that some companies owe most of their
reputational standing to dazzling economic performance, while
others owe their reputations primarily to the strength of their
outreach practices and policies. The most highly rated companies
in Fortune's annual survey, however, turn out to be those
companies that achieve both — not only do they demonstrate the
kind of solid economic performance that pleases investors but
they also look to the interests of employees, customers, and
communities.

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THE ECONOMIC RECORD
Everybody loves a winner. In business, nothing impresses us
more than a company with a strong record of profits. To investors,
past profits not only constitute necessary short-run returns on
investments but a strong signal that the company is well
positioned for the long haul. To employees, profits are the source
of generous bonuses and perks. Since products often develop
problems, customers are more likely to buy the products of more
profitable companies, if only because they want them to be around
when something goes wrong. Finally, the local community
welcomes the stability of operations, tax revenues, jobs, and other
contributions that profits make possible. Nothing makes everyone
more edgy and skeptical about a company than volatile earnings:
one year good, one year bad; one year up, one year down.
Companies earn better reputations with their constituents when
they show steady, positive economic returns. Not surprisingly,
return on equity for the 10 companies that were most highly
regarded in early 1993 averaged a sterling 25 percent in the prior
year. It's a result that holds over the long term: Better-rated

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companies have higher 10-year returns than their lesser-rated
rivals.

THE SOCIAL RECORD

Our study demonstrates that three social factors affect a
company's reputation in the Fortune survey: (1) advertising, (2)
community involvement, and ( 3) visibility in the media.

Companies that advertise more heavily than their rivals

benefit from the marginally greater exposure. However allocated,
those advertising dollars appear to raise the status of rated
companies.

Like advertising, involvement in community-based initiatives

is good. It tends to heighten a company's public profile and
enhance its reputation. Companies supporting foundations or
donating more to charities enjoy better reputations than their
principal rivals. Casual inspection against the roster of stocks in
the DSI 400 portfolio confirms this: The 20 largest companies
included in the index claim a much higher than average
reputational rating on Fortune's scale.

Visibility in the media, however, is all too often bad visibility:

It heightens public attention, raises eyebrows, and reduces the
latitude managers have in making strategic decisions without
interference. In other words, the results show that investigative
reports and newspaper write-ups-whether positive or negative —
do little to help a company's reputation. The lower a company's
visibility in the media, the better its reputation.

When companies make the news for their involvement in

social causes, however, it helps their reputations. For instance,
reporters like to write about Sara Lee's outstanding record of
social involvement: its charitable giving, its active foundation, its

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commitment to women, and its volunteerism. Procter & Gamble is
frequently applauded for its efforts to rethink manufacturing
processes, to conserve energy, or to design environmentally
friendly consumer products. Rubbermaid routinely passes ethical
screens for its conscientious efforts to make household products
that are safe, durable, and carefully designed; for its support of
recycling; and for its positive labor relations.

ASSESSING PERCEPTUAL RANKINGS

On the face of it, then, Fortune's rankings are valid. The 1993
rankings justifiably deflated companies that were facing
bankruptcy (Wang Labs, Continental Airlines). They also marked
down companies with prospects for profitability that were low
because of intense rivalry (McDonnell Douglas in aerospace) or
overextension (Sears, Roebuck in retail, Citicorp in financial
services). And they applauded innovators in retailing (Wal-Mart),
in reliable package delivery ( UPS), in global competition (Coca-
Cola, General Mills, Boeing, Deere), and in conservative growth (J.
P. Morgan).

Table 7-3 compares companies that were ranked at the top and
bottom of their industries in the fall of 1993. Again, the winners
make sense. Within industries, the top companies confirm most
expectations: Merck in pharmaceuticals, Boeing in aerospace; J. P.
Morgan in banking, Wal­Mart in retail. Overall, the top 10 for the
year turn out to be Rubbermaid, Home Depot, Coca-Cola,
Microsoft, 3M, Walt Disney, Motorola, J. P. Morgan, and UPS-a
familiar cast of characters, each one highly regarded for a
consistent record of both economic and social performance, for
sensitivity, to customers, employees, and communities as well as
to investors. The only surprise is that long-time favorite Merck
dropped from the top spot, doubtless reflecting the financial
community's concern over the loss of revenue that could result

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from the company's merger with mail-order drug distributor
Medco and the possible changes in the health-care system
nationwide.

At this point, Fortune's survey is probably the most visible of all

the perceptual rankings of companies now published. It seems to
be reasonably constructed and produces an interesting summary
ranking of rival companies. What's more, these rankings also
provide unique information of value to investors. In the statistical
study I conducted with Mark Shanley, the stocks of better-rated
companies showed a small but marginally positive return in the
two-day period after Fortune's survey issue appeared on
newsstands. It's not much, but as these things go, perhaps it's
something to trade on.28

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 Despite its popularity, the Fortune survey suffers from some
serious limitations. For one, it reflects the assessment of only a
single constituency: senior executives, directors, and analysts. As
such, the ratings do not incorporate the independent and possibly
divergent judgments of employees, customers, or local
communities. Although our empirical study shows that raters
unconsciously managed to factor into their assessments some of
the concerns of these other constituencies, a more representative
sampling of all corporate constituents would surely improve the
validity of the rankings as comprehensive measures of reputation.

A similar problem confounds the rival rankings of business

schools presented in the popular press. As I discuss at length in
chapter 10, these ratings are based on a sample of different groups
of raters and so reflect the disparate criteria that these groups
apply. For instance, the ratings of MBA programs published by
Business Week reflect a sampling of recruiters and alumni but
completely exclude faculty, students, donors, and the local
communities in which these institutions operate. For its part, U.S.
News & World Reports surveys business school deans, but no one
else. The final ranking incorporates a wide range of archival
measures that may or may not reflect the judgments of other
groups. The net effect of these disparate criteria is to make the
surveys inconsistent and difficult to compare. How then can they
be used to evaluate the schools?

To develop more systematic reputational profiles of

companies, business schools, and other institutions, it would
make sense to pick a representative sample across all major
constituent groups. The resulting rankings would better capture
the multidimensional functions that these institutions try to
fulfill. Drawing on the sampling techniques of political pollsters
would surely make feasible a more balanced assessment of
constituents, and so a more accurate depiction of corporate
reputations.

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RATED TO DEATH
It has become commonplace in literary circles to bemoan the
proliferation of prizes and awards given to articles, books, and
authors. A recent Vanity Fair article laments the fact that literary
prizes have become "a dime a dozen." The apparent concern is
that prizes and award ceremonies seem to exist only as a way to
reward sponsors, to pacify egos, and to generate sales. The article
goes on to deplore what appears to be a distinctly American
phenomenon: our embarrassing thirst for prizes and trophies.29

A similar phenomenon characterizes the corporate realm.

Ratings and rankings, prizes and awards are now proliferating. I
disagree with the literary pundits, however. In my view, in the
corporate realm, ratings and awards are to the good. The
widespread interest in these contests demonstrates our increasing
discomfort with relegating assessments of a company's merits to
a small coterie of self-styled "experts," most of whom are largely
and solely financially oriented. By soliciting and combining many
individual judgments on many criteria, by forcing us to make
comparisons between companies, ratings help us to judge the
overall quality of a company. Just as literary prizes guide us to
worthwhile readings, so do corporate prizes suggest what
companies we might prefer to work for, to invest our money in, or
to buy our products from. If well­conducted, these corporate
competitions can provide us with valuable information about the
overall economic and social performance of our companies-a
worthwhile objective in itself. At a minimum, they force us to
examine more closely the images and identities of our favorite
companies.

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CHAPTER 8:
THE REPUTATIONAL AUDIT
“The meaning of a message is the change
which it produces in the image.”

Kenneth Boulding

S
OME TIME ago, I read a brief op-ed piece written by a public
relations consultant. The author deplored the industry's
lack of strategic insight, its failure to understand that the
purpose of public relations is to help a company to exploit and
defend its reputation. He also proposed that companies appoint a
chief reputation officer to do the job. 1 Eager to know if he had
been heeded by his peers, I met the author, Alan Towers, at h is
midtown office in Manhattan, only to hear him describe his
continuing frustration with PR professionals who were concerned
more about quick "deliverables" than about fundamental
questions of strategic merit. As he put it: "PR practitioners are
insecure. They worry about one thing: quick results. They
recognize that reputations are important, but it's hard for them to
see any immediate payoff from working on the reputation level.
Getting stories into the press-now that has clear returns.
Reputation tends to only count after the fact, when a crisis has
already hit. Then they want you for damage control." His speech
sounded strangely familiar. I had witnessed a similar problem in
discussions with human-resource professionals in the early
1980s. In a book edited with my colleagues Noel Tichy and Mary
Anne Devanna, we challenged the traditional operational view
personnel managers take of their role. Instead, we proposed that a
well-structured personnel department had a strategic role to play
as a caretaker of the company's human capital and corporate

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culture.2 It took time for the idea to gel. Today, forward-thinking
managers take it for granted. They rely heavily on their human-
resource departments not only for the traditional operational
duties of employee recruitment, training, and compensation but
for the more strategic tasks of controlling and shaping the
internal climate and culture of their companies — their identities.

Much the same could happen to departments of public

relations and investor relations if these professionals would
recognize their roles as caretakers of their companies'
reputational capital. As noted public relations expert James Grunig
commented recently: "For public relations to be valued by the
organizations it serves, practitioners must be able to demonstrate
that their efforts contribute to the goals of these organizations by
building long-term behavioral relationships with strategic publics
— those that affect the ability of the organization to accomplish
its mission."3 It's also the case for investor relations, as noted in a
recent article in the New York Times: "At some companies . . .
many consider investor relations nothing more than a public
relations function, where there is only coincidental concern for
stockholders or the availability of meaningful information. . . . But
many companies are getting wiser. They realize that institutional
investors prefer to put money into companies that provide lots of
information and that good investor relations can help their stock
price."4

Increasingly, companies are recognizing that relationship

building must take place not only with employees and the general
public but also with customers, investors, the local community,
and the media. In a world where intangibles like reputation matter
at least as much as tangible assets like plant and equipment,
competitiveness demands strong relationships with all
constituents. Indeed, some analysts estimate that the stock price-
and so the reputational capital — of many diversified companies
would probably be at least 20 percent higher if those companies

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helped investors make better sense out of the diversity in their
portfolios.5

Unfortunately, most companies deal with their publics in a

fragmented manner. For the most part, they relegate them to
distinct functional silos-finance, marketing, human resources-
with minimal opportunity for contact or coordination.6 Doing so
reflects a poor understanding of the determinants of corporate
reputation. It also imperceptibly damages a company's
competitiveness and profitability while increasing its riskiness
and vulnerability to crisis. I suggest here that to exploit
reputational capital and build more resilient companies, we will
have to institute new roles and structures in our companies, as
well as better, more creative scripts for the managers who run
them. The reputational audit is a systematic effort designed to
help managers assess the practices that undergird a company's
reputation with its constituents.

MANAGING RELATIONSHIPS
In practice, a company's reputation derives from the more or
less healthy relationships it establishes with seven audiences:

• customers,

• investors,

• employees,

• competitors,

• the local community,

• government, and,

• the public at large.7

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 The quality of each relationship shapes the particular image
the company develops with that constituent. Whether consistent
or inconsistent, these images combine to create a company's
reputational halo.

The form each relationship takes depends greatly on the way

information flows between the company and the constituent, the
frequency of their contact, and the level of trust between them.8
Distinct image projection strategies may be required to reach a
constituency effectively. Self­presentations run the gamut from
corporate advertising, identity systems, and financial reports to
press releases, charitable contributions, and pro bono work.
Seldom are they fused into a coherent whole.

Traditionally, a company has indicated the seriousness of its

commitment to a particular constituency by staffing an internal
department exclusively devoted to it and giving that department a
discretionary budget. There are six key departments of this kind:

1. Customer-service relations: This department tries to shape

customer perception of the company. Key strategies
include product and image advertising, the creation of
customer-service centers, the provision of warranties,
and investments in building brand equity to market the
company's goods and services. Managers also try to get
the nod from clients — and repeat business — by
meeting their expectations for quality and service.9

2. Investor relations: The historical function of investor

relations is to maintain investor confidence in the
company's prospects. Key strategies include hiring
credible auditors, issuing optimistic financial
statements, and making assertive presentations to
investment analysts and institutional shareholders.
This department's mission is to generate favorable
judgments from these opinion leaders by signaling a

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 genuine commitment to strong economic
performance.10

3. Employee relations: This department is principally

concerned with the design of human-resource practices
for recruitment, compensation, and development that
show commitment to and concern for employees. When
recruiting, human-resource practitioners often try to
convey to prospective hires the nonfinancial benefits of
working for the company to elicit positive feelings.11

4. Community relations: The purpose of the typical

community relations department is to convey a
company's benevolence, corporate citizenship, and social
responsiveness. Key strategies range from pro bono
activities and charitable contributions to relationship
building with artistic, educational, and cultural
institutions. In this way, companies integrate themselves
into their local communities and surround their activities
with a positive halo of goodwill.12

5. Government relations: These departments developed in

the 1960s and 1970s as companies struggled to find ways
of maintaining positive relationships with regulators.
Key strategies for doing so include distributing position
papers, testifying before committees, lobbying
regulators, and supporting the political campaigns of
elected officials. By forming close ties with legislators
and regulators, managers try to ingratiate themselves
with powerful monitors and participate in shaping more
favorable environments for their activities.13

6. Public relations: A company's PR staff is responsible for

influencing broad questions of public opinion. Expert
communicators are assigned to manage relationships
with the media and to help a company create identity
programs, construct corporate advertising campaigns,
issue press releases, and, broadly speaking, develop

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 the set of strategic issues and frames of reference that
govern the conversations of outside audiences.14

Missing from this list is a seventh department of

"competitor relations." I know of no company that has one. It
may help explain why companies never address the structure
and form of their relationships with competitors consistently.
Doubtless the omission is a legacy of antitrust legislation that
has long prohibited close ties between rivals. As alliances
proliferate in the globalized world economy, however,
companies are increasingly participating in constellations of
supplier deals, joint ventures, and consortia. Corporate
reputations are therefore increasingly tied to those of their
alliance partners, and visionary companies may want to
consolidate oversight of these competitor relationships into
one department.11

Analytically, the above relationships describe the strategic

efforts a company's managers can make to shape coherent
images for constituents and to build reputation. The research
record suggests that companies committed to sustaining their
reputational capital are likely to budget more funds, pursue
closer social ties, and disseminate more extensive information
targeted to each of the company's principal audiences:
customers, investors, employees, competitors, government,
local communities, and the public at large.16 That task is
increasingly likely to require its own administrative unit.

CREATING A NEW EXECUTIVE ROLE

In any company, power and influence derive from position in a
corporate structure. Where should these six staff groups — each of
which worries about a particular constituent-be positioned? To
whom should they report? If we examine existing practice, in most
companies the activities of these six groups are typically isolated
within business units, with disparate reporting lines and

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involvement in corporate-level decision making. What this says is
that in terms of reputation management, no one is really minding
the shop.

Much as companies appoint a chief financial officer to

safeguard financial capital, a chief operating officer to monitor
operations, and a chief information officer to control and
manipulate corporate databases, so might they benefit from
appointing a chief reputation officer ( CRO) to watch over the
company's intangible assets. As PR consultant Alan Towers
suggests: "The CRO's tactical responsibilities would include over­
sight of pricing, advertising, quality, environmental compliance,
investor relations, public affairs, corporate contributions, and
employee, customer and media relations. Rather than literally do
each of these jobs, the CRO would act as a corporate guide,
working with specialists in each area to help them see the
reputation consequences of their decisions. If necessary, the CRO
could impose an opinion . . ."17

With or without the title, such a position would help to signal

the importance and make explicit the hidden value of the
company's reputation. It would also encourage other managers to
more systematically relate knowledge drawn from brand
marketing, public relations, organization theory, and strategic
management. Figure 8-1 shows how the CRO could be made to join
the executive suite as a full partner, complementing the more
traditional chief executive, financial, operating, and information
roles. The CRO would recognize the different tasks that a company
must undertake to build, sustain, and defend its reputational
capital. In all aspects, however, it's a role that emphasizes close
coordination-a matrix arrangement-with the traditional
functions of marketing, finance, human resources, and
operations.

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 The downside to appointing CROs in our corporate structures
may lie in the ease with which they can be made scapegoats for
events beyond their control. In the United States, however, CEOs
have not always shouldered the blame for reputational losses,
despite being the first to lay claim to reputational gains. In this
they differ from Japanese CEOs, who are expected to shoulder full
responsibility for reputational losses as well as gains. By
comparison with Japan, it's apparent that senior executives in the
United States have been artificially sheltered from concerns about
corporate reputational matters. Formalizing the position of CRO
would arguably return accountability where it belongs — to the
top team.

BUILDING REPUTATION
New companies are well aware of how difficult it is to launch a
business without a track record. As every salesperson will tell you,
it's not easy to get the ear of an established buyer when you're
trying to sell them an untested product. Conversely, that same
salesperson will readily attest to the value of having a highly
regarded corporate name to get you in the door.

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 Start-up companies are not the only ones to face the challenge
of having to build reputation. Large companies launching new
divisions as well as older companies changing their names face
similar issues. Take the largest company of them all, AT&T. In
1984, under the terms of an antitrust settlement, the courts
presided over the breakup of the telephone colossus. Seven
regional companies were spun off with responsibility for
providing regulated telephone service, but they would be allowed
to participate in unregulated businesses as well. Rising from the
ashes of the old monopolist was a new entity, divorced from local
phone service but with the freedom to roam unfettered into the
brave new world of telecommunications products and services. No
longer would the benevolent reputation of "Ma Bell" hover over
these companies. Each would face an uphill battle in the ensuing
years to crystallize new identities and build reputational capital.

In 1983, the corporate identity consultants Lippincott &

Margulies were called in to advise the largest of the spin-offs, the
company that would cover New York and New England. L&M's
task was to develop a new identity for the nameless entity that
would draw its employees and culture from AT&T but that would
also soon be entering the foreign terrain of unregulated business.
L&M recommended the NYNEX name and designed its
communications program. As Clive Chajet, L&M's current
chairman, recalls:

The new company needed identity practices to

differentiate its regulated businesses from its unregulated
ones, and to establish separate yet linked identities for an
entire range of the unregulated ones. We recommended
retaining the names of NYN EX's regulated subsidiaries
New York Tele­ phone and New England Telephone, and
making sure that subscribers directed all their attention,
payments, and service needs to those entities. . . . On the

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 other side, we recommended that the whole line of NYNEX
unregulated businesses be positioned so that they all
primarily made use of the NY N EX name-NYNEX
Enterprises, NYNEX Information Resources, and NYNEX
Mobile Communications. . . . Lippincott & Margulies
produced a series of a dozen manuals on how to use the
new NYNEX identity on everything from vehicles to
signage to advertising . . . and so some of these manuals
that we wrote were actually codes of conduct for the
employees, teaching them the manner in which NYNEX
wanted them to do business.18

In 1994, NYNEX unveiled the latest phase in its reputation-

building effort. With a series of upbeat print and television ads,
the company announced that it was adopting the NYNEX name for
all of its subsidiaries, including its telephone operations. Clearly,
this development culminated the company's efforts to cohere
disparate images.

When Japanese manufacturer Nissan decided to enter the

luxury car market in the late 1980s, it too approached L&M for
assistance. Concerned about Nissan's established reputation as a
low-price producer, the consultants encouraged Nissan to
completely separate its luxury car from its other products.
Nissan's top managers agreed and devoted millions of dollars up
front to building reputation. They focused on three areas: (1)
developing the new division's name, logo, and identity, (2)
persuading and assisting the company's dealers to construct the
separate showrooms the new car would require, and (3) targeting
creative ads to consumers that portrayed the car's distinctive
image. All this well before the prototype of the car-the Infiniti-
had even been created.

It would prove to be a successful campaign. As Chajet recalls:

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 Infiniti was introduced during the fall of 1989, and its
initial awareness level was at an unprecedented high. . . .
Everything that surrounded it was distinctively Japanese,
from bamboo frames for the background to the foliage used
in the foreground. This too was a reinforcement of the
message Nissan wanted to convey. . . . Since we hadn't seen
the actual car when we'd made the logo, we were now
pleased to see that it stood the test of good badges, that it
could be applied in both expected and unexpected ways to
various parts of the car from the hubcap to the dashboard,
and still maintain its integrity. . . . As a measure of the detail
to which Nissan committed itself to the positioning and
design theme, by way of greeting and thanks, Nissan sent to
dealers a distinctive and expensively original origami Infiniti
Christmas card, the final touch in a fully integrated identity
and image management program.19

The efforts of both NYNEX and Nissan illustrate the critical

decisions managers face as they try to define a company's
principal character traits. In chapter 11, I describe in depth how
these identity programs can help a company to build reputational
capital. They force a company to explore the merits of establishing
closer relationships with key constituents and add another
dimension to the debate about the linkages that should exist
between a company's old and new businesses.

The questions listed below should provoke extensive debate

about a company's competitive strategy and corporate culture.
They place discussion about reputational matters where they
belong-as a center­ piece in the formulation and implementation
of business and corporate strategy.

• What kind of company do we want to be? What are our

defining traits?

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 • How do those internal features correspond to current
perceptions of our company by our different audiences?

• How can our internal features build competitive

advantage against rivals?

• How distinctive is our reputation from the rest of the

industry's reputation?

• How accurate and consistent are the images that we

project to our different audiences?

• How can we strengthen our relationship with our key

audiences?

SUSTAINING REPUTATION
Identity programs also have a great deal to do with sustaining
reputation. Coherent self-presentation and consistent projection
of reinforcing images help to build and maintain favorable
appraisals by constituents. More central to the task of maintaining
reputation, however, are two sets of programs: (1) internal
monitoring programs that secure compliance to a set of principles
and (2) external relations programs that manage the interface
with key constituents.

Internal monitoring programs address two areas that have

enormous potential impact on a company's reputation: product
quality and organizational integrity. As discussed in chapter 5, to
manage product quality well is to signal to employees the
importance the company places on meeting its implicit contracts.
All employees must believe that a company is serious about its
product claims. They must recognize that if the company's
reputation is to act as a credible warranty in a transaction with a
customer, the product must regularly live up to its quality claims.
Of course, that's long been a strength of the Japanese and German

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programs of quality management. As many management gurus
have pointed out, German and Japanese employees take inordinate
pride in the products their companies make. Their companies
support well-crafted programs that train and socialize employees
to help make this possible. It hasn't always been true of U.S.
companies.

Numerous programs are put in place to help companies

address external constituencies. Environmental programs convey
concern about a company's effects on the planet; community
programs signal an interest in helping to solve the problems of the
town or region in which the company operates; investor relations
programs try to satisfy the needs of the company's major
fiduciaries; government relations programs examine the interface
of the company's interests with regulatory bodies; media relations
programs deal with the informational needs of the press; and
public relations coordinates them all.

When well executed, these internal and external programs can

help a company to elicit positive feelings from constituents and
sustain its reputation. As I pointed out in chapter 6, the difficult
challenge is to coordinate the multiple messages that are
broadcast by the various and sundry professionals involved in
managing these different programs. By being structurally
empowered, a chief reputational officer could perhaps ensure that
the dialogue between functions is institutionalized.

In order to focus attention on sustaining reputation, an

empowered CRO would ensure that the following questions are
addressed systematically:

• What are we doing to maintain healthy relationships

with all of our constituents?

• How well do we monitor our images with each of our

different audiences?

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 • Could we improve our reputation by developing better,
more consistent images?

• What kinds of activities should we engage in to sustain

our reputation?

• Do our employees understand and appreciate the

importance of our reputation? Do our customers,
suppliers, and rivals? The local government and
community? The public at large?

• How much money should we give to charity? Through a

foundation or direct giving? How much publicity do we
want from corporate giving?

• How can we obtain favorable reviews and ratings in the

media ?

• How can we generate more favorable appraisals by

financial analysts?

• How can we improve our relationships with those

organizations which monitor social responsiveness?

DEFENDING REPUTATION
In the late 1980s, perhaps egged on by a rising stock market,
many investment banks fell victim to a rash of scandals. With the
conviction of junk-bond king Michael Milken and the collapse of
the investment bank Drexel Burnham Lambert that he had helped
raise to the top ranks of the industry, many expected these
scandals to subside. As chapter 12 describes, that has not been the
case. In 1994, General Electric's Kidder Peabody subsidiary came
under fire for reporting false profits and disguising more than
$300 million in losses. The scandal has meant considerable bad
press not just for Kidder but also for GE, tarnishing somewhat the
company's reputation for savvy management. It cost Kidder's

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chairman his job and led to a court case against the rogue banker
in charge of the bank's government-bond-trading unit. In 1995,
the British investment bank Barings PLC was driven into
bankruptcy by its investments in financially risky "derivatives";
Bankers Trust saw a dramatic drop in its reputational capital as
lawsuits brought by customers produced costly government
sanctions, layoffs, and mounting losses. In all of these cases, lax
controls made it possible for enterprising employees to
circumvent internal programs that were intended to secure
adherence to common standards of reporting and to monitor
compliance. Clearly, these companies have not done a good job of
protecting their valuable reputations. All too often companies
become aware of such reputational issues only when it's too late-
when a scandal looms or a crisis has already hit. Generally, the
problem is allowed to develop because top managers are leary of
taking valuable time away from operating duties to postulate
unlikely contingencies. After all, it's difficult to anticipate the
future, and everyone agrees that the future never conforms to
expectations. The result? Very few effective crisis preparedness
programs. There's a tendency to either completely avoid the issue
or to prepare weighty manuals detailing how to respond to a
crisis-manuals that are easily set aside and seldom, if ever,
consulted.

That's bad news. As Chajet, points out:

Since it's virtually impossible to imagine in detail every

potential nightmare, the real requirement is to have an
overall plan for dealing with crises, to establish the context in
which your later actions may be judged. This, in turn,
mandates an attitude that both in good time and in bad,
image matters. A contingency plan to clean up the spill, as
well as to handle public reaction, certainly would have helped
Exxon, and a similar plan did help Johnson & Johnson — but

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 Johnson &Johnson's evaluation of the significance of image,
its willingness to invest in its nourishment, and its
commitment to making the necessary resources available to
do the job were the true differentiators. Having managed its
image extremely well for many years, the company was able
to deal with its crisis from a position of true strength. Its
positive, honest, forthcoming image allowed the employees
and divisions to rally to the company's side, furthered
communications with the press, and afforded the company
time to make the necessary adjustments in the product
packaging without losing too much ground.20

The good practices of Johnson & Johnson have since been

imitated by many others. Source Perrier is a case in point. When
some Perrier bottles were found to be tainted with benzene in
February 1990, the company quickly recalled all of its outstanding
stock of 160 million bottles from shelves around the world. Some
thought Perrier had over­ reacted. But as Gustave Leven, Perrier's
75-year-old chief, put it: "We don't want the slightest doubt to
weigh on Perrier." From a reputational standpoint, he was dead
right. Total recall was necessary to safeguard — and actually
reinforce — the image of purity on which Perrier's sales are based,
which is why the brand quickly returned to its original market
share after it was reintroduced a few weeks later. The cost? A mere
$30 million after taxes — not much considering the company's
$500 million in annual sales of sparkling water.

Union Carbide has also been commended for its handling of an

accidental lethal gas leak from its pesticide plant in Bhopal, India,
in December 1984 that killed more than 2,000 people and injured
some 10,000 other local residents. Had the crisis been poorly
managed, it could have wiped out the company entirely. Instead,
most experts acknowledge that the company's reaction to the
disaster was a textbook example of good management and good

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reputation management. Union Carbide's chair­ man Warren
Anderson immediately visited the site, pledged to correct the
source of the problems, launched independent investigations, and
quickly offered financial compensation to the victims and their
survivors. The negative impact of the tragedy was softened by the
company's well­ executed campaign in crisis management, vis-a-
vis its public relations, media relations, customer relations, and
investor relations.

In chapter 15, I describe the crisis faced in 1991 by the

investment bank Salomon Brothers. Its successful handling of that
situation illustrates how skillful self-defense can help overcome
disastrous circumstances after the fact.

Public relations firms maintain specialized units to advise

companies facing such crisis situations. At Hill & Knowlton, a
team of experts called the special situations team provides
planning, counsel, and logistical support in crisis communications
and risk management: "The team has a worldwide reputation
earned through its work in labor disputes, takeover contexts,
industrial accidents, financial irregularities, product tampering
and recalls, bankruptcies, controversial legislation, natural
disasters and other major client problems. . . . Special Situations
helps ensure that the client communicates its position to all
concerned audiences as effectively and clearly as possible."21

Depending on the crisis situation and a client's particular

needs, a PR firm can help a company in the following ways:

• Draft an issues-response advertisement.

• Set up a company crisis committee.

• Prepare materials — releases, statements, Q&As,

position papers, backgrounders, third-party testimony.

• Secure interviews and handle media calls.

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 • Monitor and analyze media coverage, and correct
mistakes.

• Retain third-party influencers as spokespersons.

• Serve as liaison with governmental groups.

• Set up and staff hot lines.

• Conduct overnight polls and public attitude

assessments.

• Arrange for press conferences, media tours, satellite

feeds, teleconferences.

• Develop employee communications materials.

• Work with outside groups — lawyers, investigators, or

insurance firms.

Successful programs appear to share the following

characteristics:

• Involve top management early on.

• Build third-party support for the company's position.

• Establish an on-site presence if the crisis is not

centered at headquarters.

• Centralize all crisis-related communications.

• Cooperate actively with the press.

• Keep employees informed.

• Keep the crisis in perspective and within context.

• Position the company for the post crisis future.

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 • Continually monitor and evaluate progress m handling
the crisis.22

In matters of reputation, however, it remains true that the best

kind of self-defense is — as the saying goes — a good offense.
Much as physicians distinguish between acute care-emergency
situations that require immediate attention — and primary care
— the everyday practice of health maintenance that helps prevent
illness — so should managers participate in actions designed to
avoid damaging a company's health. To safeguard a hard-earned
reputation, a company must take preventive action long before a
crisis occurs. It means empowering the company as a whole, and
someone in particular — perhaps a chief reputation officer? — to
act as the primary care physician, to ask probing questions that
link managerial initiatives to their effects on the health of a
company's identity and reputation.

To help a company defend its reputation, a vigilant CRO should

routinely call attention to the following questions:

• What could go wrong in our business?

• How good are we at anticipating rogue behavior,

unethical acts, scandals, and other forms of crisis that
might threaten our reputation?

• How prepared are we to react to unanticipated events?

• What kinds of behavioral controls and monitoring

systems have we put in place to prevent a crisis from
occurring?

• What kinds of compliance programs do we have m

place to safeguard the integrity of our actions? To deal
with unusual events? Who's in charge of these
programs?

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MANAGING REPUTATION
To successfully manage reputation, a company must
establish the programs necessary for actively relating to
constituents. In turn, the company must regularly audit its
reputational profile-its position against rivals. Figure 8-2
presents the three principal components of a fully executed
reputational audit:

• Stage 1: A diagnostic review of the company's current

identity, images, and reputation.

• Stage 2: A strategic analysis of trends, plans, and

competitive positioning that defines the company's
desired future state.

• Stage 3: A review of the company's plans for managing

the transition toward the future state.23

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STAGE 1: DIAGNOSING THE CURRENT STATE
The first step in conducting a reputational audit is to
accurately assess a company's identity, the images it projects, and
the reputation it enjoys. Identity Analysis.

Here, all of a company's communications with its different

audiences — customers, employees, shareholders, suppliers,
distributors, regulators, reporters, analysts, and the public at
large — are reviewed. That generally means putting together
advertisements, brochures, manuals, posters, correspondence,
logos, and signage. Communications experts assess the
company’s graphic support systems and naming practices for
products and businesses. Ethnographic experts interview
representative groups of employees to identify their personal
understanding of the company, their sense of what it stands for,
its strengths and weaknesses. The purpose of the analysis is to
explore whether the company's identity systems convey a set of
impressions that are more or less consistent with the company's
self-concept. The identity analysis also explores the myriad ways
in which the company presents itself to constituents, whether by
phone, through a visit to the company's facilities, or in
correspondence with corporate representatives. At the conclusion
of the process, the identity portion of the audit should provide an
accurate rendering of how a company sees and presents itself,
both to its employees and to the outside world.

Image Analysis. Having established how the company projects

itself outwards, the reputational audit can assess current
perceptions of how well those projections are communicated. How
do constituents rate the company's performance on key financial
and nonfinancial dimensions? To what rivals do constituents
compare the company? On what dimensions? What businesses
draw most of their attention? Which businesses rate more highly
than others?

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 Probably the most critical decision in the constituent survey
involves identifying those individuals who should be surveyed.
The process begins by developing as accurate a map as possible of
the company's principal constituencies. Within each constituency,
key influentials should be identified and interviewed along with a
representative sampling of other constituents in the group. To
develop an accurate reputational profile, a well-balanced
sampling of all influential constituents is essential. Polling
methods are highly appropriate to use in developing a valid
sample, especially for companies that have large groups of
customers and shareholders. For instance, relatively small
samples of 500-1,000 people are found to represent national
public opinion with a margin of error of 3-5 percent at a 95
percent confidence level. In addition to conducting face-to-face
interviews, telephone polls and mail surveys can be used to
provide more valid depictions of a company's images and
reputation profile.

Coherence Analysis. The final step in diagnosing the company's

cur­ rent state is to explore the coherence of the different images
obtained from the constituent surveys. Where do images
converge, and where do they diverge? On what dimensions? How
well do the images represent the company's sense of its identity?
How much of the company's identity is reflected in its self-
presentations? How accurately are these presentations perceived
by constituents? As indicated in chapter 3, a company's
reputational profile is the overall halo that emerges from all the
images held by constituents in different groupings.

STAGE 2: DESIGNING THE FUTURE STATE

A clear understanding of the company's strategic intentions
and competitive circumstances is necessary before a desired state
can be formulated.

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 Classic discussions of a company's strategic pos1t10n in the
industry through scenario planning, trends analysis, and
competitive analysis should be paralleled by a discussion of rival
companies' relative reputational standings and self-
presentations. Which companies have a higher status in the
industry, and why? What kinds of strategies are they pursuing to
maintain their reputational positions?

From these discussions a feasibility analysis can emerge, and

the stage is set for developing a consensus opinion from top
managers that elaborates where they would like their company to
be positioned given its strategic direction and resource
constraints. The key point to remember at this stage is that
identity projections are not one-shot deals; to have any effect,
they require nontrivial commitments of money, time, and energy.

STAGE 3: MANAGING THE TRANSITION

The gap between current and desired states raises significant
questions about transition management. The close involvement of
a representative cross section of employees is necessary to ensure
the success of any intervention. As with all programs for change,
lack of information generates rumors that can sabotage the
intervention. In this case-and unlike discussions of key corporate
strategies-secrecy is not essential, and the company should
probably encourage broad discussion of its efforts to convey
identity and reputation to its audiences. Not only are
representative multi­ function and multi-level teams appropriate
as testing grounds for ideas, they are also vital to disseminating
information inside and outside the company. The more positive
the signals that emanate from these teams, the more likely the
intervention is to be well received by constituents.

As an identity program crystallizes internally, parallel systems

must be installed to train employees in the use of common

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graphics, the procedures for dealing with constituencies, and
mechanisms to monitor compliance. Although it often seems
simple to generate such programs, it actually proves ever more
difficult to secure general adherence by employees, especially in
the pursuit of a monolithic identity across divisions of a
diversified company.

In part two we explore many of the issues raised in a

reputational audit through case studies of particular companies
and industries. We focus in particular on how organizations as
diverse as fashion businesses, consumer product makers, business
schools, and investment banks build, sustain, and defend their
reputational capital.

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 PART TWO

THE UPS AND DOWNS OF REPUTATION

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318
CHAPTER 9:
FASHION’S INS AND OUTS
“The fashion wears out more apparel than the man.”

William Shakespeare

P
ERHAPS NOWHERE is reputation more of an obsession than
in the world of fashion. In newspapers and magazines —
and now even on CNN's regular news broadcasts — fashion
designers flaunt their seasonal flights of whimsy to mesmerized
observers the world over. The fanfare and publicity they generate
for their high-priced and frequently unsalable clothing lines place
reputational halos around their names, halos that support
numerous and highly profitable subsidiary businesses such as
perfumes, personal care products, and home furnishings. This
chapter explores the peculiar rhythms of fashion businesses: how
they invest in building high-profile labels; how the prestige of a
label sustains a pyramid of derivative licenses; how those licenses
generate extraordinary wealth and reputation for the designer at
its core; how the reputation of a label can be tarnished; and how
that tarnished reputation might be restored. Reputation building
in the fashion business is a collective affair. A designer's ability to
sustain visibility requires active cooperation by a large and diverse
coterie of constituents, all of which are intimately involved in the
creation of images.

FASHION'S EMPIRES
Every season, the world's great fashion centers —Paris, Milan,
London, and New York — are set abuzz as designers whip the
industry into a frenzy of creativity. Their purpose: to invent next

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year's look — the shape of the clothes to come. The profits of a
staggering $2 trillion dollar community depend on the ability of
designers to anticipate tastes, capture trends, and at the same
time create uniqueness.

Contrary to the romantic image, the establishment of a style

involves far more than the creative output of a lone designer
working in blissful isolation. To create a look requires the active
cooperation of players up and down the industry's value chain: the
upstream textile mills that produce sample yardage of exciting
fabrics; the forecasting services that predict the shapes, lengths,
and color trends of the next season; the cottage trade that makes
complementary trim, lace, buttons, and hats; the buying offices,
department stores, and retailers who will later order the fashions;
and the fashion press, whose critical eye will either praise and
popularize or disparage and discourage purchases. Although
creating a signature look would seem to be an artistic pursuit
carried out in solitude within the great fashion houses of the
world, its actual production is, in fact, a collective effort of
coordination among a diverse community of designers,
manufacturers, wholesalers, promoters, retailers, and reporters.
Success comes to those designers more skillful than the rest at
weaving a web of linkages among specialized players in the
industry. Good relationships get press; press generates celebrity;
celebrity fuels sales.

The fame that attaches today to the Parisian fashion houses of

Chanel, Christian Dior, or Yves Saint Laurent, to the Italian design
companies of Gianni Versace or Giorgio Armani, or to America's
Donna Karan, Bill Blass, or Calvin Klein derives in large part from
the success each has had in planting a unique set of expectations
in the minds of consumers. Each has established a reputation that
reduces our uncertainty as to what its clothing will be like — the
fit, the durability, the overall look. We also rent the reputational
halos of fashionable designers to draw status, image, and success

320
to ourselves. As historian Daniel Boorstin reminds us, we buy
products emblazoned with prestigious names because they
provide us with "a feeling of shared well-being, shared risks,
common interests, and common concerns that come from
consuming the same kinds of objects . . . . A designer label is a
community of consumers on whom some of the celebrity of the
name rubs off."1 That's why, once in place, the reputations of top
fashion companies are worth a lot of money.

Take Donna Karan. As mentioned in chapter 3, in August 1993

the New York designer announced that her company would be
going public with the sale of 11 million shares worth an anticipated
$159 million in a first offering. Although economic circumstances
conspired to delay the sale, it is instructive to look at the logic that
propelled the initial announcement. According to the New York
Times: "Most, if not all, of the shares of the fashion company,
which tapped into the psyche and physique of American career
women with easy-to-wear clothing cut for a real woman's figure,
are almost certain to be spoken for by the time the offering hits
the market. The offering, which was rumored for months . . . is one
of the most eagerly anticipated of the year, and even the skeptics
are angling to buy shares."2

By improving demand for the limited supply of shares, the

designer's established reputation obviously inflates the
prospective selling price. Individual shares are expected to sell at
$16 according to the prospectus, despite an underlying net worth
estimated at less than $2.70 a share.

Whether for wine, food, or clothing, many of us willingly pay

premium prices to buy the products of high-profile fashion
companies. The stratospheric prices of Donna Karan's ready-to-
wear clothes — and of the company's shares — are justified by the
company's reputation for making high-quality products, a

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reputation based on the designer's success at providing her
customers with a unique look, a signature.

To acquire such a reputation requires enormous up-front

publicity. Fashion companies exact premium prices from
customers in order to reimburse themselves for heavy initial
outlays in advertising and promotion. Donna Karan's highly
visible billboards in the late 1980s used the busy New York skyline
to showcase the company's secondary label, DKNY, targeted to the
career woman. In the mid-1980s, Calvin Klein's provocative ads
featured a sultry Brooke Shields whispering seductively, "nothing
comes between me and my Calvins." The campaign was designed
to draw young customers to newly introduced product lines that
included, in quick succession, jeans, underwear, active wear, and
the wildly successful Obsession fragrance. In the early 1990s,
Calvin Klein's print ads featured rap singer Marky Mark, scantily
clad, in sexually suggestive poses. Again the campaign captured
widespread attention, reaffirming the company's controversial
image. It also helped to boost the market value of the business. In
January 1994, retailer Warnaco paid $64 million to buy Calvin
Klein's lucrative underwear franchise.

Once established, a designer's reputation acts like a bond. It

guarantees potential customers that the fashion enterprise will
deliver on both old and new products whatever its reputation
claims: a classic fit, an innovative cut, an avant-garde look-not to
mention the status that comes with it.

Table 9-1 lists the design empires that dominate the fashion
world. Each company contributes not only to the sale of high-
priced clothes but to the selling through licensees of a wide range
of consumer products that bear its name. In essence, they sell us
status; they sell their reputations.

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BUILDING A LABEL
Every year, a coterie of ambitious juveniles, middle-aged
dropouts, and newly minted graduates of fashion academies sets
out to conquer the world. Their dream? What else — to become a
household name. Their strategy? Launch a fashion label.

I met many such upstarts between 1985 and 1991 as I closely

followed the progress of one beginning designer and documented
his efforts to make a name for himself in Manhattan's dynamic
fashion industry. Some of those I met at trade shows and
conventions specialized in shirts, others in scarves; some made
hats, others made coats; many made full collections. As their
experiences showed me, the industry has peculiar rhythms that
outsiders have difficulty identifying. To build a label from scratch
requires a good understanding of those rhythms, as well as

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exquisite timing. I break down the experience into three stages,
each with its distinct challenges.

STAGE 1: DEVELOPING UNIQUENESS

The upstart designer breaks into the fashion business by
creating difference. Before a garment can reach the customer, it
gets screened by an established group of store buyers who act as
gatekeepers of the industry. All buyers are looking for one thing:
uniqueness. They want to know what's new about the coats, pants,
shirts, jackets, dresses, scarves, gloves, bags, or earrings the
newcomer is trying to sell. The search for just the right degree of
uniqueness dominates the early efforts of most of the small
companies I observed. Some never achieve it; lacking uniqueness,
they eventually go out of business.

Each newcomer picks a spot on a continuum from

contemporary to avant-garde. Collectively, they present to store
buyers varying degrees of fashion-forward cuts, styles, fabrics,
and colorations. It remains for those seasoned buyers to intuit the
future and anticipate what consumers will clamor for some six
months hence when the garments actually reach the stores. Of all
the clothing on display, what will be eye-catching? What will
stand out just enough to attract customers but not too much to
alienate them? What garments, fabrics, and colors better reflect
the "times"? And, more important, what will sell? These are the
questions that dominate the concerns of specialty and department
store buyers, the questions that make or break the newcomer.

Most of today's established designers are remembered for

designing a unique product. In the 1920s, Coco Chanel
revolutionized women's wear with simple, elegant dressing. The
"little black dress" and the two­piece suit with gold buttons and
braid trim anchor the Chanel collections to this day. Pierre Cardin
brought us space-age designs in the 1950s. Andre Courreges

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flashed into the 1960s with his cookie-cutter dresses and little
white boots. Laura Ashley put her trademark prints on frumpy
little dresses and made them the rage of the late 1970s. French
designer Azzedine Alaia created the slinky skintight look of the
1980s. In the mid-1980s, Donna Karan centered her first solo
collection for executive women on the body suit. In the late 1980s,
Christian Lacroix brought back the ill-fitting (and highly
inconvenient) "pouf" silhouette in his introductory collection, to
the considerable dismay of women and men the world over — but
oh, the publicity!

For most designers, early visibility comes from proposing to

the fashion world a uniquely different look, one that often
becomes the kernel around which their reputations are built and
that remains with them for life. Who can imagine Calvin Klein or
Giorgio Armani offering anything but soft, simple, contemporary
clothing? Their established reputations create expectations
among clients, store buyers, and media critics that heavily
constrain the look of the clothes they continue to create.

By far the most important link a newcomer in the fashion

industry must forge is with the store buyer. Gaining access to store
buyers is no mean feat. Hounded by would-be designers, buyers
naturally try to distance themselves from every Tom, Dick, and
Harry that comes along. At the same time, they recognize the
importance of remaining sufficiently accessible to appreciate
what's out there, to feel the pulse of the times. In the mid-1980s,
the buyers of two prominent Manhattan retailers, Bergdorf
Goodman and Henri Bendel, initiated open houses to which
newcomers flocked with samples. Although most hopefuls were
eventually turned away, everyone I spoke with claimed to know of
at least one fashion designer whose beginnings could be traced to
a small initial order by a prominent retailer. The most frequently
mentioned stories were Ralph Lauren's career-launching sale of a
small collection of ties to a specialty retailer and Calvin Klein's

325
first $50,000 dress order from the tony retailer Bonwit Teller.
Word of mouth obviously keeps fashion's hopefuls lining up at
every such open house. Not coincidentally, being in touch with the
market and on the cutting edge enhances the reputations of the
retailers.

More significant are the sales reps and trade shows through
which retailers come to know designers and their offerings. There
are two types of sales reps: in-house reps and outside agents. In-
house reps work for a single designer — often it's a job start-up
designers do themselves. They spend their days contacting and
courting stores in an effort to attract the buyer to the designer's
showroom. Lacking clout, most newcomers spin their wheels in a
vacuum. Few succeed in getting top retailers to review their
collections. This drives many start-up operations to call on
outside agents, who represent multiple designers. Outside agents
contact stores directly and sell on commission. They rely on their
own network of contacts and personal reputations to attract store
buyers. The better regarded the set of collections an outside agent
represents, the more inclined are prestigious buyers to patronize
the agent.

Most designers also take advantage of the industry's seasonal

trade shows to make direct contact with retailers. At trade shows,
newcomers join forces with more established companies and so
stand to benefit from being "accidentally" discovered as top
buyers stroll by their booths. Participation in a trade show also
legitimizes newcomers. They benefit from the reputational halo
that the show enjoys. Each segment of the fashion industry
supports various trade shows around the world, and each show
has developed a distinct reputation for attracting different types
of retailers. A show's status derives from the reputations of both
its exhibitors and its clients.

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 In the New York menswear market, for instance, I saw
firsthand how the Designer's Collective (DC) built a distinctive
image as the leading trade show in the pricier segment of the
American market between 1984 and 1990. Although periodically
challenged by gate-crashers like the International Design Group,
the DC was able to assert itself in the field by carefully cultivating
an elite image. Founding members elected a board that was
charged with screening trade show applicants to ensure high
quality; selecting a first-class site for the show (a luxury hotel
rather than typical trade show venues); and publicizing it widely
through ads in trade papers and close contact with the fashion
press. Consistent with the image the show sought to project,
exhibitor fees were far higher than those of rival shows. Not only
did it help to demarcate the show, but it created a significant
barrier to underfunded entrants. The results were astounding.
Thanks to strong attendance and extensive favorable press
coverage, within a few seasons the trade show had established
itself as a leading purveyor of U.S.-based, designer-quality
menswear. By 1989, the DC relied on its established reputation as a
purveyor of prestigious trade shows to spawn its own progeny.
The organization launched a similar show to feature American
designers of women's fashions — the Fashion Coterie.

STAGE 2: PROJECTING IMAGE

Getting press — any kind of recognition — is central to the
success of every fashion start-up. Here, too, uniqueness is
important. Reporters like to feature novelty, and so are more likely
to review the work of fashion's more distinctive and forward-
looking newcomers. In the United States, the fashion press is
dominated by the editors and writers of a small group of daily and
weekly newspapers and magazines, none more visible than
Women's Wear Daily (WWD) and Vogue. Designers who manage to
catch the eye of these veteran journalists get free publicity and

327
instant legitimacy from favorable reviews. Publicity opens many
doors, most critically, those of the industry's top retailers.

Fashion shows are by far the most important means of

showcasing a designer's uniqueness and projecting the company's
image. By displaying garments on attractive models in an
ambience of the designer's choosing, runway shows more clearly
convey the designer's intent than can the showroom. Fashion
shows are also theatrical events. Buyers far prefer a fashion
show's aura of glamour and excitement to the stark anonymity of
a giant trade show or the pressured environment of a designer's
showroom.

Fashion shows are also an extremely expensive means of

promoting a line of clothes. Few things are more depressing than
to attend a newcomer's show that the fashion establishment
snubs. That's why most designers who present runway shows are
already established. They can count on the media to publicize the
event and so can justify the show as a promotion expense.

The fashion cycle is regularly punctuated by the runway shows

of the world's most prominent designers, with Paris and Milan at
the pinnacle, London and New York a notch below. Every January
and July, the top designers in the world's four centers of high
fashion show their ready­to-wear collections with great fanfare.
Everyone awaits with baited breath the designs that will come
walking down the runways. Buyers pay caution fees that can
amount to thousands of dollars for the right to attend these
shows. Large retailers like Bloomingdale's and Saks Fifth Avenue
rely on the shows to plot the direction of their private labels.
Indeed, a whole industry of illustrators, photographers, and trim
and accessory manufacturers depends on the couture showings to
develop the knockoff designs that will be mass-marketed
throughout the world for the year to come. If imitation is truly the

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sincerest form of flattery, then the fashion industry clearly
adulates its star couturiers.

Fashion companies spend a great deal to convey an image to

customers. Gucci invests $10 million a year in print advertising
alone, while arch rival Louis Vuitton lays out more than $30
million. Calvin Klein is probably better known for his controversial
ads than for his clothes. The early Calvin Klein ads that featured
Brooke Shields cost the company $16 million in 1979. Not only did
the campaign help build the moribund jeans business, but it
helped to solidify Calvin Klein's reputation in youth-dominated
urban markets. In 1990, Ralph Lauren's new fragrance Safari was
launched with an advertising budget of $23 million and was
boosted again in 1993 with another $20 million campaign. In 1992,
Italian designer Giorgio Armani launched his new perfume Gia
with a marketing budget estimated at some $20 million. In
1993, the marketing campaign for Calvin Klein's Escape
fragrance was gauged at $30 million. Generating visibility and
maintaining reputation are costly propositions. Since generating
press is the sine qua non of reputation building in the industry,
designers often try to gain media attention "by association."

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Designer Halston's popularity grew exponentially when First Lady
Jackie Kennedy wore his trademark pillbox hat on national
television in the early 1960s. British designer Vivienne Westwood
gained notoriety by outfitting the punk group Sex Pistols. In the
1980s, designer Stephen Sprouse got publicity for designing the
clothes of Deborah Harry, lead singer for the new wave group
Blondie.

In fact, designers routinely lend out their clothes to celebrities.

Association with a prominent, visible, or admired personality
works like an endorsement. It conveys to potential customers an
implicit guarantee of prestige and quality; it also assures store
buyers that an order will have a good sell-through at retail.

Given the importance of getting press, the relationship

between fashion designers and reporters is fraught with tension.
Today's media darling could be tomorrow's fashion outcast.
Listen to how the notorious editor of Women's Wear Daily, John
Fairchild, viewed his reporter's role in the flagship newspaper of
Fairchild Publications, his family's business: "I had learned early
on that the world of fashion was a gossipy, theatrical,
unscrupulous, dogmatic, and opinionated business, and that to
succeed, WWD had better be alive in this alive business,
controversial in this controversial business, smart and snobby in
this smart and snobby business. As a result, it approached its
world like a tiger and not like a cat."3

Over the years, many designers have felt the tiger's claws,
among them Yves Saint Laurent. For years the fashion press
lauded the talented French designer, until one day a critique by
Fairchild provoked Saint Laurent to ban the reporter from his
subsequent fashion shows. As a result, Saint Laurent's work
languished for a time in the fashion press.

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 A similar story is told of a feud between New York designer
Geoffrey Beene and Fairchild that has unquestionably diminished
Beene's public profile. Since 1983, WWD has shunned the
designer's fashion shows, in return for which Mr. Beene has
studiously avoided advertising in the trade paper. In his book on
the fashion industry, Fairchild gives Beene only passing and
unflattering reference. In my own search, I could find only limited
coverage of Beene in the fashion press, far less so than his stature
as a leading American couturier warrants. Clearly, to build
reputation in the fashion world involves maintaining close
interpersonal ties not only with store buyers but with celebrated
reporters.

Fashion companies also build reputation indirectly through

philanthropic acts. Liz Claiborne's $2 billion fashion empire
routinely supports community arts projects and makes charitable
contributions. In 1991, the company donated $10 million to
Columbia University's Graduate School of Business. Calvin Klein
sponsored an extravagant showing of his collections in Los
Angeles in 1993. The $600,000 raised was targeted for scientific
research on AIDS. The event brought considerable publicity to the
name. Bill Blass's $10 million donation to the New York Public
Library in January 1994, put his name in gilt over the entrance to
its public catalogue room. Philanthropy begets visibility.

Ultimately, a designer's reputation reflects acquired status in

fashion's pecking order of celebrity customers, store buyers, and
media reporters. Until the late 1970s, winning the prestigious Coty
American Fashion Critics' Award for fashion designer of the year
was considered a great honor. Since its inception in 1943, the
contest had been sponsored by the cosmetics and fragrance
division of the giant pharmaceutical company Pfizer in obvious
recognition of the symbiotic link between fashion and perfume.

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 When the Coty began to lose prestige in the late 1970s, the
Council of Fashion Designers of America ( CFDA) instituted its
own annual award. Like the Coty it replaced, the CFDA helped to
crystallize a designer's emerging reputation. Past winners include
the full roster of today's top names ( Calvin Klein, Anne Klein, Bill
Blass, Oscar de la Renta), most of whom won Coty awards in the
1970s and were repeatedly recognized with CFDA awards
throughout the 1980s. If form holds, the most recent award
winners of the 1990s should be the next decade's top fashion
names. At the 1993 CFDA awards, Italian designer Giorgio Armani
was on hand to present Donna Karan with the menswear award.
Gianni Versace also came to accept the international designer
award from another celebrity, pop singer Elton John. Besides
Donna Karan, recent award winners whose names will likely stand
for fashion empires in the coming years are those of Isaac Mizrahi
and Joseph Abboud.

Table 9-2 crystallizes the reputations of fashion's leading

empires in terms of the industry's two main considerations:
styling and price.

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STAGE 3: CAPITALIZING ON REPUTATION
Once established, a designer's reputation quickly acquires
value. It's evident in the number of licensing offers designers
receive. Fashion companies appear to charge higher royalty rates
than most consumer goods companies. For simply putting its
name on items like ties or sunglasses, a fashion company earns
from 5 percent to 12 percent of sales in royalty income. Top-tier
houses like Chanel and Christian Dior are known to charge 12
percent. Designer names with less drawing power at retail charge
less. This means that licenses net some $50 million to $100
million annually for the billion dollar businesses of mega
designers like Calvin Klein and Ralph Lauren. Christian Dior's
licensed products posted a wholesale volume of $1.1 billion in
1992; royalties to Dior from those sales totaled some $65 million.
All licensed apparel products accounted for a staggering $20
billion in retail sales in the United States alone in 1990.

Older fashion houses tend to grant more licenses. Yves Saint

Laurent has 211 licenses, Christian Dior 280. In contrast, Ralph
Lauren has only 16 licenses and Calvin Klein 12; Italian designer
Gianfranco Ferre limits its licensees to 18. By far the most
promiscuous of all designers is Pierre Cardin. His name appears on
more than 840 products (from alarm clocks and telephones to
scuba suits and skis) sold in more than 100 countries. In
1992,worldwide retail sales of Cardin's licensed products
amounted to some $2 billion, and the House of Cardin collected
more than $75 million in royalties-7 percent to 10 percent on
clothing sales, and 3 percent to 5 percent on sales of other
consumer goods.4

The most lucrative of all licenses are perfumes. The U.S.

market for perfumes is estimated at close to $1 billion. Ever since
Coco Chanel introduced her now classic Chanel No. 5in 1921,
fashion designers have sought to capitalize on the link between

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clothing and fragrances. In 1991, Chanel brought out its popular
Egoiste fragrance. Calvin Klein's Obsession, introduced in the late
1980s, is now the company's most profitable product. Oscar de la
Renta has Parfums Stern. In 1990, Pierre Cardin launched its most
recent perfume, Rose Cardin. In 1993, Donna Karan added scents
to her rapidly growing empire, improving the company's
profitability and so the marketability of its future public offering
of shares.

Perhaps the most recent licensing trend is for designers to put

their names on residential buildings. In a novel partnership with
local real estate developers, French designers like Paco Rabanne,
Ted Lapidus, Guy Larroche, and Andre Courreges have created
signature buildings in Brazil. Construction is now under way for
Maison Paco Rabanne, a cluster of designer condos in Florida's
trendy Miami Beach. Can Maison Pierre Cardin be far behind?

Many fashion companies also try to capitalize on their

reputations and improve their profitability by opening up their
own retail shops in direct competition with their wholesale
customers. For instance, Yves Saint Laurent has built a network of
about 150 boutiques around the world. Christian Dior operates 35,
Chanel 41. In the early 1990s, Giorgio Armani entered retail in
force, opening a string of Emporio Armani and N X Armani
Exchange shops in major U.S. cities in one fell swoop.

Designers see many advantages to retailing their own

products. Direct interaction with consumers provides rapid
feedback about styles that sell; it also facilitates risk taking, since
designers can always place their excess inventories in their own
stores. More important, the fashion company generally favors
retailing because it reduces dependence on whimsical store
buyers. Ralph Lauren opened his flagship store in New York's
trendy Upper East Side in the late 1980s. In 1993, a new store

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opened nearby under the Polo Sport banner to capitalize on that
label's younger image.

A number of prominent designers, such as Calvin Klein, opt to

negotiate with prestige retailers like Bloomingdale's and
Bergdorf's to maintain free­standing boutiques within those
stores. The self-contained boutiques increase a designer's sense
of control. They ensure the integrity of the clothing presentation
and so protect the company's image and reputation. Many leading
designers go so far as to hire, train, and pay the sales staff in their
boutiques, much as they might if the boutiques were independent
entities. In 1995, however, the reputational gains and other
benefits expected from direct marketing through company-owned
stores led rival labels Calvin Klein, Anne Klein, and Liz Claiborne
to open flagship stores within blocks of each other on New York's
Madison Avenue.

Of the 30 or so start-up companies that I became familiar with

over five years, only a handful survive to this day. Of those, only
two have identified a viable niche, one in the design and
production of knit sweaters, the other in lower-priced menswear.
Despite continued growth over the years, both are still struggling
to get past stage 1, and have yet to capitalize on their budding
reputations with licenses.

When designers make it, however, the results are certainly

impressive. Although estimates of the personal fortunes of
successful designers are difficult to obtain and unreliable at best
(most are privately held or dispersed in interlocking
corporations), what seems clear is that celebrity status brings
considerable income and wealth. Ralph Lauren, arguably the most
successful designer in America in terms of earnings, has built a
personal fortune that was estimated at more than $700 million in
1993. The prolific Karl Lagerfeld designs for many collections,
most notably for the Chanel and Fendi labels. Each collection he

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designs reputedly pays him more than $1 million a year-a total of
$4 million from Chanel alone. In 1989,the Christian Dior label
hired Gianfranco Ferre to design its couture collection, for which
he is reportedly paid $2 million a year. Minor arithmetic leads
most analysts to "guestimate" the personal incomes of top-
ranked designers at anywhere from $5 million to $100 million a
year. Not a bad return on reputation.

THE DIFFICULTIES OF MAINTAINING A LABEL'S

REPUTATION
If establishing a label is difficult, maintaining it — which
comes down to maintaining its reputation — can be even harder.
Designer label companies are regularly plagued by problems of
growth and succession. Transitions from one stage of
development to another often more closely resemble revolutions
than expansions. Diversification from menswear to women's
wear, from a U.S. market to an international market, or from
clothing to accessories often tax a company's ability to adapt.
Following are some of the problems a company may face in the
fickle and volatile world of fashion.

CHANGE OF OWNERSHIP
Of all the top fashion companies listed in Table 9-1, all but two
are still run by their founders. Insofar as the reputations of most
such companies rest squarely on the shoulders of their individual
creators, constituents find it difficult to accept replacements.
Those who are brought in fail to convince former customers to
remain loyal, and as the vision that animated the early years
dissipates, the business loses a sense of identity. Take Liz
Claiborne, one of the most successful fashion empires created
since the 1970s. The company went public in 1986 and built a
billion­ dollar franchise in no time. Despite the company's strong

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management structure, however, succession proved difficult to
implement when founder Liz Claiborne and her husband elected to
retire in the early 1990s. The company's direction has been
somewhat uncertain since then, and its reputational capital has
eroded significantly.

All too often it is death that proves insurmountable. Most top

companies take out "key man insurance" on their designers.
While that can buy some time, it seldom proves sufficient. When
American menswear designer Perry Ellis died in 1986, the
company collected a $5 million benefit; it had not identified a
successor. The company struggled for a time under the leadership
of Ellis's business partner. When he too died a year later, a
succession of designers stepped in, until the company hired
newcomer Mark Jacobs. Despite the initial success of the Jacobs
collection, however, it proved difficult to sustain momentum; the
company's design business is now entirely run by committee, and
its reputation has suffered.

Throughout the 1980s, newcomer Willi Smith built a

successful fashion business based on affordable but innovative
styling, carefully targeted to urban youth. When the designer died
in the late 1980s, the company floundered despite solid financial
backing from prestigious retailers like Barney's in New York.
Today, little is left of the Willi Smith label, and the likelihood of its
return declines daily as its once valuable reputational capital
evaporates.

The death in September 1990 of Halston, who had been wildly

successful in the 1970s, proved to be the final blow in a series that
severely damaged the reputation of the label, as will be explained
later in the chapter.

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COMPETITION FROM KNOCKOFFS AND
COUNTERFEITS
If the engine of fashion is uniqueness and innovation, the fuel
that propels the industry along is imitation. Every season, it’s the
job of the top designers in the fashion capitals to interpret
fashion's trends; everyone else's job is to follow. That’s why an
underground community of fashion "spies" scours designers'
backrooms, chasing down leads that they might sell to faraway
manufacturers eager to get an early start on next season's styles.

To protect themselves, designers operate guardedly and under

a veil of secrecy. Models and photographers with early access to
next season's designs swear their undying allegiance and, fearful
of reprisal, keep their word. Attendance at the top fashion shows is
by invitation only. Rival designers and copycat manufacturers are
not welcome.

After the shows, once a designer's new collection has garnered

the free worldwide publicity necessary to secure next season's
orders from retailers, it's a free-for-all. Sketches and
photographs are faxed to copyists, who quickly translate the
trends defined by the major fashion houses into affordable
imitations that will be sold around the world. Fashion's brightest
stars propel industry-wide knockoffs.

The knockoff is an understood and, in fact, expected

phenomenon. Imitation serves to strengthen the reputation of the
fashion centers. Unfortunately, in recent years, along with
knockoffs have come more threatening counterfeits. Sold at far
lower prices, these imitations appropriate not only the styles but
also the labels and logos of the originals. In the early 1980s,
leather-goods maker Louis Vuitton lost much of its once exclusive
cachet because of widespread copying of the company's logo all
around the world. A few years ago, I watched street vendors

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aggressively hawk counterfeit Gucci watches and accessories right
out­ side the company's Fifth Avenue store. Though superficially
similar, counterfeits are generally of far lesser quality than the
company's branded goods. When consumers mistake them for
originals, they seriously depreciate the reputational capital of
fashion's biggest names. To the dismay of fashion's movers and
shakers, piracy has proven resilient.

In the early 1980s, British designer Katherine Hamnett created

a line of slogan T-shirts. The popularity of the T-shirts and the
ease with which they could be copied led to worldwide piracy of

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her designs. More than 30 unlicensed manufacturers from Brazil
to Hong Kong turned out counterfeits of her line. They proved
difficult to prosecute, however, because of U.S. laws of public
domain that do not protect goods and ideas that have entered the
public consciousness. To prosecute successfully, the designer
must prove direct copying of dimensions and proportions from an
actual sample, not just from a photograph-a difficult prospect at
best.5

LOSS OF CONTROL
A name loses its sparkle when the products that bear it are
either sold in the "wrong" retail outlets or made too widely
available. Both signal a loss of prestige and reputation for the
designer name. The company has lost control.

Perhaps the most devastating loss of control in the recent

history of the industry befell Halston, whose reputation suffered
from being licensed to an incompatible distribution outlet.

In the early 1970s, the American designer was fashion's

brightest star. The darling of the press, he surrounded himself
with an entourage of celebrities that included choreographer
Martha Graham, entertainer Liza Minelli, and actresses Candice
Bergen and Raquel Welch. In the mid-1970s, to capitalize on his
snob appeal and enter larger markets, Halston sold the rights to
his name to the Norton Simon Industries in exchange for a
lucrative employment contract and guaranteed royalties. By the
early 1980s, Halston products generated some $90 million a year,
$75 million of which was from fragrances.

In 1983, interested in further expanding the Halston business,

Norton Simon persuaded Halston to go along with licensing his
name to mass retailer J. C. Penney. The deal was attractive.
Spanning women's sportswear, menswear, home furnishings, and

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children's wear, the six-year plan projected sales at a staggering
$1 billion, with a guarantee of an estimated $16 million to Halston
Enterprises, on top of which Halston himself would be paid a $1.25
million annual salary, with increasing royalties. 6 The deal went
through.

The backlash was terrible. No sooner did prestige retailer

Bergdorf Goodman hear of the Penney deal than it dropped
Halston's clothing line and fragrance completely. Others quickly
followed suit. By the time the Halston III line was released in June
1983 throughout the Penney empire, the designer was widely
considered to have sold out.

Tremendous success greeted the mass-market-priced line.

Nonetheless, Halston's prestige would drop another notch when
in September 1983 Norton Simon Industries-Halston's parent
company-was bought by the $6 billion conglomerate Esmark.
Without warning, Halston Enterprises found itself fused with two
other Norton Simon units-Max Factor and McCall's Patterns-into
Esmark's International Playtex division. In terms of prestige, that
was the ultimate blow. As Halston's biographer put it, "Suddenly
Halston had become part of a bra and girdle company. "7 For
Halston, things would never be the same. Playtex executives were
horrified at the casual and informal character of Halston
Enterprises. They struggled to impose corporate controls but
succeeded only in alienating the designer. By 1984, Halston had
seemingly lost all interest in his operation, and the Penney line
began to falter at retail.

It would get worse. This was the era of the corporate takeover,
and in 1984, Esmark and its Playtex unit were themselves bought
by food conglomerate Beatrice. Halston Enterprises was now an
inconsequential part of a huge empire; the company's identity was
threatened, its reputation in tatters. The unit would be sold again,
this time to the cosmetics giant Revlon. Following the designer's

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death in 1990, Revlon shut down his famous offices in New York's
prestigious Olympic Tower. Halston's reputation has drifted into
corporate oblivion.

The reputations of other fashion houses have also faltered

owing to placement in unlikely outlets. In the 1970s and 1980s,
France's House of Chanel lost its clout from seeing its licensed
products turn up in discount outlets. Or consider prominent
licensee Cosmair, the maker of fragrances under the names of
Ralph Lauren, Giorgio Armani, Lancome, and L'Oreal, among
others. In 1993, Cosmair launched an aggressive effort to keep its
well-known brand names from getting diverted to mass retailers.
A key problem fashion companies face is the difficulty of tracking
down distributors who sell their products to unauthorized, less
prestigious outlets.

Many prominent fashion labels lose reputation from

overexposure. In the late 1980s, Gucci had either scrawled its
name or put its well­known logo on more than 22,000 items. In
1989, overexposure had so tarnished the Gucci name that the
company's U.S. sales fell by 25 percent to $120 million. It didn't
help the company that its owners were embroiled in highly public
disputes for control, as well as facing charges of tax evasion by the
IRS that led to heavy fines. The combination of excessive
licensing, counterfeits, and overexposure seriously depreciated
the Gucci name.

Then there's French designer Pierre Cardin, with his 840

licenses and $1.2 billion in retail sales a year. As one observer
wryly observed: "His current reputation rests more on the variety
of his endeavors: on the theatrical, musical, and artistic events he
sponsors at his theatre L'Espace Cardin, as well as on his
undaunted efforts to dress (or somehow affect) every human
being in the world. One wonders what the space-age couturier will
do when other planets are made accessible to him."8 By putting his

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name on everything in sight, the designer's reputation has
undoubtedly suffered, forcing him into businesses ever more
remote from the heart of fashion. Having lost significant
credibility as a leading designer, Cardin's attempts to return to
fashion in the last few years have proven difficult.

Some companies are too quick to lose control of their name

entirely by selling it to another. This holds for Halston as well as
for Christian Dior. Dior's fragrances are wholly owned by the
French luxury goods conglomerate LVMH (Louis Vuitton-Moet
Hennessy), from which Dior collects no royalties and, more
important, over which it has no control. Regaining control is key,
as Gianni Versace showed when in 1988 he paid $12 million to buy
back the rights to a fragrance that bore his name.

To avoid depreciating a fashion company's reputational

capital, its managers must retain control of the name. It proves
vital to limit the number of licensees, to exert strict supervision
over the products that carry the name, and to pursue counterfeits
aggressively. Internally, it requires building a credible process of
leadership succession that shores up the viability of the name and
secures the company's reputation with its outside publics.

THE COMEBACK TRAIL

Although names can be tarnished, they can also be brought
back. A surprising number of fashion companies have
demonstrated the resilience of their names in recent years, none
more so than Chanel.

The House of Chanel is one of France's oldest and most

prestigious fashion houses. Begun in 1914 by Gabrielle "Coco"
Chanel, the couture operation built a reputation for emancipating
women and dressing the well-to-do. In 1921, Chanel pioneered the
link between fashion and cosmetics by launching Chanel No.5, the

343
perfume that became synonymous with glamor and that remains
an enduring best-seller. Despite the charges of German
collaboration that were leveled at the designer and her company
during World War II, consumers continued to snap up Chanel
products, and its reputation soared.

Following Ms. Chanel's death in 1971, however, creative

control of the house passed to lesser-known designers, and its
reputation went into a tailspin. Despite efforts to expand through
product-line extensions in both cosmetics and ready-to-wear,
Chanel lost its avant-garde reputation and became widely known
for producing dowdy clothing for society matrons. Sales
languished. By the late 1970s, Chanel products had become widely
available in discount outlets. Counterfeit products proliferated and
served to diminish the exclusivity of the company's imprint. In the
early 1980s, the Swiss family Wertheimer, the inheritors of the
Chanel name, plotted a course to revive the house's reputation.
They recognized that Chanel, like all fashion companies, relies on
its name to sell a large number of products at retail. Under Alain
Wertheimer's leadership, Chanel executives opted for an
aggressive reputation-building strategy. They decided to cut the
number of distribution outlets, raise prices, and open more
company-owned stores. At the same time, the company initiated
aggressive litigation against low-priced knockoffs and hired a
legion of lobbyists, lawyers, and detectives to protect it against
counterfeiting. The company also launched an intensive
advertising and public relations campaign. Top models were
retained to represent and promote the company's cosmetics, and
the high-profile designer Karl Lagerfeld was hired to revitalize the
clothing collections.

By 1986, the House of Chanel had once again become the

darling of the fashion press and returned to widespread popularity
and profitability. With its reputation resuscitated, the company
saw a phenomenal increase in sales not only of clothing and

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cosmetics but of related categories like leather goods and
accessories.

A number of other flagging fashion reputations have been

revived in recent years. The strategies these companies pursued to
rebuild their eroded franchises suggest some revealing lessons.

RENTING REPUTATION
To offset the loss of a founder from either disinterest or death,
many fashion houses turn to other established designers and
"rent" their reputations. Just as Chanel brought in Karl Lagerfeld
in 1983 to revive its fashion appeal, so did the Dior empire call on
Italy's highly regarded Gianfranco Ferre in 1989 to design its
couture collection and bring out its first ready-to-wear line. The
relationship worked. Ferre added luster to Dior's faded label, and
critics and customers once again flocked to the company's
products. The revival enabled Dior to go public in 1991, capitalized
at some $2.33 billion.

The languishing Lanvin label tried the same strategy by hiring

avant-garde designer Claude Montana to revive its fashion-
appeal. As one reporter put it: "Its banker/chairman, Leon
Bressler, bet big — some say bet the company — on Claude
Montana's ability to deliver a riveting couture performance that
would win the house the attention and excitement it needed to
galvanize a new image and a new future."9 Unfortunately, it didn't
work. Lacking a coherent strategy to rebuild — not only couture
but the all-important licensing and ready-to-wear businesses —
Lanvin's fortunes continued to sag despite Montana's
involvement. So much so that in 1990 Bressler sold Lanvin to a
joint venture of the Vuitton family and the L'Oreal Group for $90
million. Their notion? To rebuild Lanvin as the flagship of a new
luxury empire.

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 In 1990, the design house of Pierre Balmain was also in serious
trouble. Lacking cash, the company tried to lower costs by pulling
out of couture entirely. Instead, it invested heavily in advertising
its fragrances and refurbishing its flagship store. The strategy
failed. Faced with declining sales and a faltering image, in early
1991 the company reversed itself and announced its return to
couture. Within months, a change of ownership was in the works
as banks called in their loans against the company.

Under new leadership, Balmain is now the latest couture house

to try to rent an established designer name. In February 1993, the
company hired U.S. designer Oscar de la Renta to revitalize its
business. As Mr. de la Renta put it, "couture is still the best way to
create and sustain an image"10-and the best way to invigorate the
money-making machine of ready-to-wear clothing and the
licenses that come from it.

REVIVING IMAGE
Advertising can help to polish up a tarnished reputation:
Christian Dior boosted advertising in 1992 to $20 million, and
Balmain did much the same by throwing some $7 million at the
marketplace.

Like Balmain and Dior, Gucci's heavily tarnished reputation in

the late 1980s was cause for alarm. Gucci's ad campaign of $10
million a year couldn't seem to overcome the company's declining
panache. Gucci's chairman Maurizio Guzzi realized that it would
require more than advertising to stop the slide and reverse track.
Unlike Balmain, Lanvin, and Dior, Gucci elected to bring in not a
well-known designer but a top merchandiser. In 1989 the
company chartered Dawn Mello, the former president of top
retailer Bergdorf Goodman, to restore the Gucci name to the
prestigious position it had occupied from 1950 to 1980.

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 The Gucci strategy was straight forward:

S. redesign the product line;

T. pick a new logo;

U. slash the number of items carrying the label;

V. buy back licenses, including perfumes, watches, and

eyewear; and
W. cut back points of sale.

In 1989, the number of Gucci products dropped from 10,000 to

5,000. In 1990, the old double G logo that had appeared on
thousands of counterfeit products was dropped in favor of a new
logo, a blazing sun. In 1991, the company launched its first-ever
catalog in the United States and Italy.

A key component of any attempt to revise image is generating

favorable press. Gucci got it in spades. Since 1991, the fashion
world has been busily proclaiming Gucci's rebirth. 11 Besides
receiving positive press from reporters, designers like Donna
Karan, Christian Lacroix, and Gianni Versace are frequently seen
sporting Gucci products, as are celebrity entertainers like Warren
Beatty, Candice Bergen, and Sigourney Weaver. Gucci became
"hip" again, and its reputation and fortunes are rising.

LIMITING DISTRIBUTION
One vital component of Gucci's strategy was reducing
distribution. Whereas in 1985 Gucci products were available in
more than 2,500 retail outlets, by 1991 the company had pulled
back to 300, of which 150 were company-owned stores and
franchises. A corner piece of Chanel's rebirth was its decision to
showcase the company's products only in its 41 Chanel boutiques
around the world. Christian Dior similarly reduced its licenses

347
from 250 to 200 to improve quality and consistency. (In 1990, Dior
also opened its first two boutiques in the United States, one in
Beverly Hills and one in New York.)

Lanvin appears headed in the same direction. Backed by two

owners with deep pockets, L'Oreal and Louis Vuitton, Lanvin is
pursuing a long­ term strategy of reclaiming control over
distribution and manufacturing to improve quality. Since 1990, it
has bought back or terminated all of its former licenses outside of
Japan at a cost of over $54 million. The company has also closed
its two costly New York stores. As one former Lanvin executive put
it: "Lanvin's policy is to create a vertically integrated company,
controlling the design, manufacture, distribution, and retailing
through fully owned stores or franchises. Everyone dreams of
doing that, but only Lanvin has that sort of money."12 Lanvin is
taking the long way, recognizing that it takes time to restore a
faded reputation.

FASHION'S VICTIMS
Joanna Mastroianni designs evening wear on Manhattan's
prestigious Seventh Avenue. She started out with $100,000 in
1990, determined to work only with expensive fabrics to create the
most elegant dresses she could conceive. At the beginning, she
recalls, "I used to call store buyers 20 and 30 times, and they'd
never call back." A little luck got her high­priced clothes first into
Bergdorf Goodman and then into prominent specialty retailer
Martha's International. She never looked back. By 1993, sales had
topped $1 million and she had parlayed her first sales into a
network of some 40 other exclusive stores nationwide. Company
buyers and private customers now regularly come to her — she's
one of the lucky ones.

In contrast, consider the more common experience of

newcomer Sarah Philips. At Bill Clinton's inaugural ball in 1992,

348
First Lady Hilary Clinton wore a dress created by the unknown
New York designer. The press had a field day interviewing Philips,
heralding the rise of a new fashion star. Despite television
interviews and considerable media hoopla, however, Philips has
since struggled to finance and produce her subsequent collections
and has largely disappeared from view-another of fashion's
victims.

To outsiders, fashion is at its best a world of beauty and

fantasy, chock full of fun, fame, and fortune; at its worst it's a
frivolous enterprise, replete with scheming, artifice, and
mendacity. To fashion's insiders, it's both. Success requires more
than a combination of skill and hoopla-it requires luck. Enduring
reputations are conferred on only a few designer names. The
winners are those savvy enough to have both identified and
exploited a unique look and wise enough to have judiciously
managed the name associated with that look. To them go the
spoils of victory — fame and fortune.

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350
CHAPTER 10:
THE MBA ACADEMIES
UNDER SIEGE
We know what we are,
but know not what we may be.

William Shakespeare

A
PPAREL MAKERS are not the only ones to depend heavily
on their reputations to compete for customers. In the
service sector, intangibles like reputation are even larger
contributors to a company's economic performance. Businesses
that rely on people skills, information, know­how, and other
"credence goods" — companies involved in consulting,
advertising, law, software development, and accounting —
depend heavily on their reputations to attract customers
and investors.

It's also true of colleges and universities, a fact that has

perhaps nowhere become more apparent than in the scrambling
for reputational standing among the MBA academies over the last
decade or so. This chapter describes the sudden turmoil that beset
leading centers for management training in the United States
following the publication of reputational rankings by the popular
magazines Business Week and U.S. News & World Report in the late
1980s. Similar reactions can be anticipated from companies in any
industry where performance is measured principally in
reputational terms.

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NAME THAT BUILDING
On an overcast Friday in April 1993, a group of New York City
dignitaries gathered on Gould Plaza, in the heart of New York
University's campus on Washington Square. Their purpose? To
join in dedicating the university's latest addition to Manhattan
real estate: the Stern School's Management Education Center.
Named for the business school's newest benefactor —
entrepreneur Leonard N. Stern, chairman of the Hartz Group —
the building capped a massive campaign to secure a place for the
Stern School among America's top business schools. The state-of-
the­art building aptly symbolizes the reputation-building efforts
of business schools now under way on college campuses across the
country.

The 1960s, 1970s, and early 1980s were heady years for U.S.
business schools. Bullish deans invested heavily in attracting
cutting-edge faculty to boost the academic reputations of their
programs within the university and to convince corporations of
their legitimacy as training centers for managers. Flush with rapid
postwar growth, large companies turned en masse to business
schools for skilled personnel with which to staff their expanding
empires. In short order, the master of business administration
grew from its humble origins as a variety of vocational training to
undisputed status as a passport to career success in corporate
America. Students enrolled in droves, abandoning liberal arts and
engineering programs for the more lucrative opportunities an
MBA could provide. And the MBA academies grew-not only in
their fund-raising muscle and public profile but also in their
power and status on the university campus, quickly gaining
ground on the older professional schools of law and medicine.

In the mid-1980s, the tide turned. A surge of rivalry from

Japan caught American companies by surprise, driving down
profitability rates. Graduates with hard-earned MBAs found

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themselves blamed for the downfall of American business. Critics
blamed the declining competitiveness of U.S. companies in global
markets on the short-run thinking of corporate managers, on
their rash avoidance of long-term investments in technological
innovation, product development, and human capital. It was not
long before the short-run orientation of companies was traced to
inadequate management education and ascribed to the narrow
training provided by the MBA academies — the very same schools
that had enthusiastically claimed responsibility for credentialing
those arrogant managers. By decade’s end, many were those who
questioned the merits of pursuing an MBA, swayed as they were by
critics who argued persuasively that the degree was both too
narrow in focus and too distant from operations.

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 Demographics didn't help matters any. By the late 1980s and
early 1990s, business schools found themselves threatened by a
shrinking pool of applicants for MBA training. The shrinking
numbers had been predicted for some time. They reflected the
bulge of the baby boom that had caused a boom-bust cycle in
every sector of society as it pushed its way through elementary
school, high school, and college from the 1950s to the 1980s. As
boomers moved into middle age, they left a vacuum that spelled
declining enrollments and increasing competition among schools
for students.

If dissatisfaction with the MBA was growing rampant in

companies and among alumni, it did not immediately command
the attention of most business schools. After all, educational
institutions are notorious for insulating themselves. For years
administrators and faculty asserted the greater wisdom of a
research-based view of reputation building in business schools. It
took unexpected scrutiny by the business media in the late 1980s
to bring the issues to the forefront, and the coup de grace was
probably delivered by Business Week in its cover story of November
1988. In that issue, the magazine reported on a detailed survey
that sought to rate the MBA academies. The results took everyone
by surprise. In the minds of the two key constituencies surveyed-
recent graduates and corporate recruiters — Harvard was
unexpectedly rated not first but second, and the Midwest's
Northwestern claimed the top spot. Championed by vocal and
loyal alumni, tiny Dartmouth came in a resounding third, while —
surprise — the perennially prominent Wharton and Chicago both
rated far lower.

The rankings fell on the MBA schools like a ton of bricks. As it

turned out, this was the first time anyone had bothered to ask the
schools' clients what they thought of their educational experience.
Prior efforts at assessing business school programs had always
relied either on the opinions of the deans that ran the programs or

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on measures of the prestige of the school's faculty. Not
surprisingly, those ratings had invariably weighted the academic
quality of the school rather than its teaching, its curriculum, or
the value of its graduates to the school's clients in the corporate
sector.

Nothing might have happened had not Business Week's

reputational rankings proved so enormously informative to the
public. Not only did the magazine itself sell out, but other
newspapers and periodicals around the world reported the
findings. Widespread dissemination of the rankings had direct
economic implications. They influenced the following year's
applicants to MBA programs. And the once genteel world of
graduate education was suddenly thrown in disarray. Like
American industry in general, the MBA academies suddenly felt
pressured to answer to the demands of their clients, and top
schools, historically committed to the "publish or perish" mindset
that championed research over teaching, began to recognize that
clients must come first. Those who enroll in MBA programs select
a school not merely on the quality of its faculty's research but on
the school's overall reputational standing-a far more complex
halo that incorporates teaching quality along with other measures
of the school's value.

The call to action resonated through the corridors of the MBA

academies. Attracting applicants to costly MBA programs would
require meeting the criticisms head on, and so throughout the
1980s leading U.S. business schools launched parallel strategic
programs designed to enhance their reputations. Addressing
corporate and alumni concerns required a radical attack on the
core character of the business school: Deans were goaded not only
to invest in new facilities, in fund-raising, and in public relations
but also to initiate radical internal changes in course content,
teaching style, faculty reward systems, and promotion processes.
A revolution was under way — one characterized by more

355
balanced attention to both research and teaching; growing
dependence on external fund-raising and image management;
and more intense com­ petition among schools for status and
reputation.

THE MBA ACADEMIES

In 1994, some 680 American institutions offered MBA degrees,
up from 389 in 1974. Of these, fewer than a third met the
minimum standards set by the American Assembly of Collegiate
Schools of Business. The vast majority of students were enrolled in
the 220 or so accredited schools.

Throughout the 1960s and 1970s, management education was

a growth industry for colleges and universities that rushed to
capitalize on the rich harvest of MBA tuition dollars. Today, more
than 220,000 students are enrolled in MBA programs. About
75,000 students are awarded MBAs annually, a 30 percent jump
from 1980, a threefold rise from 1970, and a fifteen fold increase
from 1960, when only 4,800 got the degree. Since 1950, more than
500,000 students have earned an MBA.

Although a quintessentially American industry, management

education has developed an international presence as well. For
many years, the only MBA programs offered abroad were direct
clones exported by Harvard's Business School to institutes like
INSEAD in Fontainebleau, France, and IMEDE in Lausanne,
Switzerland. They have since spread to the four corners of the
globe, with MBAs being offered in Japan, Singapore, South Korea,
Costa Rica, Brazil, Argentina, and the Philip­ pines. Most recently,
Europe's finest private universities have recognized the potential
gold mine from management education, and prestigious names
like the London School of Economics, Oxford, and Cambridge have
thrown their reputations at marketing MBA programs. For
simplicity's sake, I focus here only on the U.S. programs, although

356
many of the ideas we discuss are relevant to the international
schools as well.

Table 10-1 lists the largest private business schools in the

United States and their MBA enrollments. 1 The heavy hitters in
management education are clearly the schools affiliated with the
nation's oldest universities, with institutions like Harvard,
Wharton (Penn), Columbia, Chicago, and NYU accounting for 22
percent of all MBAs. Business schools obviously benefit from the
visibility that a university affiliation provides. Besides the MBA,
many of the schools also offer undergraduate degrees in business.

In the mid-1 970s, Northwestern and Duke chose to abandon

their fledgling undergraduate business programs to concentrate
on the more lucrative MBA market. The decision proved salutary.

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Both schools rode the MBA boom to prominence in the 1980s. In
fact, of the schools listed in table 10-1, only two have stuck with
their university's core base of undergraduates-Wharton and NYU.
In both schools, the undergraduate programs are the lifeblood of
the institution. They justify a much larger faculty body and so
increase the school's public visibility. Since most of the other top
schools specialize exclusively in graduate education, they tend to
boast far smaller faculties, a factor that has a significant influence
on their identities.

We can identify two contrasting model s of business education:

a scholastic model and a practitioner model. The two models
anchor opposite ends of a continuum, and all of the MBA
academies have traditionally leaned more heavily to one extreme
or the other. More scholarly programs emphasize the intellectual
grounding of their instruction, while practitioner-sensitive
programs place higher value on the pragmatic "relevance" of their
curriculum.

A school's relative position on the educational continuum

affects its activities in three principal areas: (1) the types of faculty
hired and promoted, (2) the composition of the curriculum and
teaching pedagogy that the faculty rely on, and (3) the kinds of
relationships the school maintains with practitioners. Eventually,
the model of choice determines the principal character traits of
the school that faculty and students come to experience. It also
shapes the reputation that schools develop with their key
constituencies — especially corporate recruiters and alumni.
Figure 10-1 summarizes the typical features of the two opposing
models.

358
THE SCHOLASTIC MODEL
MBA academies that lean more heavily toward the scholastic
model favor research-oriented faculty, social scientists whose
primary identification is with developing knowledge rather than
imparting it. By recruiting social scientists versed in cutting-edge
analytical techniques, these schools develop an internal culture
dominated by the publish-or-perish mindset typical of
mainstream university departments. Not coincidentally, these
professionally oriented, cosmopolitan faculty members identify
more closely with peers at other institutions than with the
cultures of their own schools. They participate with greater
interest in a school's doctoral program since that's where they get
to discuss scientific ideas and find junior assistants with whom to
draft research articles. The result? More limited contact with MBA
students and practitioners, whose presence newly recruited
faculty generally regard as, at best, incidental to their core
scientific pursuits. The business schools of the University of
Chicago and Stanford, for instance, owe their reputations

359
principally to the academic content of their programs and the kind
of school culture that it implies.

THE PRACTITIONER MODEL

At the opposite end of the continuum from the scholastic
model stands the practitioner model, with its main focus on the
flagship MBA program.

More practitioner-styled schools hire and promote faculty

who show skill and interest in creating and conveying usable
knowledge to students. Given their pragmatic interests, faculty
often build strong advisory and research ties to the corporate
sector and identify in more limited ways with the scientific
concerns of more academic programs. The business schools of
Harvard and the University of Virginia have both built strong
reputations in the corporate world for their leading-edge,
practitioner­oriented programs — their proven ability to prepare
general managers. In turn, however, both schools have suffered
from a lower standing in the academic community. By most
measures, their faculties produce less research and have less
impact on the development of knowledge about business than
their more scholarly counterparts.

FROM PRACTICE TO SCHOLARSHIP

From the founding of the nation's first business school, the
Wharton School, in 1881 and lasting well into the 195Os, U.S.
business schools were run pretty much on the practitioner model
of established professional schools. Just as on university campuses
the faculties of the law and medical schools prepared students to
practice law and medicine, so were business school faculties
expected to train people to manage businesses. Throughout the
early years, much of the instruction was vocational and

360
descriptive rather than analytical, aimed at preparing students for
industry jobs rather than general management.

As corporations expanded throughout the 1950s to take

advantage of the postwar surge in economic growth, critics called
for business schools to create and disseminate more scientifically
grounded knowledge about corporate life. Reports sponsored by
the Carnegie and Ford Foundations recommended improving the
quality of business education by building stronger links to
academic disciplines like economics, mathematics, and behavioral
science. Rather than simply convey information to students, the
faculty should extend knowledge through active research and
publication and engage students in a process of analytic reflection
and problem solving that would stimulate lifelong learning about
the world of business.

The reports were highly influential. Spurred by Ford and

Carnegie Foundation grants, the major business schools sought to
build credibility throughout the 1960s and 1970s by recruiting ever
more highly credentialed faculty members from mainstream
university departments such as economics, psychology, and
sociology. In doing so, business schools departed radically from
the models pioneered by the law schools and medical schools,
which had built prestige on the practitioner model. The MBA
academies sought to model themselves after traditional academic
departments, embracing the scholastic, scientific model that
favored research over teaching, the ivory tower over the factory
floor.

BUILDING ACADEMIC REPUTATION

To develop credibility as scientific research institutions,
throughout the 1970s business school deans hired legions of
younger faculty that were skilled at carrying out methodologically
sophisticated research programs. Working under the publish-or-

361
perish mandate, these academics released their often ponderous
research studies to small-circulation, peer-read, peer-reviewed
journals and encountered little pressure to interpret their findings
for the seemingly forgotten practitioner.

The character of the leading MBA academies was heavily

shaped by that total commitment to research. Departments sought
to buffer junior faculty from institutional pressures that could
divert attention from scientific study and analysis. For promotion
purposes-and especially for the all-important tenure decision
that young professors normally face by their sixth year in
residence — teaching had to be adequate, but merely that.
Published journal articles were expected to demonstrate the
candidate's facility in carrying out complex research. Everyone
assumed that success in publishing obscure academic notes would
have greater impact on the reputation of the school than
publishing practitioner­styled articles.

To build scholarly credentials, most business schools funded

costly doctoral programs that were intended to serve as incubators
of ideas. From a managerial standpoint, however, there can be
little doubt that doctoral students are costly perks that principally
benefit research faculty. Unlike MBA students, who pay (or whose
companies pay) their way, most of the top schools write off tuition
fees and disburse living expenses for their highly touted doctoral
students. Under the scholastic model, however, doctoral programs
were considered investments in knowledge creation. Among top
20 schools, only Dartmouth's Tuck School did not offer a Ph.D., for
which it was initially castigated. Much later, critics would point
approvingly to Tuck for its generalist orientation and chastise
deans for not recognizing that doctoral programs are a diversion
of both money and faculty time from practitioners' concern with
"relevance."

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 In those heady days of the scholastic model, schools measured
faculty performance by adding up the numbers: How many
conference presentations had been led ? How many books had
been written? How many doctoral dissertations had been
sponsored ? How many awards did faculty research bring in? How
many funded grants did the faculty hold? And, bottom line, how
many prestigious journal articles had the faculty published?
Numbers like these enabled comparisons of schools and
departments according to faculty prominence: their productivity,
visibility, and stature, in other words, their academic reputations.

One study of the research productivity of the MBA academies

counted the number of articles published by faculty members
between 1979 and 1985 in the top 18 academic journals devoted to
business topics. A total of 125 different schools contributed
articles to these journals. Fewer than 20 schools, however,
supplied the bulk of those articles. Table 10-2 lists the most
prominent schools and the ran kings obtained from counting
either the total number of articles published by their faculty or the
total number of published pages of research. The two rankings
differ, largely because the faculty in those schools published
articles of differing length. For instance, although NYU's business
school published more articles than either Wharton or Chicago's
business school, the articles written by NYU's faculty tended to be
shorter. Note how highly rated NYU's business school is on this
particular measure. I'll come back to this point later.

Another measure of research excellence that had its fans in the

late 1980s was derived from looking not at the quantity of articles
published by faculty members, but at their impact on the research
ideas of other scholars in the field. In recognition of Einstein's
dictum that we stand on the shoulders of giants, authors of
academic articles always make explicit reference to the papers of
scientists who influenced them. By compiling these "citations," it
occurred to many researchers that one could assess the influence a

363
particular individual had on a field and, by extension, the
contribution that any faculty group had made to knowledge. 2

At one point, I gathered data on the number of citations

received between 1966 and 1990 by a subset of the international
community of faculty members who study problems in the
management of organizations. Figure 10-2 presents a graph of
some of those data. It demonstrates the typically skewed shape of
the reputational plot that results: Whether artists, musicians, or
opera singers, very few people always attract the bulk of the
attention-they are the superstars. And so it is in scholarly
research. Few business school faculty members achieve celebrity
status; most toil for a lifetime only to remain in relative obscurity.3

364
 Because extraordinary scholarly success is so rare, business
schools tend to build reputation in one of two principal ways: (1)
by investing in junior faculty in the hope of producing a "star"
(star making ) or by waiting patiently for researchers at other
schools to become "stars" and then recruiting them (star buying).
Throughout the 1980s, debate raged among faculties and deans
about the relative merits of star making and star buying. Some
favored the far less certain but seemingly more supportive and
humane path of internal development and promotion; others
endorsed the safer strategy of building reputation by buying
established stars.

By the late 1980s, it wouldn't matter much. The scholastic

model was unraveling as nagging questions of relevance were
posed ever more insistently by students, alumni, and recruiters.
The pendulum had come full swing. As they had been in the early
1950s, the citadels of management education were again under
siege-this time by the all-important but forgotten practitioner.

365
366
BUSINESS SCHOOLS BESIEGED
The challenge to which the MBA academies are still actively
responding probably originated with a Harvard Business Review
article of 1980 entitled "Managing Our Way to Economic Decline"
(not coincidentally, penned by two Harvard professors). In it, the
authors ascribed the rapidly declining competitiveness of
American companies against Japanese and German rivals to the
preference our managers displayed: "for (1) analytic detachment
rather than the insight that comes from 'hands-on' experience
and (2) short-term cost reduction rather than long-term
development of technological competitiveness."4

In those transitional years for the U.S. economy, their

comments found a receptive audience. Orders for reprints of the
article set a record at the review, lending credence to the authors'
conclusions. So much so that, according to Earl Cheit, then dean of
Berkeley's well-regarded business school, "within a year, there
was widespread support for the conclusion that the nation's
competitive problems were in large part attributable to
managerial problems, which could in turn be traced to business
education."5 The criticisms boiled down to this: that business
schools had become too academic and removed from the day-to-
day problems of practitioners, had retreated too far into the ivory
tower to be relevant to the concerns of the factory floor. The
pendulum had gone full swing since the pre-1960s era when B-
schools had been accused of being too vocationally oriented and
unscientific in their teachings.

Despite these grumblings, however, few business schools felt

any real sense of urgency in the early 1980s. After all, the economy
was booming, graduate salaries were higher than they had ever
been, and MBA enrollments were up. Why rock the boat? In fact,
not until November 1988 did deans feel their blood pressure rise.
That's when Business Week published its first ranking of business

367
schools based on actual surveys of some 3,000 alumni and 265
corporate recruiters.

The results startled the MBA academies. It wasn't just that the
practitioners' rankings did not match the now standard rankings
by academic reputation, it was that practitioner feedback was
raising a whole new set of concerns that business schools had long
ignored. By juxtaposing schools starkly on the basis of client
assessments, the rankings forced faculty and administrators to
realize that, unlike most other academic departments, B-schools
would henceforth be competing not for legitimacy in academic
circles but for the approval of students and executives. Table 10-3
summarizes the rankings of the top 20 business schools first
published by Business Week in 1988 and then enlarged and
replicated in 1990, 1992, and 1994. Most surprising in these
rankings was the strong showing of midwestern schools over
traditional bastions of excellence from both East and West. In an
impressive show of reputation building, Northwestern had
seemingly come out of nowhere to overtake the acclaimed Harvard
Business School. In the 1992 rankings, Chicago had risen to
number 2, while Michigan eclipsed top Ivy League contenders like
Stanford and Columbia. By 1994, Wharton was claiming the top
spot, unseating Northwestern and eclipsing Harvard.

368
 Naturally, criticisms of the Business Week rankings abounded.
After all, some observers pointed out, business schools have many
constituents, and a business school should not be ranked
exclusively on the basis of what practitioners think. Scholarship
and research are also a core responsibility of the faculty. And there
are other constituents to please. Why should business schools
attend only to the concerns of recruiters and alumni?

Eager to tap into the enormous publicity generated by the

Business Week rankings, the competing magazine U.S. News &
World Report proposed a rival measure of reputation that sought to
balance the perceptions of both academics and practitioners,
gauging schools on both dimensions. The overall measure of
excellence also incorporated information about the selectivity of
MBA programs, the quality of their students (as measured by

369
scores on application tests), and the placement success of the
schools. Table 10-4 summarizes the rankings obtained by the
news magazine between 1990 and 1993.

Clearly, the new measure was more robust. In contrast to the

Business Week measures, which reflected solely practitioner views,
the better balanced ratings of U.S. News & World Report produced
more stable rankings from year to year. It didn't hurt that the
traditionally dominant schools (Harvard, Stanford, and Wharton )
came out on top year after year. The new rankings did, however,
confirm Northwestern's newfound prominence. Some schools

370
showed marked improvement over the years-Michigan, in
particular. Others declined, most notably Indiana and Illinois.

A side effect of the reputational maelstrom started by the two

magazines was that it goaded most of the lower-ranked schools
into action. Following the widespread distribution of the
conflicting rankings, many deans could be heard to proclaim a
renewed sense of vision, with the specific intent of serving
constituents more convincingly. Their comments indicated
growing awareness that in an era of declining enrollments and
reduced job opportunities, the MBA academies were going to have
to compete. They would be doing so based not only on their
academic strengths but on their overall reputations with their
constituents-with students, alumni, faculty, and practitioners.

THE RACE TO NUMBER 1

The Wharton School has long been celebrated as the oldest
center of management education in the United States. As a junior
professor there in 1979, I was surprised at how far the school's
reputation outdistanced its resources. Until 1984, Wharton's
facilities were among the most antiquated of all leading business
schools. Classrooms were of the old­ fashioned sort, with
antiquated furnishings and scratchy blackboard and chalk, and
there was an absence of modern technologies like video or
overhead projectors. Most of the faculty toiled in small, dungeon-
like cells, many of them like mine, physically underground, and
students could be seen shuffling down dimly lit corridors to meet
with them. If facilities reflect in part the character of any
organization, Wharton's identity seemed incongruous with the
school's external reputation.

Over the years, Wharton's character would reveal itself more

clearly to me. Junior faculty were treated as expendable resources,
meant largely for rapid consumption rather than development. As

371
I discovered, the school was principally committed to the "star-
buying" model; successful researchers were brought in to fill a
growing number of high-status endowed chairs. In the
management department, it had been more than 17 years since a
faculty member had actually been promoted to tenure. In 1983,
Russ Palmer was appointed dean at Wharton. I attended numerous
meetings as a junior professor at which I recall how the former
managing director of the accounting firm Touche Ross
International (since then absorbed into Deloitte & Touche)
conjured up for the faculty a vision of "Wharton #1." His intent
was clear: to mobilize support for a campaign that would put
Wharton's reputation ahead of those of its leading rivals,
crystallized in everyone's mind principally as Harvard and
Stanford. To faculty members like me, the campaign rested on two
pillars:

• External image: The need to increase fund-raising

and marketing; to enhance physical facilities.

• Internal character: The need to recruit faculty "stars";

to tie rewards to both scholarship and teaching; to
make the curriculum more relevant; to produce
integrative learning experiences rather than
specialist training.

In fact, Wharton was just a small half-step behind Kellogg, the

business school at Northwestern that had begun making waves in
the late 1970s under its aggressive dean Don Jacobs. The early
initiatives of Kellogg and Wharton would soon be imitated around
the country, as comparable efforts at reputation building took
hold in most of the MBA academies during the 1980s and 1990s.

NEW DIGS, NEW MARKETS

In the mid-1980s, it seemed like every top MBA academy was
involved in a major capital project: building new facilities. A

372
deteriorating physical plant at many of the top schools was
thought to deter students from enrolling and to reduce the quality
of their educational experience. At the same time, B-schools saw
an opportunity to capitalize on a booming market for executive
education that required state-of-the-art facilities.

If nothing else, the challenge was to keep up with the

acknowledged sovereign in business education: the resource-rich
Harvard B-School. After all, Harvard boasted the largest
endowment by far, estimated at some $350 million in 1992. As a
result, the school maintained modern facilities, with tiered
classrooms, audiovisual equipment, and a fitness center
(including whirlpool) for students. How much ground could lesser
schools keep giving up while still charging comparable tuition?

In 1982 Wharton enclosed its antiquated Dietrich Hall in a new

building with sponsorship from its high-profile benefactor,
Reliance chairman Saul Steinberg. At about the same time,
Columbia Business School launched a major extension and
renovation of its facilities. Michigan embarked on construction of
a seven-building complex that would triple the size of its business
school, also adding a computer center and library. Duke's Business
School broke the ground for a sparkling new concrete and glass
building.

With the booming 1980s, deans also recognized the lucrative

opportunities for executive education. The B-schools of Columbia
and Harvard already boasted well-established and highly
profitable executive pro­ grams. Earlier in 1979, Northwestern' s
school had opened the James L. Allen Executive Center to wide
acclaim. Surprisingly quickly, Northwestern's reputation had
soared as the school demonstrated its relevance to the 3,000 or so
executives it hosted annually. Its midwestern neighbor Michigan
quickly decided to follow suit. By 1992, Northwestern and
Michigan proved that their efforts had been worth it: The two

373
schools ranked third and fourth behind Harvard and Stanford in
surveys of executive programs.

In an all-out effort to capitalize on its name recognition with

senior managers, Wharton jumped into the executive education
market in 1985. A state-of-the-art center was built that would
make money and at the same time exploit the school's high-
profile faculty and strengthen the school's links to practitioners.
The executive training center might also present other
advantages. By supplementing faculty incomes, it would fuse
faculty self-interest to the pragmatic interests of companies,
encouraging research that was more relevant and credible to
executives. From 1986 to 1992, Wharton's revenues from
executive education more than tripled, and its program had come
to be ranked sixth behind the older ones of Harvard, Stanford,
Northwestern, Michigan, and MIT.6

The early 1990s marked a second wave of capability-altering

efforts by business schools struggling to catch up to their front-
running rivals. In 1993, the University of Maryland completed its
new building, as did UC-Berkeley and New York University. All
three schools abandoned crowded facilities and consolidated their
operations on the university's main campus. For NYU's business
school, the building was, in fact, the centerpiece of a strategy
designed to shake the school's vocational image, born of a large
part-time program and the school's roots as a night school to
which Wall Street managers once walked from work.

Investments of this magnitude are impossible without major

funding. To carry them out, the MBA academies ran major fund-
raising campaigns throughout the 1980s. Solicitations to alumni
multiplied as schools tested the loyalty of their graduates. Centers
for research and chaired professor­ ships proliferated as donors
dedicated their gifts to pet uses, particularly to programs in
international business, information systems, and entrepreneurial

374
studies. At Northwestern, Kellogg gathered more than $40 mil­
lion between 1986 and 1989. Between 1988 and 1993, Columbia's
business school increased the value of its endowment from $6
million to $35 million. From 1983 to 1990, Wharton tripled its
endowment to $90 million.

Newly established outreach staffs pushed business schools to

realize the value that high-profile business leaders place on
lasting association with a top school. A number of them pursued
"naming gifts." Northwestern's business school was named for
cereal king J. L. Kellogg. In 1979, it opened its $15 million James L.
Allen Center, named for the founding partner of consulting giant
Booz Allen & Hamilton. In 1980, for $20 million, Duke's business
school was reborn as the Fuqua School in honor of industrialist J.
B. Fuqua. Others quickly followed suit. In the late 1980s, Cornell's
business school became the Johnson Graduate School of
Management in memory of Samuel Johnson of Johnson's Wax
fame. Berkeley named its business school in honor of former Levi
Strauss chairman Walter A. Haas. NYU's business school was
named for its $30 million benefactor Leonard N. Stern, chairman
of the Hartz Group.

A school like Wharton, which was among the earliest named

schools of a university, obviously could not change monikers. To
acknowledge Saul Steinberg, its most recent donor, the school
grafted his name onto the new building. In 1982, the ponderously
titled Dietrich Hall-Steinberg Hall was born, immortalizing hefty
gifts, past and present. By the early 1990s, the leading troika of
Stanford, Harvard, and Chicago were among the few to remain
"nameless." In 1993, of the top 25 MBA academies, 15 prominently
proclaimed their association with a corporate donor. The funds
raised through these naming gifts would help both to finance new
facilities and to provide discretionary funds with which to make
significant changes in the internal identities of the schools.

375
RESHAPING SCHOOL IDENTITY
Naming gifts, glitzy PR, fund-raising, and new facilities
enhance the external image of any organization. They do not alter
its identity. Prompted by the inimical environment for
management education in the late 1980s, deans initiated internal
changes that were designed to alter the core character traits of the
MBA academies and to swing the pendulum away from the
scholastic model and toward the practitioner model. Table 10-5
describes the fundamental changes that are under way in the
capabilities, controls, and cultures of business schools.

At NYU, Stern's vocal dean Richard West conveyed the changes

in this way:

The real challenge for business schools after all is not to

tear down the research traditions and disciplinary strengths
that have developed over the past three decades. Rather, it is
to give teaching and education a more equal place in the life

376
 of the institution and to avoid the overemphasis on
disciplinary purity at the expense of more applied concerns.
The objective, in short, should be to have a professoriate
whose members are highly adept both as teachers and
scholars and whose interests bridge theory and practice. 7

To achieve that objective, the MBA academies began slowly

altering the reward systems that encouraged faculty to dedicate
themselves almost exclusively to publishing in arcane, peer-
reviewed journals at the expense of applied research and high-
quality teaching. No reward is more visible than tenure in
academe. In May 1990, NYU's business faculty voted in a policy
that placed equal importance on teaching and research in tenure
decisions. It promised to shift priorities in how up-and-coming
professors would allocate their time.

With the quality of education now being pushed toward center

stage, the MBA academies encouraged closer inspection of the
formal instructor ratings gathered after every course, what
business enterprises would refer to as customer feedback.
Vigorous debate about the composition, validity, and reliability of
those ratings animated many discussions throughout the 1980s.
Most schools coalesced around summary ratings of the
educational experience, and these ratings — already widely
publicized among students — became increasingly scrutinized by
faculty and administration. To reward teaching excellence,
opinion polls were taken; monetary and symbolic prizes were
awarded to the most popular members of the faculty.

Little by little, the center of gravity at MBA academies was

shifting toward the practitioners. Nowhere was this more
apparent than in the metamorphosis of the business school
curriculum. By the late 1980s, most schools had created advisory
committees composed of faculty, alumni, and corporate advisers.

377
After much analysis, they all made similar recommendations in
favor of:

• increased contact between faculty members

and student,

• stronger integration across courses and among

faculty, and

• redesign of the curriculum to reflect business practice.

In content, the message was also clear: New courses were

needed that would explore the "softer" skills of leadership and
teamwork rather than finance; that would place more emphasis on
quality rather than quantity and cost; that would focus more on
technology, change, and cooperation than on economics. It meant
that faculty should strive to teach future managers not about
narrow specialty areas but about the world of business, one that
practitioners saw as an intertwined whole.

To faculty and administrators, conveying holism and

complexity intimated a radical change from the specialist
orientation of the scholastic era. Organizationally, it signaled a
shift toward integration — the breaking down of the many walls
that the traditional departments of marketing, finance,
management, and accounting had erected to protect their
specialties. These internal barriers had discouraged joint research
on business problems, confused students, and alienated
practitioners. It suddenly seemed vital to foster more dialogue
across departmental lines and to explore the creation of
partnerships with companies. Under the scholastic model, those
faculty members who consulted had been widely disparaged as
money-grubbers. Under the practitioner model, consulting
suddenly appeared immensely attractive as schools saw benefit in
encouraging their faculties to build ties to elite consulting firms

378
that might help promote applied research and better prepare
students for jobs in that small but highly visible market.

Since taking over the Wharton deanship in 1990, Thomas

Gerrity, a former head of the Index Group (now the CSC Consulting
Group), has been busy "reengineering" the school, breaking down
barriers across departments and encouraging teamwork:

The changes . . . have taken many forms. In the

classroom, old semester structures have been flung aside;
flexible mini-courses have been introduced; cross-
functional areas of stud y have been fused together; and
leadership, teamwork, innovation and globalization have
emerged as recurrent themes in most courses. Outside class,
Wharton's 1,550 M BA students and 2,340 full-time
undergraduates have been organized into teams to work on
academic and field projects. 8

At Northwestern, Kellogg insisted on building a group culture

that rewards teamwork and leadership. Chicago's Business School
launched a leadership program with companies like Exxon,
Bankers Trust, and Pfizer designed to foster interaction between
students and practitioners. Michigan introduced a six-week
apprenticeship program that would immerse students in
corporate problem solving. Wharton inaugurated week-long
integrative learning experiences designed to encourage systemic
analysis of complex problems. Virginia's Darden School mustered
support from leading companies for an apprenticeship program
that involved students closely in corporate projects. All of these
pedagogical innovations were designed to tie academe more
closely to the world of practice.

Behind the scenes, faculty were also taking part in integrative

experiences of their own. Perhaps nowhere more so than at NYU's

379
Stern School, where a radical change in both the curriculum and
the culture was launched in the fall of 1993 with elements not
unlike those introduced earlier by Wharton, Columbia, and
Michigan. The new program had students moving through their
coursework in "blocks" of 65. Students within blocks worked
together intensively, as did the faculty who taught those blocks. In
a sense, it was much like creating smaller, more tightly knit
"family groups" or primary units within the school. It served to
heighten interaction, in the hope of generating a more intense
learning environment and sense of shared experience. On the
faculty side, it meant far greater communication across
traditionally isolated departments as the school encouraged
integrative experience: studying common cases, sequencing
assignments, and cross-fertilizing class work. A lot more work for
everyone, all around.

A parallel effort was under way on the academic front. During

the summer of 1993, for instance, I participated in a retreat that
the 27-member faculty of the management department initiated
as part of the school's efforts to shift its center of gravity closer to
the practitioner model. As these things go, we naturally began by
venting our mixed emotions about the radical changes we were
experiencing. Anxieties aside, we then turned to building a
roadmap for the future. The process looked like this:

• First we identified our key constituents as

students, companies, other departments, peers in
other schools, and the media.

• Next, we discussed the kinds of resources,

relationships, and information linkages we might
want to establish to project to constituents a
better image of ourselves as a department.

• Finally, we assigned responsibility to individual

380
 faculty members for each set of activities.

Ultimately, we committed ourselves to some short-run,

incremental actions that might help build up the department:
it's self-image and project it outward. Figure 10-3 summarizes
the matrix of initiatives that we felt would accomplish greater
integration of the department with the rest of the Stern School
and with its key constituents.

381
 Implementation of departmental plans began during the
fall of 1993, as we moved into the Stern School's new
Management Education Center in New York's Greenwich
Village. The faculty had picked a new dean — George Daly,
formerly dean at the University of Iowa's business school-to
lead the school into the next phase of its reputation-
building efforts. When Dean Daly came on board, he
articulated his personal commitment to two strategic
themes with familiar overtones:

1. The need for integration: This was articulated as the

need to increase coherence across traditional
departmental boundaries — the need to emphasize
school-wide, mutually supportive activities that
combine rather than dissipate the school's diverse
strengths. As Daly told the faculty, one of the Stern
School's most fundamental weaknesses is "anti-
synergy" — the whole was somehow less than the
sum of its parts. "How can we have top departments
in finance and international business — the two
most popular majors nationwide — yet not be in the
top five overall?" he asked. "Somehow these diverse
parts of the school have not come together to add up
to more than their sum."

2. The importance of boundary spanning: This was

expressed as the need to link up more closely with the
university and with the school's other constituents —
the need to transmit a concise, meaningful image of the
school, its qualities and its mission.

In February 1994, the Stern School engaged an outside

public relations firm-the Dilenschneider Group-to help
sharpen its messages and images. Among the first tasks that
the Dilenschneider Group undertook was to survey some of

382
the school's constituencies-in essence, perform a
reputational audit. The results presented to the faculty in
May 1994 suggested that Stern had unclear and inconsistent
images among key constituencies. As Dean Daly put it: "To
some, it is an incoherent image; to others, because Stern is a
new name, it is an unknown image. . . . We have not
projected a consistent and meaningful image." Whereas the
names Wharton, Kellogg, and Tuck convey strong images to
constituents, the name Stern does not.

Time will tell whether the dual objectives of integration and

boundary spanning will succeed at bringing coherence to Stern's
multiple images and will help to enhance its overall reputation.
Looking at it in mid-1995, and from my vantage point in the
academy, the strategy seems to be working; external perceptions
may be catching up to the reality as we creep up, ever so slowly, in
external rankings like those of Business Week.

OUTSIDE THE SCHOOL'S GATES

As we head into a new millennium, the leading MBA
academies appear to have recognized and addressed head on
the challenges posed to them by their critics of the early 1980s.
Spurred by competition for status in popular rankings,
aggressive deans are hard at work propelling reputation-
building efforts and shifting the center of gravity back to the
familiar practitioner model of professional schools like law and
medicine. Challenges remain, however. They include:

• firmly anchoring a "local" teaching and service

orientation in faculty recruited and raised in an era
dominated by the more "cosmopolitan" scholastic
model;

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 • building lifelong faculty-student relationships that
promote alumni giving and involvement;

• staying adaptable to changing environmental trends

that are likely to induce the further rebalancing of
the demands from different constituents; and

• ensuring that realistic student expectations are set

and met, both during their stay on campus and in
subsequent job placements.

So far, luck has been on the side of the business schools.

Ominous warnings of declining enrollments have not panned out.
Despite the smaller size of the baby-bust generation, MBA
applications have continued to increase. The startling surge is
somewhat perverse. Although poor economic conditions fostered
massive layoffs and decreased job prospects, applicants to
graduate programs have actually increased as managers seek ways
to improve their future employability. If you combine that with the
popularity of the MBA academies among international applicants,
you have an offsetting trend: By 1993, foreign students accounted
for more than 30 percent of MBA student population.

If a decade ago the Harvard Business School was the

tantalizing object of every dean's daydreams, by the early
1990s it was no longer as attractive. In part, it's because
throughout the greed decade resource­rich Harvard changed
its internal character very little. Business Week launched a
frontal attack on its MBA program in mid-1993, lambasting the
institution for its dinosaur-like slowness to change; its
excessive emphasis on competition rather than cooperation;
and its failure to integrate international issues into the
curriculum. In other words, the business school with the
world's largest endowment was assailed for resting on its
laurels while others had moved aggressively ahead.9 Harvard's

384
sagging reputation was concretized in Business Week's 1994
survey: The school had plummeted to fifth place.

The assault on the Harvard Business School is likely to carry

over to other MBA academies as their parent universities
struggle to respond to a real decline in enrollments and to
resource tightening. Since 1991, for instance, Harvard's
president Neil Rudenstine has tried to unite the university's 11
disparate schools — including the law school, the business
school, and the medical school-into a more coherent whole. As
he put it," What we need to do is to figure out how to get more
out of what we've got, to coalesce more, rather than to add."10

A similar call for greater integration of the business school

into the university was made by Columbia's newly appointed
president, George Rupp, at his open-air inauguration in the fall
of 1993. Rupp told his 2,300-member audience that the
challenge for major universities heading into the next century
would be to desegregate schools to make better use of the
university's limited resources:

There's a real danger that different parts of the

institution grow independently. By my count, we have 123
separate centers and laboratories. There simply must be a
great deal of overlap. In some areas, there are huge amounts
of money involved. We have to learn to get more out of the
same investment. We will be pulling people together. . . . The
business school will work with the economics department
rather than replicate its offerings. The school of public health
will not duplicate the investment of arts and sciences in
statistics. 1 1

Doubtless the next challenge for the MBA academies will be

to respond to the pressure for increased integration with their

385
parent universities. For some schools, it could prove
debilitating as universities rashly give in to the temptation to
plunder the lucrative niches of their professional schools. For
others, however, their high-profile progenitors could turn into
a rich source of competitive advantage capable of
differentiating them more strongly from rival programs. In
March 1995, an article in the New York Times suggested the
progress NYU had made in entering the top tier of universities
in the United States. The paper traced the reputational gains of
NYU to extensive fund-raising and investments in upgrading
facilities, hiring world-class faculty, and raising entrance
standards for students.

Ten years ago, New York University was what college-

bound students from New York regarded as a safety school,
fourth or fifth on their application lists. I f you didn't get into
Cornell or Brandeis or Brown University, you could always
commute to NYU. . . . But the administration, doing some
long-range planning, decided that being the safety school
was not good enough. So in 1984, it began a brash campaign
aimed at moving the school into the nation's top tier of
universities. And according to academics around the country
who have looked on with envy, the strategy worked. In what
was a remarkable fund drive at the time, the university set
out to raise $1 billion. But unlike most institutions which
plow such sums into their endowments and then live off the
interest, NYU spent nearly all of it to rebuild the university. 12

For the first time in its history, then, NYU's university-wide

reputation casts a favorable halo over its member schools. For the
Stern School, capitalizing on that halo may be a sound strategy for
the future. The best-regarded MBA academies of the future could
well be those that succeed in blurring the boundaries that now

386
separate business schools from neighboring professional schools
like law, medicine, and engineering. As Columbia's Business
School dean, Meyer Feldberg, points out, it is likely that in the
continuing contest for reputation, "the strong schools will get
stronger and the weak will get wiped out."13

In the next chapter, we explore how the identity-shaping

programs that business schools are putting in place to build
reputation are actually created. To do so, we examine in detail the
consulting practice of Lippincott & Margulies, the acknowledged
founders of the industry.

387
388
CHAPTER 11:
SO YOU WANT A NEW IDENTITY
In order to create loyalties, the organization has to manufacture
the symbols of loyalty: the flags, the rituals, the names. Affirmation of
faith must be followed by constant reaffirmation.

Wally Olins

A
COMPANY’S REPUTATION sits on the bedrock of its
identity — the core values that shape its
communications, its culture, and its decisions.

To help companies conceive, develop, and manage their

identities, a small group of consulting firms has developed a
niche within the larger public relations industry. These
advisors help clients develop effective naming practices and
counsel them on related reputational matters. This chapter
describes identity consulting in general and focuses in
particular on the contributions of Lippincott & Margulies, the
firm largely credited with initiating the practice. Its work
shows how companies benefit from systematic practices that
support identity and reputation.

THE IDENTITY MAKERS

Throughout the 1980s, General Cinema Corporation was
known as a highly diversified conglomerate with interests in
publishing, retailing, entertainment, and financial services. After
acquiring publisher Harcourt Brace in the late 1980s, however,
General Cinema elected to pursue a more focused strategy, with
publishing at its core. In 1992, the company crystallized its

389
reorientation by taking on a new name: Harcourt General. To
Wall Street observers, the christening signaled a welcome
commitment both to exploit Harcourt's established reputation
in publishing and to capitalize on the conglomerate's financial
strength.

Not long after Harcourt's rebirth, Korea's largest company

— the Samsung Group — celebrated the fifty-fifth anniversary
of its founding by unveiling a new identity system to 10,000 of
its employees at Seoul's Olympic Park Gymnasium. As
Samsung's chairman, Lee Kun-Hee, indicated, henceforth the
corporate name would appear in English typeface on all of its
operations throughout the world. The clear message was that
Samsung intended to unify the disparate identities of its many
subsidiaries. A singular corporate philosophy would now apply
to all of the company's internal and external activities.

Now consider the Gillette Company. In the early 1990s, the

well­known maker of branded products like Sensor razors,
Paper Mate and Waterman pens, Braun appliances, and Oral B
toothbrushes sensed that its broad portfolio of products was
undervalued: "Management felt that the financial community
underappreciated the full value of all of the company's
consumer brand franchises; the trade underperceived the
company's capacity to meet its diverse merchandising needs;
and employees and potential employees frequently had too
narrow a view of the career opportunities available within the
company."1 Much as Harcourt and Samsung were doing,
Gillette embarked on a campaign to strengthen and more
systematically project its corporate identity. By May 1993, the
company had introduced a new corporate logo (the dynamic G),
an identity statement (World-Class Brands, Products, People)
that would appear in all of its media advertising, and had
adopted a visual design to unify all of its corporate
communications.

390
 Finally, take TW Holdings, the company that owns fast-
food chains like Denny's, Quincy's, and El Pollo Loco and is
also the largest operator of Hardee's franchises in the United
States. On June 15, 1993, the company held a ceremony
attended by some 1,000 corporate staff and coordinated via
satellite with its 119,000 other employees around the country.
The purpose? To announce the company's rebirth as Flagstar.
Along with the company's new name, chairman Jerry
Richardson pointed to a new logo, visual design, and
communicators plan as key elements that would help to
integrate the different subcultures of its subsidiaries. As he put
it: "Showing our employees that our future success depends on
unity and a single vision for our entire company is a high
priority.

Using a new corporate identity to get this message across has

proved to be a great way of getting this important job done."2

What do Flagstar, Gillette, Samsung, and Harcourt General

have in common? All of them benefited from the creative
advice of Lippincott & Margulies. Since its founding in 1945,
L&M has helped numerous For­ tune 500 companies-well-
known companies like Coca-Cola, Chrysler, and Nissan's
Infiniti division-to crystallize and project their public
personas. Common to all the identity programs they create is a
three­ phase process through which they:

• examine how a company is perceived by its different

publics,

• compare that perception to management's desired

perception, and

• develop a coherent set of identity tools-name,

design style, and nomenclature systems that help

391
 achieve the desired image while reinforcing the
company's corporate strategy.

As environments have changed, as companies have

globalized their operations and consolidated their product
lines, questions of self-presentation have gained increased
attention in the executive suite. By itself, globalization compels
a careful analysis of diversity. How do a company's products,
brands, factories, advertising, and strategies cohere across
regions and countries? To expand more quickly, companies
often grow by acquisition-a strategy that multiplies their
identities and inevitably raises questions about the values,
commitments, and actions of the merged entity. The result:
widespread interest in communicating a company's
uniqueness through the use of clearly identifiable and
consistent names and symbols, in projecting an overall "look"
that crystallizes a company's singular identity.

Just as some of our largest companies are growing more

aware of the hidden value of establishing and reinforcing their
identities, so too are small start-up companies showing a more
sophisticated understanding of the images that they project.
Lacking the capital to hire full-time staffs and support heavy
overhead, many entrepreneurial ventures turn to franchises
like Mail Boxes Etc. and HQ Business Centers for help. From
them, a start-up can purchase a "business identity package"
that provides part-time office space and support services as
well as an "image package" that offers professionally designed
stationary and business cards. Positioned at the low end of the
market, these standardized services enable entrepreneurs to
convey an attractive image to prospective clients, to sound big
when in fact they are quite small. What these packaged services
do for small firms, identity consultants do with far greater
sophistication for large firms. They help a company to

392
construct a customized architecture for naming its products
and communicating its merits to the outside world.

LIPPINCOTT & MARGULIES, BROKERS

OF PERCEPTION
Identity consulting is a lucrative niche that lies at the
intersection of advertising and public relations. It typically
helps a company in three ways: (1) to assess its external
images, (2) to establish the key character traits that top
managers want the company to be known for, and (3) to
develop a graphical and verbal infrastructure that conveys
those characteristics to the company's different audiences.

Most advertisers focus narrowly on creating media

messages that will sell a company's products. At the other
extreme, public relations deals with the broader strategy of
persuading key influentials about a company's merits.
Identity consultants dwell on a company's visible symbols
and its means of routinely broadcasting its actions,
especially at the corporate level. That means developing a
coherent package of names, logos, symbols, graphics, and
supportive practices to convey the company's sense of self,
unique features, and character traits-its identity. This
identity appears ubiquitously and without any incremental
costs to the company.

Four companies control most of the corporate identity work

done in the United States: Lippincott & Margulies; Anspach,
Grossman & Portugal; Landor Associates; and Segal & Gale. Of
the four, L&M — and particularly its founder Walter Margulies
— is widely credited with having invented the expression
"corporate identity" and made it a profitable business. Today,
the identity business remains distinctly American in flavor, the

393
only other notable outfit being the United Kingdom's Wolf
Olins/Hall, a company similar in style and product to L&M.

L&M's early thrust was in industrial design and product

packaging. In various meetings during June and July 1994 in his
office, Clive Chajet, L&M's current chairman, recalled how Gordon
Lippincott, a professor of design, and Walter Margulies, an
architect, joined forces:

They got their start in the design business after World

War II, when a lot of the hotels that had been requisitioned by
the army as facilities for soldiers were returning to
commercial use and needed to develop a more attractive
image. Gordon and Walter were also involved in the early
days of industrial design and product design. According to
Walter Margulies, he and Gordon went over to M OMA [New
York City's Museum of Modern Art] in the early 1950s and
looked at the products that were on display. They were all
beautiful, but most of them had been commercial failures.
Now Walter Margulies was a business man heart and soul.
Why can't industrial design, he wondered, produce not just
esthetic success but also commercial success? And so they
went to work on products. The Tucker automobile, the subject
of the Hollywood film Tucker, was among the early products
that were "styled" by Gordon Lippincott.

In the 1950s, the rapid growth of mass marketing

throughout the United States created enormous interest in
packaging. L&M and its key rivals grew the business
accordingly, abandoning much of their earlier commitment to
industrial design. The rise of supermarkets and department
stores called for a substitute voice for the salesperson who used
to stand behind the counter. Packaging design fulfilled that
role, and what was once a sideline that printers had dreamed

394
up to sell boxes and containers quickly became a full-fledged
business. As Chajet recalls:

Walter Margulies was among the first to recognize that

packaging design was an enormously important component
of business and to argue that we should get good money for
it. He founded the Package Designers Council (PDC) as a way
to make it a profession — we don't give our stuff away. After
all, if accountants, lawyers, and architects can have
professional associations, so should package designers.
Packaging design became the thrust of the business at L&M ,
and in the 1960s we were undoubtedly the premiere
packaging design company in the world. Just imagine, we did
all the packaging design for the world's most famous brand,
Coca-Cola. At one point, we had 150 people working for us.

As the art and technology of packaging design grew familiar

to corporate America, however, CEOs increasingly delegated
the work to product managers and marketing directors. And
when packaging turned into a cost item on the profit-and-loss
statements of staff instead of management, it meant tighter
budgets and less lucrative design opportunities. Consulting
companies like L&M sought to diversify away from strict
design work. Full-fledged identity consulting came into being
when one of L&M's packaging clients, the furniture wax maker
Johnson's Wax, came looking for advice. In the 1960s,
Johnson's Wax started to diversify away from the furniture wax
business. It had bought a company called Metrecal, an
extremely successful diet-food product — the Slimfast or
Weight Watcher's of its day. According to Chajet:

It occurred to the Johnson's Wax people that their image

was not exactly compatible with a health-food product. They

395
 are purported to have said among themselves: "We ought to
repackage our corporation. Well, who would you go to for
help if not to a packaging company, and to who else but
L&M?" So Gordon went out to the magnificent Frank Lloyd
Wright headquarters of Johnson's Wax in the Midwest to help
them repackage their image. According to Gordon, that was
how corporate identity programs began. L&M invented the
term and the discipline at that time.

Because identity consulting had the ear of top management,

it quickly proved more lucrative than packaging design. CEOs
recognized in the concept of "identity" a valuable way to
imprint their companies, and so they stayed closely involved
with the programs. Naturally, L&M cut back on packaging
design, moved aggressively into the identity business, and
established a more consultative relationship with clients. At
that time, says Chajet, L&M relied heavily on Walter
Margulies's strengths in networking with prominent
corporate chieftains.

In his heyday, Walter could call the chairman of the board

of General Motors and get through. He was very
sophisticated, distinguished; not a salesman type. There
wasn't a major corporate identity program that L& M didn't
do. We had no rivals in those days. It was a design-driven
business. If somebody asked what corporate identity was in
those days, it was described in design terms: the logo and
how to use it.

From logos and visuals, L&M soon got involved in

nomenclature. A name is an important symbol for
communicating a company's core values and character traits.
According to Chajet, this was a public relations bonanza for L&M:

396
 For some reason, whenever a company changes names, it
gets a lot of press. Everybody's got an opinion when you
change your name. So L&M became even more famous. We
got double favors because we created some of the most
famous names in American industry. Throughout the 70s,
naming and design dominated the practice of corporate identity.
Rivals sprang up. It was a good business, profitable and
interesting. Unfortunately, Walter was not inclined to share
ownership of the business and held on to it 100 percent, so that
many entrepreneurial people left to work for themselves. That's
how Anspach Grossman & Portugal started. They graduated
from L&M . M any of those rivals did better than L&M . They
were more aggressive, more sharing, and more motivating to
their key people. By the late 1970s, L&M was at a standstill and
had begun to decline as a force in the business. Mind you, it was
still considered the Tiffany of the business, but it simply wasn't
growing.

By the early 1980s, Margulies's health was failing. With no

family members interested in the business, he sold it to Chajet,
who until then had been an independent package designer with
his own company, Chajet Design Group. As Chajet recalls:

Negotiations were conducted in total secrecy. The deal

was to merge Chajet Design Group with L&M . When I finally
got into L&M, however, I found only 5 people on staff and
about 8 clients, some of which were in litigation with L&M . I
went home, thinking to myself: What have I done! I'm in debt
up to my ears. . . . The reality, of course, was that Clive Chajet
had bought an image. I didn't know it then, but that's the
truth: I had bought nothing more than an image. I quickly
saw in the first 90 days that it was crazy to have a staff of 20
people to do packaging design, when L&M with only five
people was making more money than Chajet Design Group.

397
 So I made the difficult decision to get out of the packaging
design business entirely. I also recognized that the Chajet
name brought nothing to the party, so over my wife's and my
mother's objections, I dropped it entirely, kept the valuable
L&M name, and got to work matching L&M's reality to its
fantastic image.

The 1980s surge in mergers and acquisitions created strong

demand for creating new identities and reconciling the new
names with existing brands, subsidiaries, and entire
companies. For L&M, it meant big­ time identity consulting
work. None was bigger than the court-ordered breakup of
AT&T, the world's largest telephone company in 1983. It
created seven new companies, each of which needed to develop
and project a unique identity. Chajet recalls how it was a lucky
break for L&M:

Walter Margulies was determined that the business

would outlive him, that it would be his monument. So he was
unstinting in supporting me. In particular, he was very well
connected. A couple of months after I bought L&M , the
telephone rang for Walter. It was a friend of his on the board
of the New York Telephone Company. He tells us that one of
the companies to emerge from the breakup of AT&T would be
a merger between New York and New England telephone
companies, that it would need a new name, and that he'd
told them to use L&M . That was the power of Walter
Margulies. We got the job without competition. Subsequently,
we created the NYNEX identity and its communication
strategy — it was the first big break that I got. It also
coincided with a great increase in the incidence of mergers,
acquisitions, and divestitures. And all of a sudden, those of us
doing corporate identity work were in a boom.

398
 By the end of the 1980s, the industry was scrambling for
position. While L&M held a premiere position in identity
consulting, it faced growing rivalry from its three principal
competitors as well as from PR firms and ad agencies
interested in doing identity work at the margin. They turned
out to be so interested, in fact, that L&M's three rivals were
bought by leading advertising agencies: Landor Associates is
now owned by Young & Rubicam (Y&R), Anspach Grossman &
Portugal by WPP Group, and Segal & Gale by Saatchi & Saatchi.
For its part, L&M resisted offers from ad agencies, at least in
part to avoid potential conflicts of interest that might develop
from doing both identity research and advertising campaigns.
As Chajet puts it:

In the late 1980s, service companies become fashionable.

The idea came from Saatchi & Saatchi in England , who
decided that they would buy ad agencies, consultancies-any
service company — for very fancy prices. The fad quickly
spread to others like WPP and Y&R. Y&R came up with the
"whole egg" idea, which meant that we at Y&R will take on
every one of your image needs, whether it be identity,
advertising, sales promotion, or you name it.

Friends in advertising also approached us. I thought,

however, that L&M would not achieve its potential as a
partner with an ad agency. Compared to advertising budgets,
ours is a small business and we will never be financially
significant. If an ad agency bought us, it would be merely to
have us introduce them to the chairmen of our clients. They'd
want our contacts. But I never wanted to be a shill for an ad
agency. Anyhow, an ad agency would definitely think it
understood our business, would want to run it, and I'd hate
that.

399
 Instead of lining up with either an advertising agency or a
public relations firm, in 1987 Chajet sold L&M to Marsh &
McLennan, the diversified professional services company that
owns Mercer Management Consulting. Chajet believed the
financial resources of Marsh & McLennan would help to forge a
link between identity consulting and management consulting:

I liked the concept of Marsh & McLennan. They bought

service companies for their own sake, for their inherent value,
not for the synergistic benefits they could bring to a port folio.
They also had no interest in running the business, and had a
history of leaving their acquires alone. Six months ago, we
merged L&M with the marketing consulting practice of
Mercer Management Consulting. I realized that we were
playing in a very big league and that, as a standalone, L&M
[didn't] have the financial resources to compete on a global
scale. By combining with a world-class consulting outfit with
offices all around the world, however, with access to talent
that we [wouldn't] have to pay for on a day-to-day basis, I
felt we would be a strengthened company. What Mercer and
L&M together provide is a unique combination of skills. Part
of what Mercer does is to create a corporate strategy. There
comes a point when corporate strategy needs visual and
verbal expression, and that's where L&M comes in.

L&M's link to Mercer Management Consulting also gives it

a competitive advantage over its key rivals, which have chosen
to partner with ad agencies:

We now have access to the kinds of professionals that ad

agencies don't have access to. An ad agency's discipline is to
solve communications problems through a creative
communications response. If a management consultant is

400
 faced with a business problem, he creates a business solution
to the problem. If an ad agency is faced with a similar
business problem, however, it creates a communications
solution. When you’re dealing with a corporate image, where
the reality must match the image, you've got to understand
that reality, and only a broad, business-based approach can
grasp the reality of the company and its future. An ad agency
by definition thinks in terms of short-lived campaigns.
Corporate strategies, however, are not short­lived. And
corporate identities must not be short-lived. So we've become
consultants. What we offer over and beyond management
consulting is a creative component to carry out some of the
implementation.

Over the years, L&M has worked with more than 2,500
companies on corporate identity programs and has developed
hundreds of corporate and product names. Owing to its early
start in the business and to prolific output, the company has
spawned numerous start-ups and many of its own rivals.

THE ART OF LOOKING GOOD

Professionals in the industry often use the words identity and

image interchangeably, a fact that contributes in no small way to
some of the confusion and perhaps skepticism that surrounds
corporate identity programs. As the prominent British consultant
Wally Olins points out:

There is no consensus among organizations that purport

to practice corporate identity on what it is precisely that they
do. The difference between what the various companies in
the field offer is startling. So is the difference in their fees. M
any of them prefer to emphasize their graphic design role;

401
 they offer corporate identity as part of a wide range of
services. Others have a more specialized approach to the
business and have nondesign consultants on their payroll or
available on a part-time basis. What they deliver also differs.3

In fact, the term identity is probably best used to

describe the self­concept of the company's internal
constituents-its managers and employees. It summarizes
how the company thinks of itself, how it would like to be
seen on the outside. Identity is therefore closely aligned
with notions of corporate character, personality, and
culture. According to Kate Moran, a long-time identity
consultant with L&M: "Identity consists of the building
blocks of communication, the visual wardrobe. Corporate
advertising elaborates on those building blocks, while
product advertising uses them to talk about how valuable
the company's offerings are to the planet and how they
enhance our lives."

On the other hand, image is the word used at L&M to

describe how a company is actually perceived on the outside. A
company may have more than one image (as shown in Chapter
2), and its many images may not be consistent-in which case
its reputation suffers. Those images themselves may or may
not correspond to the company's self-concept or accurately
describe the company's key character traits. The purpose of
most identity programs is therefore to influence the coherence
of the images that the company projects. Ultimately, identity
programs are self­presentations designed to achieve a closer
match between a company's inner reality and constituents'
perceptions of that reality.

Which is not to say that an identity program is merely a

facade, that it can portray false characteristics. As audiences

402
have grown more sophisticated, they have become adept at
separating the wheat from the chaff, the real from the
imaginary. Which is why a good identity program tries to
reflect the reality of the company, not its self-delusions. As
Kate Moran says: "We have a savvy, almost cynical audience
out there. You need both good performance and good
communications. The standards of what the marketplace is
looking for are very high, and amateurism doesn't fly
anymore."

Despite the apparent diversity of corporate identity

programs, most share some basic commonalities. In part, it's
because the companies in this business are driven by common
pressures: mergers and acquisitions, organizational change,
morale issues, market pressure, poor internal relations,
recruitment problems, and lack of internal cohesion.4 In fact,
the factors within companies that create perceptions — the
building blocks of identity, as it were — are threefold: (1) the
constituent relationships of the company, (2) its naming
practices, and (3) its visual designs. Jointly, they project the
company's persona to outside audiences and create a more or
less coherent set of images in the minds of observers. Figure
11-1 depicts these three drivers of perception. At L&M, for
instance, they are in evidence in the official breakdown of the
company into three main departments: analysis and planning,
naming, and design. Though assigned to different
departments, in practice professionals from all three areas
work jointly on overlapping project teams, and the company
operates more like a loose federation of client-centered projects.

403
CONSTITUENT RELATIONS
Generally, identity programs are initiated by CEOs who are
unhappy about the way their companies are perceived by some
key audiences. As an L&M publication describes it: "Perhaps
these publics still see the company as it was, and fail to
perceive its present performance and future potential. Or they
mistake a part of the company for the whole. Or in other crucial
ways they misread or misunderstand the company. The
concerns of the CEO about the identity his company is
projecting and about how the company is perceived are, in
many cases, warranted."5 To gauge external perceptions,
identity consultants conduct a broad range of interviews with a
company's key audiences. The interviewers seek to paint as
accurate a picture as possible of how constituents perceive the
company, its businesses, its products, and its prospects. A
leading consultant describes it this way:

404
 The intention behind the interviews is to find out how the
organization is perceived by the different groups of people
with whom it has relationships. . . . The organization's own
employees at various levels of seniority} in varying
geographic locations and in different divisions, are selected
largely on the basis of the "diagonal slice," topped up with a
number of special cases who for one reason or another have
to be on the list. In addition, representatives of various
outside groups must be interviewed: shareholders and others
with a financial stake or interest in the organization, business
journalists, financial institutions, customers, suppliers,
competitors, collaborators, trade unions, national and local
government. Consultants in public affairs, advertising,
management, organization, personnel and finance are all
appropriate interviews.6

Exhibit 11-1 summarizes key areas that interviewers routinely

probe. Most of the time, the data that come out of these sessions
are qualitative; sometimes they can be quantified. The purpose
of the analysis is to examine the diversity of viewpoints put
forward. The job of the identity consultant is to cull the data for
areas of consistency and areas of difference. Points of
convergence and divergence are the backbone of all subsequent
discussions surrounding the company's image. "When
suppliers, competitors, customers, consultants and financial
analysts speak about an organization and its separate parts,
different perspectives inevitably emerge. The same story keeps
being told, but always from a different point of view. Each
version underlines and confirms the others, and gradually the
reputation of the whole, and of its individual parts, emerges."7

405
 To many at L&M, this is the backbone of the identity
business: offering consulting services to companies that are
grounded in an analysis of constituents' perceptions; helping
clients to better position themselves against rivals in their
industry; facilitating the implementation of strategies that
require stakeholder support. The newly created link with
Mercer Management Consulting is widely expected to enhance
L&M's ability to deliver a more broadly based strategic service.

NAME MANAGEMENT
Often a client's changing circumstances require expertise in
naming or renaming a product, a brand, a division, or the
company as a whole. Some 400 to 800 companies make a name
change every year. L&M's naming department provides
research and analysis around naming systems. In many cases, a
company's products and brands may have proliferated, and it
lacks a coherent strategy for tying together its operations. The
critical concern is to maximize the value and equity inherent in

406
a brand name and a corporate reputation. That may mean
streamlining existing managerial practices and altering the
decentralized decision­making process that created so many
names in the first place.

Name development takes place in three stages:

• Analysis involves exploring the image and functional

requirements of the name, how it should relate to
business objectives, and what the sensitivities of key
audiences might be.

• Creative development uses individual and group

brainstorming to identify a broad range of naming
alternatives. Should the name capitalize on existing
familiarity? How close should it be to the old name?
How much of a bridge should there be to past,
present, and future? How suitable is the name to the
global marketplace?

• Decision making involves name evaluation based on

legal screening, linguistic analysis, and market
research. What does the name connote? Is it
available? Can it be trademarked?

L&M has been a major force in creating many famous

corporate names and logos in the United States. Infiniti,
Duracell, and Amtrak are among some of the better known. As
mentioned earlier in the book, one of its most successful
identity programs was put into place at NYNEX, the $17 billion
company that came into being following the breakup of AT&T
in January 1984. The fusion of New York Telephone Company
and New England Telephone and Telegraph raised serious
considerations about the choice of name and the way it would
be communicated to its 3 million shareholders, a group

407
accustomed to predictability from years of investment in AT&T.
While still regulated in its telephone operations, the new
company would be free to expand far beyond its roots as a
utility and move into the emerging telecommunications
marketplace.

408
 L&M began by conducting an in-depth study of the
landmark AT&T antitrust settlement and its impact on the
spun-off operating companies that would keep their individual
names. Consultants interviewed telephone company executives
and board members as well as members of the financial
community. They also studied the company's confidential
goals and strategies.

Several management concerns were defined in those

interviews. One was to establish a public perception of a
reliable telecommunications company. Another was to help the
new company's employees understand and appreciate the
competitive, market-driven business they were now in. A third
was to focus the attention of external audiences on the
company's technological leadership in advanced
telecommunications. It was also critically important that the
new company be favorably positioned in the eyes of the
financial community in order to raise capital in the years
ahead. That meant earning a high price/earnings ratio on Wall
Street. Continued perception as purely a telephone company
instead of as a sophisticated, broad-based technological
company would place it at an immediate competitive
disadvantage.

Discussions with management and analysis of external

perceptions led L&M to formulate a list of criteria for the
generation of a new name. For one, the name should easily
interrelate the two operating companies (New York Telephone
and New England Telephone) as well as its service subsidiaries
and products. The name should also recognize that the
company:

• is a major corporate organization,

• is highly experienced and well managed,

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 • embraces telecommunications,

• is technologically driven,

• serves the sophisticated Northeast, and

• and has a strong link to its history.

A company report described some of the issues raised

during the reputational audit in the following way:

In selecting a name that would meet the particular

criteria agreed upon for the company, and that would be
distinctive, non-limiting, brief, phonetic, and appropriate —
literally hundreds of alternatives were considered. Inclusion
of "Bell" in the new name was ruled out. It would have
created problems of limitation, suggesting too restrictive a
link to telephones and regulated utilities, AT&T, and dated
technology. Also it would not distinguish this baby bell
sufficiently from the other newly formed regional holding
companies who would probably choose to use Bell in their
name. NYNEX , the new name created for the holding
company, is derived from the initials and geographic
designation of the two principal subsidiaries, linking their
traditions of quality and dependability to the "new"
company. It is non-limiting in the descriptive sense,
embracing the spectrum of present and future
telecommunications services and activities. And it is a
distinctive name in the field of high technology where the
corporation’s operations are rooted. Appropriately the name
ends with an "X," the mathematical symbol for an unknown
quantity: the future. The forward thrust of the new company
is reinforced by the visual presentation of its new name. The
logotype was designed especially to support the marketing
and communications strategy developed for NYNEX .8

410
 Today, the NYNEX name is used to relate the service and
product subsidiaries to the pa rent company, including NYNEX
Mobile Communications and NYNEX Information Resources.
Until the NYNEX name was both well established and well
regarded, the company chose to retain the names of its well-
known phone subsidiaries for local phone service. In January
1994, NYNEX executives finally announced that the company
would no longer be using New York Telephone and New England
Telephone as identifiers and would henceforth be known simply
as NYNEX in all of its businesses. The identity program was
truly complete.

DESIGN SYSTEMS
Along with compiling the perceptions that constituents
have of a company, British consultants Wolff Olins/Hall
conduct three complementary audits to determine why
outsiders have the perceptions that they do:

The communication audit examines how the

organization talks and listens, and to whom. The design
audit looks at how the different parts of the organization
present themselves and how all that relates-if it does-to the
presentation of the whole. The behavioral audit examines
what it is like to deal with the organization, to come into
contact with it in any way. Listening, looking, and feeling
audits, you could call them.9

Expert communicators examine how the company speaks

with its customers, investors, the media, regulators, and
lawmakers. They get involved with designers early on by
accumulating all of a client's existing communications in print,
video, and electronic forms and displaying them on the walls of

411
a large room. As Connie Birdsall, L&M's design director,
describes it:

In a typical project, we'll gather boxes and boxes of

materials, a room full of stuff. We'll pin it up on the walls and
then analyze the overall effect of the ads, brochures,
letterheads, logos, and signage. What kind of images do they
project? How consistent or contradictory are the messages
and use of identity elements? We'll spend a lot of time
studying and reacting to these signals before we actually start
doing anything.

Finally, a behavioral audit complements the

communications and design audits by looking at how the
company deals with different constituents: how it interfaces
with potential recruits, addresses customer complaints,
responds to services inquiries, and answers phones. Advisors
might also investigate, as anthropologists would, the myriad
small signals the company broadcasts about itself. At Wolff
Olins:

Michael Wolff, the eminent designer, speaks of a journey

through the company starting with an exchange of letters
and culminating in visits, in which the consultant monitors
everything around him, including the physical state of the
reception area, the date and condition of the reading matter
provided and the manner in which refreshment, such as
coffee or tea, is offered — and carrying on from there.10

Throughout the program, designers work closely on project

teams with the different kinds of expert consultants needed to
conduct these audits. Together they explore ways to visually
express a company's main character traits in different media,

412
including print, signage, video, and electronic. They assess
alternative forms of expression appropriate to global markets
and look for ways to create a cumulative image-a reputation-
that reinforces the strengths of the company and helps to
correct any unwanted distortions, Throughout the process, the
key concern is with improving the reputational profile of the
company vis-a-vis its principal rivals, especially in the global
marketplace.

WHAT DRIVES CORPORATE IDENTITY?

As even a casual appraisal suggests, companies demonstrate
widespread diversity in the identities they develop. Some
companies seem weak and fragmented, while others boast a
strong and monolithic presence. Some seem downright open,
candid, and extroverted, while others appear more guarded and
introverted.

In fact, Figure 11-2 shows that corporate identities range along

a continuum from monolithic to fragmented. Exxon, IBM,
McDonald's, and Coca-Cola are examples of companies with
seemingly monolithic identities. Their names immediately convey
the essence of their corporate character to uninformed observers
and proclaim key character traits for all to see. At the opposite
extreme, few of us would immediately associate much of anything
with corporate names like Grand Metropolitan, Procter & Gamble,
or Church & Dwight. Grand Met is better known for its Pillsbury
brands, Procter & Gamble for its stable of branded products like
Ivory soap, and Church & Dwight for its popular Arm & Hammer
brands of baking soda, toothpaste, and detergent. Their identities
are more fragmented than unitary.

413
 Closer examination suggests that three main factors account
for the different types of identities that we observe in most
companies:

HOW PRODUCTS AFFECT IDENTITY

Short-lived products benefit more from brand-level
marketing than from corporate-level endorsement. That's
because they require frequent replenishing. Customers make
many small purchases, and product sales depend heavily on
advertising and promotion to maintain visibility and encourage
impulse buying. Companies in industries that sell soft drinks,
fast foods, and other short-lived products — companies like
PepsiCo and Procter & Gamble — emphasize their branded
labels and evolve a bottom-up identity. According to D. Wayne
Calloway, PepsiCo's chairman and CEO:

We focus on our strong brand names. Names such as

Pepsi-Cola in soft drinks; Frito-Lay and its line of snack
foods; and Kentucky Fried Chicken, Pizza Hut and Taco Bell
in quick service restaurants. We believe that concentrating on

414
 promoting our brand names is our best investment. We
market Pepsi with a youthful, feisty, aggressive advertising
campaign, and we don't mind that kind of image as a
company. So instead of a corporate image working its way
down, in this case the brand image work s its way up. I don't
think that telling people that PepsiCo is a wonderful
corporation that also owns a lot of other wonderful
companies would help us sell any more Diet Pepsi or
Mountain Dew or Doritos. 1 1

Procter & Gamble is another company that has traditionally

emphasized its brand identities. Like PepsiCo, P&G specializes
in consumer products with short shelf lives, where the key is to
generate many repeat purchases. In recent years, the company
has placed growing emphasis on developing its corporate
identity. This reflects a recognition of the possible value of
generating additional equity from corporate-level familiarity
and recognition by consumers, investors, and analysts.
According to Edwin Artzt, P&G's longtime chairman and CEO:

Our traditional approach is changing. Procter & Gamble

as a company is fast becoming one of our most important
brands. The integrity of the company and its policies and
practices concerning the environment, nutrition, the safety of
our raw materials and our social consciousness all can have
an important bearing on how the consumer feels about our
brands. It is still our policy that our brands must stand on
their own feet. But today the image and reputation of Procter
& Gamble visibly stand behind them as well.12

In companies selling long-lived products, a monolithic

identity is more likely to build reputational capital. For large-
ticket items such as cars and refrigerators, in which consumers

415
make big investments that they expect will last for years, the
GM, GE, or Sony standing behind them creates trust and
credibility.

HOW STRATEGY AFFECTS IDENTITY

Reputations and identities reflect observers' interpretations
of a company's activities. Companies that operate in multiple,
unrelated businesses — conglomerates, for instance — have
difficulty establishing a corporate-level, top-down identity. In
part, this is because the individual businesses in the corporate
portfolio are often older than the parent organization that
owns them. The conglomerate Gulf & Western, for instance,
struggled for years to establish name recognition on Wall
Street. In the end, it failed, and Gulf & Western sold off many of
its businesses. By the late 1980s, the company had consolidated
its remaining operations to such an extent that it made sense
for the company to take on the name and identity of its best-
known subsidiary, Paramount Pictures, and emerge from the
doldrums as simply Paramount.

Companies pursuing strategies of related diversification —

especially those that grow from within rather than through
takeover-benefit most from developing top-down identities.
They capitalize on the top-down identity and enhance their
reputational capital by imprinting each new product line and
business with the corporate identity.

AT&T is a case in point. After the breakup of the telephone

monopoly in 1984, AT&T lost the use of its trademarked Bell
logo and name to its former operating companies. The
company worked hard to establish a new identity for itself by
imposing the new AT&T name and logo on all of its businesses.
Throughout the 1980s and 1990s, as the company extended
itself into telecommunications, computers, and financial

416
services, it systematically leveraged its top-down identity. We
were introduced one after the other to AT&T Long Distance, the
AT&T Personal Computer, and the AT&T Universal Credit Card.
In other words, individual brands endorsed by a corporate
parent. As Robert Allen, AT&T's chairman and CEO, pointed out
in 1990:

We changed the structure of our business a year and a

half ago so that we now have many smaller business units
that are more or less self-contained and focused on specific
customers and markets. In making that change, we stressed
the importance of the AT&T image and how it could be
advantageous to the new units. These strategic business units
have a good deal of autonomy, but at the corporate-level we
maintain a substantial measure of control over how the
brand and the image are portrayed, so that nobody damages
them to the detriment of everyone else. . . . I don't think we
could sell an AT&T car or potato chips. We should use that
name in connection with what we know best and do best. An
AT&T Universal Card is an extension of that because we have
the Calling Card. As we add products to that card in the
future, they should be related to technology and information
services. I wouldn't want to use the AT&T name for products
and services that don't fit our heritage and tradition and
don't normally fall into the concept of what the brand
means.13

Like their AT&T parent, most of the former Bell operating

companies have also tried to establish monolithic corporate
identities. Like Bell­ South, Ameritech, and Bell Atlantic,
NYNEX identifies all of its subsidiaries with the corporate
emblem. This reflect efforts by NYNEX to enhance its

417
reputational capital as it diversifies into technologically related
businesses in telecommunications.

HOW STRUCTURE AFFECTS IDENTITY

Top-down identities are more difficult to create and
manage in companies with decentralized administrative
structures. If most key decisions are made at the level of the
subsidiary, the corporate-level controls are necessarily weak
and compliance with an identity program is difficult to enforce.
In other words, companies that develop monolithic identities
tend also to develop more centralized administrative
structures.

Some companies have tried to mix the monolithic and the

fragmented identity models. General Motors and United
Technologies, for instance, tried for many years to capitalize
on the benefits of both. Between 1920 and 1980, GM used its
corporate-level umbrella identity to endorse five major car
divisions: Chevrolet, Pontiac, Oldsmobile, Buick, and Cadillac.
At the same time, each car division differentiated itself in the
marketplace in both price and quality, supported by an
elaborate identity system. In similar ways, United
Technologies developed a corporate-level identity in the
1980s (with the help of identity consultants Lippincott &
Margulies) that would take advantage of synergistic
relationships among the related businesses in its portfolio.
At the same time, it promoted the distinct identities of its
decentralized subsidiaries with customers: Otis Elevators
and Carrier Corporation's air conditioners are among its
better­ known brands. As one commentator says:

General Motors and . . . United Technologies reorganized

their huge structures, with their multiplicity of names and

418
 identities, in such a way as to achieve coherence. Where the
group strength was required — in purchasing, senior
recruitment, research and development, government
relations or relationships with the financial community —
they presented the whole; but when individual companies
needed to express their own identities — in relation to their
customers, their collaborators, the local community — they
could do that too.14

Results are mixed for these endorsed models. Over the

years, it has proven difficult to maintain a balance between
monolithic and fragmented identity systems. At GM, for
instance, the purchase of EDS and the launch of its Saturn
small-car division has fostered a more fragmented identity
system than ever before, one that has undermined the
company's reputational capital.

IN SEARCH 0F IDENTITY
Identity systems are important tools for a company to use
in developing a coherent sense of self and communicating it to
the world. If properly developed, they put forth the company's
most attractive character traits and improve our ability as
outsiders to understand what the company is up to. By helping
us to pierce the barrier behind which most companies hide,
they reduce skepticism about a company's operations,
intentions, and performance.

At the same time, identity systems are an important set of

controls that can help a company to build shared values,
mobilize employees around a common vision, and hence
mitigate the kinds of crises that arise from rogue behavior. As
Gordon Lippincott, one half of the founding team at Lippincott
& Margulies, observes:

419
 Unless a company manages its image as professionally
and systematically as it manages any other valuable business
asset — with standards of accountability across all business
lines, in all areas of operations, throughout the
organizational ranks — the value of that asset will
depreciate, along with the company's ability to achieve its
business objectives. . . . Image management programs cannot
make weak companies strong, mask unethical practices or
actually prevent management from making stupid decisions.
What they can do is help prevent decisions that appear
harmless when made but that can, years later, generate
image-damaging headlines around the world.15

That’s the kind of work L&M continues to do for prominent

companies around the world. It's at the heart of managing
reputation in companies as diverse as consumer-goods makers
Church & Dwight and Procter & Gamble and premier service firms
like Goldman Sachs, J. P. Morgan, and McKinsey & Company.

420
CHAPTER 12:
PITCHING ARM & HAMMER

Remember that green is magic . . . and the

color of your money is green. Use your green
magic as if the fate of our planet depends on
the decisions you make every day. It does.

John Heinz (U.S. Senator)

M
AKERS OF consumer products like Procter &
Gamble and Unilever have extensive experience in
managing brands. Success with branded products,
they insist, depends on persistent and savvy marketing,
advertising, and promotion. The fervent belief in the merits
of advertising explains why every year companies spend over
$200 billion in promoting their products through the media.

To Church & Dwight, the makers of Arm & Hammer baking

soda, advertising goes only so far. Rather than merely
advertise, at Church & Dwight some forward-thinking
managers advocate growing involvement in direct relationship
building with the company’s key constituents as an effective
tool for promoting the brand. They argue that forming win­
win partnerships with key constituents creates and
disseminates positive images of the company that translate
more effectively into sales than diff used advertising.

Partnering with constituents also helps to strengthen the

brand. In recent years, Church & Dwight has effectively
capitalized on its famous Arm & Hammer brand of baking soda
to diversify into other product categories. This chapter
examines the innovative alliances created by

421
 Church & Dwight, particularly those that helped tie the Arm &
Hammer brand to the environmental movement. Their success
provides valuable insight into alternative means for creating
economic value through systematic reputation management.

AWAKENINGS
In the late 1960s, the Church & Dwight Company was a small
and sleepy family-run business with about $15 million in
revenues. A single product accounted for most of the company's
sales: baking soda, sold then as now in the small yellow boxes with
the red, white, and yellow Arm & Hammer logo. Today, less than
25 years later, Church & Dwight racks up an impressive $500
million a year in sales of products as diverse as toothpaste,
laundry detergent, and industrial cleansers. To what can we
ascribe its startling growth?

From all accounts, Church & Dwight's success results from

equal parts strategy, luck, and consistency. Since 1969, the
company has benefited from the leadership of Dwight Minton,
a direct descendant of the company's original founders. When
he assumed the presidency in the late 1960s, he helped to
articulate a growth strategy that was designed to leverage the
Arm & Hammer brand name. Over the years, Church & Dwight
would diversify more or less consistently into areas that
capitalized on its identity as "the baking soda company."
Rather than scatter the company's limited resources, as so
many others did during the conglomeration and deal-crazed
decades of the 1970s and 1980s, Church & Dwight diversified
into products and markets that were more directly related to its
core competence in sodium bicarbonate.

Over the years, the company also benefited from good old-
fashioned luck when it stumbled into various related markets

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for baking soda and washing soda, used along with soap in
doing laundry before the development of modern detergents.
Probably none proved more productive than the niche created
by mounting social concern about the environment. No one had
predicted it, no one had anticipated it. Yet, as many consumers
grew increasingly concerned about the nefarious effects of
chemical additives in commercial detergents and household
products, they turned to the mild and relatively harmless
alternatives of washing soda and baking soda.

For Church & Dwight, it was a lucky stroke. As consumers

flocked to the company's benign products, they encouraged
its senior managers to recognize the environment as a social
issue, and to shape a strategy and image that would address
it. The result? In a relatively short time, Church & Dwight
built a corporate reputation centered around the
environmentally friendly features of its versatile core
product-baking soda. These features now anchor public
perception about Church & Dwight’s products among
employees, consumers, regulators, and investors. And more
than any other single factor, the company’s environmental
reputation now takes center stage in animating, motivating,
and guiding strategic decisions. As Bryan Thomlison,
Church & Dwight’s director of public affairs, points out:
"Our corporate reputation has become a competitive
advantage for us in the marketplace. For instance, few people
realize that we compete head on against Unilever and
Procter & Gamble, each of which is 50 to 70 times larger
than we are. Yet we've repeatedly made inroads against
these giants because we've been able to build trust in our
products and capitalize on our reputation with the right
consumers."

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 The role Thomlison plays at Church & Dwight is far broader
than that of a traditional director of public affairs. Not only is
he responsible for corporate philanthropy and environmental
management, but he also oversees employee communications,
government relations, media relations, and public relations.
His role in the company therefore closely resembles that of
chief reputation officer, as discussed in chapter 8.

To help Church & Dwight manage its reputation as an

environmentally responsible company, public affairs relies on
a "stakeholder-relations" model that is entirely consistent
with the reputation-management models discussed
throughout the book. It involves:

• identifying groups with a vested, often

ideological, interest1

• seeing Church & Dwight outperform its rivals,

• exchanging information with key influentials who

shape informed opinion on environmental issues,

• forming partnerships with stakeholder groups to

achieve mutual goals and, ultimately, generate
positive word of mouth, and

• coordinating internal efforts and expenditures to

produce consistent images of Church & Dwight on
the outside.

Although Church & Dwight now strategically links its

products to environmental issues, the company could just as
well have identified itself with some other critical social
concerns. In the rest of the chapter, I examine the company's
general approach to creating reputation and economic value.
Its experiences should prove valuable to managers interested

424
in helping their own companies derive value from building
relationships with key constituents and tying their reputations
to a strategic issue.

THE GREENING OF BAKING SODA

In 1846, Dr. Austin Church developed a method to convert soda
ash into bicarbonate of soda and, with his brother-in-law John
Dwight, founded a company to make and sell the now familiar
baking soda. In the early years, the compound was used primarily
as a leavening agent in baked goods. Over time, however; it would
prove to have an ever­widening array of uses in food products, in
personal care, and in house­hold and industrial cleaning. The
highly recognizable red, white, and blue Arm & Hammer logo was
first developed in 1867. Today it is a key identity element and
appears on virtually all of the company's products.

When Dwight Minton, a fifth-generation descendant of Austin

Church, took over as chairman of Church & Dwight in 1969, he set
the company off on a growth strategy that would essentially build
on the environmentally oriented tradition of his predecessors. As
he points out, however, using "the environment" was not planned
a priori. Rather, it resulted from opportunistic reaction to an
emerging social issue:

The "greening" of Church & Dwight first crystallized in

1970. We had already started long-range planning, but our
plans made no mention of the environment. A young and
inexperienced management team thought our then-existing
business to be at the end of its life-cycle. Innovative new
products and acquisitions were the way to go. . . . Operating
earnings in the late 1 .960s came from baking soda and an
old-fashioned product called washing soda. In its heyday,
washing soda had been a normal companion to laundry soap.

425
 This was the way washing was done before phosphate­built
synthetic detergents were developed.

Much to our surprise, washing soda sales reversed a long

decline and started to grow rapidly. We hadn't a clue as to
why, but were smart enough to go ask our customers.
Concern that excessive phosphorus was damaging our lakes
and streams had started a movement back to traditional soap
and soda. At the rate Arm & Hammer Super Washing Soda
was growing,

we could project that it would soon overtake Arm &

Hammer Baking Soda! We enjoyed the current earnings
effect, but quickly concluded that consumers would not long
tolerate the inferior washing results achieved with soap and
soda. Our next thought was therefore opportunistic. Let's
make a nonphosphate detergent to meet this demand. We
and several score other companies had the same brilliant
idea. We are the survivor. "1

The opportunistic reaction to growing concerns being

expressed about the environment proved fortunate. Church &
Dwight entered the non­phosphate laundry detergent market
in 1970. Despite fierce rivalry from Procter & Gamble and
Unilever over the years, by 1993 Arm & Hammer could lay
claim to more than $200 million in annual sales of laundry
detergent — having displaced Colgate as the #3 "soaper."

The result was impressive, if only because Church & Dwight

achieved it with far less marketing spending than its rivals.
Table 12-1 reports a comparative study of advertising
expenditures per market share point gained and shows how
much Church & Dwight was able to capitalize on its brand-

426
equity and environmental reputation to drive sales of its
laundry detergent.2

Church & Dwight would subsequently repeat that strategy in

other related markets. In 1988, the company introduced a
toothpaste with 60% baking soda. Here, too, the Arm & Hammer
brand name and trusted reputation enabled rapid market
penetration with far less advertising expenditure than rivals were
forced to make (Table 12-2). Indeed, consumer tracking data
showed that in less than five years, the Arm & Hammer name had
captured an estimated 10 percent of the U.S. market against fierce
competition.

427
 Besides diversifying into new consumer product areas,
Church & Dwight has also moved aggressively into industrial
products. Among the many uses to which bicarbonate could be
put, four key product areas have been uncovered: animal feed;
industrial cleansers; agricultural fungicides; and pollution
prevention and environmental remediation. For many years,
Church & Dwight has supplied sodium bicarbonate to the
animal feed market. It is given to dairy cattle, for instance, to
improve digestion of higher-energy foods and to increase milk
production. This has been the largest use for baking soda. The
company's expansion to industrial cleansers is more recent
and involves product extensions into more than 300 markets.

Church & Dwight’s Armex, for instance, uses a water-

sodium solution that is blasted onto various surfaces — much
like low-pressure sandblasting — to remove paint and
corrosion without damaging underlying materials. Armex was
originally developed to remove layers of tar and paint from the
Statue of Liberty during restoration before its 100th
anniversary. The development of another cleanser, Armakleen,
was inspired by a dinner conversation with members of an
environmental group in late 1990. One of Thomlison's guests
made the suggestion that Church & Dwight produce a cleanser
to substitute for CFCs and other environmentally harmful
solvents used to clean electronic circuit boards. As Bryan
Thomlison recalls:

We took this idea generated by one of our stakeholders

back to our scientists. Within 1 8 months we introduced a
proprietary technology covered by several patents. Of course,
our environmental friends received a substantial fee. But the
real point here is that we came up with a product that we
simply would never have created if we hadn't been out of our
offices talking to people with a different perspective on life.

428
 Product innovation is just one of the many benefits of
stakeholder sharing.

Most recently, Church & Dwight has been finding new uses for
bicarbonates as alternatives to traditional pesticides in organic
and commercial agriculture. And the company has put
bicarbonates to use in various technologies that remove lead and
other metals from drinking water and replace solvents used in
cleaning precious metals. Bicarbonates have even been used to
neutralize a lake that had been damaged by acid rain.

Jointly, these product applications move Church & Dwight

more forcefully into the environmental arena. Not coincidentally,
it's estimated that 95 percent of all Americans now have at least
one Arm & Hammer product in their homes. Consumer surveys
also show that the Arm & Hammer name and logo have a 92
percent recognition factor, making it one of the strongest and
most enduring franchises in the United States. We now examine
more closely how Church & Dwight has managed the Arm &
Hammer name in recent years.

NETWORKING ON ISSUES
Key to coherently managing a company's reputation is a
centralized corporate role vested with broad responsibility for
relating to the company's diverse constituents. As previously
mentioned, Church & Dwight created just such an innovative
position under the title director of public affairs. Since 1991,
Bryan Thomlison has been the company's point man on
reputational matters. As director of public affairs, Thomlison is
fully responsible for all constituent relations, including
pollution prevention, environmental outreach, corporate
philanthropy, employee communications, community
relations, government relations, and PR. He reports directly to

429
chairman and CEO Dwight Minton as well as to the presidents
of Church & Dwight's two main divisions: Arm & Hammer,
which sells consumer products, and specialty products, which
develops and markets the company's industrial products.

At Church & Dwight, it is difficult to untangle the person

from the role. Indeed, it would not be wholly inaccurate to say
that Bryan Thomlison is public affairs-the head of a lean
operation with a total annual budget of less than $2 million for
managing all constituent relations. Among the more attractive
features of Thomlison's background is his extensive
experience in sales and marketing. Having worked at both
Procter & Gamble and Unilever, he understands firsthand
the aggressive but more traditional marketing approach of
Church & Dwight's two chief rivals in consumer products. He
can therefore speak the language of marketing and
counterpose it to the potential benefits of alternative
strategies for reaching consumers and other constituents.

A critical problem facing a reputation manager, however, is

the lack of a clear bottom line. Unless the building of
constituent relationships is measured on the same yardstick as
other forms of promotion, it will not have access to sizable
budgets. As Thomlison points out:

Constituent relations is generally considered "do good"

work. For example, in the United States, the total funds
allocated to corporate philanthropy is only $6 billion — a
drop in the bucket when you contrast it with the $200
billion that corporate America spends on product
advertising and promotion. . . . What we've shown — and
what we're trying hard to continually verify at Church &
Dwight — is that for every dollar we spend in constituent
relations, we generate $10 in sales. This ROI changes the

430
 stature of our programs in the eyes of our top
management. We now have access to a larger pool of
resources. Imagine if others followed our lead; corporate
philanthropy managers would be more likely to tap into
the $200 billion and would no longer have to settle for the
crumbs.

To Thomlison, then, networking with key influentials is a

far more cost-effective strategy for reaching consumers than is
direct advertising when the objective is to build corporate
reputation. At one of our meetings, he recalled how in 1989, as
marketing director for Church & Dwight in Canada, he had
successfully driven Arm & Hammer Super Washing Soda into a
market leadership position, usurping the dominance of
Bristol-Myers's number-one-ranked product. As Thomlison
argues, he achieved the win not through traditional advertising
but by developing a third-party endorsement campaign, hand-
in-hand with a network of environmental stakeholders:

At the beginning of 1989, Arm & Hammer's Super

Washing Soda was the number 2 brand behind Bristol-
Myers's Bleach for the Unbleachables, a brand that held a 40
percent share in Canada. By mid-1990, Arm & Hammer
became number 1 in the segment while Javex dropped to less
than a 30 percent share. The interesting thing was this: In
1989, I pulled all the advertising dollars away from our brand
and put it all into a third-party endorsement campaign
involving a multitude of stakeholder organizations and
influentials. They helped us to promote baking soda and
washing soda as alternatives to the other household cleaners.

For instance, we ran a free-standing insert on washing

soda, one corner of which we donated to an

431
 environmental group. They used that space to promote
their own book, one which had many references to the
benefits of baking soda and washing soda. Now our ad
copy had nothing to do with the environmental
organization, but the juxtaposition of the two told an
environmental story.

We also worked closely with authors and broadcasters,

helping them verify information about baking soda and
giving them access to our R&D staff. We got a lot of extra
media attention because of that. It gave us free exposure and
was far more effective in driving the brand than any direct
advertising would have been on its own.

That early success in Canada with both baking soda and

washing soda was instrumental in getting me brought down
to our headquarters in Princeton [New Jersey] and in making
the environment a driver for our products.

As pointed out in chapter 6, researchers confirm that

networking with key influentials can be an efficient strategy for
reaching consumers. That's because research shows that
people form their own opinions about products and companies
through a trickle-down process in which respected leaders help
to shape the ideas conveyed to wider audiences.2 As numerous
studies have confirmed, few people in a country set policy;
most people simply follow. Moreover, within a particular issue
area, an even smaller clique of primary gatekeepers shapes the
opinions of others. Thomlison recognizes that simple fact, and
tries to use it:

Take the issue of household hazardous waste. There are

probably only a few hundred people around the country who

432
 are gatekeepers on this issue. They're the ones who are
influencing and formulating policy in Washington and in the
different states around the issue. I f we want to affect public
opinion on the issue, they're the ones we need to reach.
Having close contact with thought leaders enables us to do
that. They help us fan out into an issue-related community
and discover its key concerns as well as explore ways for
addressing them.

With these ends in mind, public affairs at Church & Dwight

maintains an active database of some 3,000 key influentials-
writers, legislators, educators, scientists, advocates, and other
opinion leaders-in various issue areas, but especially in
environmental issues. The network helps the public affairs
staff to assess the impact of a possible corporate initiative, to
mobilize supporters for a cause that's of mutual interest, or
react to threats from rivals that encroach on Church & Dwight's
business. For instance, when the company's marketing staff
recently proposed substituting a certain low-cost but more
harmful chemical to one of Arm & Hammer's laundry
detergents, public affairs opposed the recommendation based
on a poll of key influentials who uniformly opposed the
additive on health grounds. Rather than betray the
accumulated trust between Church & Dwight and its
stakeholders, the company opted against the additive.

In and of itself, the company's database of key influentials

constitutes a prime market for Church & Dwight's products.
Research by Cone Communications indicates that key
influentials generally tend to be:

• "greener" than most other consumers,

• more active in their communities,

433
 • early adopters of products,

• more likely to recycle,

• more active participants in more environmental issues,

and

• opinion leaders — they whisper to others

what to do.

Not only are these opinion leaders key consumers of the

company's environmentally oriented products, but they also
provide an early warning system for understanding consumer
preferences, trends, and other signals from the marketplace.
Calling on them before making a strategic decision can help
prevent a company from making strategic mistakes.

A case in point concerns the poor results the company

experienced in 1994. Much of the downturn can be traced to the
public beating Church & Dwight took in the market for liquid
laundry detergent when it opted to move to a more
concentrated product in a smaller bottle. Archrival Procter &
Gamble did not follow suit, and the Tide brand products P&G
sold in larger containers drew market share away from Church
& Dwight. Consumers mistook Church & Dwight's smaller size
for fewer "uses," failing to recognize the environmental
benefits of the smaller containers. To Bryan Thomlison, the
strategic mistake was one of failed communication. He
suggests that if management was determined to lead P&G into
the more concentrated product market, Church & Dwight
should have called on its network partners earlier for support
in launching the new product. This might have increased the
likelihood of success. At this point, he sees the role of public
affairs as that of mobilizing support for the concentrated form,
especially from environmental and consumer groups, which

434
are more likely to recognize its ecological value at smaller size
in terms of conservation of natural resources and reduction of
waste.

435
REACHING OUT TO STAKEHOLDERS
Who are Church & Dwight's stakeholders? Who should the
company contact to promote its products? They are of two sorts:
internal stakeholders — the company's shareholders and
employees — and external stakeholders — customers, vendors, and
regulators, educators, environmental and other advocacy
organizations, industry associations, media, and community
groups. As Thomlison recalls, he initially worked on building a
supportive internal constituency for his public affairs department;
then he tackled a variety of external considerations:

When I came on board, I did a series of things; First, I

interviewed all the vice presidents, directors, and managers
throughout the company. From those interviews, I lined up
the key internal stakeholders — the folks from R&D,
purchasing, manufacturing, marketing, etc., whose support
would be critical to moving ahead in linking product
development with the environment. Second, I hired a PR firm
that could put a green team in place. Since I was coming from
Canada, I knew I needed the resources of a large firm that
could get me assimilated into the U.S. context quickly.
Burson-Marsteller stood out from the others who pitched us
because they put together a core "green" team headed by a
former Jesuit priest. Third, I asked Burson-Marsteller to
prepare an environmental binder for the executive committee
of Church & Dwight that would bring them up to speed on the
importance of the environment — the key issues and players
involved in household cleaners, household hazardous waste
management, and other environmental concerns. It had to be
informative, yet readable in two hours. We then worked with
our sales management to coordinate "top-to-top" meetings
with leading U.S. retailers. Our seven-member executive
committee fanned out across the nation and met with the

436
 most senior executives of our customers, inviting a
partnership with Church & Dwight around the issue of
environment. On a parallel track, we met with leading
environmental advocates, regulators, and educators to gain
an understanding of issues, opportunities, and mutual goals.
Within six months we crafted our communications strategy
around the theme "multistakeholder partnerships for
environmental education." We kicked it off on two fronts:
internally, we infused the environmental ethic into our
quality management process; externally we ran a retail
merchandising program and a consumer communications
campaign that were integrated with the resources of
participating retailers, environmental groups, and the print
and broadcast media. Just as we were introducing the
program to the trade, Ad Week's Marketing Week magazine,
I recall, ran a cover article describing the program. On the
basis of that article and prior to a call from our sales reps, in
January 1991 Kmart phoned in the single largest order in our
company's 149-year history. It was so large, we had to scale it
back by 50 percent because we simply did not have the stock
on hand in the time required.

Contacts beget other contacts. As a result of those early

efforts to mobilize support internally and meet with key
stakeholders externally, Thomlison was invited to join the
planning committee for the U.S. Environmental Protection
Agency's annual conference on household hazardous waste
management. The purpose of the committee was to set the
agenda for the conference. Committee members represented
trade associations, regulators, companies, and advocacy
groups involved in disseminating information on issues
related to household hazardous waste. As he recalls, being a
member of the committee was invaluable: "Membership

437
really brought me up the learning curve quickly about these
issues in the U.S. It also connected me with a lot of key
influentials. From then on, my personal stature, knowledge,
and involvement mush- roomed. Church & Dwight became a
visible player in the whole arena of household hazardous
waste and the setting of public policy around the issue."

Spurred by its entrepreneurial public affairs group, Church &

Dwight now actively targets each of its key constituencies in
an effort to create win-win relationships. Figure 12-1
presents some of Church & Dwight's key reputation
management programs and their activities in 1994.

438
• Pollution prevention: Identified ongoing
opportunities and disseminated information in
partnership with the engineering, law, and facilities
management departments.

• Employee communications: Produced "Hammerings"

(the company-wide newsletter), "Environmental
Solutions" (the annual employee update on their
pollution prevention and waste-management
initiatives), and various publications designed to
reinforce the environmental ethic.

• Public relations: Coordinated an information "news

bureau" campaign through several outside agencies,
each with particular strengths in different sectors-
consumer press, industrial press, knowledge of the
communities in which they operate, and state and
federal government relations.

• Media relations: Worked with journalists, book authors,

TV producers, movie producers, and conference
organizers toward establishing multistakeholder
partnerships for environmental education.

• Environmental stakeholders: Built bridges between

opposing forces in the environmental arena and
sponsored the environmental education programs of
many national, state, and local environmental
organizations. One such program was a 65-part
radio series coproduced with three national
environmental organizations and offered at no cost
to radio stations.

• Educational programs: Coproduced an Audubon

television special, "This Island Earth"; codeveloped
an educational curriculum, "Give Water a Hand";

439
 and cosponsored a program of the Management
Institute for Environment in Business for including
the environmental ethic in the curricula of graduate
schools of business.

• Government relations: Created awareness among

legislators and regulators of pollution prevention
and remediation products and technologies. By 1995,
this effort had led to the adoption by the White
House of Thomlinson's idea of creating a President's
Environmental Technology Leadership Challenge, a
program that brings together developers and
potential users of environmental technologies.

• Community relations: Cofunded the Washington-based

"Environ­mentors" project, a large-scale community
relations program designed to add value to students,
educators, and existing service organizations in the
communities in which it operates.

In addition to running these company-wide programs, Church

& Dwight invests in projects designed to help market the
products of its consumer and industrial divisions. I highlight
below two interesting programs, one at the corporate level, one
at the divisional level. Each addresses an important social issue
but is also intended to benefit Church & Dwight by bringing
about more favorable attitudes toward the company's products
and increasing sales. In the language of game theory, both are
win-win projects, one short term, the other long term.

The Department of Public Affairs at Church & Dwight

handles both external relations and internal
communications. Pictured here is the masthead of the
company's monthly newsletter entitled "Hammerings." It
bears the familiar red & yellow Arm & Hammer logo that

440
 appears on all Church & Dwight products and
communications.

"EN-GRAFFITI"

In 1994, Church & Dwight formed a coalition with four other

groups to address a crucial urban social issue: homelessness.3 The
other partners were the Office of the President of the Borough of
Queens in New York City, the Queens County Overall Economic
Development Corporation, a Salvation Army homeless
veterans' center, and the public interest group We Care about
New York. The coalition targeted a group of prescreened
homeless veterans motivated to become entrepreneurs and
establish their own graffiti removal businesses.

Church & Dwight’s interest in the coalition was twofold. It

would help address an important social issue, and it would
promote the use of one of its proprietary technologies for
graffiti removal — a machine that uses sodium bicarbonate
and pressurized water to clean buildings without damaging
their surface. The Borough of Queens, blemished by old and
new graffiti, stood to benefit from improving its appearance.
The Queens Overall Economic Development Corporation
identified graffiti vandalism as a deterrent to local economic
development. And the Salvation Army's Borden Avenue
Veterans' Residence housed 400 homeless veterans known to
be responsible, motivated, and sufficiently skilled to work.

Since every participating member of the project stood to

benefit directly, it created a win-win situation. Moreover,
besides the obvious perceived benefits to the coalition
partners, the community as a whole would gain indirectly
from an employed labor force. It would also gain from
Church & Dwight's environmentally friendly bicarbonate

441
technology. Because of the system's reliance on baking soda,
runoff would not further burden the borough's sewage
system and water supply with toxic chemicals, as would other
commercial cleansing systems.

For this program, public sector organizations contributed

funds for training the homeless veterans; borough president
Claire Shulman's office provided meeting space and vehicles;
and Church & Dwight put up the seed capital, the baking soda,
and the graffiti removal equipment. By August 1994, a group of
some 14 homeless veterans had graduated from the program
and were ready to start work in the hope of eventually owning
their own businesses.

After the program was tested, refined, and proven

successful, a press conference was held to announce it
formally. The press conference included a demonstration of the
technology by the formerly homeless veterans as well as
speakers, among them Bryan Thomlison, Mayor Giuliani,
Claire Shulman, city council members, a congressman, and
coalition members. The Arm & Hammer brand had a prominent
presence, and Thomlison recalled that "the amount of
broadcast and print media pickup was absolutely stupendous."
Thomlison argued that a project such as this gains far more access
to influential people than high-priced lobbyists can achieve,
making this stakeholder approach analogous to his environment
technologies: better, cheaper, faster, safer (entailing less risk).

"GIVE WATER A HAND"

Since the late 1980s, a variety of public and private
organizations has produced curricula to promote
environmental education in schools. Many of the materials
developed on water conservation have tended to reflect the

442
biases of their developers, thereby increasing the level of
confusion around it. According to Walter Coddington, an
environmental consultant and project facilitator, "While
successful at conveying basic water science and education
about specific water concerns such as wet­ lands and water
conservation, as a rule water curricula fail to help youth to
integrate information about water topics or to provide youth
with practical, local, community-oriented activities."

To address the issue, on September 18, 1993, Bryan Thomlison

convened representatives of the National Fish and Wildlife
Foundation, the EPA, the U.S. Department of Agriculture
Extension Service, and the National 4-H Council. The purpose
of the meeting was to form a coalition with the purpose of
developing and promoting a curriculum on water preservation.
Each partner would agree to leverage its network and available
resources to ensure maxim um distribution of the curriculum.
As the partners concluded: "It is the belief of the members of
this Multistakeholder Partnership for Water Education that a
multiparty, multidisciplinary approach to water curricula
development will deliver an objective, action-oriented, and
widely distributed water education curriculum. This effort is in
support of the goals of 'Water Quality 2000,' a cooperative
effort of over 80 public, private, and nonprofit organizations."4

By April 1995 the completed curriculum had been

distributed to more than 35,000 environmental educators.
Table 12-3 lists the composition of the partnership. The core
partners of the program, titled Give Water a Hand, defined
their objectives as follows:

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• National 4-H Council/USDA Extension Service: To
support youth development with environmental
education and stewardship programming; to promote
the use of research-based information about natural
resource topics and environmental education
techniques; and to secure funding from public and
private sources to help develop environmental
programming.

• National Fish and Wildlife Foundation: To promote

water-related conservation and protection education;
to support experts in the development of an
educational curriculum.

• National Drinking Water Alliance: To develop public

awareness of the hydrology of sources of water supply
and of threats to water quality integrity; to stimulate

444
 public appreciation of the science and technology of
water treatment and supply; to encourage public
understanding of the importance of water quality to
public health; to increase public involvement in the
water supply and use decision-making process.

• Church & Dwight: To educate youths and adults on

water issues and the science of sodium bicarbonate; to
work with environmental advocacy and conservation
organizations and government agencies to develop an
environmental education curriculum; to promote, by
example, the merits of multistakeholder alliances for
environmental education.

Target groups for the curriculum include schools, 4-H

clubs, Girl Scouts, Boy Scouts, Junior Achievement clubs,
YMCAs, YWCAs, Camp­ fire Girls, Future Farmers of America,
and other formal youth environ­ mental groups. If successful,
the program should increase youth awareness of home and
community water management issues and pro­ vide young
people with experience in community action, practice in life
skills, and a sense of empowerment in knowing that they can
make a difference in their community.

Church & Dwight's role was to sow the seeds of the new
curriculum. Ultimately, public and private sector teams
representing multiple constituencies actually articulated the full
curriculum. The final output incorporated insight about water-
related ecosystems, everyday life needs, water testing, and home
water treatment. It also invites students to contemplate careers in
water management.

445
CHURCH & DWIGHT'S MULTISTAKEHOLDER MODEL
Both of these projects illustrate the stakeholder-relations
model that Bryan Thomlison advocates for managing a
company's reputation. The graffiti removal project offers
obvious short-term benefits to Church & Dwight. On one hand,
it disseminates the company's proprietary technology into
local communities, increasing its visibility and potentially
enlarging the market. On the other hand, by addressing a
pressing social issue, it generates favorable word of mouth
about the company and its products. In contrast, Give Water a
Hand is a long-term program with mostly indirect benefits. By
including discussions of the benefits of baking soda in
educational materials, Church & Dwight stands to benefit from
widespread exposure to millions of children-the future
consumers of its products.

Developing strategic alliances with diverse nonindustry

groups requires the ongoing nurturing of mutual trust. In
general, the multistakeholder model employed by Church &
Dwight operates as follows:

• Define the social issue that fits best with your core
competences and business objectives.

• Gain the CEO's clear, unequivocal, long-term

commitment to the "cause."

• Map out all the constituencies affected by the cause

and your possible role with them.

• Identify and contact key influentials in those

constituencies.

446
 • With both internal and external constituents, define
mutual needs and objectives; then rank the potential
partners for strategic fit.

• Forge alliances and engage the new stakeholders in

issues, opportunities, and projects of mutual benefit.

• Bring your trusted constituents into every stage of

your projects, allowing you to both develop
opportunities with the input of a diverse array of
stakeholders and revamp inappropriate concepts or
programs.

• Work with the constituents to determine how your

goods, services, and operations can be modified to
reflect your commitment to the cause. This is what
differentiates your company from your competition
and separates the committed from the opportunists.

• Understand that you must deserve the reputation

you are trying to create, and ensure that everyone in
the organization is continually energized and
empowered toward that end.

Alliances can be both internal and external. Internal

alliances are designed to encourage employee involvement in
environmental issues. They also help to mobilize employee
stakeholders around a common strategic orientation. Among
the many programs managed by public affairs, for instance, the
publishing of the company-wide newsletter gives the office a
direct reading of employee viewpoints. As Bryan Thomlison
points out:

The philosophy was that if I am going to be the key

influencer on environmental issues, then employee

447
 communications was vital. So I changed the newsletter and
introduced other forms of employee communications on
environmental matters. I also changed how we handled our
community relations program. Instead of simply attending
Chamber of Commerce meetings and funding any old
philanthropic project that came along, I decided to create a
short list of action plans. If something doesn't tie in directly to
building business for the company, then it doesn't make it
onto the short list. For the most part, we try to orient
everything we do now, all outreach programs, to
building business.

Church & Dwight’s data suggest that the core consumers

brought into the franchise with the multistakeholder model
are its most profitable consumers. Unlike brand-switchers or
price-buyers, they are more likely to buy the brand
repeatedly, and those who identify with the cause are more
likely to switch from another brand to Arm & Hammer.
Compared with the national average, these consumers are
almost twice as likely to buy based on trust, rather than on
advertising. And they are more likely to be among the 10
percent of Americans whom the Roper organization calls
"influentials," those most likely to influence the purchases of
others. Thomlison claims that his database provides almost
instant access to the most powerful environmental
influentials in the country and, through them, to the homes of
millions of environmentally oriented consumers. By
generating and nurturing mutual trust and credibility within
a network of key constituents, stakeholder alliances help
companies to create reputational capital. In turn, alliances
prove invaluable, both in helping the company to make key
strategic decisions and to react more quickly to attacks on
the company and its products. As the relationships mature,

448
the allies become frontline "eyes and ears" for each other,
readily communicating nonconfidential issues,
opportunities, trends, and even competitive reconnaissance.

CAPITALIZING ON REPUTATION
Has Church & Dwight been successful in managing its
reputation? Although cause-and-effect relationships are
always difficult to establish, there is some evidence that the
company is benefiting from identifying the environment as a
strategic issue and from owning a reputation as an
environmentally friendly company. Besides spurring the design
of many new products in the last decade, Church & Dwight has
enjoyed faster growth and higher profitability than its rivals
over the past 25 years. The record suggests that the company's
success may result from a combination of two factors: (1) its
ability to attract a large proportion of so-called green
consumers to its products and (2) its ability to earn widespread
support from the institutions that influence those green
consumers. In recent years, the company has received a
number of awards that confirm its harmonious relationship
with influential institutions.

GREEN CONSUMERS

Opinion surveys conducted in 1993 suggest that Arm &

Hammer customers are greener than those of rival companies.
In responding to the question, "How concerned are you about
the environment?" some 84 percent of Arm & Hammer
customers indicated high concern, compared with only 64
percent, 65 percent, and 70 percent, respectively, for each of
the company's three leading rivals. In this, Arm & Hammer
customers appear to more closely resemble the "evergreen"
group defined by the opinion research firm of Yankelovich,

449
Skudder, et al. Moreover, Arm & Hammer appears to have
increased its penetration into the green market. In a
comparable survey conducted in 1990, only 77 percent of its
customers had indicated high concern for the environment.

In another comparative survey of consumers by

Environmental Research Associates in 1993, some 9 percent of
respondents claim to purchase Arm & Hammer products because
of the company's reputation for environmental concern compared
to 1percent for Procter & Gamble, Clorox, Colgate-Palmolive, Dow
Chemical, and Du Pont.

Several corroborating studies lead Church & Dwight to

estimate that a significantly higher proportion of its customers
are green than the national average of 16.5 percent. Of its $200
million in laundry detergent sales, the company ascribes some
$43 million to the green segment-$10 million more than the
company would expect to get on average. Across its consumer
product categories, the company estimates increased product
sales of about $17 million-$10 million in laundry detergent, $1
million in baking soda, and $6 million in toothpaste.
Stakeholder­ generated product innovations, incremental
business attributable to access to new customers, and reduced
manufacturing costs due to pollution prevention and waste
management efforts jointly create several million dollars in
additional benefits.

With an annual budget of less than $2 million, Bryan

Thomlison's public affairs department takes responsibility for
generating an incremental $20-25 million in revenues as a result
of the company's strategic focus on the environment. Table 12-4
shows the comparative leverage of his stakeholder-based
programs against Church & Dwight's more traditional
marketing programs.

450
HONORS AND AWARDS

Between 1990 and 1994, Church & Dwight was the recipient of
a variety of awards. In 1992, the company was nominated by the
well-regarded Council on Economic Priorities (of which I am a
board member) for one of its prestigious America's Corporate
Conscience Awards for Environmental Stewardship. In 1993, the
United Nations Environment Program named Church & Dwight
the recipient of a Corporate Achievement Award for
Environmental Responsibility. Also in 1993, Dwight Minton, the
company's CEO, was singled out by the American Marketing
Association for its Edison Achievement Award. Distributor Ace
Hardware made Church & Dwight the winner of its Ace
Environmental Award for environmental stewardship and
marketing innovation, while Meijer made it the recipient of its
Meijer Environmental Award. In 1994, Connecticut College picked
Church & Dwight for its Inherit the Earth Award. The company
was also made the recipient of an Earth Day Award from Imagine
Magazine and Earth Day USA. Most recently, American Rivers
selected Church & Dwight for its Corporate Citizenship Award. In
1995, Bryan Thomlison was recognized by Claes Nobel with a
United Earth award for personal environmental achievements.

Together, these awards demonstrate growing recognition by

important stakeholder groups that Church & Dwight is a company
friendly to the environment. Though it is difficult to quantify their

451
effect in hard numbers, it suggests continued dissemination of
attitudes favorable to the company. These groups publish
newsletters, author books, and otherwise communicate with
current and potential customers for Church & Dwight's products.
They indirectly promote the company's products.

In the remaining chapters of the book, we turn our attention to

firms in the financial services community. We explore how
stakeholder models similar to Church & Dwight's can help
professional services firms to exploit their hidden stock of
reputational capital more systematically.

452
CHAPTER 13:
THE DEAL MAKERS

Penny wise, pound foolish.

Robert Burton

B
ANKERS BANK on their reputations. They regularly get
clients to part with their wealth and advise them how to
invest it. To do so, bankers invariably claim a
commitment to the highest standards of honesty, credibility,
and trustworthiness. After all, who among us would invest a
lifetime's savings with someone whose integrity was in doubt?
In many ways, then, banks are much like other professional
service firms — law firms, accounting firms, and consulting
firms among them — in that the measure of their success is
their ability to maintain strong and favorable reputations.
Which is what has made the rash of blunders by investment
banks in recent years so startling. This chapter explores
reputation building in financial services firms. In particular, it
examines recent cases of meltdown at investment banks and
the reputation-management issues that these crises and
scandals raise.

DIRE STRAITS
In the last few years, it became apparent that during the
go-go decade of the 1980s, brokers at Prudential Securities, a
subsidiary of the mammoth Prudential insurance company,
enticed many elderly investors to buy partnership shares in
what they were led to believe were safe investments. In fact,
a good number of those investments involved oil and real

453
estate assets, high-risk deals. When the investments went
bust-as risky investments often do-investors were
dismayed to learn that they had lost their nest eggs. They
brought suit. After a drawn out investigation, in October
1993, the investment bank reluctantly admitted widespread
fraud and settled charges with regulators. They set up a $330
million fund to pay out claims to the hundreds of investors
that had been deceived. Not only had the rogue brokers
violated ethical norms, they had dealt their company's
reputation a critical blow. Yet it wasn't until March 1994
that Prudential's chairman, Robert Winters, publically took
responsibility for the lapse of control in the company's
brokerage subsidiary. As he put it: "The public image of the
Prudential has suffered on my watch, and I feel the weight of
that burden. Any action that was taken that was not in the
best interest of our customers was wrong. We have hurt too
many of our customers. We are committed to taking care of
these customers, and that commitment extends well beyond
that $330 million." 1 A few months later, he would publically
admit to the company's criminal actions and agree to settle
criminal charges to the tune of yet another $330 million.

Although the scandal at Prudential briefly eclipsed the major

Wall Street crimes of the 1980s, it would itself be dwarfed by
dramatic losses in the derivatives markets that occasioned highly
publicized lawsuits against prominent bankers Merrill Lynch and
Bankers Trust in 1995 and the collapse of the venerable British
investment house of Barings PLC.

In fact, most of these banking scandals share common

features. They can ultimately be traced to a combination of (a)
rogue behavior by individual bankers and (b) institutional
failure to infuse sound judgment and secure compliance from
employees. They suggest the necessity for companies to install

454
key internal systems to monitor and maintain reputational
capital.

Take Drexel Burnham Lambert. The bank's dramatic

collapse in the late 1980s can be traced not only to the dubious
practices of its entrepreneurial bankers, Dennis Levine and
Michael Milken, but to the whole laissez-faire culture of Drexel
that CEO Fred Joseph had sanctioned. Left to his own devices,
Milken generated extraordinary profits from his junk-bond
operation, blinding the firm to the reputational risks it was
taking.2 As journalist Connie Bruck observed, "Milken would in
effect create his own firm within the firm of Drexel Burnham, one
which its members would refer to simply as 'the department.' He
laid the groundwork for that autonomy in 1973."3

As a prominent banker also told me, however, the Milken

machine was itself a form of self-promotion: "Mike Milken's
marketing was fantastic. Everyone called him a genius. But he was
really selling a cancer. As far as the Drexel Burnham company was
concerned, he was just another con-artist." In falling victim to the
promoter's spiel, Drexel Burnham failed to create a system that
could safeguard its reputational capital.

Another casualty of 1994 was the once-proud securities firm of

Kidder Peabody. The firm and its parent company, General
Electric, had both suffered heavily from the reputational loss
incurred when Martin Siegel, Kidder's former takeover star,
pleaded guilty in 1987 to two felony counts of tax evasion and
conspiracy to violate securities laws and paid $9 million in civil
fines. At that time, Siegel proved to have been deeply involved in
trading on inside information with risk arbitrageur Ivan Boesky.
Publically embarrassed by the indictment, GE vowed to clean
house and rebuild Kidder from the ground up, filling it with
presumably better-trained managers from GE — only to find itself
eating those words when in April 1994 Kidder announced another

455
scandal. The firm had been obliged to discharge its chief
government bond trader after uncovering a bond trading scheme
that had artificially inflated the firm's profits by some $210
million. This development did little to help Kidder Peabody's
standing in the competitive securities industry and explains why
GE opted to sell off Kidder's investment banking division to rival
PaineWebber in October 1994 for a paltry $650 million.

In 1985 it was broker E. F. Hutton that scandalized Wall Street

by pleading guilty to 2,000 felony counts of defrauding its banks
of millions of dollars through a massive check-kiting operation.
The revelation was jarring. As one reporter put it:

For decades a powerful mythology had surrounded

Hutton as the home of Wall Street's shrewdest and
classiest professionals. When Hutton talked people listened
— the advertising line had been so successful because, to
millions of investors, and the brokers at Hutton, it had
seemed a simple statement of fact. That made it difficult
for many to accept that the firm would try and pull off such
a sleazy scam.4

Hutton never recovered from the scandal. Within years, the

firm's tarnished assets were sold and absorbed into the
Shearson brokerage empire and have now fused into
Primerica's Smith Barney operations. And the once-proud
Hutton name has vanished in all but memory from the
industry.

In 1991, Salomon Brothers was rocked by scandal. The premier

bond trader in the industry was charged with systematically
violating auction rules over a two-year period and of cornering the
market in various new issues of U.S. Treasury bonds. The charges
were serious. The bank's parent company lost about $500 million,

456
or 15 percent, of its market value in the scandal's immediate
aftermath. Much of the blame for that scandal would get placed on
rogue behavior by the point man in charge of the bank's
government bond-trading desk, Paul Mozer. As most analysts
concluded, it seems Mozer simply got caught up with winning at
any cost in the high-stakes lotteries at which Salomon and 13
other leading banks regularly compete as primary dealers for
securities of the U.S. Treasury. His errant behavior seriously
jeopardized the bank's reputation and its very survival.

Because of their complex and high-stakes financial

dealings, investment banks face such reputational risks on a
regular basis. Many banks, including the upstanding Goldman
Sachs, were dragged into the insider trading scandals of 1986
and 1987. Facing ambiguous situations, employees allowed
themselves to be enticed by producing bigger numbers, all too
often at the expense of doing what's right for the firm as a
whole and its reputation.

Of the banks that manage risks better than others, Goldman

Sachs may be among the more vigilant. Over the years, the
closely held partnership has proved highly adroit at protecting
its reputational capital from erosion. In large part, its success is
due to widespread recognition within Goldman Sachs that at
heart securities firms rely heavily on their reputations to
compete. We'll take a closer look at Goldman Sachs after a
quick tour of the close-knit community of investment banking.

BANKING ON REPUTATION

Investment banks mediate between buyers and sellers of

assets. They bring in their revenues by issuing new
securities, trading old securities, managing financial assets,
or deal making-advising client companies about possible

457
mergers and acquisitions. Since investors are reluctant to
buy securities from unknown dealers, the industry is
concentrated. Investment banks are few in number and high
in clout. Table 13-1 lists the small group of companies that
dominates the market in which securities are bought and
sold in the United States. The volume of business that each
bank does in the major product areas of the industry is a
significant indicator of its reputation.

Naturally, all of these banks compete against each other for

visibility and status with corporate clients. Those with stronger
reputations, however, enjoy a relative advantage in generating
business with better­regarded clients. A bank's reputation
signals to a client company the likely success of the bank's
counsel, whether for pricing a new issue of the company's
stocks and bonds or for negotiating a buyout. A corporate
financial officer is therefore likely to give greater latitude to a
bank with a solid reputation. In a book about investment banks,
two Harvard professors rightly observe that:

458
 impressions gained from marketing presentations.
Reputation has a strong influence on these expectations and
impressions. And because reputation extends to particular
people, customers will sometimes select an investment bank
if they are guaranteed that certain people will work on the
deal.5

Banks are also regularly rated by specialized magazines like

Institutional Investor, and the rankings are widely disseminated.
Every year, for instance, the magazine ranks leading investment
banks on the quality of their research. To do this, it sends out a
questionnaire to the director of research or head of investments of
about 750 money management groups as well as to corporate
clients and a sample of analysts and portfolio managers.
Respondents are interviewed, and the opinions of a total of almost
2,000 people are tapped to produce the "All-America Research
Team."

Table 13-2 summarizes the reputational rankings of these

banks based on surveys of the quality of their research between
1991 and 1993. The ranks are adjusted for the relative size of
each bank's research departments. Topping the list are
Donaldson, Lufkin — number 1 since 1990 — and Wertheim
Schroder. Although both are far smaller than rivals like Merrill
Lynch and Goldman Sachs, they earn consistent praise for their
research. Since Merrill stands at a lowly eleventh place in the
ranking, it's safe to conclude that research is not the backbone
of Merrill Lynch's reputation. Although its research is well
regarded, the bank is more labor intensive and therefore much
less productive than its rivals.

459
 In the underwriting business, reputation is critical. When a
bank agrees to help a company raise capital by issuing new
shares of stock, it normally cooperates with rival banks to sell
those securities to appropriate investors. Since no investment
bank has enough brokers of its own to sell out a large corporate
issue, rivals act like retail outlets. They share with the issuing
bank the management and commission revenues derived from
actually selling the securities.

Banks announce a newly issued security by placing ads in

financial newspapers like the Wall Street Journal. Although these
standardized ads register the "birth" of a security, they are
paradoxically described on Wall Street as "tombstones." Listed on

460
every tombstone are all the banks that have agreed to
collaborate in distributing the security; they constitute the
"syndicate."

If you pool all the tombstones issued in any one year, you'll
find that the order in which syndicate members are listed on
the tombstone reflects their position in the hierarchy of banks
in the industry.6 Reputation has implications for which banks
get invited, how much of an issue each bank gets to distribute,
and how large a cut of the fees each one gets. Given the
financial implications of getting "bracketed" at a particular
level, banks argue about the order in which their names appear
in tomb­ stone ads: "High-status firms want to reinforce their
status by maintaining the rank order, whereas lower-status
firms seek to improve their status by moving up. . . . In some
cases, firms will not participate in a deal rather than have
themselves listed below other firms they consider of lower
status."7

Tombstones invariably remind both banks and their clients

what the pecking order is — who's on top and who isn't — and
they raise some valid questions. Where do these rankings come
from? How do banks earn top billing in the minds of customers,
whether for their underwriting, trading, advising, or research?
How do they acquire the reputations that entitle them to
preeminence in the eyes of their peers? And how can
investment banks safeguard against reputational loss from
rogue behavior?

REPUTATION AND IDENTITY

In the financial business, there are essentially two types of
institutions: specialists and generalists. Specialists build
reputation by staying small. They focus on delivering a unique
service to corporate clients quickly and capably. Often these

461
specialist firms can do a better job for a corporate client in a
particular transaction than can a big-name generalist. Indeed,
throughout the 1980s and into the 1990s, large banks often lost
ground to speedier, more focused, and more aggressive
specialists. In contrast to specialists, top-tier investment banks
improve their reputations by enlarging their service offerings.
To do so, they grow their capital base and expand their
distribution network. As you might expect, the premier
investment banks-the so-called bulge-bracket banks — are all
very big. They're generalists.

THE SPECIALTY BANKS

The industry provides safe haven for a large number of smaller
securities firms that specialize in delivering a unique service to
corporate clients. These specialist firms build reputation in
distinctive ways.

Consider Herzog, Heine & Geduld (HHG), a securities firm

that specializes in trading stocks in the over-the-counter (
OTC) market. Most of its clients are institutional funds. In
reputational surveys of the OTC market, HHG ranks among the
leading firms, in close competition with its two archrivals Alex
Brown and Montgomery Securities. Though smaller, these
specialist banks regularly vie with top-tier powerhouses like
Goldman Sachs to entice institutional investors to invest in the
stocks of smaller OTC companies rather than those of the
larger companies traded on the major exchanges.

Spear, Leeds & Kellogg (SLK) is another type of specialist

firm. Since 1931, SLK has provided other banks with trading
services by maintaining a market in the securities of some 230
companies on the New York and American stock exchanges,
including top names like Boeing, Mobil, and Motorola. Over the

462
years, the firm has built a reputation for being among the best of
market makers. It also has a reputation for being frugal with its
own money. The spartan facilities I visited on lower Broadway
reflect that attitude. As one of the firm's 30 partners told me:

To a specialist firm, the basis of a good reputation is

financial. You can schmooze all you want, but if you don't
have the capital, financial history, and performance, you
won't make it. Your reputation depends on how your clients
see your management. We have a reputation for being well­
managed, not overly aggressive. We stick to our knitting.
We're also known to be very conservative. We have to be
conservative because we're in some of the riskiest businesses
of all-risk arbitrage.

As a specialist, SLK competes principally with the likes of

MJ Mien and Henderson Brothers on size-the bank's total
capital base. In the OTC market, its principal rival is none other
than Herzog, Heine & Geduld. One way SLK retains its
reputation is by always putting its customers first: "The firm
maintains close rapport with the companies in which it
specializes. Regular communication is required in order to
assure that management is satisfied with the trading of the
company's stock."8 As one of the partners added:

We try to help customers through their bad times. For

instance, if we get information about a transaction, we'll
make sure our customers get it first, even if it means one of
our partners loses. Because we're part of a very small
community, that kind of story gets around and boosts our
reputation. For us, communication is key. That's why I'm on
the phone regularly with our customers. You never want a

463
 customer or banker to find out something negative from a
third party.

Given the high stakes involved in making markets, the firm

puts a lot of stress on industry apprenticeship-a recurring
theme in the industry. Its 800 employees continually take
classes inside and outside the firm. As a partner put it: "People
stick around for a long time at SLK, but before an employee will
make partner, you want to make sure he has the proper
mindset."

Neuberger & Berman is yet another type of specialty firm.

Founded in 1939, the company has built an enviable
reputation as a specialist in money management. Its in-house
analysts do corporate research on more than 700 companies.
Their analyses enable the firm's money managers to act like
entrepreneurs in building portfolios of stocks and bonds for
wealthy individuals, corporate pension funds, and school
endowments. Today, Neuberger & Berman manages more than
$20 billion in mutual funds, pension funds, and individual
funds. As a member of the firm recognized: "For us, reputation
is key. When people leave their money with you, it's more than
a heart transplant. Clients will tell their money managers more
than they tell their doctors or lawyers."

The company is known for being bright, customer oriented,

careful, and conservative; it is not known for being on the
cutting edge. In part that's because Neuberger & Berman
prefers to hire older money managers — the average age of
employees is more than 50 years. "We hire only people who
have been through a bad market cycle. We're very cynical about
having younger people manage our funds. That's because we
believe that if you've been through a down, you'll take less risk.
Another way to put it is that we're plain vanilla."

464
 Despite continuing technological and economic challenges,
the firm's specialist identity has remained impervious to
change over the years. Past attempts to diversify into other
products and markets were quickly undone, and under founder
Roy Neuberger's streetwise leadership, the firm has opted to
stick to its knitting. According to one long-time employee:
"We're very internally focused. We don't trade real estate, art,
rare coins, commodities, or tax shelters. We don't want to
diversify. We tailor our operations to the people we have
instead of the other way around."

Consistent with its conservatism and internal focus,

Neuberger & Berman maintain an introverted facade. It avoids
strategic efforts to shape its own reputation. Most
emphatically, for instance, the firm refuses to advertise to
recruit customers. Like many prestige-oriented businesses,
they expect new business to come in through a network of
referrals and by word of mouth. At the same time, caution
dictates an arm's-length relationship with the media. That's
why no one in the firm has direct contact with the press. The
official policy is to avoid publicizing the company's opinion on
any financial matter. As a senior employee put it: "We're
always quoted out of context, so we avoid giving quotes. We
regularly turn down invitations to speak out for fear of looking
sensationalistic."

In exceptional situations, the firm does take ads in major

papers to comment on what it considers to be "alarming"
industry trends. The big debate on program trading that took
place in the aftermath of the stock market crash of 1987 was a case
in point. On that issue, the company decided to express itself in a
high-profile ad published in October 1989 in the New York Times,
the Wall Street Journal, and Investor's Daily:

465
 We're angry at what is happening to the American
investor. The issue is program trading, especially what's
known as stock-index arbitrage. . . . In short, program
trading is nothing more than a numbers racket in which
those running the numbers win, while individual investors,
corporations, and the American economy lose. . . . We usually
stay out of the limelight and work quietly to increase our
clients' financial well-being. But program trading is such a
threat to everything we find positive about investing in
America's future that we believe action must be taken now.

As these examples suggest, specialist firms share a

common concern with continually defining and refining their
target market. They build reputation by developing a strong set
of relatively narrow skills that give them a competitive
advantage against their larger rivals. Specialist firms also favor
lower public profiles and seem to delight in their introverted
postures. Not unlike specialists in other industries, they rely
heavily on word-of-mouth advertising and avoid direct
involvement in actively shaping their external images.

THE GENERALIST BANKS

Unlike specialists, major investment banks build reputation by
enlarging their scope of operations. They work hard to encompass
the full gamut of securities and strive to create new sources of
revenue by introducing ever more innovative financial
instruments and services. Increasingly these top-tier banks
operate globally. They maintain branches outside the United
States and trade securities on the exchanges of countries like
Japan, England, France, and Germany.

Because of their wide reach, strong capital base, and

breadth of offerings, generalist firms find it difficult to

466
differentiate themselves from one another. As one banker said:
"Most Wall Street firms don't really do anything different from
one another. There's high overcapacity in the industry. You
could probably shrink each one of them to 10% of what they are
without losing much." Another senior banker concurred:
"Most new products are short-lived and our services are
commoditized, so there's no real difference between the
handful of firms that can pro­ vide them. These companies can
only differentiate themselves based on ( 1) how hard they work,
(2) how fast they are, and (3) how ethical they prove to be."
Differentiation among generalist firms is accomplished largely
by their carefully managing the way clients perceive them-by
engaging in active efforts to build, sustain, and defend their
reputations. To explore the corporate reputations of generalist
banks, in 1992 I surveyed some 725 of their major corporate
clients. The questionnaire asked the chief financial officers of
these companies to nominate the banks for which they had the
most respect and with which they did most of their business.
Exhibit 13-1 lists the top 20 banks that got the most votes from
the 268 companies that replied. These generalist banks are
clearly the most active in the industry.

What factors influenced a bank's reputation? A statistical

analysis of the reputational rankings in Exhibit 13-1 suggests that
four factors differentiate the high-visibility bank from the low-
visibility bank:

• Capital base: A bank's visibility to clients was

significantly-and positively-related to the bank's
total capital position.

• Growth rate of capital: Banks expanding their capital

base at a faster rate were less attractive to clients.
The growth rate of a bank's capital position appears

467
 to signal to clients that the bank may be
overreaching, which significantly dampens the bank's
visibility.

• Number of branches: The number of branches a

bank operates throughout the United States, an
estimate of its strength in distribution, proved to
be inversely related to the bank's attractiveness to
clients.

• Number of agents: Agents constitute a measure of

retail distribution. Large corporate clients appear
less interested in banks with a large network of
agents.

Overall, then, clients ascribe better reputations to banks

that can provide higher-quality services. A strong capital base
is key, but banks that grow their capital base too quickly worry
clients. Strengths in distribution through branches and agents
appear to have a negative affect on a bank's external image
with corporate clients, because it seemingly suggests a
stronger commitment to retail brokerage activities than to
financial deal making.

468
 In 1992, generalist banks fell into a three-tiered hierarchy. At
the top were the "premier banks," dominated by big names like
Goldman Sachs, along with Merrill Lynch, Salomon Brothers,
Morgan Stanley, CS First Boston, and Shearson Lehman. They
were followed by a second tier of "select banks," led by J. P.
Morgan, Kidder Peabody, Smith Barney, and Bear Stearns. Finally,
in the third tier were the smaller, high-profile, "niche banks,"
including Alex Brown; Lazard Freres; Donaldson, Lufkin &
Jenrette; Dillon Read; and Prudential Securities. All of these
investment banks are generalists, with varying degrees of
diversity and aggressiveness.

Moving between the top tiers of the industry is difficult. There

are significant barriers that derive from perceptions of the bank by
clients and from self-perceptions within banks. For one, clients
recognize the hierarchy of prestige of the banks and are unwilling
to alter existing relationships. At the same time, bankers

469
themselves often participate in recreating the established order, at
the cost of occasionally shooting themselves in the foot when they
insist, say, on lead-bank status on a new issue, despite defections
by rival banks.

Historians like to point out how an archetypal rivalry between

upstarts and blue bloods is actually woven into the historical
fabric of investment banking. They remind us that at the turn of
the century the industry was dominated by the House of Morgan,
the ancestral parent of J. P. Morgan and Morgan Stanley. It was
"the establishment," and upstarts fed on the scraps from the
Morgan table. As one historian put it: "Gold­ man Sachs
specialized in commercial paper, Lehman in commodity trading.
Around 1900, they began underwriting shares for companies that
were spurned by the gentile firms as too lowly-retail stores
and textile manufacturers, for instance. Among them was
Sears Roebuck, introduced by Goldman Sachs and Lehman
Brothers in 1906."9 In due course, a new "establishment"
was born that included former upstarts Goldman Sachs and
Lehman Brothers along with the pedigreed successors of the
House of Morgan-]. P. Morgan and Morgan Stanley. Jointly
they came to dominate the prestigious and profitable
underwriting business that derived from school ties and the
"old boy network."

The rivalry between establishment and upstart would recur,

however. Salomon Brothers was launched as a bond-trading
house in large measure because of its outsider roots. The now-
prestigious Bear Sterns was founded in 1923 as a rough-and-
tumble trading firm, with no connections to the corporate
establishment. In the late 1970s, the recently merged
Philadelphia-based firm of Drexel Burnham, like its upstart
predecessors, found it difficult to attract first-rate companies
as clients because of the brash, outsider image that one

470
partner, Burnham & Company, had brought to the other-the
older, more genteel Drexel Firestone.

The rivalry between rednecks and blue bloods, between

moneyed upstarts and the establishment, would also take root
at Lehman Brothers in the 1980s. As trading became strong
enough to rival banking as a profit center in the bank, traders
sought parity with the bankers who had looked down on them.
In the end, the firm virtually exploded from the internal
conflict between traders and investment bankers and was
absorbed into the rapidly expanding Shearson retail empire.

Over the years, these generalist banks have become well

known to one another and to corporate clients for their
historical strengths in particular markets and products. Among
premier investment banks, for instance, Goldman Sachs and
Morgan Stanley now owe their sterling reputations to
phenomenal strength in underwriting — the ability to sell out a
new issue of securities. In contrast, Salomon Brothers derives
its reputation from the bond-trading side of the house, and the
aggressive, gun-toting image that the traders project. Different
still are the first-rate reputations of firms like Merrill Lynch
and Shearson (absorbed in 1994 into the Traveler's Smith
Barney subsidiary), which draw heavily on client awareness of
their powerful retail distribution networks. All of them try to
exploit their reputations to build linkages across the different
financial markets in which they all participate.

The second-tier "select banks" have reputations for dealing

with smaller and less prestigious client companies than
premier banks. They are known principally for their historical
strengths in serving the complete needs of clients in focused
markets: Smith Barney for its established strength at retailing
financial products to middle-market firms; J. P. Morgan for its
blue-chip clientele in wholesale banking; Kidder Peabody for

471
its underwriting business; and Bear Stearns for its scrappy and
aggressive trading.

The third tier is dominated by niche players like Alex

Brown, Lazard Freres, and Dillon Read. Niche firms have
reputations for doing a better job than generalists in focusing
on key products and so attract more "transactional" clients.
For instance, Alex Brown is widely known for its strength in
IPOs (individual placement offerings), Lazard and Dillon Read
for their advisory business in mergers and acquisitions, and
Donaldson, Lufkin & Jenrette for its involvement with middle-
market firms and its strength in issuing IPOs.

Ultimately, however, what underlies every bank's

reputation is money. As a prominent banker put it, with only a
hint of cynicism: "In this business, there's only one thing that
builds reputation: How good are your deals, and how much you
make for your clients. The only thing you can really use hype
for is to get into the advisory business-that's where
friendships can really count."

RENTING A BANKER'S REPUTATION

In the process of mediating flows of capital, investment
bankers build an extensive network with firms, investors, and
rivals. Historically, bankers developed close, almost proprietary,
relationships with their clients, few of whom would ever dream of
betraying their banker by associating with a rival.

Things changed in the 1980s. Much has been written about the
decline of "relationship banking" in those years. The
globalization of the securities markets combined with
technological developments in funds transfers and a booming
economy to fuel rivalry between investment banks. Rivalry, in
turn, dissolved many established relationships between clients

472
and bankers, as clients shopped around for better deals and as
newcomers to the industry aggressively promoted their
innovative products. An era of transactional banking had
seemingly arrived. As one senior banker with whom I spoke at
the former American Express subsidiary Shearson­ Lehman
recognized: "Companies now do a lot of competitive bad­
mouthing in this industry as a way of selling their own
products. We're highly sensitive to the kinds of commentary
competitors make about us to governments and corporations.
During the Salomon crisis, you had Goldman, Lehman, and
others bad-mouthing Salomon, telling issuers that Salomon
was dead."

Despite growing rivalry, some 46 percent of the 268 major

companies that responded to my survey still claimed to
maintain a primary relationship with their banker — a
relatively high proportion. Statistical analyses showed that it's
the more profitable companies that favor relationship banking,
whereas less profitable clients shop around for the "right"
banker at every transaction. Not surprisingly, perhaps,
transactional clients reported having more frequent contact
with their temporary bankers-a reflection of their relative lack
of familiarity with the banks and their greater need for advice.
Indeed, transactional clients reported being less centralized in
their decision making about financial matters, which also helps
to explain why they parse out their business to different banks.
In sum, the study showed that banks' reputations play an
important role in affecting a client's decision of which bank to
hire. It suggests that when companies call on an investment
bank, they are in effect "renting" the bank's reputation.
Better-regarded client companies associate with high-
reputation banks to signal their common membership in an
elite private club. Lower-status companies may hitch themselves

473
to better­regarded banks in an effort to benefit from the banker's
reputational halo.10

The hostile takeovers launched in the 1970s also built

lasting reputational halos around banks for representing either
aggressors or defenders. As often happens, Morgan Stanley and
Goldman Sachs stood on opposite sides of the issue:

Representing the restless, mature giants who wished to

diversify into other fields, Morgan Stanley took the offense.
Associated with the more medium­sized and retail firms
likely to be prey, Goldman Sachs would refuse to represent
aggressors, although it would sometimes offer them advice.
Gradually Wall Street divided into two camps — the offensive
(Morgan Stanley, First Boston, Drexel Burnham, Merrill
Lynch, and Lazard Freres) and the defensive (Goldman Sachs,
Kidder Peabody, Salomon Brothers, Dillon Read, and Smith
Barney).11

Once established, such reputations influence the kinds of

clients each firm chooses to represent.

PREVENTING ROGUE BEHAVIOR

A bank's reputation also matters to potential employees.
They interpret reputation as a signal about the bank's internal
practices and recognize what it implies for their work lives,
personal income, and careers. As two industry observers note:
"If potential hires think a firm is in the 'second tier' or
'unethical,' they will be concerned about the firm's future and
their own personal reputation and will be less likely to join it if
they have other opportunities."12

474
 The reputations of investment banks therefore coincide
closely with their internal character and identity, and develop
in part from each bank's recruitment, training, and
compensation practices. A senior banker described to me the
importance in recruitment of achieving "fit" with his bank's
trading culture: "We don't look for basic skills when we recruit.
Instead, we look to see whether a person fits into the culture.
And that means whether he's aggressive, quick-moving,
quick-acting, quick-thinking, results-oriented, something of a
braggart, thumbing their nose at everyone. We ask: Is this guy
or woman tough enough to take it?"

Bear Stearns operates with just such a street-smart,

maverick culture. During the 1980s, the bank's well-known
CEO Alan "Ace" Greenberg circulated a memo in which he
described the firm's recruitment philosophy: "Our first desire
is to promote from within. If somebody applies with an MBA
degree, we will certainly not hold it against them. But we are
really looking for people with PSD degrees. PSD stands for
poor, smart, and a deep desire to become rich."

Even if a bank does a good job at recruiting, however, the

record suggests that people will still look out more for their own
interests than for the interests of the bank. It therefore magnifies
the importance of designing intensive training experiences and
creating foolproof monitoring systems to ensure compliance with
the bank's operating philosophy. As a senior banker told me:
"When you believe a particular idea is going to drive the business,
you've got to communicate it and create policies to support it.
You've also got to set an example: When you've got voracious
man-eaters at the top, that's the kind of company you get. Around
here everyone sees what I'm doing."

Before he stepped down as CEO of Bear Stearns, I spoke

with Alan Greenberg by phone. The cantankerous CEO

475
surprised me when he asserted that reputation building was
nothing more than one simple thing: "Managing by example."
He seemed to believe that whatever he did, the rest of the firm
would invariably copy. A good reputation simply meant that
you personally were doing the right things.

In premier banks, there's no doubt that recruiting and

example setting play a key role in managing reputation. Training,
however, counts more. At highly rated J. P. Morgan, from the
bank's earliest days new management trainees underwent a
rigorous six-month training program meant to acculturate them
to the hank. Rarely did 23 Wall [the original headquarters address]
recruit from outside, and it spent millions annually on free
lunches to promote camaraderie. There remained an ethic of not
stealing credit or upstaging colleagues. "The Morgan feeling of
collegiality is the most important thing we've got," said former
Morgan president Rod Lindsay. 13

Training programs have grown more important as leading

banks struggle to diversify their product portfolios. When
underwriting became a more mundane activity in the 1970s,
generalist banks committed themselves heavily to the lucrative
takeover business. To compete, premier institutions expanded
quickly, bringing newly minted college graduates into
positions of significant responsibility, with minimal training.
To prevent information leakage between their advisory and
trading functions, banks erected so-called Chinese Walls
between departments. Simultaneous participation in
underwriting, trading, and acquisitions, however, created
potentially thorny conflicts of interest and ethical issues. It
called for more intense training, more profound consideration
of ethical issues:

476
 Morgan Stanley tried to throw the fear of God into
merger specialists and monitored their activities closely.
Briefed on legal and ethical issues, young professionals had
to sign statements that they understood house rules. To faster
a healthy paranoia about using inside information for
personal gain, scare memos listing grounds for dismissal
were circulated periodically. . . . Every fortnight, security
officers conducted electronic sweeps and projects were
camouflaged with the names of English kings or Greek
philosophers. Staff members weren't permitted to discuss
them in halls or elevators and weren't sup posed to k now
each other's deals. Stock research people couldn't even
browse in the library's corporate-finance section.14

Finally, most top investment banks like to pay relatively

modest salaries, with high pay-for-performance bonuses. To
encourage teamwork across departments and identification
with the bank's overall interests, many have moved away from
paying bonuses from a departmental pool to paying bonuses
out of an aggregate pool. By sharing in company­wide success,
the bonuses have decreased the likelihood that individual
traders or bankers would show excessive zeal in ways that
might jeopardize the bank's reputation.

Unfortunately for Drexel, that wasn't the case in the mid-

1980s. Under Michael Milken's tutelage, the bank's high-yield
department operated in virtual secrecy and with complete
autonomy-an abnormal practice for which Drexel's
shareholders and other employees ultimately paid the price. As
reporter Connie Bruck documents:

Milken told his boss . . . that he wanted to create an

autonomous unit, with its own sales force, its own traders
and its own research people: the high-yield and convertible-

477
 bond department. . . . From the very beginning, Milken made
it mandatory that a certain portion of his people's pro fits
were reinvested in trading accounts which he ran. It was a
system of forced savings, in which these salesmen and traders
were able to watch — from a distance — their wealth
accumulate. With the kind of return Milken got, no one really
had much to complain about. On the other hand, if one
decided to leave him on less than amicable terms, as one
trader would, there might be difficulty getting one's money
out. It was a powerful disincentive to taking any secrets from
Milken's operation to a rival firm.15

The combination of excessive autonomy without

accountability and acculturation proved costly, first to Drexel's
reputation and then to its survival. In large measure, the issue
was revisited time and again in the early 1990s: first at
Prudential Securities, where the quest for higher volume-based
bonuses encouraged misrepresentation of particular securities
by sales staff; then at Salomon Brothers, when the bank and
one of its top traders were found guilty of violating auction
rules in trading government bonds; next, at none other than
Bankers Trust, the fast-growing newcomer to investment
banking in the 1980s, with a corporate culture founded on
individualism, entrepreneurialism, and autonomy.

In the early 1990s, Bankers Trust found itself charged by

former clients Gibson Greetings (the card maker) with
misrepresenting the risk of various "derivatives"-a set of
complex financial instruments used mostly by sophisticated
corporate investors to manage their interest costs on
outstanding debt. According to government investigations in
the case, Bankers Trust staff lied to Gibson about how much
money it was losing in these transactions. Unfortunately for
Bankers Trust, the lies were actually recorded on tape as part of

478
an internal system set up by the bank itself to monitor trades.
So much for the bank's ability to build an ethical culture in an
individualistic environment motivated by greed that rewarded
growth.

Finally, nowhere was rogue behavior made more visible

perhaps than in March 1995 when Barings PLC, the British
investment bank, was driven into bankruptcy by an
overzealous trader in "derivatives" for the bank's own account.
The evident lack of corporate controls and the bank's inability
to prevent unbridled speculation by a lone trader in its
Singapore office still puzzles most observers.

Since then, the tide has turned on Wall Street. As premier

institutions have faltered, they have worked to reinforce
internal systems for recruiting, training, paying, and
monitoring traders and bankers in an effort to prevent rogue
behavior. Their struggle backs the importance of enacting a
coherent set of recruitment, training, control, and
compensation systems that crystallize the bank's shared values
and magnify for all employees the reputational as well as the
financial risks of their activities.

THE MEDIA FACTOR

The struggles of the financial services industry illustrate the
role of the media in reputation management. As indicated in
chapter 6, most banks shun celebrity and favor a more introverted
posture. As one banker told me, they prefer that their products act
as their PR. In his prize-winning biography, The House of Morgan,
author Ron Chernow recognizes banking's historical inclination to
secrecy:

479
 Though the world's prestige investment bank, Morgan
Stanley seldom appeared in the press. It didn't promote
itself and conscientiously avoided publicity. . . . To
advertise would be ''kind of cheap . . . ." Investment
bankers subordinated themselves to clients and tried to
keep their pro files low. . . . This aversion to publicity was
related to the restrained style of competition: if you
couldn't raid other firms' clients, why bother to advertise?
Morgan Stanley's goal was to freeze the status quo.16

In the 1970s and 1980s things changed, and many banks

found themselves thrust into the fray. As one banker reminded
me: "If you go back 15 years, there were probably no PR or
media people in the industry. They started doing it in the 1970s
and 1980s, and that generated incredible interest in investment
banking that wasn't there before. It helped boost the salaries
and prestige of bankers and attracted an aggressive new breed
into the industry." Broker E. F. Hutton was among the first to
shape an aggressive image through the televised media. Its
arrogant tagline-"When E. F. Hutton talks, people listen"-
became one of the most widely known mottos of all time. It was
designed to support the company's large retail network of
brokers in their efforts to reel in individual investors.

The avalanche of media attention, although initially

flattering, quickly turned deadly as reporters uncovered
scandal after scandal and used them to deride the industry.
Various watershed articles stand out for their attacks on the
premier banks and the implicit signal they gave that all banks
were fair game.

480
MORGAN STANLEY TRIPS
In 1978, the Wall Street journal broke a story centered
around Morgan Stanley that launched extensive debate about
client-banker confidentiality. The incident in question
involved Morgan Stanley's improper sharing of information
obtained from one client with another client during a takeover
battle. The article strongly suggested ethical violations at
Morgan Stanley. It was followed by other articles that
demonstrated the ineffectiveness of Morgan Stanley's Chinese
Walls: While one department of the bank was pursuing
takeover discussions with a client, the bank had taken a large
stake in the target, giving it a vested interest in the outcome. In
1981, the first criminal indictments ever brought against
investment bankers were handed down. They produced jail
terms and fines for a former Morgan Stanley banker. The
charges of insider trading did significant damage to the bank's
reputation and foreshadowed the Ivan Boesky debacle.

DREXEL COLLAPSES
Throughout the 1980s, secrecy had been crucial to the
operation of Michael Milken's junk-bond machine. From the
start, he shunned publicity, convinced that it had no upside and
a considerable downside. Having been ignored, the press would
have a field day uncovering Mr. Milken's maneuvers and the
stores of data his department had kept from the public. The
publicity would not serve the other parts of the Drexel empire
well. In its last years, the bank tried to revive its sagging
fortunes with televised ads that promoted Drexel's populist
image of helping "the little guy." By then, of course, it was too
little good press, too late.

481
GOLDMAN SACHS STUMBLES
Goldman Sachs treasures privacy and discretion. It's not a
firm that likes to see its name in the press. In 1987, however,
the firm got dragged into the public eye when Robert Freeman,
a senior partner in charge of risk arbitrage, was found to have
ties to arbitrager Ivan Boesky and to others accused of insider
trading at Kidder Peabody and Drexel Burnham. After a drawn
out negotiation, Mr. Freeman pleaded guilty in 1989 and
resigned from the firm, leaving its reputation a tad sullied.

SALOMON'S GREED
In August 1991, it was Salomon's turn to fall. In a flurry of
damaging revelations to the press, the bank admitted guilt in
attempting to corner the market in five separate auctions of
Treasury securities. In an attempt to manipulate the prices at
which those securities sold and thereby make a profit,
Salomon's rogue banker Paul Mozer had not only exceeded
bidding limits at the regulated auction but submitted false bids
on behalf of clients without their consent. A barrage of negative
publicity greeted the announcement, and Solly's market value
dropped by some $500 million, more than 15 percent (see
chapter 15).

KIDDER COLLAPSES
Joe Jett may have fabricated paper profits of $250 million in
1993, but it was media exposure from the scandal that turned a
lapse in control into a public relations nightmare for Kidder
Peabody's conservative parent, GE. Unable to cope with the
damaging effects of the scandal, in October 1994 GE essentially
dissolved the Kidder name by selling off the bank's investment
banking unit to PaineWebber for $650 million, a fraction of its
original investment.

482
ANY LESSONS?
As these public beatings suggest, managing the press looms as
an ever larger concern for investment bankers. One industry
insider justified the reactive posture of most leading investment
banks as follows: "You can't deal with the press in the middle of a
crisis. Where reporters are concerned, ideally we'd like to play
offense, but most of the time we're playing defense." Still, the
introverted facade that banks maintain clearly has more downside
risk than was ever anticipated. In the struggle to maintain
reputation, introversion may be unwise. Some banks are
recognizing the danger of remaining outside the community of
journalists involved in print and television that regularly monitors
the industry. In my conversations with different bankers, it struck
me that many banks, especially the bigger, potentially more
vulnerable generalists, were coming to grips with the need to build
stronger relationships with constituents other than clients to
protect their reputational capital. As the next chapter suggests, J.
P. Morgan is among the more active of the top banks in reaching
out to one of its key constituencies: New York City.

483
CHAPTER 14:
DOING GOOD,
THE MORGAN WAY
A man always has two reasons for doing something: A good
reason, and the real reason.

]. P. Morgan

C
OMPANIES THAT rate well in reputational surveys
demonstrate consistent attention to constituents other
than clients. J. P. Morgan is among the premier banks in the
United States. It regularly appears on top-10 lists of the best-
managed companies. This chapter explores some of the bank's
efforts to demonstrate corporate citizenship. The bank focuses on
"doing good" in the community with which its employees most
closely identify, the city of New York. I argue that J. P. Morgan's
sterling reputation derives in no small part from the bank's efforts
to create a symbiotic link with the city that accounts for most of its
revenues. Acts of corporate citizenship are taken seriously by most
of the bank's employees, if only because everyone recognizes that
doing good is, quite simply, good business.

COMMUNITY ACTIVISM
On June 11, 1992, I joined a group of 40 teachers and principals
from two New York public schools at J. P. Morgan's headquarters
to celebrate a major transition. An independent program, designed
with support from Morgan to improve teaching quality in public
schools, was being adopted by the city's Central Board of
Education to be put into effect throughout the school system — a
clear sign of success. The professional development laboratory

484
had grown out of a private initiative begun in 1988 to improve
public education by providing teachers with growth opportunities
and peer feedback on teaching methods. The program brought
together representatives from New York's Board of Education, the
United Federation of Teachers, the Manhattan Borough
President's Office, the City Council President's Office, and banker
J. P. Morgan.

Within Morgan, Hildy Simmons, head of community relations

and public affairs, convinced the bank to contribute more than
$900,000 of funding. She also mobilized some of the bank's staff
to hold skill-building workshops for teachers. After two city
schools had been selected as test sites, a number of Morgan
volunteers were picked as school liaisons, and groups of teachers
were put through staggered four-week cycles during which they
left their classrooms to observe more experienced teachers and to
work on skill building and professional development. At the
cocktail celebration, everyone I spoke to testified to how the PDL
pilot program had been both a personal and an organizational
success. A month later, on July 25, 1992, I joined yet another
celebration sparked by Morgan. This time we were far away from
the bank's post­modern headquarters, in one of New York's more
colorful but poor neighborhoods. Gourmet ice cream gurus Ben
Cohen and Jerry Green­ field, who had arrived from their Vermont
headquarters along with a busload of employees, grinned proudly.
News cameras rolled, spectators gawked, music blared, children
skipped rope, dancers frolicked, and everyone crowded around to
sample free ice cream up and down New York's 125th Street in
Harlem. The occasion? A block party celebrating the opening of
Ben & Jerry's first Partnershop, a revolutionary alliance between
the well-regarded Vermont ice cream maker, a Harlem
entrepreneur by the name of Joe Holland, and HARKhomes, a
nearby homeless shelter founded by Holland. Joe Holland's idea?
To create a viable business in a distressed neighborhood, capable

485
of providing disadvantaged residents with employment
opportunities and job training. As Mr. Holland put it: "The
challenge is to meld the profit-making goals of a business
enterprise with the social mission of HARKhomes and the
economic development needs of a courageous comeback
community. My greatest hope is that, by setting a sustainable
example, we will encourage other companies and organizations to
establish similar programs for doing well by doing good."

In realizing the project, no one proved more valuable than J. P.

Morgan's Oliver Wesson, president of the Morgan Community
Development Corporation. Since early 1991, he and the bank's
subsidiary had helped both to structure the deal and to identify
viable lending sources for start­up and operating expenses. In
1992, Morgan itself turned investor by purchasing some $65,000
in preferred stock from the scoop shop. With ice cream in hand
and family in tow, Wesson obviously had much to celebrate on
that sunny July afternoon in Harlem.

Both of these events demonstrate the range of contributions

that prominent companies like J. P. Morgan regularly make to
sustain their reputations.

J. PIERPONT MORGAN'S LEGACY

Morgan sustains its first-rate reputation in New York by
"doing good" in two principal ways: It donates considerable
sums of money and time to needy nonprofit groups, and it
invests in community development. Much of the bank's
commitment to good citizenship harks back to the philosophy
of "enlightened self-interest" propounded by its influential
founder, Pierpont Morgan.

Mr. Morgan became interested in philanthropy at an early

age. Unlike such other noted philanthropists as John D.

486
Rockefeller and Andrew Carnegie, however, Pierpont Morgan
never developed a philosophy of giving; he simply gave to the
causes and institutions that pleased him most, especially to
religious, cultural, and educational institutions that were
private and elite, whether the Wadsworth Athenaeum in
Hartford, the Harvard Medical School, St. Paul's Cathedral in
London, or a hospital in Aix-les-Bains. In New York, he made
large gifts to St. George's Church on Stuyvesant Square, St.
Luke's Hospital, the American Museum of Natural History, the
YMCA, the Cathedral of St. John the Divine, and the
Metropolitan Opera. His greatest love, however, was art, and
Mr. Morgan played a leading role in organizing and funding the
Metropolitan Museum in 1871, serving as its president from
1904 until his death in 1913.

His considerable charitable contributions aside, Pierpont

Morgan is also well remembered for the sense of institutional
responsibility he demonstrated at critical times. In October 1907,
for instance, the failure of Augustus Heinze, a well-known copper
speculator who controlled a chain of banks, touched off
widespread panic. When one bank subsequently failed (the
Knickerbocker Trust Company), other institutions trembled in
anticipation of an assault by frightened depositors. Since they
were allowed to operate with low reserves, a run on the
unregulated trusts could have created a financial crisis that would
have damaged the national economy. Morgan personally stepped
in and organized the presidents of the solvent institutions to meet
the threat. For two weeks, financiers wrangled in the rooms of Mr.
Morgan's library to raise enough capital to save the trust
companies, the stock exchange, and the city of New York. As
historian Frederick Lewis Allen comments, "In an emergency that
threatened the national economy, the crucial leadership did not
come from the president of the United States or from the secretary

487
of the Treasury. It came from Morgan. Morgan served as a one-
man Federal Reserve Bank."1

Many times since then, the bank's top executives have

played a leading role in averting contemporary financial panics.
A recent example was in 1984, when J. P. Morgan's top
managers were key players following a global run on the
Continental Illinois Bank and Trust Company. With speculation
of Continental's imminent collapse widespread, the Federal
Reserve Bank appealed to Morgan's chairman, Lew Preston, to
help assemble a $4.5 billion credit line for Continental.
Although the U.S. government ultimately had to step in,
Morgan's leading role in mobilizing the banking community to
safeguard the monetary system is widely acknowledged.

This tradition of answering to a higher calling continues to

pervade the company. Morgan's current chairman, Dennis
Weatherstone, is a member of many national advisory groups
such as the Business Roundtable, a high-profile network of
chief executives of the largest American corporations. He also
sits on multinational study groups that contemplate and
analyze the safety and soundness of the financial system
worldwide. The Group of 30 is one such group, its principal
objective being to ensure the free flow of capital to productive
uses around the world. Indirectly, these actions sustain the
bank's reputation.

CONSTANCY IN THE MIDST OF CHANGE

In the late 1920s, the financial services industry was
dominated by the House of Morgan, the jewel in financier J.
Pierpont Morgan's crown.

Fearful of overconcentration, the U.S. Congress passed the

notorious Glass-Steagall Act in 1933 to separate commercial

488
banking from investment banking. As a result, the House of
Morgan was forcibly divided ·into two companies: J. P.
Morgan & Company, a commercial bank, and Morgan
Stanley & Company, an investment bank.

Since 1933, Morgan has operated mainly as a wholesale

bank, providing banking services and loans to blue-chip
companies, governments, and institutions throughout the
world as well as to individuals with a high net worth.
Throughout the post-World War II era, Morgan held a
dominant position in blue-chip lending. In 1956, the Bank
Holding Company Act precluded the bank from acquiring more
than 5 percent of companies engaged in nonbanking activities
and limited its involvement in the securities business. As
deregulation progressed in the 1970s and 1980s, Morgan faced
growing threats from clients themselves, who began borrowing
more cheaply by issuing their own commercial paper or
tapping the bond markets, getting transactional assistance
from other, more innovative banks.

Threatened by aggressive rivals, Morgan moved into

investment banking with determination. Throughout the
1980s, the bank focused its efforts on Europe, where it
became a prominent underwriter of new securities. In the
mid-1980s, to get into the securities business in the United
States, CEO Lewis Preston even considered having Morgan
abandon its commercial banking charter, which would have
meant sacrificing some of its traditional business. It proved
unnecessary. Between 1988 and 1990, industry deregulation
spurred the Federal Reserve into giving Morgan progressive
authorization to underwrite and deal not only in Treasury
and municipal bonds but also in corporate bonds.

In June 1992, Morgan brought to market for the first time in

62 years a $172 million initial public offering of equity

489
securities for Riverwood International. The stock placement
opened a new chapter in U.S. financial history, making Morgan
the first commercial bank to exercise a full range of securities
powers since 1933. Today, although Morgan remains, technically
speaking, a commercial bank, its increasingly visible involvement
in mergers and acquisitions and securities underwriting places it
ever closer to competing with top investment banks like Goldman
Sachs and Salomon Brothers as well as its prominent sibling,
Morgan Stanley. In terms of strategy, the company retains a
strong focus on disciplined diversification. Its clients are relatively
few in number, distinguished not by size but by quality and scope
of activity. The need for sophisticated financial services defines
the market that the bank strives to serve on a global basis.
Although early in the company's evolution Morgan made some
judicious acquisitions, most notably the Guaranty Trust Company
in 1959, since then the company has grown largely by capitalizing
on the skills and creativity of its employees and diversifying from
within. The results have been impressive. In 1992, Morgan's
13,000 employees brought in more than $10 billion in revenues.
With $102 billion in total assets, the company ranks fifty-ninth in
market value among Business Week's top 1,000 and first in banking,
ahead of Citicorp and Bank America.

Morgan is generally characterized as having a fortress-like

mentality: a conservative, relatively low-risk posture in its
lending practices; a cautious stance in investing its own portfolio;
and, most emphatically, a preference for maintaining a low profile
in the media. Throughout the 1980s, it was frequently chastised by
analysts and competitors for lacking aggressiveness. It shouldered
few Third World loans, shied away from high-yield debt
financing, and grew steadily, if somewhat unspectacularly. The
bank's cautious style, however, has proved highly effective as
more aggressive institutions like Citicorp have had to shoulder the
huge burden of low-performing loans.

490
 Growing rivalry in the financial services industry created a
new pool of competitors in the 1970s and 1980s that shunned
the more traditional relationship-based orientation to banking
in favor of a one-shot, transaction-based outlook. Increasingly
under assault was Morgan's historical reliance on a network of
stable relationships with large, established, blue-chip
companies.

Despite numerous flank attacks throughout the years, the

bank remains true to its roots. As chairman Dennis
Weatherstone emphasizes:

Our company's character is woven through J. P. Morgan's

evolution as a global financial intermediary. First, we seek
relationships of trust with clients who have challenging
financial needs. We are international, in perspective and
ability. We don't avoid risk , we manage it. Westress thorough
research and analysis. We believe in personal responsibility,
accountability, and teamwork. Finally, we aim for sound
performance and leadership over the long term.2

The growing importance of investment banking in Morgan's

portfolio has, however, created some tensions in the bank
between the more tradition-bound lending side, oriented to
relationship banking, and the more risk-prone securities
side, which has a more transactional outlook. As the business
mix has continued to evolve, J. P. Morgan has found itself
facing something of an identity crisis and has been forced to
communicate more aggressively with its outside publics.

Internally, the bank recruits top talent, trains for

specialized skills, and rewards professionalism. But it prides
itself on teamwork. In contrast to the individualism stressed in
many rival banks, especially Citicorp, Morgan's culture

491
strongly supports cooperative relationships; team assignments
bring together an eclectic group of professionals to meet client
needs.

Both creativity and common sense flourish when people

with diverse points of view get together. We see it vividly in
working with people of different nationalities, since we have
a long history of international orientation. We purposely look
for diversity of experience right through to the Corporate
Office, the senior governing group at Morgan. We've got four
accents among the five of us, and a mix of business
backgrounds as well. But as much as we believe in teams, we
equally believe in getting the best and brightest on the teams.
And we've got to have people who can balance sound
principles with competitive drive and brilliance.3

The well-greased workings of the internal culture give J. P.

Morgan an external reputation for being fair in its dealings
with clients, employees, competitors, and other stakeholders.
As one manager told me: "We have a reputation for probity,
depth, responsibility, international scope, long­ term client-
oriented focus, and quality in every possible sense of the word.
We are a responsible participant in business finance, in the
world monetary system, in communities, and in the way we
deal with employees. And we care about that reputation, we
care a lot."

In June 1992, ]. P. Morgan announced that it would

participate in a debt-for-nature swap with Bolivia. By donating
its holdings of Bolivian debt to support the country's
environmental programs, the company became the largest
private donor to benefit a single country. The debt had a face
value of $11.5 million and would be converted to approximately
$2.8 million in cash. The funds were to be used by the Nature

492
Conservancy and the World Wildlife Fund to support projects
ranging from the maintenance of national parks to the training
of Bolivians in natural resources management skills. The swap
is representative of the many efforts Morgan now makes to
convey the sense of a social con­ science, which in turn
fortifies its first-class reputation.

Officially, Morgan's outlook is phrased as follows:

Our overall philanthropic objective is to improve the

quality of life in the communities in which we live and work.
We focus our efforts on increasing the capacity of people and
organizations to help themselves, and stress long-term
solutions to problems rather than short-term remedies. We
are often able to supplement and multiply the beneficial
effect of our financial contributions in other ways.

Historically, the bank's senior executives have routinely

encouraged employee involvement in the community.
Following Morgan's fusion with the Guaranty Trust Company
in 1959, for instance, then chairman Henry Clay Alexander
made an explicit and often-repeated exhortation to employees
of the merged company: "I hope that a lot of our people will
take part at the precinct level or otherwise in the affairs of their
community. Make a better citizen and in turn a better banker, if
I may say so."4

A June 1992 memo from Sandy Warner, J. P. Morgan's

president, reminded employees about the merits of corporate
giving and of Morgan's matching gifts program:

A commitment to community responsibility and

involvement is part of our institutional heritage; a similar
personal commitment on the part of many of our people is

493
 one of the things that makes Morgan special. . . . I salute those
of you who have used [the matching gifts] program in the
past and urge everyone to consider taking advantage of it. It's
a great way to make a difference and put Morgan's resources
to work for the organization of your choice.

Rooted in the tradition of noblesse oblige that the Morgan

family itself grew up with, the values of philanthropy and
citizenship permeate the institution and powerfully inform its
reputation.

THE LEGISLATIVE IMPERATIVES

In 1977, the U.S. Congress passed the Community
Reinvestment Act ( CRA) to encourage banks to lend more to
the poor and to minorities in areas where they maintain
branches. Even though Morgan does not operate retail
branches or make mortgage loans it must comply with the CRA
because it is chartered as a commercial bank. The CRA requires
banks to live by the spirit of a broad mandate: to look at lower-
income neighborhoods as potentially profitable markets and to
apply systematic market planning in these areas.

In December 1989, the laws got tougher with passage of the

Financial Institutions Reform, Recovery, and Enforcement Act.
Accordingly, since July 1990 all regulated financial institutions are
now monitored and assessed by examiners who then publish an
overall rating of each institution. Like other banks, Morgan
maintains a CRA log that documents internal discussions about
community development. Every 18 months or so, government
evaluators visit Morgan and conduct an in-depth review of the
bank's compliance with CRA requirements. Regulators scrutinize
logs, records, and documents, from which they compile a report
that provides feedback to the bank about its community

494
performance, including an overall rating on a scale of 1
(outstanding record) to 4 (noncompliance). In its 1992
performance review, Morgan received a rating of 2, indicating a
"satisfactory record of ascertaining and helping to meet the needs
of its entire delineated community in a manner consistent with its
resources and capabilities." As the examiners wrote: "Morgan has
been able to establish a good working relationship with
government and private sector representatives and to identify
opportunities for becoming involved in community development
lending programs."

Are these community-based efforts purely a result of the

need to comply with legal constraints? Not really. As one
manager told me:

Certainly we're doing a little bit more, maybe a little bit

differently because of the way the CRA has been interpreted.
We're spending money differently not because of the CRA but
because it's made us rethink how we could use our money.
The CRA committee has involved more people within the
firm. I hear a lot of positive comments from people who like
to see that M organ is doing something responsible in the
local community in a way that draws on our strengths and
fits our strategy. It makes sense, and people here feel very
good about it.

CITIZENSHIP PROGRAMS
Morgan sustains its first-class reputation through the
activities of two principal groups: community relations and public
affairs (CRPA) and the Morgan Community Development
Corporation (MCDC). Together, CRPA and MCDC strive to fulfill J.
P. Morgan's official mandate: "to ascertain community funding
needs and implement community development lending,

495
investment and charitable programs appropriate to the activities
of a wholesale bank."

The citizenship activities of the bank are officially monitored

by a committee established in 1989 to coordinate the bank's CRA
program. The nine-member CRA committee is chaired by one of
Morgan's vice chairmen and includes Morgan's general counsel,
Morgan's CRA compliance officer, the president of MCDC, and
representatives of the CRPA and four other Morgan departments.

Oliver Wesson, MCDC president since 1990, explains the

CRA committee's relationship to the community development
corporation in this way:

We generally go to them and say this is what we want to

accomplish this year. For instance, we want to deal with
entrepreneurs who want to open up businesses in Harlem
and Bedford-Stuyvesant. We'd like to see $300,000-400,000
equity investments made in these companies, and we'd like to
grow the assets by this much. We ask them if this makes sense
for M organ as a whole. After they give us their input and
stamp of approval, we implement it through our own board.

Jack Ruffle, the head of the CRA committee, points out that the
ground rules for success in community development require
searching for committed individuals who stay with a project.
"Successful community effort occurs," he argues, "only when the
people themselves feel some kind of ownership in the process, and
when we can encourage that, we can have an impact. The trick for
us is to figure out how to do it intelligently and within our means.
Again, it's consistent with the idea of adding value-just as we do
for all clients."

496
 Besides community investments, J. P. Morgan's citizenship
activities include charitable grant making, community
development, volunteerism, networking, and communications.
Through volunteer activities and board memberships, bank
employees are networked into a plethora of local nonprofit
organizations, where they encounter employees of other
companies located in the New York area.

CHARITABLE GRANTS
Charitable grants are made by a staff of five CRPA program
officers led by VP Hildy Simmons. Grant making is determined
through team reviews of more than 1,500 proposals received
annually.

In community development, Morgan benchmarks itself

most closely against investment banks. As one senior employee
points out, "In the U.S. we tend to compare ourselves more and
more with Goldman Sachs and Morgan Stanley. One of our
more traditional peers is also Bankers Trust. We look less to
Citicorp and Chase, although in some businesses they are our
rivals. . . . Overseas, we compare ourselves to Warburg in the
U.K. and Deutsche Bank in Germany-in other words, to the
premiere banks in those countries, the ones that have a
specialized high­ quality wholesale business in particular."

Comparisons with peers are difficult to make as Morgan

moves more aggressively into investment banking. "We used to
look at the money­ center banks," says Simmons, "but that's
become more problematic, since there are fewer of them now
due to mergers. Although we never felt that we had to base our
numbers precisely on what any one of those institutions were
doing, it used to give us a range for what competitors were up
to. As we've evolved in the last few years, we don't even see

497
most of those institutions as competitors anymore, so it's less
useful to look at their numbers."

J. P. Morgan's charitable contributions consist of: grants,

matching gifts, and volunteer funds. The CRPA in New York
distributes 78 percent of the grant-making budget. The remaining
22 percent is distributed locally by subsidiaries located principally
in London, Paris, and Delaware.

In 1990, 2,490 of J. P. Morgan's 12,000 employees made

charitable donations that were matched by the company. In 1991,
the number of employees making donations grew by 60 percent to
3,963. Since many of the 2,000 different organizations receiving
funding through the matching-gifts program are fledgling
nonprofit organizations that rely heavily on individual
contributions for their survival, the near doubling of individual
contributions from Morgan extends the bank's outreach
dramatically and makes it a powerful voice in the community. This
explains why the corporate office encourages employee
participation and makes it likely that the number and size of
Morgan's matching gifts will continue to grow. Table 14-1 shows
that the bank's total pool of funds available for grant making is
constituted of direct corporate contributions, matching gifts, and
volunteer gifts.

SUPPORT OF NONPROFITS
The CRPA allocates Morgan's annual contributions budget to
nonprofit programs and projects of its choice. In 1991, funds were

498
allocated to organizations involved in six principal areas: the arts
(20 percent), education (50 percent), health care (19 percent),
international affairs (10 percent), urban affairs (33 percent), and
environmental issues (4 percent). Of the 1,500 or so requests for
funding received in 1991, 379 programs were funded by the CRPA.
Consistent with the needs of the city, the largest number of grants
were given to nonprofit groups involved in urban affairs, the arts,
and education. Among the recipients of the largest grants made in
1991 were the New York Downtown Hospital ( $330,000), the Fund
for Public Schools ($200,000), Lincoln Center for the Performing
Arts ($100,000), and Educators for Social Responsibility (
$100,000). Some of these funds came from a special allocation
made at the end of the Persian Gulf War to support a nursing
internship and a program on conflict resolution in public schools.

In fact, education receives a disproportionate share of

Morgan's charitable grants. One educational program that has
received extensive commitment from J. P. Morgan in terms of both
financial resources and the involvement of Morgan employees is
the professional development laboratory (PDL). The program was
launched in 1989 as a collaborative public/private venture with the
goal of sharing skills that characterize excellent teaching practice
across the public school system. In two different New York school
districts, teachers volunteered for PDL "sabbaticals" of three to
four weeks, which they spent in the classrooms of outstanding
teachers. They observed their coaches in action, consulted with
them, and actually practiced new skills in the classroom. Mean­
while, adjunct teachers were hired to replace those teachers who
were involved in PDL training.

As mentioned earlier in the chapter, the PDL program

brought together some powerful collaborators in education and
local government. The annual budget was $1.2 million, toward
which Morgan contributed $200,000 for the first two years, an

499
additional $200,000 in 1991, and $500,000 more for 1992 and
1993.

Morgan, however, did more than provide funding for the

program. The bank's human resources department played a key
role in helping to design an interviewing process to select the
project coordinator and other project staff. The training group
sponsored various sessions to train teachers in presentation
skills, facilitation skills, and communication skills. The human
resource department also helped to design an outcome­ based
evaluation system for teachers. Morgan liaisons worked with
teachers to design goal-oriented, action-plan workbooks that
encouraged individual accountability and facilitated the design
of new performance appraisals that are now being used for
teachers.

Morgan also helped the PDL network with relevant

audiences. For instance, some of the adjunct teachers
substituting for those undergoing PDL training were hired
from the financial services industry. As the program
coordinator, Mary Ann Walsh, recalls, "I had thought that we
might be able to find some unemployed people in the industry
with a teaching license. Morgan invited the top employment
agencies the bank deals with to a luncheon, and we ended up
hiring a number of businesspeople as adjunct teachers."

During the early life of the PDL,J. P. Morgan hosted a dozen

luncheons during which teachers and Morgan staff could share
professional experiences. At every lunch, one Morgan
employee sat with two teachers from different districts. "After
an initial icebreaker," says Walsh, "we had them share ideas
about nurturing professionalism, and it was incredibly
instructive for teachers to hear what people from the business
culture did, what they read, and how they formed networks. As
a result of these luncheons, teachers from different schools

500
made contact, shared ideas, and formed networks to continue
the process of professional development."

Two years after the PDL was first introduced, more than 100
teachers had participated and 5,000 students had been exposed
to the program's results. An evaluation study demonstrated
that PDL produced impressive results. Teachers had mastered
more effective teaching strategies and learned to collaborate
with peers; they also reported feeling increased confidence in
themselves as professionals and closer rapport with students.

According to Walsh, "A major reason PDL proved so

successful was that, throughout the program, it never was
Morgan doing for us, it always was Morgan doing with us-a
really successful collaboration." In mid-1992, with the
program widely perceived as a success, PDL and its project
coordinator moved under the umbrella of the Central Board of
Education of New York's public school system. The bank had
done its part.

SOME DIFFERENT KINDS OF ASSISTANCE

Besides providing financial and human resources, Morgan
periodically donates office furniture, computers, and other
equipment to needy groups in the community. First choice is
typically given to holders of community grants. In 1990,
Morgan donated used equipment to more than 25
organizations.

Morgan employees also participate in popular local food

collection programs. Canned food is collected annually and
distributed to 900 programs in the New York City area through
one of the bank's grant recipients, Food for Survival. In 1990,
the food drive collected 2,809 pounds of food for the needy. In
1991, the drive brought in more than 3,449 pounds.

501
 Like many other well-regarded companies, J. P. Morgan also
provides computerized payroll deductions as a means to
contribute to the United Way. In 1991, however, increasing interest
in environmental issues prompted Morgan to offer employees the
opportunity to contribute to Earth Share, an environmental group
as an alternative to the United Way campaign. Total contributions
remained comparable to prior years at about $552,000.

Finally, J. P. Morgan regularly offers community groups-and

especially grant recipients like PDL-free use of meeting facilities
in its Wall Street headquarters building. The bank frequently hosts
social gatherings either to facilitate information exchange or to
provide training in management and communication skills for
nonprofit groups that it funds.

COMMUNITY DEVELOPMENT
Various regulatory amendments instituted in the Bank
Holding Company Act of 1970 allowed bank holding companies
like J. P. Morgan to engage in some activities that were,
technically speaking, nonbanking activities. One of these
happened to be community development, specifically: "Making
equity and debt investments in corporations or projects
designed primarily to promote community welfare, such as the
economic rehabilitation and development of low-income
housing, services, or jobs for residents."5

The Morgan Community Development Corporation,

launched in 1971, was the first such organization created by a
bank holding company. The subsidiary's purpose was to
provide equity interest in joint ventures with developers of
small apartment dwellings that qualified for federal assistance.
It encouraged equity investments in projects that essentially
promoted social welfare.

502
 In 1989, the federal regulatory agencies got more vigilant
about enforcing the Community Reinvestment Act of 1977.
MCDC president Oliver Wesson points out that:

As the criteria for evaluating a bank's CRA performance

got tougher, MCDC shifted its focus to respond to the new
CRA guidelines, yet still did things in a Morgan-like way. The
CRA committee targeted nonprofit financial intermediaries
as a good vehicle for reaching out into the community.
Through them, we could funnel capital to low and moderate
segments of the community, and get very involved in areas
that one would not automatically identify with ]. P. Morgan.

Since 1990, the J. P. Morgan subsidiary has helped

community organizations to construct and renovate low- and
moderate-income housing, to fund small business, and to
promote economic and community development and welfare in
New York City's neighborhoods. Unlike community relations
and public affairs, which focuses on charitable donations, the
MCDC focuses on generating returns for Morgan.

According to Jack Ruffle,

We have a special role to fill because we're not a retail

institution with branches in those communities. So we find
other viable alternatives, such as providing $250,000 in seed
capital for the Community Capital Bank in Brooklyn, or
lending $300,000 at below-market rates to the National
Federation of Community Development Credit Unions: an
umbrella organization for nonprofit, community-based
credit unions that provides capital and basic financial
services in low-income neighborhoods.

503
 The MCDC is legally structured as a separate corporation,
distinct from its parent company J. P. Morgan. Since its
inception in 1971, the subsidiary has built up an equity base of
more than $25 million. This equity base, together with short-
term financing from parent J. P. Morgan, enables the MCDC to
make commitments to the community in excess of $60 million.
It operates with a small staff of three officers but draws on the
legal, accounting, and marketing resources of its parent.

Rather than fund programs directly, the MCDC tends to

make loans to large intermediaries that have more intimate
knowledge of the local area and the skills needed to deliver and
monitor programs. On May 5, 1992, for instance, Jack Ruffle
announced that via the MCDC, Morgan had pledged $10 million
to the New York Equity Fund, a limited partnership jointly
funded by Morgan, Bankers Trust, and Republic National Bank.
The purpose of the equity fund is to revitalize neighbor­ hoods
by financing rehabilitation and providing low-cost housing.
"The equity fund's commitment to New York City," said Ruffle,
"goes well beyond bricks and mortar and reaches into the
community."

A good example of the kind of venture support MCDC favors

is the Ben & Jerry's Partnershop that opened in Harlem in July
1992. In the fall of 1990, New York-based entrepreneur and
Harvard Law School graduate Joe Holland approached the
MCDC. According to Wesson:

Joe had decided that what he wanted to do was to start a

business that would actually employ some of the local
teenagers as well as some of the men from HARKhomes [the
local shelter for the homeless founded by Holland ]. He had
heard about Ben & Jerry's desire to promote economic
development of inner-city areas through socially responsible

504
 investments. He discussed the idea of a Harlem franchise with
managers at Ben & Jerry's, and they indicated interest in
assisting him in establishing a franchise. Ben Cohen, a
cofounder of Ben & Jerry's, agreed to work with Joe on a
marketing plan for the store and agreed to donate their
franchise fee if Joe was able to get financing to establish an
ice cream parlor on 125th Street in Harlem.

Joe came to us with a proposal: We would lend

HARKhomes $175,000 to $200,00 for five years to establish
the business. After looking at the projections, we realized that
they were very optimistic: It was unlikely the company would
be able to support much debt in its early years. However,
since we liked what Joe was trying to do, we wanted to help
him. In conversations with another client, we had learned
that the New York Urban Development Corporation [UDC]
had established a lending program to assist minority
entrepreneurs. Under the UDC program, New York State lends
up to two dollars of debt for each dollar of equity put into the
business. We described the program to Joe and indicated that
if he got approval for the loan, we would help him with the
equity. We also agreed to put up $65,000 of the bank's capital
as an equity investment.

Based on the equity and the donated franchise fee, Joe

was able to secure a commitment from UDC to provide a
$100,00 medium-term loan. The commitment also enabled
him to get a construction loan from Community Capital Bank,
a community development bank in which Morgan had also
invested.

When Joe Holland opened his Ben & Jerry's Partnershop on

July 25, 1992, to a barrage of local publicity, Oliver Wesson

505
preserved Morgan's traditional low profile, avoiding press
interviews. In none of the press releases widely distributed to the
reporters and officials present was J. P. Morgan's name even
mentioned.

VOLUNTEERING
Another activity that sustains Morgan's reputation in the
local community is the Volunteer Center. Established in 1971,
the program is designed to help community organizations
benefit from the skills and talents of Morgan employees. The
Volunteer Center acts as a clearinghouse for matching
interested employees with organizations in need of assistance.

The files of the center indicate that about 350 of Morgan's

9,000 or so New York-based employees volunteered time in 1991.
Unlike other companies, Morgan does not keep a detailed record
of volunteers. As one of the center's program officers put it, "We
respect their privacy. We don't want them to feel like Big Brother
is looking over their shoulder. Even if we know from the agency
that they are volunteering, we don't necessarily go back to them.
What employees do on their own time is up to them." Volunteering
occurs largely from employee responsiveness to announcements
made in the company newsletter or from fliers that are widely
distributed and posted.

Morgan supports two large programs on company time:

Junior Achievement and Project Live. Project Live is sponsored
by the Children's Aid Society. "We pay for transportation," says
Morgan's program coordinator, "to take children from a
seventh grade class in Washington Heights to the bank for
tutoring on a one-to-one basis with Morgan volunteers.
They're at the bank from 4 P.M. to 6 P.M., so it's an hour of bank
time and an hour of employee time. We have the Project Live

506
library, where books and computer programs are made
available for the tutors to work with the children."

In the nationally coordinated Junior Achievement program,

employees volunteer to go into the public schools and work
with a class of third, sixth, or seventh graders. According to a
Morgan administrator, "The programs that Morgan works with
run from five to eight weeks, and their aim is to encourage kids
to stay in school. The volunteers usually bring their class to the
bank to show them the world of work. Most of these kids come
from low-income areas and have never been in a company like
this. Children tend to associate banking with tellers. They don't
realize that there are kitchens, with chefs that work in those
kitchens, that we have a building department, with painters
and spacklers, and that there are many other careers in a bank
other than tellers."

NETWORKING
Although business has become more competitive and work
more time­consuming, senior executives do considerable
volunteer work. Morgan president Sandy Warner sits on the board
of Sloan-Kettering. Dennis Weatherstone is president of the Royal
College of Surgeons. Various other employees sit on nonprofit
boards that provide Morgan with informal links to a wide variety
of organizations in the New York area. As Table 14-2 indicates,
Morgan's top managers, directors, and officers serve as board
members for more than 144 nonprofit organizations.

507
 The staff of the CRPA and the MCDC are also members of
various networks of nonprofit professionals that meet
regularly to exchange information about various programs at
one another's companies. For instance, Morgan is a member of
Corporate Volunteers for New York, and members of the bank's
CRPA meet once a month with representatives of other banks
and companies to exchange information about nonprofit
groups. "At those meetings," says Morgan's volunteer center
coordinator Mary Stuart, "I hear about what other banks are
doing, and I tell them what we're doing." Volunteer networks
like these help to amplify Morgan's reputational standing in
the community.

COMMUNICATIONS
Morgan employees are low key and reserved in dealing with
publicity. "That stance suits our institutional character, with
its stress on discretion and seriousness of purpose," says Jack
Morris, former head of public relations in the corporate
communications department. Public shyness carries over from
the business side and affects how the bank publicizes its
community development efforts. As Laura Dillon, Morgan's
managing director of communications, explains:

508
 We haven't communicated our philanthropic efforts
quite as aggressively as we could have. It's part of a
natural reticence about blowing one's own horn. We've
gone about building relationships in the community the
way we have gone about dealing with clients, carrying on
a corporate tradition of privacy — quiet diplomacy, if you
want to put it that way — without too much fan fare. We
feel that it's seemly to take a low-key approach. We don't
want to boast about doing good.

The bank publishes many brochures and notices to

communicate with employees and outside groups. Internally,
they help to build a common bond among employees. "Once an
organization gets to be as large as ours," adds Dillon, "you
have to be more aggressive in communicating what the
organization does so that people who work for you identify
with your approach. So part of our communications efforts are
focused internally to help people understand what the
company does to be responsible in the community, from pure
philanthropy to organizing volunteer networks."

The principal newsletter circulated throughout the bank is the

monthly MorganNews, in which announcements of ongoing events
and activities are made, including requests for volunteers. In 1990,
the CRPA launched a specialized biannual publication called
Capital Ideas to illustrate how Morgan invests to strengthen the
community. The elegant newsletter details specific activities
engaged in by different parts of the bank that benefit the
community. Each newsletter focuses on particular organizations
that may be grant recipients or clients of the MCDC. It is
distributed to all of Morgan's U.S. employees, community groups,
and interested government officials.

509
 Externally, publications help Morgan to meet the regulatory
mandate imposed by the Community Reinvestment Act that
requires bank holding companies to publicize their activities.
Various publications are also distributed that describe
Morgan's citizenship activities. One is entitled "Community
Development Initiatives" and describes the credit and
investment products of the MCDC and the grants provided by
CRPA. It is widely shared not only with Morgan employees but
also with many not-for-profit community groups in New York
City and with publically elected officials.

THE REWAR DS OF GOOD CITIZENSHIP

In conversation, Morgan employees appear to be justifiably
proud of their record of community involvement. They are
often applauded at social functions, thanked by politicians,
educators, hospital administrators, artists, and community
organizers. Adds Laura Dillon:

I'm embarrassed to say that we keep no systematic

records of awards we've received. But it's revealing, isn't it?
We don't like to brag. It translates into the business sphere.
You don't see Morgan trumpeting record financial
performance, which we did turn in last year. We'll use the
"best" and "most'' citations in marketing and publicizing
business activities, but at the corporate level we are reserved.
I don't know if your parents ever taught you this, but I
remember my mother saying very clearly: You don't brag
about yourself; somebody else will if you deserve it. That's a
clear strain in the Morgan ethic.

510


In July 1991, a multicolored quilt was presented to Morgan

at a reception that marked the end of the first full year of the
professional development laboratory. The quilt was sewn by
grateful students and teachers from elementary schools in
Manhattan, where the program was piloted. Today the quilt
hangs in a prominent place at Morgan headquarters. To
Hildy Simmons, "It's a very beautiful quilt. It's been

511
beautifully framed, and put it in a place where all employees
pass every day for lunch. It acts as a constant reminder of
Morgan's good works. It's not a big thing, but it's certainly
symbolic."

CAPITALIZING ON REPUTATION
There appears to be a pervasive belief among employees
that corporate citizenship, as one employee put it, "is not
merely a charitable act but is a form of 'enlightened self-
interest.'" The convergence of goodwill and good business is
perhaps best manifested in the bank's recent efforts to extend
its business into the not-for-profit domain. By marketing its
services to non profit groups, Morgan stands to capitalize on a
heretofore untapped source of potential synergy between its
line activities and its goodwill-generating citizenship efforts.

In August 1990, J. P. Morgan underwrote $54 million in tax-

exempt bonds for the much publicized renovation of the
Guggenheim Museum in New York. Coming after its $20
million in tax-exempt financing for the new, ecologically
designed headquarters of the National Audubon Society in New
York's Greenwich Village, the backing of the Guggenheim
pointed to Morgan's entry into a new and promising line of
business: financing for not-for-profit companies. The not-
for-profit (NFP) group was formally constituted in early 1991
to assist in marketing Morgan's asset and liability
management services to such nonprofit groups as foundations,
health care institutions, and educational, environmental,
religious, and cultural organizations.

The NFP group's explicit strategy is to identify all the not-

for-profit clients now being served by various Morgan business
groups, to determine which products and services those clients

512
currently use, and to expand existing relationships into new
areas. The group also tries to identify key prospects in each
segment and develop new client relationships with them.
Through the NFP group, not-for-profit organizations have
access to all of the Morgan financial products and services
available to major corporations, governments, and wealthy
individuals.

The NFP group also develops financial plans, for both not-
for-profit organizations and donors. Through Morgan's
fiduciary services group, the bank helps wealthy individuals
identify philanthropic objectives and establish appropriate
legal and accounting structures to establish new charitable
trusts and foundations and make long-term commitments of
assets. Today, Morgan acts as the trustee or investment advisor
for charitable accounts that total more than $3.1 billion.

In May 1992, the NFP group sponsored a seminar entitled

"Philanthropy and the Family" at the Pierpont Morgan Library in
New York. Some 60 clients and wealthy prospects came to hear
experts in philanthrophy — including CRPA's Hildy Simmons —
outline strategies for effective giving.

Most recently, the NFP group has tried to generate

marketing contacts within Morgan itself. Employees who
participate in the management of not-for-profit organizations
are encouraged to contact NFP if they feel their group might
benefit from Morgan's advice or services. "It's nothing fancy,
just the basic 'blocking and tackling' of relationship
management," says Sandy Smith who heads NFP. "We want to
make the organization as seamless as possible to clients so that
we can capitalize on business opportunities that otherwise
might fall through the cracks."

513
 Although difficult to quantify, it's clear that throughout the
bank citizenship activities are thought to sustain the bank's
reputation and bring in business. That's doing good, the
Morgan way.

514
CHAPTER 15:
SONG OF SOLOMON
“The more you are talked about,
the less powerful you are.”

Benjamin Disraeli

N
OT ONLY must top-flight companies like J. P. Morgan
regularly sustain their reputations, but they must
occasionally defend it against attack. In 1991, the
venerable trading firm of Salomon Brothers faced a crisis
unprecedented in its history: Charges of rigged bidding and rogue
behavior by its trader of government bonds quickly escalated and
threatened the firm's survival. In many ways, the circumstances
Salomon encountered epitomize those of the entire financial
services industry in the late 1980s. Salomon was hardly the first
company on Wall Street to take a fall. Few, if any, banks emerged
from the 1980s with their reputations unscathed. Today, the
industry is littered with the scattered remains of once-prominent
companies like E. F. Hutton, which succumbed to indictment for
mail and wire fraud, and Drexel Burnham Lambert, which
eventually collapsed from charges of insider trading in 1990.

This chapter examines the actions taken during 1991 and

1992 by Salomon Brothers, where a savvy group of managers
skillfully postured the bank both publicly and privately so as to
defend its reputation, sustain its character, and regain
economic value and a sense of self.

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SALOMON ON THE BRINK
In March 1991, the esteemed investment bank Salomon
Brothers moved out of its old stonefaced structure at the tip of
lower Manhattan and into a nearby building: the never before
occupied corporate headquarters of Drexel Burnham Lambert.
Today, most of us remember Drexel as the junk-bond house
sullied by charges of insider trading and bankrupted by stock
fraud. It was to be an ironic and oddly prophetic move for
Salomon. A few months after the move, John Gutfreund,
Salomon's mighty chairman, publicly admitted that its
government desk had placed illegal bids in some 30 of the 230
auctions of government securities in which it had participated
since 1986. Shortly thereafter, both Gutfreund and Thomas
Strauss, Salomon's president, resigned, and the U.S. Treasury
Department suspended Salomon from bidding for its clients at
future Treasury auctions.

At the time, Salomon was without doubt the most powerful

broker on Wall Street and a top-gun trader of government
securities. The disclosure threatened not only to shatter the firm's
hard-won franchise and pristine reputation but to eviscerate its
culture by striking at the heart of the bank's character and
identity. This was surely the worst scandal to hit the company in
its 81-year history, and it would take exquisite managerial skill
and timing to weather the storm.

Although no one could have predicted the precise form that a

crisis would take — or its timing — most industry observers
believe that some­ thing like this was bound to happen to
Salomon Brothers someday. Among the preconditions that made a
crisis likely were, on one hand, the firm's aggressively "macho"
culture and, on the other, the lax regulatory and increasingly
competitive environment that Salomon's traders faced. Like

516
kindling, these two sets of factors helped to ignite unethical and
illegal behavior in the bank.

BACKGROUND
Salomon, Inc., is a holding company with assets of $147 billion
(1992) held in two major operating units: Salomon Brothers and
Phibro Energy. Phibro is the largest oil-trading company in the
world. In early 1991, however, the crown jewel of the Salomon
empire was clearly Salomon Brothers, the investment bank with
the reputation for masterful trading in the $2.4 trillion global
market for U.S. government securities.

About 80 times a year, the U.S. Treasury auctions bonds to

raise money for the government. An elite club of some 40 leading
investment banks are granted status as primary dealers at these
auctions, giving them the exclusive right to buy the government's
securities and the power to influence not only a bond's original
offering price but its resale price in the secondary market.
Three investment banks walk especially tall at these auctions:
Salomon Brothers, Morgan Stanley, and Goldman Sachs. At
every auction, the Treasury allots bonds first to the highest
bidder and then to each successive bidder until the issue is sold.
Treasury rules limit each bidder to acquiring no more than 35
percent of the issue. But since banks buy bonds for clients as
well as for themselves, they often enter multiple bids and can
sometimes end up controlling more than 35 percent of an issue
as both principal and agent. In 30 of some 230 auctions held
since 1986, Salomon had actually acquired close to 50 percent
of the securities offered.

517
THE CRISIS
In June 1990, Paul Mozer, managing director of Salomon's
government bond desk, bid for more than 100 percent of the
four-year notes up for auction. Soon after, a concerned
Treasury official warned Mozer about excessive bidding.
Despite the warning, two weeks later Mozer again bid for more
than 100 percent of a 30-year bond issue in an effort to buy
more than his share. An angered Treasury rejected the bid and
reaffirmed the 35 percent rule.

To circumvent the limit, in December 1990 Mozer

submitted bogus bids in the names of uninformed customers at
an auction of four-year Treasury notes. The unauthorized bids
gave Salomon effective control of 46 percent of the securities,
once again breaching the Treasury's 35 percent rule.
Unbeknownst to Treasury officials, Mozer repeated the practice
at eight other auctions in 1991 in which Salomon ended up
illegally controlling more than 50 percent of an issue by
submitting false bids from clients.

In April 1991, Mozer informed Vice-Chairman John

Merriwether about the illegal bidding and, through him,
Salomon's top team of John Gutfreund and Thomas Strauss.
Incredibly, no action was taken. To explain why he delayed
reporting the violation, Gutfreund would later claim he had not
been told that the infraction was part of a sustained pattern.1

But Mozer did not stop there. In a rash display of arrogance

— and doubtless heady from his previous successes-he bought
effective control of more than 94 percent of a $12 billion issue
of two-year notes at a May 1991 auction. Angered by the
exorbitant prices Salomon made them pay to buy the notes
they needed, dealers whose bids had been unsuccessful rose up
en masse and charged the bank with monopolizing the issue.

518
Following the auction, the Treasury officially invited the
Securities and Exchange Commission to investigate. In June
1991, the seriousness of Mozer's actions hit home when the
SEC and the Justice Department both issued subpoenas to
Salomon and some of its clients. Surprisingly, it wasn't until
August 1991 — a full three months later — that Salomon
itself released a gingerly worded statement that admitted to
committing "irregularities and rule violations in connection
with its submission of bids in certain auctions of Treasury
securities." By year's end, the bank found itself accused of
having submitted a total of 10 false bids between August 1989
and May 1991 totaling $15.5 billion, $9.5 billion of which were
illegally acquired. In bottom-line terms, the returns to
Salomon were not startling. Net profits from those illegal bids
totaled no more than $19.7 million, including a $13.8 million
loss from a February auction. Losses to other firms affected by
the "May Squeeze," however, were estimated at more than
$100 million.

As a result, the company faced 46 lawsuits charging: (1)

fraud in trading securities, a violation of antifraud provisions
of the SEC Act of 1934; (2) price manipulation by purchasing
Treasury securities above the legal limit, a violation of antitrust
laws and the Racketeer Influence and Corrupt Organization (
RICO) Act; and (3) misrepresentation, for stating in its March
1991 proxy statement that "management has no knowledge of
any business other than that described herein." It had not been
a good year for the institution affectionately known as Solly
and widely regarded as the preeminent trader on Wall Street.

BACKDROP TO THE CRISIS

Investment banks are of two sorts: relationship oriented
and transaction oriented.2 The business of underwriting new

519
corporate securities has traditionally been dominated by the
more prestigious relationship bankers, who call on their close
personal ties with the captains of industry to do business — the
old boy network. Morgan Stanley and Goldman Sachs dominate
that market. It's a sober world of three-piece suits, school ties,
antique clocks, and old money.

In contrast, traders like Salomon grew up in a world

dominated by transactions, one concerned less with relationships
and more with matching all possible buyers and sellers and
collecting on the interest rate spread. In the early 1980s, the
dynamics of trading changed dramatically when the Federal
Reserve instituted floating interest rates. Since bond prices are
tied to interest rates, suddenly they too were free to fluctuate. As
Michael Lewis, author of the wildly popular Liar's Poker, puts it,
"Bonds became objects of speculation, a means of creating wealth
rather than merely storing it. Overnight the bond market was
transformed from a backwater into a casino."3 And all sorts of
bonds were created to finance the huge budget deficit run up
during Ronald Reagan's presidency and to fund the massive
acquisition binge of consumers and businesses. Salomon made a
killing throughout the 1980s by packaging and trading on that
debt.

THE SALOMON MYSTIQUE

Salomon was started in 1910 by brothers Arthur and Percy
Salomon to arrange bank loans for Wall Street firms and to
trade bonds. Twenty years later, it was among Wall Street's
most prominent traders. Rather than deal with individual
investors, Salomon Brothers concentrated its efforts on
institutional investors ( like pension funds and big companies)
that bought and sold bonds in large blocks. In the 1960s, the
company diversified into stock trading and quickly became

520
known as a partnership capable of handling any deal, no matter
how large.

A partnership structure breeds collegiality at the top of a

company and encourages loyalty among younger bankers.
Since retired partners depend on the next generation of
employees to safeguard their accrued wealth and to deliver
their pensions, a partnership structure makes them careful to
leave the firm in safe hands. When Salomon Brothers sold itself
to commodity trader Phibro Corporation in 1981 for the
seemingly astronomical sum of $550 million, it gave up, with
its partnership structure, a part of the glue that had held the
company together.

Salomon is known for its "street fighter" mentality. Since

its founding, "the squabbling, the internal competition, the
buccaneering spirit-all became part of the Salomon culture."4
Graduates of the bank's training programs have likened the
experience to "Green Beret training: They teach you the
business; then they drop you in the Amazon with the weapons
to fight your way out." Appearances to the contrary, "the ones
who succeed at Salomon are not the nice ones. They're the ones
who scream and rant and rave; who kick butt." Mr. Gutfreund's
legendary instructions to trainees were to come to work ready
to "bite the ass off a bear." Adds another associate: "This is a
very macho place. No one holds your hand and tells you what to
do. You have to live by your wits." And that can create tension:
"If you're covering a client and that client does a deal with
Morgan Stanley or First Boston, you're going to get incredible
heat, no matter how thorough a job you've been doing. And
they don't care where they chew you out-often it's right in
front of everyone."5

Through the years, the company's competitiveness and

innovativeness was fueled by a corporate structure that

521
decentralized decision making and gave ambitious young
traders the chance to start a new department or package a new
security. Lewis Ranieri joined Salomon in 1966 as a $70-per-
week night clerk. After spearheading the growth of mortgage­
backed securities, he was made general partner in 1978,
becoming in 1984 the youngest member of the executive
committee. Stories like his were commonplace as staffers were
given both autonomy and resources to make money for the
bank. Whereas careful hiring and training to produce shared
values are characteristic of relationship-oriented banks like
Morgan Stanley and Goldman Sachs, at Salomon, "They just
don't care if you don't look, talk and act like the typical
investment banker, as long as you are good at what you do."
According to wunderkind Lewis Ranieri, "It has to do with
identity. No one gave us what we have. We got where we are
today through sheer guts. You don't get where we are by being
someone else's equal, but by being better."6

A mix of ambition, individualism, and autonomy encourages

innovation. Indeed, most of Salomon's extraordinary profits
throughout the 1980s can be traced to popular new
instruments like zero-coupon bonds, interest rate swaps, and
Ranieri's highly profitable mortgage-backed securities.

To stimulate competition and innovation, Salomon always

paid extremely high bonuses. Ranieri, for one, was paid $2-5
million a year in each of the golden years between 1982 and
1986. By 1990, 106 employees each took home $1 million or
more. At $1.6 billion in 1992, compensation remained the
heftiest expense on Salomon's books. Although consistent
with the bank's trading outlook, these bonuses only tied pay
to the bank's short-term performance, encouraging staffers
to achieve quick results but discouraging them from
appreciating how their actions might affect the bank's long-

522
run reputational capital.

In early 1990, John Gutfreund made a secret deal with one of

the bank's most profitable fiefdoms-risk arbitrage-to let
them retain 15 percent of the group's profits that year. To
everyone's surprise, the group's performance improved
dramatically. By year's end, that meant outsized bonuses for
the group's top traders. One bond trader pocketed a cool
bonus of $23 million, exceeding all prior compensation rules
that unofficially denied paying commission. Not surprisingly,
news of the extraordinary bonuses of the arbitrage group
infuriated traders like Paul Mozer, doubtless fueling his
fraudulent bidding activity.

All this, of course, because Gutfreund couldn't see his way clear
to disciplining the different businesses of the bank. As one
reporter commented in the mid-1980s:

An organization so dominated by internal competition is

less managed or run than it is guided and manipulated. Any
overt attempt by a single personality to impose its will-
whether over the feuding barons of the executive committee
or the hungry spear-carriers on the battlefields of trading,
sales and corporate finance — would stifle the dynamic of
conflict and tension that has made the firm so successful.
Stability in the form of a rigid, autocratic management
system would be anathema to a firm whose very essence is
instability and opportunism. Turmoil must to some degree be
constant; egos must be allowed to clash so that, like the two
dogs in the room, they become "meaner and tougher."7

Which is exactly what Gutfreund did throughout the 1980s.

Rather than force discussions of budgets, strategies, and other
critical trade­offs, the man that Business Week had dubbed the

523
"King of Wall Street" back in 1985 elected to decentralize
operations and thereby avoid conflicts between the bank's
profitable fiefdoms. As one observer puts it: "In John
Gutfreund's Salomon, nobody much wanted to supervise
departments that were making money; in Ronald Reagan's and
George Bush's administrations, nobody much wanted to
regulate anything that was making money. Greed was good;
more greed was better. Fraud was undesirable but only a
frictional inefficiency, and, after all, the best people were
doing it."8

Not surprisingly, Salomon's costs ballooned as bonuses

skyrocketed to reward and retain star performers, provoking ever
more internecine conflict between the bank's different businesses.
Growing competition and declining profits in the early 1990smade
clear the fact that Gutfreund had done little to improve the bank's
operations but had instead so delayed addressing its core
problems that the bank was in jeopardy.

After the scandal broke in 1991, a New York Times editorial

put a moral caveat on the bank's aggressiveness. It
characterized Salomon as a company that celebrated clever
evasion of rules and trampled anyone standing in the way of
profit and as a company governed by a "culture of greed,
contempt for government regulations, and a sneering attitude
toward ethics or any other impediment to earning a buck."9 Not
someone you'd necessarily want to do business with.

CATALYSTS OF CRISIS
Although Salomon's internal character pushed
individualism and set the stage for one employee's rogue
behavior, various external conditions also contributed to the
bank's violations in 1991. They were of two sorts: lax regulators

524
on one hand and an increasingly competitive environment on
the other.

The Treasury Department sells its new issues through the

off ices of the Federal Reserve Bank of New York. The Fed
supervises the auctions and ensures that primary dealers
comply with Treasury rules. The close­knit relationships
between the two government agencies and the primary dealers,
however, may well have contributed to escalating the
violations to crisis proportions. For one, the Treasury is an
organization like any another, and many of its career officials
have strong ties to Wall Street; most were once employees of
the primary dealers that they now regulate. They come into
regular contact through the weekly auctions.

Even among dealers, collusion and price fixing appear to

have been routine in the $2.5 trillion market for the Treasury's
securities. Although officially the companies denied having
participated in any form of collusive behavior, in anonymous
interviews with the Wall Street Journal traders from Salomon,
Morgan Stanley, First Boston, Citicorp, Daiwa Securities, and
Greenwich Capital Markets admitted to having shared
information. By exchanging information, dealers could avoid
bidding too high for an issue and reduce the risk of losing
millions from overpricing. Although illegal, information
sharing is standard procedure, according to a former top
Salomon trader: "This is the way business has been conducted
forever, and that's why it hasn't changed."10 Could neither the
Fed nor the Treasury possibly have noticed?

In fact, the Federal Reserve routinely saw information

detailing Salomon's huge positions at auctions throughout
1990. In and of themselves, the bids should have prompted an
internal investigation. As one observer noted:

525
 Salomon did cheat, and disgracefully, but a lot of the
blame for what happened rested with the government
agencies that failed to supervise this market at precisely
the time when it most needed supervision . . . . [By] 1991
the Federal Reserve Bank of New York had become
essentially part of the audience for the auction and the
subsequent trading of the bonds and notes. What
supervisory process survived had become pro forma,
vestigial from previous administrations of the bank.11

Despite Salomon's disclosure of auction violations, in mid-

August 1991 the Fed still claimed it saw no need for new
regulations. In this, the agency adhered to policies set by
Chairmen Paul Volcker and Alan Greenspan, who both endorsed
loose auction regulations because they believed that laissez-faire
policies would bring in the best prices. Critics of this system,
however, view it as insufficiently open. Narrowing the flow of
investors to the 40 primary dealers creates incentives for
collusion, they say. A more competitive auction would open the
way for other large institutions to bid, possibly electronically, and
function much as the over­ the-counter market does.

Instead of the Federal Reserve, it was the Treasury

Department that took action in May 1991, under a barrage of
complaints by dealers squeezed out of the May auction. The
Treasury extended an unprecedented invitation to the
Securities and Exchange Commission to investigate the
apparent violations. Having responded to the immediate
pressure, Treasury officials opted to postpone until August a
review of possible changes in auction rules that might prevent
overconcentration of an issue in the hands of a few dealers.

The limited response of the Treasury Department was

consistent with its reputation for maintaining loose

526
regulations and caving in to the requests of primary dealers.
The Treasury drew most of the criticism for meek monitoring.
Records of a meeting between Fed and Treasury officials on
May 1, 1991, show that the Treasury knew of Salomon's
violations well in advance of the May auction but did nothing to
prevent it. Clearly, then, the regulatory apparatus of the
industry contributed to aggravating the crisis. As often
happens, social proximity seems to have disarmed regulatory
officials and compromised their willingness to take preventive
action at the first signs of Salomon's rule violations. After all,
this was not Salomon's first such scandal. In October 1991
Salomon paid $30 million to settle with Revco, and in
December 1991 Salomon and two other securities firms settled
a suit by First Republic Bank Investors for $42.2 million.
Documentation on those two deals suggests that regulators and
officials were all too willing to overlook problems. At the same
time, the financial services industry of the late 1980s had
grown increasingly competitive. Declining interest rates, fewer
deals, and a moribund global economy put pressure on traders
and bankers to generate profits for the bank. A generation of
bankers and traders raised in the go-go era of acquisitions and
leveraged buyouts found it difficult to adjust to the post crash
conditions of the market. With their own pay contingent on the
short-term performance of their area, traders like Mozer
sought ways to dampen the loss of profits from declining
interest rates, emboldening them to take larger positions in the
higher­priced bonds.

If competition was a dark cloud hovering over Salomon in the

late 1980s, Paul Mozer served as the barometer of the industry's
ills. Likely as not he fell victim to the very competitiveness and
aggression that the industry had instilled in him as a condition of
success.

527
WEATHERING THE STORM
Not only did conditions internal and external to Salomon
propel the violations, but the reactions of important
constituents of the bank helped shape the way the crisis
unfolded.

COMPETITORS' RETRIBUTION

Rival dealers affected by the May Squeeze were estimated to

have lost more than $100 million. They did not take it lightly.
Their vociferous complaints provoked the early investigation
by the Fed and the Treasury. As one observer states: "What
did damage to Salomon was not regulation but the fury of the
participants in the market who had lost money. These
participants screamed for the cops."12 The threat from rivals
was great. They stood to gain dramatically from crippling
Salomon's trading ability in the Treasury market.

REGULATORY PROBES
The investigations launched by the SEC in June 1991 and the
Justice Department were without doubt the forces that drove
the violations into the open. They were the result not of
regulatory initiative but of complaints by Salomon's rivals for
the exorbitant prices they were forced to pay at the May 1991
auction.

Salomon only publicly admitted its guilt in August 1991,

when warned that it would be barred from bidding for clients in
future auctions. When the Treasury shut out Salomon on
August 18, 1991, it threatened the very existence of the firm.
Many thought the bank might permanently lose its status and
franchise as a primary dealer. Everyone realized that Salomon
would face huge fines and penalties.

528
 States can also revoke licenses to operate in their
jurisdictions, and considerable pressure was put on state
government agencies to do so. On August 29, 1991, Missouri's
secretary of state announced a national commission to
investigate Salomon. By September 18, 33 states were involved
in the investigation. Salomon risked losing more than just its
primary dealer status in Treasury auctions.

MEDIA FRENZY
The media reveled in the crisis. Figure 15-1 shows that
between August 1990 and December 1990 coverage of Salomon
Brothers by the Wall Street Journal was limited to 26 articles,
whereas between August 1991 and December 1991 coverage
multiplied fivefold to 126 articles. Much of it was negative
publicity and did damage to Salomon's reputation. Salomon
had to act swiftly to prevent continued erosion of the
company's intangible assets.

529
INVESTOR ANXIETY
The reaction of investors was swift and devastating. Figure
15-2 depicts Salomon's market value before and after its public
confession. In early August 1991, the price of Salomon's shares

530
dropped from an immediate precrisis high of about $29 to a
postcrisis low of $24, representing a loss of more than $500
million, or some 15 percent of the company's market value-and
all of its $350 million in reputational capital. Indeed, many
analysts contend that the overall market drop for the entire
week was a ripple effect induced by the Salomon scandal. It
wouldn't stop there: The following week saw more of the same,
including a drop of another 5 percent in Salomon's market
value on August 20.

The danger to the firm from stockholders was twofold.

First, there was the threat that speculative panic could drive
massive sell-offs, destroying the bank's market value. In turn,
the loss of value would not only increase the bank's cost of
capital-its borrowing power-but completely destroy the bank's
credibility with customers and paralyze its ability to function in
its other activities. A second fear was that the loss of
reputational capital could fuel shareholder law suits charging
market manipulation.

Soon after the scandal broke, credit regulators launched

reviews of Salomon's debt. Late in August 1991, Moody
downgraded Salomon's debt rating from A2 to A3. Standard &
Poor's followed suit by lowering the bank's long-term debt
rating from A+ to A-, its subordinated debt from A to A-, and
its preferred stock from A- to BBB+. Lower ratings meant
significantly higher borrowing costs and would seriously
hinder Salomon's ability to function in its different markets.

CONCERNED EMPLOYEES
Employee reaction to the impending changes in the bank
would be pivotal to its successful rebirth. Early signs were not
good. Low morale coupled with expectations of a precipitous
decline in future compensation frayed employee loyalty. Since

531
staff members remaining at Salomon till the end of December
1991 would share in a $100 million bonus pool put in place
before the crisis, it was expected that most would stick around
till then.

By the end of 1991, in fact, industry-wide bonuses for

investment bankers jumped by 25 percent. At Salomon, however,
bonuses dropped by 25 percent from the previous year. A
significant voluntary exodus of Salomon staff was expected
in 1992.

CUSTOMER REACTIONS
Many customers initiated legal action against Salomon.
Dozens of state pension funds and international customers
suspended their dealings with the firm. Their initiatives
dramatized the events, fueling panic about the bank's future
prospects. Exhibit 15-1 lists client reactions to Salomon's
August 1991 revelation.

532
 Once activated, a scandal like the one faced by Salomon
invariably triggers an informational stampede that can prove
difficult to stop. Regulatory actions create a crisis of
confidence. As the company loses market value, clients defect
and credit ratings drop. Defections and credit downgrades
paralyze work activities, generate more bad publicity, and so
propel a downward spiral that can quickly drive a company to
bankruptcy. Arresting the process is difficult, and this is what
Salomon's board had to do in August 1991 after confessing to
the company's violations.

SALOMON'S SELF-DEFENSE
There were seven key elements in Salomon's self-defense:
accepting responsibility, selecting esteemed leaders, disclosing
information candidly, rebuilding confidence, restructuring for
credibility, revising pay systems, and dodging bullets
(especially those delivered in the form of criminal charges). In
combination, these initiatives appeased regulators, placated
investors, and mollified the public. They also secured renewed
respect for Salomon with the public.

STEP 1: ACCEPTING RESPONSIBILITY

Following Salomon's board meeting in early August 1991,
the company publicly disclosed violations of several Treasury
auctions. Action was swift. The board suspended Paul Mozer,
head of the company's government desk, as well as the key
members of his team who had helped him make the bogus
clients bids in different auctions.

It soon became clear that Gutfreund, Strauss, and Vice-

Chairman John Merriwether had known about the illegal bids
since April, yet had failed to act. The board viewed this as a display

533
of unreasoned arrogance by Solly's top team and accepted their
resignations. After his departure, Gutfreund reportedly told
executives at a closed-door meeting: "I'm not apologizing for
anything to anybody. Apologies don't mean [expletive]. What
happened, happened."13 In the board's judgment, this was
obviously not the kind of attitude that would earn kudos in the
court of public opinion.

STEP 2: SELECTING ESTEEMED LEADERS

At a shareholder meeting a few days later, Salomon's board
appointed one of its own directors, Warren Buffett, to act as
interim chairman. As chief of Berkshire Hathaway, Buffett
represented the bank's largest shareholder, with a 16 percent
stake in Salomon valued at some $700 million.

Buffett was an inspired choice. The vaunted "sage of Omaha"

had a solid reputation for conservative, long-term investing; he
was a custom­made antidote to the get-rich-quick schemes
Salomon was being charged with. He was also known as a master
at manipulating the media, some­ thing he had done skillfully in
building his own image as a nice, down­ to-earth, grandfatherly
sort of guy, and definitely "Mr. Clean." That personal reputation
for integrity proved extremely useful to Salomon. After dropping
38 percent since the scandal broke, Salomon's stock fell no more
than the market after Buffett took over, and quickly rebounded by
15 percent.

From the start, Buffett recognized the value of the bank's

intangible assets. As he told a group of managers: "If you lose
dollars for the firm by bad decisions, I will be very
understanding. If you lose reputation for the firm, I will be
ruthless." 14 The Wall Street Journal concurred: "Salomon's
biggest hurdle is to convince customers and creditors that it is

534
worthy of keeping their trust and that it is a creditworthy
institution."15

In his first move as chairman, Buffett named Deryck

Maughan, an eight-year veteran of Salomon's Tokyo office, as
the company's chief operating officer. Hailed as "Mr. Integrity"
and the "savior from the East," he was credited with building
Salomon's Japanese business unit into a major force. He would
play insider to Buffett's role as outsider.

Buffett also quickly appointed Los Angeles lawyer Robert E.

Denham as the bank's general counsel to replace Donald
Feuerstein. Feuerstei n resigned at Buffett's request for failing to
ensure full disclosure of the violations in the four months since he
had known about them.

STEP 3: DISCLOSING INFORMATION

CANDIDLY

In July 1991, before the crisis broke, Gutfreund had asked

Wachtell, Lipton, Rosen & Katz, the bank's outside counsel and
well-known Gutfreund allies, to conduct an internal review of
the alleged violations. Under Gutfreund's leadership, neither
Wachtell nor Salomon was willing to disclose the contents of the
report, angering regulators who had anticipated the bank's
cooperation after the uproar over the May auction. In contrast,
Buffett was keenly aware of the importance of accepting
responsibility for the crisis if Salomon was to regain the trust of
investors and clients. He viewed full disclosure and cooperation
with regulators as necessary first steps to preventing further
reputational drain. As he told reporters: "The most important
job we have is to come clean in an aggressive way to regulators.
. . . My job is to clean up the sins of the past and capitalize on
the enormous attributes that this firm has."16

535
 In his first days as chairman, Buffett candidly discussed
with the press and with regulators what the company's own
reviews of the auctions had revealed. Concerned about Martin
Lipton's ties to Gutfreund and their joint strategy of making
piecemeal disclosures to the press about the crisis since April
1991, Buffett asked the Wachtell firm to resign. He replaced
them with Cravath, Swaine & Moore.17

Crisis management is about rebuilding confidence.

Although Arthur Andersen, the bank's accounting firm, was
not faulted in any way, Buffett hired Coopers & Lybrand in
August 1991 to conduct "a comprehensive internal control and
compliance review of our U.S. securities trading operations."
He conveyed poise by seeking an independent review from a
company with no prior connection to Salomon. Shareholders
approved of his assurance that the bank would implement any
recommendations made.

Early in the crisis, Salomon had hired a new public relations

firm, Kekst & Co. As with Wachtell, however, rumors of close
personal relationships with Gutfreund led Buffett to fire the firm
in August 1991 and to bring in Burson-Marsteller, the company
that won wide acclaim for its handling of J&J's public relations
after a woman died from taking a cyanide-laced Tylenol capsule
in 1986.

Some key customers were marshaled to demonstrate

Salomon's trust­worthiness. On August 26, 1991, Laurence
Tisch, chairman of CBS and Loew's-and a close friend of
Buffett-bought 1.5 million shares in Salomon. To further regain
the confidence of shareholders, Buffett sent them a letter
sharing his analysis of Salomon's situation and his plan for
turning things around. He personally assured smaller investors
and the public of Salomon's fundamental integrity and

536
pronounced the bank's future good. The two-page open letter
was widely published in major dailies on October 29, 1991.

Finally, in a symbolic show of support for Buffett's leadership

and for Salomon's role as a major employer in New York State, in
late August 1991 Governor Mario Cuomo put Salomon on the
bidding lists for the state Treasury and the Urban Development
Corporation. As economic and political allies rallied around the
beleaguered bank, the public grew more confident in its stock and
share prices rose steadily from their postcrisis low of $24 a share
to about $31, a level approaching the company's precrisis high
of $33.

STEP 5: RESTRUCTURING FOR CREDIBILITY

To convey credibility in a crisis of this sort, a firm must
convince the public that drastic actions are being taken to remedy
the problem. Buffett did just that. The restructuring addressed
three areas: personnel; control systems; and financial systems.
This restructuring accomplished several things simultaneously.

Personnel Changes. The purge of top managers was drastic.

Only three of the bank's top nine managers remained with the
firm following the scandal. Although some of these moves were
only indirectly related to the crisis, many reflected Buffett's
commitment to mute what he saw as Salomon's overaggressive
culture. Some 15percent of Salomon's senior investment bankers
were forced out and the bank's real estate department was
chopped in half. In December 1991, Salomon appointed 22 new
managing directors, reinforcing its new focus on the core bond
business. All told, more than 140 bankers, stock traders, and
security analysts were dismissed as part of the restructuring.
The personnel changes achieved three purposes: They cleaned
house of those involved in the scandal; proved that Salomon
was serious about preventing a similar scandal from ever

537
recurring; and, politically, removed those who opposed the
restructuring.

Control Systems. Buffett heavily ascribed blame for the scandal

to an improper structure that placed the investment banking
subsidiary of Salomon, Inc., in an overly powerful role vis-a-vis
its parent. As he put it: "In recent years both Salomon Inc., the
parent, and Phibro Energy have been treated by top
management as adjuncts to Salomon Brothers. That was
understandable, given that the managers of the parent came
from the securities unit. Now, however, we are viewing
Salomon Inc. as the owner of two independent and substantial
businesses, each of which will be measured by return on the
equity capital it requires."18

In November 1991, Buffett amended the power structure of

the investment subsidiary by naming an executive committee
composed of nine Salomon executives to take charge of all of
the company's daily operations. In an effort to reduce risk-
taking in the firm, Salomon also tilted power towards the bond
units and away from the riskier stock units. Buffett also set up a
compliance committee of the board to monitor Salomon's
trading activities.

Eager to demonstrate its rebirth, Salomon returned to the

municipal market for the first time since 1987 with the largest
offering of nontax­ able bonds ever made. Despite the success
of the offering, Salomon's market share for underwriting
tumbled from 11 percent to 2 percent. To boost Salomon's
underwriting presence, Berkshire Hathaway (the company
chaired by Buffett) filed a secondary offering of $163.5 million
jointly with Salomon.

Financial Systems. Before the crisis, Salomon claimed $150

billion in assets and excellent credit ratings. To shore up its

538
capital position, just before the crisis the bank sold off $40
billion in assets, the most rapid balance sheet reduction in Wall
Street history. Beefing up cash would help Salomon cope with
tightened credit resulting from likely downgrades in its ratings.
Salomon also increased its internal borrowing rate, forcing
traders to rethink their market positions. With its commercial
paper coming due at the end of August, the bank needed lots of
cash. Rolling it over in the aftermath of the crisis would cost
millions. Instead, the bank substituted 90 percent of its
commercial paper with more flexible, short-term repurchase
agreements backed by securities. Impressed with the financial
condition of the firm, Citicorp and J. P. Morgan committed to
lending Salomon $2 billion in October 1991.

STEP 6: REVISING PAY SYSTEMS

Warren Buffett wanted to soften the swashbuckling image of
the Salomon of old. To do that, he prodded the bank to sell off
some big blocks of stock and take losses. The $30 l million sale
of the bank's shares of ConAgra recorded a $10 million loss,
while the sale of Sun Microsystems produced a 17 percent loss.
It sent to all traders a signal that Salomon was no longer
interested in high-risk wait-outs, that the bank would no
longer act as a bull y trader, that it would assume a less
aggressive stance in the market. If the old Salomon had been
like John Wayne, known for its swagger, the new Salomon was
to become more like Ozzie Nelson, nice and low key, neither so
strong nor so effective.

Arguably the most controversial step Buffett took to force

cultural change was his concerted attack on the pay structure.
As he claimed, "The problem at Salomon Brothers has been a
compensation plan that was irrational in certain crucial
respects." Buffett went on to say that:

539
 One irrationality has been compensation levels that
overall have been too high in relation to overall results. For
example, last year the securities unit earned about 10%, on
equity capital-far under the average earned by American
business. . . . But the overall result made no sense: Though
1990 operating pro fits before compensation were flat versus
1989, pay jumped by more than $120 million. . . .A related
irrationality is connected to the lopsided way in which
Salomon has earned its profits. . . . The data . . . show that
Salomon's lack luster overall profits of recent years resulted
from a combination of excellent earnings in a few areas of
the business — operating in an honest and ethical manner, it
should be added — with inadequate or non-existent
earnings at the remainder. Yet the compensation plan did not
take this extreme unevenness into account. In effect, the fine
performance of some people subsidized truly out-sized
rewards for others.19

Mr. Buffett favored a closer link between pay and

performance. To this end, he scrapped all special pay pacts.
To align the interests of owners and managers more closely,
Buffett offered equity-partnership plans. He drained $110
million from the 1991 bonus pool and began paying
employees in Salomon stock. By July 1993, employees held
12 percent of Salomon, up from 5 percent in 1990. Under the
new scheme, employees are obliged to hold the shares the
company pays them for at least five years. Senior managers
thus have a more significant portion of their wealth invested
in Salomon shares, which should alter their concern for the
bank's overall welfare and enable the bank to recapture
some of the advantages of its old partnership structure
without sacrificing its ability to tap the capital markets.

540
STEP 7: DODGING BULLETS
The biggest threat to Salomon's survival clearly came from
the regulators. To avoid the fate of E. F. Hutton and Drexel,
Salomon would have to dodge the criminal charges that might
be brought forward. Intense lobbying by Salomon and the swift
action of its new leadership reassured regulators that the bank
was making the necessary changes. The Treasury was
persuaded to allow Salomon to continue to participate in
government auctions, if only for its own account.

To Salomon, however, the SEC's investigation was the most

threatening of all. The crucial development was this: In the
months following the crisis, the SEC came to believe that
Salomon's infractions were rooted in individual excess rather
than in systemic abuse. The SEC's chairman publically praised
Salomon's management team for its swift action in purging the
company of its rogue elements and quickly turned to the
broader question of regulatory negligence and the possibility of
dealer collusion. Within days, the SEC issued 100 subpoenas
throughout the industry, diverting attention from the
immediate problems at Salomon.

Salomon's reforms not only impressed the SEC and allowed

the bank to dodge the proverbial bullet but also appeased a
Congress busily revisiting securities laws. Warren Buffett's
credibility helped a lot. At a September congressional hearing
on the Salomon violations, in fact, Buffett was received like a
messiah. "Mr. Buffett . . . get in there and kick some butt,"
intoned a representative from Ohio. Clearly, by renting Mr.
Buffett's reputation for integrity, Salomon had avoided facing a
Congress customarily intolerant of large-scale financial
offenses.

541
PRACTICING CORPORATE JUDO
Salomon's crisis could have been anticipated. It was
precipitated by characteristics of both the bank and its
institutional environment. In recent years, few banks on
Wall Street have been more closely identified with the
mentality of short-term trading. Salomon was successful
and its traders autonomous. If you combine the power and
capabilities of the largest firm on Wall Street with
heightened competition and a loosely regulated
environment, you have a sure recipe for disaster.20

As Exhibit 15-2 indicates, the Salomon saga presents a vivid

example of how managers can actively return from the brink
and rebuild reputational capital damaged by a scandal. Like
Johnson & Johnson before them, Salomon's adroit self-defense
demonstrates that crises need not permanently depreciate a
company's reputation. Because all established companies face
challenges to their reputations at one time or another,
managers need to be prepared to defend them.

542
 From Salomon's experience we can derive some instructive
advice. First, leadership. As one commentator put it: "If Warren
Buffet had not been available to lead Salomon Brothers in
August 1991, the firm would have gone under that fall."
Buffet's personal relationships with politicians and regulators,
his credibility to investors, and his carefully cultivated image of
scrupulous benevolence were tailor-made to the situation.

Second, every crisis needs a fall guy, a scapegoat. A company's

managers must quickly accept responsibility for a scandal and
punish those responsible. Buffett's purge of top personnel
expressed the company's moral outrage at their ethical lapses. It
sent a clear message to regulators and investors that the company
recognized its delinquency and would take whatever steps were
necessary to avert a recurrence.

Third, far-reaching structural, cultural, and financial

reforms were instituted that reduced the incentives to cheat the
system. They signaled the company's willingness to follow
through on its commitment to perform drastic surgery on
internal practices. In a highly competitive marketplace, Buffett
made clear that to rely on the self-control of individuals when
stakes are high is at best unwise and likely as not foolish.
Decentralization without control invites anarchy.

Fourth, Salomon's well-publicized efforts to address the

root causes of the scandal clearly muted the reprisals it might
have faced from institutional authorities. As much as anything
else, it was the stonewalling, the negative publicity, and the
steady barrage of civil lawsuits and settlements that eventually
sank Drexel in February 1990. Many observers suggest that it
was Drexel's notorious defiance and uncooperative posture
that probably provoked regulators to scrutinize it so closely
and to levy heavy penalties. In contrast, Salomon successfully

543
deflected the blows that regulators might have inflicted. The
substantial steps taken by Buffett reduced the need to punish.

Finally, all stakeholders need reassurance that their

positions are being aggressively defended and want
information about how changes will affect them. Buffett kept
everyone focused on Salomon's future prospects rather than on
its past wrongs. Through open letters to shareholders
published in the media, stepped-up staff meetings, and
constant contact with customers, Salomon reassured investors
and employees and helped secure Salomon's turnaround.

In the end, Mr. Buffett proved that it was wiser to take

tough measures early and suffer in the short run than to run
the risk of loosing the hard currency of a good reputation. Had
John Gutfreund acted forcefully in April 1991 when he was
informed of Paul Mozer's violations of auction rules, there
would probably not have been a scandal. Although no company
will ever eliminate the possibility of rogue members breaking
the law, under Buffett's leadership, Salomon has shown us how
to deal with them in a way that protects the company's most
valuable asset — its reputation.

THE AFTERMATH
Less than two years after the trading scandal brought Salomon
to the brink of collapse, the bank was back with a vengeance. In
1992, Salomon Brothers earned $1.4 billion before taxes, an all-
time peak and a 34 percent gain over 1991. By March 1994, the
company's stock price had jumped to a high of $50 per share from
its low of $24 in June 1991, and its market value had grown to a
healthy $5.5 billion.

In May 1992, Salomon agreed to pay $290 million in civil

fines and damages, in return for which it would not face the

544
kinds of criminal charges that had felled E. F. Hutton and
Drexel. Instead, the company agreed to dole out $122 million
for civil securities law violation, to pay $68 million in
forfeitures to the Justice Department for settlement of antitrust
and other claims, and to create a $100 million fund for
restitutions in private damage claims. With considerable relief,
the company also agreed to a two-month suspension of its
primary dealership, to payment of legal costs of $12.5 million
for private claims, and to $54.5 million in payments to holders
of the company's stock and bonds. In March 1994, Salomon
settled the remaining class-action lawsuits brought by rival
bond traders claiming injury for an estimated $30 million in
additional payments.

The joint investigation initiated by 33 individual states largely

followed the lead of the federal agencies. Although these actions
had the potential to be devastating, they did not amount to much
in either fines or penalties, and no state has permanently banned
Salomon from operating in its jurisdiction.

In December 1992, John Gutfreund agreed to never again run a

securities firm and to pay a $100,000 fine as part of a settlement
of civil charges stemming form the firm's illegal bidding. Thomas
Strauss, Salomon's former president, agreed to a fine of $75,000
and suspension from associating with a Wall Street firm for six
months. John Meriwether, a former vice chairman, agreed to a
three-month suspension and a fine of $50,000.

In September 1993, Paul Mozer, the trader at the center of

the Treasury scandal, was allowed to plead guilty to two
felonies stemming from his submission of illegal bids when he
was head of government bond trading for Salomon. He faced a
maximum prison term of 10 years and a $500,000 fine. By
December 1993, he had been sentenced to a four­ month term in a
minimum-security prison and fined a mere $30,000.

545
 In justifying his lenient sentence, U.S. District Court judge
Pierre Leval praised Mozer's "valuable cooperation" in
testifying against others. He also called Mozer's crime an
"extremely foolish, arrogant, insouciant offense."21 The closing
chapter on the 1991 bond auction scandal was written on July
15, 1994, when Mozer agreed to pay a $1.1 million fine and
accepted a permanent ban from the securities industry.

On June 3, 1992, in a surprise move, Salomon named its

general counsel, Robert Denham, to replace Warren Buffett as
chairman of Salmon, Inc. An outsider, Denham had been
brought in only nine months before to shepherd the company
through the long investigation that culminated in the $290
million settlement. Deryck Maughan was subsequently named
chairman and chief executive of Salomon Brothers, while
Buffett remained on the parent company's board and
continued to chair its executive committee.

Competitors have taken advantage of the diminished role

Salomon has been forced to play. Shortly after the crisis broke,
Salomon ranked fifth among investment banks, down from first
just before the crisis. Salomon's skillful handling of the crisis and
revitalized reputation make long-term effects less clear. Today,
Salomon is still Wall Street's largest bank and among its most
influential players.

Shortly before the scandal broke, John Gutfreund was asked

about the future culture of Salomon. The man who throughout
the 1980s personified Salomon's culture of aggressive bullying
and who inspired fear and respect on Wall Street had this to
say: "I'd like to see a return to more collegiality, more
camaraderie. And I think this will come about, because I expect
over the next few years that more ownership will revert to
employees. Then there will be a community of interest that will
change the interpersonal relationships again."22

546
 Under Buffett's artful maneuvering, that's precisely where
Salomon seems to be headed, its reputation bruised but
healthy, its stock once again flying high. On August 17, 1993,
the well-known holding company that Buffett controls,
Berkshire Hathaway, announced that it had sought permission
from antitrust regulators to raise its stake in Salomon to
between 15 percent and 24.9 percent. Investors clearly
welcomed the news: Salomon's shares spurted $2.25 to close at
a healthy $48, near its 1986 high of $53 — a remarkable
recovery.

547
548
CONCLUSION:
THE BURDEN
OF CELEBRITY
“Fame is a bee;
It has a song, it has a sting;
ah, too, it has a wing.”

H. Emily Dickinson

C
ORPORATE REPUTATIONS are both products and
by-products of competition. They are direct products of
competition because companies strategically
manipulate the images they project to gain favor with
constituents. Internally, companies adopt managerial practices
that are more or less employee friendly. Externally, companies
actively project their most attractive features-to customers
through advertising, to communities through social and
environmental projects, and to investors through profitability.
The result is that some companies treat their employees better
than others, some make better products, some are better
investments, some more responsive, some more
environmentally sensitive-and their reputations partly reflect
these identity traits.

Reputations are also indirect by-products of competition

because they crystallize from the assessments generated by
reporters, analysts, and the rumor mill. These images are not
under a company's control. Rather, a reputation forms from these
disparate images much like a reflection in a broken mirror.

549
 Clearly, corporate reputations fulfill an important role in
the competitive process. For one, they inform constituents
about the merits of a company's products, jobs, and strategies.
For another, companies held in higher regard attract more and
better resources than rivals. Their products entice more
customers, their jobs lure more applicants, their stock
offerings draw greater demand.

Reputations are rent-producing assets — they create wealth.

In particular, they are a form of capital that goes unrecorded on
corporate balance sheets. One take-away from these observations
is therefore that creating shareholder value involves not only
exploiting the financial and human capital of a company to
maximum benefit but extracting value from the company's
reputational capital. To build and safeguard reputational capital,
managers must hone their skills in observing constituents and in
recognizing the importance of constituents' perceptions and
interpretations in the competitive process.1

Ultimately, reputations have economic value to companies

because they are difficult to imitate. Rivals simply cannot
replicate the unique features and intricate processes that
produced those reputations. Reputations are therefore a source
of competitive advantage. To sustain that relative advantage
requires a commitment to the ongoing management of a
company's reputation — that is, the extent to which the
images a company projects coincide with and reinforce its
identity.

This chapter explores some of the gaps between reality and

perception that occasionally appear when managers
mismanage a company's reputation. As companies diversify
their products and disperse their operations around the globe,
they are challenged as never before to ensure the convergence

550
of image and identity, to exploit more effectively their hid­ den
stock of reputational capital.

REPUTATION AND REALITY

Reputations are not only a boon, but a burden. King Midas's
gift of the golden touch had a downside. Whatever he touched
turned to gold — including his food! All too soon the wealthy
but starving monarch found himself wishing his gift would
simply go away. Companies that achieve preeminent standing
face a similar challenge. Because they perform in the limelight,
their every move is subject to close scrutiny, interpreted and
reinterpreted; their every action-like Midas's every touch-has
significance. The reputations they earn from doing some things
particularly well sit on the slippery ground of their
constituents' fickle interpretations. Managing those
interpretations requires considerable savvy.

Intel provides a vivid example of a company that got caught

in a crisis of perception in fall 1994. Intel's managers were
caught unprepared — and stumbled badly as a result — when
the company's pristine reputation for engineering excellence
came under attack after a fundamental flaw in its highly touted
Pentium chip was first identified by the mathematician Dr.
Thomas Nicely of Lynchburg College in Virginia. Specifically,
the chip sold in the latest models of personal computers since
May 1993 miscalculated by a very small amount when it
performed some simple divisions — making a so-called
floating point error. This was a serious charge. Moreover, it was
being levied against a company with such a widespread
reputation for quality that its name lent distinction to PC
makers themselves: For years they had boldly emblazoned
their machines with the label Intel Inside to attract customers.

551
 Initially, Intel's managers publically denied the charge. But
after Dr. Nicely's memo was circulated on the gossip channels
of cyberspace — the Internet — an initial hum turned into a
veritable explosion of speculation, rumor, and innuendo as
users, researchers, computer nerds, and scientists first
confirmed and then struggled to assess the relative
significance or insignificance of the flawed chip. Reacting to
the rapidly spreading rumor and the growing sense of panic in
a user community that was investing thousands of dollars in
new machines, Intel's Andrew Grove sent out a message on the
electronic network in November 1994, part of which follows.

This is Andy Grove, president of Intel. I'd like to comment

a bit on the conversations that have been taking place here.
First of all, I am truly sorry for the anxiety created among you
by our floating point issue. I read thru [sic] some of the
postings and it's clear that many of you have done a lot of
work around it and that some of you are very angry at us. Let
me give you my perspective on what has happened here. . . .
We held the introduction of the chip several months in order
to give [OEM] more time to check out the chip and their
systems. We worked extensively with many software
companies to this end as well. We were very pleased with the
result . . . . In the summer of '94, in the process of further
testing (which continued thru [sic] all this time and continues
today), we came upon the floating point error. . . . We started
a separate project, including mathematicians and scientists
who work for us in areas other than the Pentium processor
group to examine the nature of the problem and its impact.
This group concluded after months of work that (1) an
error is only likely to occur at a frequency of the order of
once in nine billion random floating point divides, and
that (2) this many divides in all the programs they
evaluated . . . would require elapsed times of use that

552
 would be longer than the mean time to failure of the
physical computer subsystems. In other words, the error
rate a user might see due to the floating point problem
would be swamped by other known computer failure
mechanisms.2

Consistent with this official, engineering point of view,

Intel invited only those customers with exceptional needs to
apply for a replacement chip. In an attempt at damage control,
Grove asked for patience from the user community:

We would like to find all users of the Pentium processor

who are engaged in work involving heavy duty scientific/
floating point calculations and resolve their problem in the
most appropriate fashion including, if necessary, by replacing
their chips with new ones. We don't know how to set precise
rules on this so we decided to do it thru [sic} individual
discussions between each of you and a technically trained
Intel person. We set up 800# lines for that purpose. It is going
to take us time to work thru [sic] the calls we are getting, but
we will work thru [sic] them. I would like to ask for your
patience here. . . . We appreciate your interest in the Pentium
processor, and we remain dedicated to bringing it as close to
perfection as possible.3

Despite mounting concern expressed by large PC

distributors like IBM, Gateway 2000, Packard Bell, and Dell, as
well as end users, Intel's top managers insisted on examining
requests on a case-by-case basis. To the consternation of most
proud Pentium owners, in fact, the company stuck to its official
technical position: that the flaw was trivial. Intel put it this way
in a public release:

553
 Earlier this year, as a part of Intel's ongoing testing and
product development work, a flaw was discovered in the
floating point unit (FPU) of the Pentium processor. This flaw
affects the accuracy of the floating point divide instruction for
certain combinations of input operands (i.e. certain
combinations of specific numbers). The impact of the flaw is
that for one in nine billion possible independent divides, the
precision of the result is reduced. . . . Intel has assessed the
likely impact of the flaw on three types of applications that
might be run on a Pentium processor-based system. These
include: (i) commercial PC applications on desk top and
mobile plat forms running M S­ DOS , Windows, and OS/2;
(ii) technical and workstation applications, such as
engineering and scientific, advanced multimedia,
educational and financial applications. . . ; and (iii) server
and transaction processing applications. . . . [In
conclusion] . . . the flaw is not meaningful for the vast
majority of commercial PC applications. The flaw is not
likely to be meaningful over the usable life of the processor
for the remainder of these commercial applications and
most work station applications. . . . The flaw has no effect
on server applications.4

Hardly a reassuring statement. Among the major users of Intel

chips, however, it was IBM (with about 9 percent of the market)
that reacted the most aggressively. IBM's researchers vehemently
disagreed with Intel's assessment of the severity of the flaw. In a
memo distributed on the Internet, they reasoned as follows:

IBM Research focused on the likelihood of error on the

Pentium chip in everyday floating point division activities.
Intel has analyzed the probability of making an error based
on the assumption that any possible 64 bit pattern is equally

554
 likely to occur in both the numerator and the
denominator. . . . Our analysis shows that the chances of
an error occurring are significantly greater when we per form
simulations of the types of calculations per formed by
financial spreadsheet users, because, in this case, all bit
patterns are not equally probable. . . . [After extensive
computations, the authors conclude that,] on a typical day
a large number of people are making mistakes in their
computation without realizing it.5

Of course, IBM had mixed motives for reacting this way.

After all, it was coproduced with Apple of a rival chip (the
Power-PC) targeted to the same market as Intel's. To IBM,
then, Intel's loss would mean a gain for the Power-PC. The
battle over the Pentium's flaw masked a more fundamental
battle for reputational standing between IBM and Intel.

Many weeks into the crisis, Intel still maintained a public

posture that inadvertently trivialized users' fears. Bit by bit,
Intel's engineering facade crumbled under the onslaught of
publicity only to reveal an arrogant company relatively distant
from customers' anxieties about the fallibility of its machines. By
mid-December 1994, IBM had stopped selling Pentium-based
PCs. A rash of articles in the New York Times, the Wall Street
Journal, and consumer-oriented technology magazines and news­
letters recommended holding off on Pentium purchases. The
Gartner Group, an information services consulting firm,
suggested that its corporate clients also delay their purchases.

Despite the negative publicity, in the last weeks of 1994 Intel's

CEO and senior officers arrogantly defied the interpretations of
customers. Speaking to newscaster Ted Koppel on NBC's Nightline
— and to the many customers who had tuned in to the broadcast-
Andrew Grove defended the company's point of view: to wit, that

555
all chips have flaws, that the Pentium chip is simply the best
engineered product of its kind, that this particular flaw was trivial,
and that the fuss being made about the chip's flaw was much ado
about nothing.

It was to be Grove's last gasp. Within days of the Nightline

interview, Intel succumbed to pressure from the growing army of
disgruntled users. In an about-face, the company announced that
it would replace flawed Pentium chips for every buyer who wanted
one free of charge. Replacement chips would cost Intel millions of
dollars. The overall crisis would wind up costing Intel even more
in lost sales for the months during which customers delayed
purchasing new machines. Moreover, ungauged would be the
hidden reputational loss to the company, its once pristine image
for engineering excellence and customer responsiveness sullied by
the crisis. As Grove concluded from the debacle, Intel learned an
important lesson: that although the company's products were sold
far and wide, Intel didn't know how to speak the language of the
consumer: "We decided what was good and what was not good
when we had to replace the Pentium. It turns out that consumers
highly resent it when a company presumes to judge the quality of
its products on their behalf."6 On the Internet, discussion groups
around the world also indulged in jokes about the crisis, for
example:

QUESTION: What's another name for the "Intel Inside"

sticker they put on Pentiums?

ANSWER: The warning label.

QUESTION: How many Pentium designers does it take to

screw in a light bulb?

ANSWER: 1.99904274017; that's close enough for non-

technical people.

556
 Most were insightful in confirming the inappropriateness
of Intel's response to what had been from the beginning not a
crisis of reality but one of perception.7 Yet despite the drama
and the financial costs to Intel, the story ends on a slightly
humorous note. After agreeing to a full replacement of all of its
installed chips, the company supplied the flawed Pentiums to a
manufacturer of costume jewelry for use as earrings.

WHAT AFFECTS REPUTATION?

As I've emphasized throughout this book, reputations deserve
greater attention from both practitioners and researchers because
they create economic value. Two sets of factors affect a company's
ability to realize value from its reputation: the company's strategy
on one hand, and its corporate practices in identity shaping and
image making on the other. Insofar as both fit well together —
they reinforce each other — then constituents experience stronger
and more coherent images of the company. In turn, coherence
induces better reputational ratings from constituents and builds
reputational capital. Figure C-1 summarizes the logic through
which companies realize economic value from their reputations.

557
STRATEGIC FACTORS
First and foremost, a company owes its reputation to its
uniqueness in delivering products and services to constituents.
In corporate parlance, reputation derives from a company's
ability to differentiate itself from rivals. Differentiation creates
perceived advantage among customers about the company's
merits. Insofar as the company pursues and consistently
differentiates itself from other constituents as well, then it
reinforces perceptions of uniqueness by those constituents and
creates economic value. In a crowded field of rivals, however,
differentiation is sustainable only when a company's
reputation sits on a solid foundation of corporate practices that
reinforce and promote its uniqueness to constituents.

For each of a company's businesses, maintaining

uniqueness suggests the following value proposition:

• Value pro position 1: The more a company pursues a

strategy that differentiates it from rivals with each
of its major constituent groups, the more likely are
constituents to ascribe a strong reputation to the
company, and the greater the company's
reputational capital.

When companies diversify either into new product arenas

or new geographic areas, new issues arise. Insofar as
diversification dilutes a company's perceived distinctiveness, it
is also likely to erode the company's reputation. It explains the
frequently observed reticence of investors to ascribe high
market value to conglomerates-hence their reduced stocks of
reputational capital compared with more focused companies.
There are exceptions, however. General Electric is a highly
diversified company that is consistently among the most
admired companies in the United States. Since 1980, with Jack

558
Welch at the helm, the company's market value and
reputational capital have soared. Consistent with our view,
however, wealth creation has largely resulted from Welch's
efforts at reducing GE's diversity and intensifying its focus.

One reason for expecting lower reputations from highly

diversified companies is the relative opacity of multibusiness
companies to outside scrutiny. Observers have much greater
difficulty understanding a conglomerate's operations and so
give it lesser ratings in reputational surveys. In a statistical
analysis of Fortune's reputational ratings, my colleague Mark
Shanley and I found that companies with more diversified
portfolios of businesses fared less well than more focused
companies. Moreover, we also found that constituents drew on
a wider range of informational inputs to interpret the actions
of more diversified companies. They were influenced not only
by accounting and market measures of performance but also by
press reports, advertising, and charitable contributions as they
struggled to resolve their sense of ambiguity about a
company's diversified operations.8 Consequently, we arrive at

• Value proposition 2: The more a company pursues a

diversification strategy around a core competence, the
more likely constituents are to ascribe a strong
reputation to the company, and the greater the
company's reputational capital.

CORPORATE PRACTICES
Strategic factors alone do not account for the creation of
value from reputation. Also vital to the value proposition are
corporate practices. To reinforce their uniqueness and
differentiate their business, companies need to develop
systematic identity-shaping and image-making programs that
also work together. Externally, programs designed to build

559
better customer relations, investor relations, community
relations, government relations, and competitor relations
should also be assessed for their effectiveness at producing
reinforcing images with constituents. Internally, programs
that target employee relations should strive to build a sense of
identity among employees that helps to reinforce the
company's strategic differentiation and uniqueness. Identity
shaping and image making should work together and become
visible in naming practices, advertising, annual reports, and
other corporate self-presentations.

Diversification presents interesting challenges to a company's

identity and image. Cross-cultural differences make it difficult for
a company to maintain coherent identities and images with
geographically diverse constituents. Legal constraints often
impede a company's ability to promote singular images and to
develop a shared identity and reputation across countries. Banks
are a case in point. Bank holding companies are generally
restricted from integrating the operations of their member banks
located in different countries. In the United States, the
Glass­Steagall Act has long prohibited a fusion of investment
services with commercial banking.

There are also cultural impediments to integrating

identities and images across national boundaries. Take Seattle-
based Nike, the maker of athletic shoes and apparel. Without
considerable effort and expenditure, employees of its Asian
factories are unlikely to perceive the company in the same
terms as its Seattle-based managers. The imagery with which
the company promotes its products can also prove difficult to
translate around the world. Nike relies on uniquely American
sports imagery and on endorsers like basketball's Michael
Jordan and tennis's Andre Agassi to project an aggressive and
dynamic image of the company and its products. Some images
travel well, others do not. An important question for diversified

560
companies to address is the extent to which their unique but
locally developed images and identities translate globally.

Although we've discussed image making with customers-the

marketing angle-parallel questions should be asked about the
images projected to suppliers, distributors, employees, and local
publics. How similarly should the company position itself vis-a-
vis each of these constituents in different countries and regions?
Should the company's many products and businesses rely on the
same corporate naming and image-making practices in all
countries? As we discussed in chapter 11, diversification tends to
encourage companies to develop fragmented identities and dilutes
their reputational capital. It takes considerable effort and
expenditure to maintain a monolithic identity in a diversified
company. I therefore suggest:

• Valuepro position 3: The more a company adopts

identity-shaping systems and image-making practices
that reinforce its strategic position, the more likely are
constituents to ascribe a strong reputation to the
company, and the greater the company's reputational
capital.

REPUTATIONAL MATTERS
Questions of reputation invariably elicit discussion and debate.
I comment below on some selected issues that are likely to be of
widespread interest to readers.

DO COMPANIES HAVE ONE REPUTATION

OR MANY?
Some observers claim that companies have many
reputations. They suggest that it may be meaningless to speak

561
of a single corporate reputation. Throughout this book,
however, I have argued in favor of looking at reputation as a
net assessment of many individual appraisals of a company by
its constituents. The argument is predicated on reasoning that
parallels the arguments made by students of public opinion.
Much as they aggregate individual opinions to crystallize "the
public's" point of view, so have I proposed that we should
conceive of corporate reputations.

That's not to say that constituents cannot hold different

points of view about a company. It's entirely possible for a
company to be well known for making high-quality products
yet still have a terrible reputation for the way it treats
employees. The better informed observers are about a
company, in fact, the more likely they are to know about the
company's different images and so to have a complex view of
the company's performance.

Nonetheless, each individual observer balances pros and cons,

positives and negatives, to form a net assessment of a company.
When we aggregate these net assessments across constituents, we
create a reputational profile. I therefore defend the merits of
looking at a company's overall reputation rather than its
underlying components.

HOW SHOULD REPUTATIONS BE MEASURED?

Opinion researchers rely on polls to gauge public opinion.
We may well want to construct reputational profiles and
rankings of companies in quite similar ways. Consistent with
the suggestions made for conducting a reputational audit in
chapter 8, the following process would result:

• Carefully identify each of the company's key constituent

groups.

562
 • Sample constituents from each group.

• Solicit their nominations of well-regarded firms.

• Obtain ratings of those firms on relevant dimensions.

The better represented are all of a company's constituents in

the reputational audit, the more valid is the reputational profile
that it generates. The main concern is with constructing samples
of constituents that will not bias results. To achieve a
representation of the population at large, political pollsters
advocate random sampling: "Respondents . . . are not selected
because of their typicality or of their representativeness. Rather,
each sampling area and each individual falls into the sample by
chance and thus contributes a certain uniqueness to the whole. It
is only when these unrepresentative elements are added together
that the sample should become representative."9

Insofar as corporate ratings accurately reflect the multiple

images of a company that are being disseminated, they provide
a useful tool for assessing the company's overall performance.
For some companies, the fragmented images will converge,
producing strong reputations. For other companies whose
actions produce contradictory images with different audiences,
weaker overall reputations will result.

Currently, the only large-scale reputational surveys of

companies are those sponsored by Fortune and Business Week.
Neither one is comprehensive, however, and both could be
significantly improved with minor modifications in
methodology. Fortune's survey of corporate reputations, for
instance, has steadily grown in size and reach over the years.
Each year, more respondents are included, as well as more
industries. Although the survey asks respondents to nominate
and evaluate companies on different dimensions, studies of
these ratings find that they are in fact highly correlated and

563
load on a single factor.10 Appropriately, then, the magazine now
reports ratings and rankings based on an index of overall
reputation rather than on individual dimensions.

As pointed out in chapter 7, however, a serious limitation of

Fortune's survey remains its near total reliance on a single
evaluating group: senior executives, directors, and analysts. To
do so is to misrepresent the company's images with employees,
customers, and local communities. There's no good reason for
perpetuating such a managerialist bias. The magazine now
surveys some 9,000 executives-a number that far exceeds the
sample size needed to develop an accurate representation of a
company's reputation with all of its constituents. Much as public
pollsters warn that a poll's validity hinges on randomness, so
do I suggest that Fortune's survey would gain in validity by
targeting the full range of constituents.

Much of the dispute surrounding rankings of business

schools (discussed in chapter 10) also derives from the
different constituents sampled and the disparate criteria that
these groups apply. Business Week samples recruiters and
alumni but excludes faculty, students, donors, and the local
communities in which the schools operate. U.S. News & World
Reports surveys business school deans but no one else (although
the final ranking does incorporate a wide range of archival
measures that partly reflect the judgments other groups might
make). To fully crystallize the reputations of these institutions,
more representative sampling should be done that includes not
only business school deans, corporate recruiters, and alumni
but also current students, faculty, and community groups. The
resulting rankings would better capture the multifaceted
missions in education, research, and service that business
schools are intended to fulfill.

564
WHO'S RESPONSIBLE FOR
MANAGING REPUTATION?
If reputations are valuable, who should be accountable for
managing a company's reputational capital? In chapter 8, I
concurred with others who have suggested that companies
appoint a chief reputation officer, or CRO, to act as guardian of
their corporate reputation. A CRO would regularly call attention to
the implications of a company's decisions and actions on its
reputation. The CRO would also examine how resource allocations
might affect reputation and systematically explore ways to build
up reputational capital.

The danger of having a CRO is that the position could be

used as a scapegoat for corporate crises and scandals. For
accountability to make sense, however, a CRO would have to be
provided an equal measure of responsibility for maintaining
reputational capital. That means equal membership on the top
management team-with access to the chief executive officer
comparable to that of the functional heads of finance,
manufacturing, marketing, and product development.

Ultimately, there is disagreement over who should be held

responsible and accountable for reputational gains and losses.
In the United States, CEOs appear more than willing to accept
praise for gains but not for losses. At a recent presentation, for
instance, General Electric's well­ known CEO Jack Welch
admitted that he had never contemplated quit­ ting over the
scandal at GE's Kidder Peabody subsidiary. Yet in all probability
a Japanese CEO faced with a similar profit-draining scandal
would have resigned.

In chapter 15, I showed how the decisive steps taken by

Salomon Brothers actually saved the company and stemmed its
reputational free­fall in 1991. In that case, however, the board

565
of directors clearly placed responsibility and accountability
squarely on the shoulders of the bank's top team-and fired its
members for their failure to prevent rogue behavior in
subordinates.

Doubtless having a CRO would have helped Salomon and

other financial institutions in recent years to anticipate and
address the kinds of crises likely to stem from rogue behavior
by individual traders and bankers. It should never be a
substitute, however, for ascribing complete accountability for
reputation management to all members of a company's top team.
Since projecting and cohering identity­consistent images is at
the heart of reputation management, members of the top
management team should be clearly the ones to carry the
burden of defending the interests of all the company's
constituents. Making reputation management in all its
different facets a centerpiece of the top team's activities should
therefore be a central ingredient of all good strategic
management.

CAN REPUTATIONS BE USED AS

PERFORMANCE MEASURES?
All too often managers fail to consider their firm's
reputation as a valuable asset until forced to do so-that is,
when a crisis hits. Then and only then do miscreant managers
seem interested in discussing reputational matters and in
decrying the lack of systematic attention to such intangibles.
By then, of course, it's too late to be discussing positive ways to
manage reputational capital.

In fact, I suggest that reputation is a potentially powerful

means of measuring a company's overall performance in a
marketplace made up not only of customers but of employees,
investors, suppliers, distributors, and other observers. By

566
drawing attention to a company's relative success at meeting
the common interests of all its constituents, a reputational
audit provides a useful vehicle for simultaneously gauging a
company's economic, financial, social, and environmental
performance.

Moreover, when reputations are aggregated into relative

rankings against rivals, they provide a viable means of auditing
the performance of an entire corporate sector. The growing
popularity of reputational ratings in the business press actually
offers the tantalizing possibility that well-constructed
reputational surveys could adequately capture the corporate
sector's ability to meet society's broadest expectations.
Imagine what would happen if these rankings were to become
institutionalized. They would constitute an attractively
decentralized mechanism capable of channeling managers'
activities in socially desirable directions. No mean feat.

To achieve those lofty aims, we'll need to strengthen the

process by which rankings are actually constructed and
reported. Valid rankings can serve as the foundation of a
performance measurement system only if information is
systematically collected, the comparison process is
standardized, and the system is institutionalized.

When ratings are reported in the press, for instance, they

draw attention. Publicly reported audits are therefore a key
mechanism for developing rankings as a guidance mechanism.
Another way to strengthen the attention-generating role of
rankings would be to present them not only in the press but in
the annual reports that companies release to shareholders.
Now annual reports only describe an independent auditor's
assessment of the company's financial results. As discussed in
chapter 4, U.S. accounting rules unfortunately prohibit the
reporting of accumulated goodwill or the value of brand names

567
on a firm's balance sheet. To explicitly capitalize reputations in
financial statements, however, would be to encourage
managers to more carefully maintain these invisible assets.

Still, extra-balance sheet reporting of reputational ratings

and rankings could be done. For instance, auditors could also
assess and report on how key constituents — other than
financial analysts —evaluate a company. Efforts in this
direction are evident: A growing number of firms now
voluntarily and systematically report in their annual
statements the results of employee surveys in the belief that
investors care about the company's human capital. The same
might be done with customers, suppliers, dealers, and other
constituencies. If well-regarded companies were to report their
relative reputational standings in their annual statements, they
might induce others to follow suit. Prospective employees,
investors, and other constituents would doubtless pay
attention to these ratings as a gauge of the company's
reputational capital, forcing lesser-ranked rivals to imitate the
practice and to work toward improving their own reputations.
In matters of reputation, however, it's best not to confuse
wishes with reality.

568
NOTES

PREFACE

1 Fombrun, C. Reputation: Realizing Value from the Corporate Image. Boston:

Harvard Business School Press, 1996.

2 Fombrun, C. & C.B.M. van Riel. Fame and Fortune: How the world’s largest
companies build winning reputations. NY: Prentice-Hall, 2004.

3 Simon, H. A. (1971), "Designing Organizations for an Information-Rich

World", in Martin Greenberger, Computers, Communication, and the Public
Interest. Baltimore, MD: The Johns Hopkins Press, pp. 40–41.

4 http://marketingland.com/survey-customers-more-frustrated-by-how-long-it-
takes-to-resolve-a-customer-service-issue-than-the-resolution-38756

5 http://www.adweek.com/socialtimes/50-twitter-fun-facts/475073

6 http://www.hrcommunication.com/Main/Articles/91_percent_of_recruiters_ch
eck_social_networks_6953.aspx

7 Van Riel, C.B.M. Essentials of Corporate Communication. Routledge, 1995.

INTRODUCTION

1 See Phyllis Fine, "Juggling the Stars," Travel Agent, July 26, 1993.

2 James Villas, "Connaught in the Act," Town & Country, April 1994, 96.

3 David Aaker, M anaging Brand Equity (New York: Free Press, 1991).

4 Peter Reuter, 'The Value of a Bad Reputation: Cartels, Criminals, and Barriers to
Entry" ( Paper presented at the Annual Conference of the Association for Public
Policy Analysis and Management, Minneapolis, October 1982).

5 Rahul Jacob, "Corporate Reputations," Fortune, March 6, 1995, 54.

6 For a similar view of how uniqueness defines excellence, see Michael Treacy
and Fred Wiersema, "How Market Leaders Keep Their Edge," Fortune,
February 6, 1995.

7 Roberto Goizueta, quoted in Fortune, March 6, 1995, 56.

569
CHAPTER 1

1. As for Tonya Harding, after the 1994 winter Olympics she returned to
Oregon, where she pied guilty to "obstructing" the police investigation into
the attack on Nancy Kerrigan. Harding agreed to pay a $100,000 fine and
resigned from the sport. Her reputation in tatters-and despite her eighth-
place finish at the Olympics — she was later denied a dinner invitation to the
Clinton White House with the other Olympic athletes.

2. H. S. Becker, Art Worlds (Berkeley: University of California Press, 1982),

25, 35, 361.

3. Gita Siedman, ed., World of Winners ( Detroit: Gale Research, 1989), viii.

4. Daniel Chambliss, "The Mundanity of Excellence: An Ethnographic Report

on Stratifica tion and Olympic Swimmers," Sociological Theory 7 (1989):
70-86.

5. Ibid., 73.

6. Ibid., 77, 81.

7. Sherwin Rosen, "The Economics of Superstars," American Economic Review

71 (1981): 845-858.

8. In The Discipline of M arket Leaders (Reading, Mass.: Addison-Wesley, 1995),

authors Michael Treacy and Fred Wiersema show that successful companies all
create economic value by making their own unique contribu- tions: "Our research
shows that no company can succeed today by trying to be all things to all people.
It must instead find the unique value that it alone can deliver to a chosen market"
( Fortune, February 6, 1995, 89).

9. "Small British Companies: Family Values," Economist, December 25, 1994,

79-82.

10. The Insider's Guide to Law Firms, compiled and written by Harvard Law
students (Boulder, Co.: Mobius Press, 1993).

11. Quoted in Erwin Cherovsky, The Guide to New York Law Firms (New York: St.
Martin's Press, 1991) 1.

12. Ibid., 2.

13. Bill Starbuck, "Keeping a Butterfly and an Elephant in a House of Cards: The

570
 Elements of Exceptional Success," Journal of M anagement Studies 18
(1993): 1-32.

14. Richard Tedlow, N ew and Improved (New York: Basic Books, 1990).

15. John Kay, "Keeping Up with the Market," Economist, September 11, 1993,
65-69.

16. Peter Drucker, The Effective Executive (New York: Harper & Row, 1985),
vu.

17. Thomas Dowdell, Suresh Govindaraj, Prem Jain, "The Tylenol Incident,

18. Ensuing Regulation, and Stock Prices," Journal of Financial and Quantita-
tive Analysis 27 (1992): 283-301, and Clark Johnson, "A Matter of Trust," M
anagement Accounting 71 (1989): 12-13.

19. Bruce Harrison, "Assessing the Damage: Practitioner Perspectives on Val-

dez," Public Relations Journal 45 (1989): 40-45.

20. John McDonald, "Sears Makes It Look Easy," Fortune, May 25, 1964, 120.

21. Max Bazerman, Judgment in M anagerial Decision M aking (New York: Wiley,
1994), 3rd edition.

22. Arthur Ashe, Days of Grace (New York: Alfred Knopf, 1993), 3.

CHAPTER 2

1. Edwin McDowell, "Helmsley Palace Succession: Brunei Royalty Buying

Hotel," New York Times, November 1, 1993: Dl, D3.

2. See Stuart Albert and David Whetten, "Organizational Identity," in Research

in Organizational Behavior, ed. L. L. Cummings and B. Staw (Greenwich,
Conn.: JAi Press, 1985), 7:263-95.

3. See "Chairmen Starring as Spokesmen May Eventually Lose Their Luster," Wall
Street journal, February 12, 1992, BS .

4. Appeared in the New York Times, September 10, 1993, D3.

5. Alexis Lichine, New Encyclopedia of Wines and Spirits, 5th ed. (New York:
Alfred Knopf, 1987), 75-78.

571
6. Quoted in Jerry Gray, "What's in a Name? If It's New Jersey, Not Much,"
New York Times, May 3, 1992, 49.

7. Kimberly McLarin, "Rutgers Seems to Like Its Stately, Stateless Image," New
York Times, February 19, 1994.

8. Advertisement in the New York Times, September 22, 1992, A19.

9. See Anne Raver, "Audubon Society Pursues an Identity beyond Birds," New
York Times, June 9, 1991, 1, 22.

10. Stephanie Strom, "Image and Attitude Are Department Stores' Draw," New
York Times, August 12, 1993, Dl.

11. Albert and Whetten, "Organizational Identity," 263-95.

12. Gerald R. Salancik and James Meindl, "Corporate Attributions as Strategic

Illusions of Management Control," Administrative Science Quarterly 29
(1984): 238-54.

13. C. Schwoerer and B. Rosen, "Effects of Employment-at-Will Policies and

Compensation Policies on Corporate Image and Job Pursuit Intentions," journal
of Applied Psycholog y 74 (1989): 653-56.

14. The complete study of the Port Authority is described in Jane Dutton and
Janet Dukerich, "Keeping an Eye on the Mirror: Image and Identity in
Organizational Adaptation,'' Academy of M anagement journal 34 (1991):
517-14.

15. Craig Weatherup, quoted by Richard Lyons in New York Times, June
18,1993, A16.

CHAPTER 3

1. In fact, even a bad reputation can serve to strengthen a competitive position.

One study of the Mafia-controlled garbage industry in New York City
observed how prosecution acts perversely to strengthen the bad reputation of
the industry and discourages honest entrepreneurs from entering it, thereby
increasing the market power of organized crime in that sector. See Peter
Reuter, "The Value of a Bad Reputation: Cartels, Criminals, and Barriers to
Entry" (Paper presented at the An nual Conference of the Association for
Public Policy Analysis and Management, Minneapolis, October 1982).

572
2. T. Hall, "Striving to Be Cosmetically Correct," New York Times, May 27,
1993, Cl, C8.

3. Susan Strange, Casino Capitalism (London: Oxford, Blackwell, 1986).

4. John Taylor, Circus of Ambition (New York: Warner Books, 1989).

5. Economists have proposed various models to analyze these investments as

dynamic games. See B. Klein and K. Lefler, "The Role of Market Forces in
Assuring Contractual Performance," ]ournal of Political Economy 89 ( 1981):
615-41. See also, Paul Milgrom and John Roberts, "Price and Advertising
Signals of Product Quality," Journal of Political Economy 94 (1986): 796-821.

6. Herbert Baum, quoted in "What Makes a Brand's Image Valuable?" Sense 91

( Lippincott & Margulies) 1989.

7. See Robert Wilson, "Auditing: Perspectives from Multiperson Decision

Theory," Accounting Review 58 (1983): 305-18.

8. Moody's Rating Process (A publication of Moody's Corporate Department),

1989.

9. David Kearns, quoted in "Corporate Identity as a Marketing Tool," Sense 90

(Lippincott & Margulies), 1988.

10. Ralph Larsen, quoted in "Tomorrow's Image: How Some Leading Compa-
nies View Image Management as a Corporate Priority," Sense 92 (Lippin-
cott & Margulies), 1990.

11. Ibid.

12. For a discussion of the difference between search goods and experience
goods, see P. Nelson, "Information and Consumer Behavior," Journal of
Political Economy 78 (1970): 311-29.

13. Rita Reif, "Record Price in a Sale of Art Owned by Streisand," New York
Times, March 4, 1994, C3.

14. See Richard Beatty and J. Ritter, "Investment Banking Reputation and the
Underpricing of Initial Public Offerings," Journal of Financial Economics 45
(1986) 213-32.

15. Ibid.

573
16. George Stigler, "Information in the Labor Market," ]ournal of Political
Economy 70 (1962): 49-73.

17. Michael Spence, Market Signaling: Informational Transfer in Hiring and

Related Screening Processes (Cambridge: Harva rd University Press, 1974).

18. David Kearns, quoted in "Corporate Identity as a Marketing Tool."

19. See Klein and Lefler, "Role of Market Forces," 615-41, and Paul Milgrom
and J. Roberts, "Price and Advertising Signals," 796-821.

20. Andrew Grove, quoted in Jacob, "Corporate Reputations," 56.

21. Sandy Weill, quoted in "What Makes a Brand's Image Valuable?"

22. Richard D'Aveni, "Top Managerial Prestige and Organizational Bank-

ruptcy," Organization Science 1 (1990): 121-42.

23. Richard Caves and Michael Porter, "From Entry Barriers to Mobility
Barriers," Quarterly Journal of Economics 91 (1977): 421-34.

24. Gary Becker, Human Capital (Chicago: University of Chicago Press, 1975).

CHAPTER 4

1. Howard Becker, Art Worlds, 23.

2. Svetlana Alpers, Rembrandt's Enterprise: The Studio and the M arket (Chi- cago:
University of Chicago Press, 1988), 105.

3. Warren Buffett, quoted by Jonathan Fuerbringer in New York Times, August

27, 1991, Dl.

4. See Fortune's special issue reviewing efforts to quantify a company's

intellectual assets, October 3, 1994, 68-74.

5. Donald Kieso and Jerry Weygandt, Intermediate Accounting (New York: John
Wiley & Sons, 1992), 598.

6. See Michael Wines, "Assets Intangible? Congress Has an Idea for You,"

7. New York Times, July 15, 1993, 1, A18.

8. For instance, see Joseph Corry, "Accounting Aspects of Takeovers," M an-

agement Accounting, September 1990, 47-51.

574
9. A comment by Michael Ozanian as part of an article by Alexandra Ourusoff,
"What's in a Name? What the World's Top Brands Are Worth," Financial
World, September 1, 1992, 40.

10. Based on data provided by Information Resources and reported in the New
York Times, April 24, 1993: 37, 44.

11. Herbert Baun, quoted in "What Makes a Brand's Image Valuable?"

12. See Alfred King and James Cook, "Brand Names: The Invisible Assets,"

13. Management Accounting, November 1990, 41-47.

14. See Peter Farquhar, "Managing Brand Eq uity," M arketing Research, Sep- tem
ber 1989, 24-34.

15. This is the prevailing technique used by British consulting firm Interbrand.
See Laurel Wentz and Geoffrey Martin, "How Experts Value Brands,"
Advertising Age, January 16, 1989, 24.

16. Ourusoff, "What's in a Name?" 47.

17. The ratio of market value to book value is popular among analysts and is
known as Tobin's Q. I favor the reputational capital measure only because
most people don't think in terms of ratios; also, a dollar value highlights the
economic worth of a company's reputation.

18. What I have termed reputational capital John Swanda defends as a com- pany's
moral standing in "Goodwill, Going Concern, Stocks and Flows: A Prescription
for Moral Analysis," Journal of Business Ethics 9 ( 1990): 751-59.

19. See Charles Fombrun and Mark Shanley, "What's in a Name? Less and
Less," Business Week, July 8, 1991, 66-67.

20. Carol Simon and Mary Sullivan propose two methods for estimating a firm's
brand equity. The first is based on the brand's advertising budget, market
share, age, and order of market entry and relies on a cross-sectional
regression model of those factors for a set of 638 firms-a cumbersome
method for which data are generally lacking. The second estimates changes
in brand equity using stock market prices. Simon and Sullivan conclude that
marketing factors are reflected in Wall Street's stock prices, thereby
justifying the use of a measure of reputational capital such as ours. See
Simon and Sullivan, A Financial Ap proach to Estimating Firm-Level Brand
Equity and M easuring the Impact of M arketing Events ( Report #92-116,

575
 Marketing Science Institute, Boston, June 1992).

21. Alexandra Ourusoff and Meena Parachakesen, "Who Says Brands Are
Dead?" Financial World, September 1, 1993, 40-52.

CHAPTER 5

1. Robert Levering, Milton Moskowitz, and Michael Katz, The 100 Best Companies
to Work for in America (New York: New American Library, 1983).

2. This idea builds on the concept of stakeholder management described by R.

3. E. Freeman in Stakeholder M anagement: A Stakeholder Approach (Boston:

Pittman, 1984).

4. This is the argument made by Treacy and Wiersema in The Discipline of M

arket Leaders. They suggest that companies build their uniqueness and
identity by pursuing operational excellence, product leadership, or customer
intimacy.

5. Robert Levering, A Great Place to Work (New York: Random House, 1988),
45.

6. The Transformation of IBM : A M arket-Driven Quality Reference Guide

(Document #G325-0670-00, IBM Corporation, Stamford, Conn., June 1992), 32.

7. Leveri ng, Moskowitz, and Katz, 100 Best Companies, 11-14.

8. "Takeovers," Sense 87 (Lippincott & Margulies, Inc., 1985).

9. Eugene F. Fama, "Efficient Capital Markets: A Review of Theory and Empirical

Work," Journal of Finance 25 (1970): 383-417.

10. Robert S. Kaplan and R. Roll, "Investor Evaluation of Accounting Informa- tion:
Some Empirical Evidence," Journal of Business 45(1972): 225-57.

11. Richard Brealey and Stewart Meyers, Principles of Corporate Finance (New
York: McGraw-Hill, 1988), 165; Steven Ross and Richard Westerfield,
Corporate Finance (St. Louis: Times Mirror/Mosby, 1988), 172.

12. Brealey and Meyers, Principles of Corporate Finance, 564.

13. Moody's Rating Process.

576
14. Susan Antilla, "Gang That Couldn't Pick Straight," New York Times, August 10,
1992, Dl, D3.

15. Beth Mintz and Michael Schwartz, The Power Structure of American Business
(Chicago: University of Chicago Press, 1985).

16. Doron Levin, "Stubborn Taurus Tramples on the Heels of the Accord,"

17. New York Times, 13 September 1992, 5.

18. Transformation of IBM , 16.

19. W. Edwards Deming, "Improvement of Quality and Productivity through Action

by Management," National Productivity Review 1 (Winter 1981-82): 12-22.

20. See the biography of Deming by Andrea Gabor, The M an Who Discovered
Quality (New York: Random House, 1990).

21. Philip Crosby, Quality Is Free (New York: McGraw-Hill, 1979). See also Joseph
M. Juran, Quality Control Handbook (New York: McGraw-Hill, 1974).

22. "Corporate Identity as a Marketing Tool."

23. Peter Kinder, Steve Lydenberg, and Amy Domini, Investing for Good (New
York: HarperBusiness, 1993), 183.

24. Mary Scott and Howard Rothman, "Companies with a Conscience," World M
onitor, October 1992, 16.

25. R. E. Freeman, Strategic M anagement.

26. Donna Wood contrasts three sets of principles consistent with a long-run
outlook: social legitimacy, public responsibility, and managerial discretion. See
"Corporate Social Performance Revisited," Academy of M anagement Review 4
(1991): 691-718.

27. Ben & Jerry's on Caring Capitalism (Company brochure).

28. Lod Cook, quoted in Principles of Excellence in Community Service: A Message

to America's Business Leaders ( Points of Light Foundation, Wash- ington, D.C.,
1992).

29. H. B. Atwater, quoted in Principles of Excellence, 7.

30. Principles of Excellence, 5.

577
31. David Lewin, "Community Involvement, Employee Morale, and Business
Performance" (Paper presented at IBM Worldwide Social Responsibility
Conference, 1991).

32. Jane Dutton and Michael Pratt, "Merck's Mectizan Donation Program"
(University of Michigan Working Paper, October 1992).

33. Al Gore, quoted in New York Times, 15 June 1993, C4.

34. Paul Shrivastava, "The Greening of Procter & Gamble" (Bucknell University
Working Paper, October 1992).

35. "Who Cares, Wins,'' Economist, May 16, 1992, 19-20.

CHAPTER 6

1. New York Times, February 11, 1993, Al, A21. See also New York Times,
February 12, 1993, A14.

2. See Business Week, August 9, 1993, 29.

3. Daniel Boorstin, The Image (New York: Random House, 1964), 12. 4.

4. Ibid., 248-49.

5. Quoted in Peter Collier and David Horowitz, The Rockefellers (New York:
Holt, Rinehart, and Winston, 1976), 152.

6. "Edward Bernays, 'Father of Public Relations' and Leader in Opinion Mak-

ing, Dies at 103," New York Times, 20 March, 1995, B7.

7. The Power of Communication, Corporate brochure, (New York: Hill &

Knowlton 1994), 6.

8. Quoted in John T. Flynn, "Edward L. Bernays: The Science of Ballyhoo,"

Atlantic Monthly, May 1931, 562-71.

9. "Corporate Image Ad: A Powerful Survey Works for Dell Computer," M ar-
keting Computers, 12 (January 1992), 21.

10. S&P spokesperson, cited in "S&P to Speed Ruling on Chrysler Upgrade,"

New York Times, June 2, 1993, Bl.

11. See Robert S. Kaplan and G. Urwitz, "Statistical Model of Bond Ratings: A
Methodological Inquiry," journal of Business 52 (1979): 231-261. Also Brealey

578
 and Meyers, Principles of Corporate Finance, 564.

12. Eric Berg, "The Bad Boy of Insurance Ratings," New York Times, January 5,
1992, sec. 3, 1.

13. Barbara Presley Noble, "A Downgraded Detroit Cries Foul," New York
Times, November 3, 1992, D1, D4.

14. Robert Eccles and Dwight Crane, Doing Deals: Investment Banks at Work
(Boston: Harvard Business School Press, 1988).

15. Stephanie Strom, "Apparel Industry Money Men Thrive," New York Times,
December 16, 1991, D3.

16. Ibid.

17. Barry Rehfeld, "Cashing In on Old Friends in High Places," New York Times,
August 15, 1993, 4.

18. The study of opinion leadership began with Paul Lazarsfeld and is extended and
well documented by Everrett Rogers and Floyd Shoemaker in Commu- nication
of Innovations (New York: Free Press, 1971).

19. Early work on the spread of rumors was done by social psychologists who saw
social networks as key to predicting the path a rumor would take. See John L.
Moreno, Who Shall Survive? (Washington, D.C.: Nervous and Mental Disease
Publishing Co., 1934).

20. John Kenneth Galbraith, A Short History of Financial Euphoria (New York:
Whittle Books, 1993).

21. Charles MacKay, "The Tulipomania," In Extraordinar y Popular Delusions

and the M adness of Crowds (1841; reprint, New York: Bonanza Books,
1981), 89.

22. Ibid., 95.

23. Keynes's argument was pointed out by columnist Floyd Norris in his interest-
ing story on Andrea Electronics, "The Spectacular Boom in Andrea Electron-
ics," New York Times, July 11, 1993, Magazine section, 39-56.

24. See R. Ball and P. Brown, "An Empirical Evaluation of Accounting Income
Numbers," Journal of Accounting Research 6 (1968): 159-77. 1968; Kaplan
and Roll, "Investor Evaluation of Accounting Information."

579
25. Frederick Koenig, Rumor in the M arketplace (Westport, Conn.: Auburn
House Publishing, 1985).

26. Described in "Anatomy of a Rumor: It Flies on Fear," New York Times, June 4,
1991, Cl, CS.

27. William Meyers, The Image-M akers: Power and Persuasion on M adison
Avenue ( New York: Times Books, 1984), 98.

28. Eric Abrahamson and Lori Rosenkopf, "Institutional and Competitive

Bandwagons: Using Mathematical Modeling as a Tool to Explore Innovation
Diff usion," Academy of M anagement Review 18 (1993): 487-517.

29. Thomas Garbett, How to Build a Corporation's Identity and Project Its
Image (Lexington, MA: Lexington Books, 1988).

30. Charles Fombrun, "Producing Organizational Configurations," Journal of

Management Studies (1991).

31. Michael Kelly, "The Game and the Show," New York Times Magazine,
November 20, 1993, 97.

32. Erving Goffman, Stigma: Notes on the M anagement of Spoiled Identity (New
York: Simon & Schuster, 1963).

CHAPTER 7

1. Siedman, World of Winners, vii.

2. Sheila Rule, "Two Cities That Want Grammys," New York Times, March 10,
1993, 13.

3. According to Gita Siedman, ed., Awards, Honors, and Prizes, 10th ed. ( Detroit:
Gale Research, 1992).

4. ]. Douglas Bates, The Pulitzer Prize ( New York: Birch Lane Press, 1991).

5. See Ray Laakaniemi, William Green, and Laurence Jankowski, "Common

6. Traits of Award Winners," Newspaper Research Journal 13, nos. 1-2 (1992):
138-45.

7. Leonard Klady, "Oscar Pays in Lotsa Ways," Variety, February 22, 1993, 1, 245.

8. Bernard Weinraub, "First Comes a Junket, Then a Golden Globe; Holly- wood Is

580
 Buzzing," New York Times, February 8, 1993, Cl 1.

9. Tom Pollock, quoted in New York Times, February 10, 1994, C18.

10. "Buyer in the Wings for Clio Awards," New York Times, January 29, 1993, Dl6.

11. "Awards Presented in Direct Marketing," New York Times, February 26, 1993,
D15. p. 15.

12. Anne-Marie Schiro, "Fashion's Night to Preen," New York Times, January 31,
1993, sec. 9, p. 9.

13. Richard Klein, "HBO Leads Pack with CableAce Awards," Variety, 25 January
1993, 33.

14. "1993 Car of the Year Winner: Ford Probe GT," M otor Trend, January 1993, 82-
83.

15. Barbara Davies, "Artists Reap Rewards from B'Board B'Cast," Billboard,
December 26 , 1992, 12, 96.

16. Alessandra Bianchi, "Well Said," Inc., January 1993, 98-99.

17. Tessa Melvin, "A Yonkers School Earns a Blue Ribbon," New York Times,
March 14, 1993, 1.

18. Eugene Carlson, "Enterprise: Baldrige Fever Spreads to State, Local Levels,"
Wall Street Journal, March 9, 1993, Bl.

19. John Grettenberger, quoted in John Holusha, "The Baldrige Badge of Cour- age-
and Quality," New York Times, 21 October 1990, 12.

20. Jennifer ]. Laabs and Allan Halcrow, "Optimas Winners Chart New Fron- tiers,"
Personnel Journal 72, no. 1 (1993): 50ff.

21. "IACP and Motorola Announce Quality in Law Enforcement Award Pro- gram,"
Police Chief 60, no. l (1993): 13.

22. Steve Lydenberg, Alice Tepper Marlin, and Sean O'Brien Strub, Rating
America's Corporate Conscience: A Provocative Guide to the Companies behind
the Products You Buy Every Day (Reading, Mass.: Addison-Wesley, 1986). See
also Myra Alperson, Alice Tepper Marlin, Jonathan Schorsch, and Rosalyn Will,
The Better World Investment Guide ( New York: Prentice- Hall, 1991).

22. Peter Nulty, "The National Business Hall of Fame," Fortune, April 5, 1993, 108-
16.

581
23. Adapted from a survey of U.S. executives, reported in "Most Innovative
Companies," Fortune, December 13, 1993, 11.

24. Peter Kinder, Steven D. Lydenberg, and Amy L. Domini, Investing for Good.

25. Baila Zeitz and Lorraine Dusky, The Best Companies for Women (New York:
Simon & Schuster, 1988).

26. See Jennifer Reese, "America's Most Admired Corporations," Fortune, Feb-
ruary 8, 1993, 44.

27. Mark Shanley and Charles Fombrun, "The Market Impact of Reputational
Rankings" (New York University, Stern School of Business Working Paper, June
1993).

28. Ibid.

29. Christopher Hitchens, "These Glittering Prizes," Vanity Fair, February 1993, 20-
24.

CHAPTER 8

1. Alan Towers, "Realizing the Benefits of a Good Name," New York Times, June
16, 1991.

2. Charles Fombrun, Noel Tichy, and Mary Anne Devanna, Strategic Human
Resource Management (New York: John Wiley & Sons, 1984).

3. James E. Grunig, "Image and Substance: From Symbolic to Behavioral

Relationships," Public Relations Review 19 (1993): 136.

4. Paul Sweeney, "Polishing the Tarnished Image of Investor Relations Execu-

tives," New York Times, April 3, 1994, 5.

5. Ibid.

6. The same fragmentation characterizes the academics who study business.

Management knowledge is largely created by specialists who work in depart-
mental silos like economics, finance, strategic planning, marketing, human
resource management, and so on. Academic specialization limits our ability to
generate a truly integrative understanding of corporate reputations.

7. Freeman, Strategic Management, 48.

8. J. D. Aram, "The Paradox of Interdependent Relations in the Field of Social Issues

582
 in Management," Academy of M anagement Review 14 (1989): 266-83. See also
Klein and Leffler, "The Role of Market Forces," 615-41.

9. See Paul Milgrom and John Roberts, "Informational Asymmetries, Strategic

Behavior and Industrial Organization," American Economic Review, Papers &
Proceedings 77 (1987): 184-93.

10. Kaplan and Roll, "Investor Evaluation of Accounting Information," 225-57.

11. Fombrun, Tichy, and Devanna, Strategic Human Resource M anagement.

12. Donna Wood, Business and Society (New York: HarperCollins, 1994).

13. Amitai Etzioni, Capital Corruption (New York: Harcourt Brace Jovanovich,
1984).

14. Boorstin, The Image.

15. In fact, economists focus almost exclusively on the reputations that develop
between competitors in their models of strategy making. See Keith Weigelt and
Colin Camerer, "Reputation and Corporate Strategy," Strategic M an- agement
Journal 9 (1988): 443-54.

16. Eric Abrahamson and Charles Fombrun, "Forging the Iron Cage: The Pro-
duction of Macrocultures," journal of M anagement Studies 29 (1992): 175-94.

17. Wanted: Chief Reputation Officer, Corporate brochure (Alan Towers Asso-
ciates, New York, July 1991).

18. Clive Chajet, Image by Design (Reading, Mass.: Addison-Wesley 1991), 98-99.

19. Ibid., 102.

20. Ibid., 46-47.

21. Crisis Communications, Corporate brochure (Hill & Knowlton, New York,
1994).

22. Tim Wallace, "Crisis Management: Practical Tips on Restoring Trust," Financier
15 (1991): 13-16.

23. Richard Beckhard, M anaging Organizational Transitions ( Reading, Mass.:

Addison-Wesley 1978).

CHAPTER 9

1. Daniel Boorstin, The Decline of Radicalism: Reflections on America Today

583
 (New York: Random House, 1969).

2. Stephanie Strom, "Braving Fickle Fashion," New York Times, August 16,
1993, Dl, D4.

3. John Fai rchild, Chic Savages ( New York: Simon & Schuster, 1989), 12.

4. Richard Morais, "What Is Perfume but Water and a Bit of Essence?" Forbes,
May 2, 1988, 90-95.

5. Nicholas Coleridge, The Fashion Conspiracy (New York: Harper & Row,
1988), 283-90.

6. Steven Gaines, Simply Halston (New York: Putnam, 1991), 238-40. 7.

7. Ibid., 251.

8. Caroline Rennolds Milbank, Couture: The Great Designers (New York:

Stewart, Tabori, & Chang, 1985), 341.

9. See "Bressler: Montana Still My Man," Women's Wear Dail y, September 2,

1990, 6.

10. Martha Duffy, "Mais Oui, Oscar!" Time, February 8, 1993, 69.

11. For instance, see "Dawn Mello: Revamping Gucci," Women's Wear Daily, May
29, 1992, 6-7.

12. Godfrey Deeny, "Looking at La nvin: A 'Flagship' Treads Water," Women's

Wear Daily, September 12, 1991, 1, 6.

CHAPTER 10

1. The list excludes some prominent MBA programs offered by state-run

institutions, such as the University of California, Penn State, and North
Carolina. Their lower tuition, heavy reliance on servicing local
communities, and state funding mean that these institutions face
circumstances different from those facing the private schools that dominate
most rankings of busi- ness schools.

2. Stephen Cole "The Hierarchy of the Sciences," American Journal of Sociology

89 (1983): 111-139.

3. Rosen, "The Economics of Superstars," 845-58.

4. Robert Hayes and William Abernathy, "Managing Our Way to Economic

584
 Decline," Harvard Business Review, July/August 1980, 66-77.

5. Earl Cheit, "Business Schools and Their Critics," California M anagement

Review 27 (1985): 43-62.

6. In a survey of 60 deans and directors of executive education programs

conducted by U.S. News & World Reports, March 23, 1992, 64.

7. Internal memorandum of Richard D. West, New York University, Stern

School of Business, October 19, 1990.

8. Mukul Pandya, "At Wharton, They're Practicing What They Teach," New
York Times, March 5, 1995, F7.

9. "Harvard B-School: An American Institution in Need of Reform," Business

Week, July 19, 1993, 58-66.

10. Neil Rudenstine, quoted in "Reinventing Harvard: A New President Tries to

Unite Its Schools," New York Times, February 10, 1993, BlO.

11. Remarks of George Rupp at his inauguration ceremony, Columbia Univer-

sity, September 18, 1993.

12. William Honan, "A Decade and $1 Billion Put NYU with the Elite," New
York Times, March 20, 1995, 1, B4.

13. Meyer Feldberg, quoted in "A Harder Sell for MBA's," U.S. News & World
Reports, Ma rch 23, 1992, 63.

CHAPTER 11

1. Brief Cases (Lippincott & Margulies, June 1993).

2. Brief Cases (Lippincott & Margulies, November 1993).

3. Wally Olins, Corporate Identity (Boston: Harvard Business School Press, 1989),
157.

4. Olins, Corporate Identity, 158.

5. "The Corporate Name: To Change or Not to Change," Sense 85 ( Lippin- cott

& Margulies, 1984), 4.

6. Olins, Cor/JOrate Identity, 160.

585
7. Ibid., 161.

8. "Corporate Name," 14-17.

9. Olins, Corporate Identity, 161. 10. Ibid., 162.

11. Wayne Calloway, quoted in "Corporate Identity, as a Marketing Tool."

12. "Employees and Image," Sense 93 (Lippincott & Margulies, 1990), 4.

13. "Today's Decisions, Tomorrow's Image," Sense 92 (Lippincott & Margulies,

1990), 5.

14. 0lins, Corporate Identity, 106.

15. Gordon Lippincott, quoted in "Image Management in a Global Economy," in

Sense 92 (Lippincott & Margulies, 1990), 19.

CHAPTER 12

1. From a speech by Dwight Minton, "Why Environmental Literacy in Manage-

ment?" ( Church & Dwight, 1994).

2. The original work in this area was done by sociologist Paul Lazarsfeld in his
studies of mass communication. He found that people are influenced by the
media in a two-step process mediated by opinion leaders. See Elihu Katz and
Paul Lazarsfeld, Personal Influence (Glencoe, Ill.: Free Press, 1955).

3. Walter Coddington, "Local Graffiti Removal Business Proposal" (Church &

Dwight, June 2, 1994).

4. Walter Coddington, "Give Water a Hand" ( Project Status Report #W92293- H,

Church & Dwight, September 21, 1994).

CHAPTER 13

1. Robert Winters, quoted in Kurt Eichenwald, "Prudential Chief Takes the Blame
for Scandals," New York Times, March 3, 1994, D5.

2. Connie Bruck, The Predator's Ball (New York: Penguin Books, 1989). 3.

3. Ibid., 32.

4. James Sterngold, Burning Down the House (New York: Simon & Schuster,
1990), 18.

586
5. Eccles and Crane, Doing Deals 110.

6. Samuel Hayes, "Investment Banking: Power Structure in Flux," Harvard

Business Review, March/April 1971, 136-52, and "The Transformation of
Investment Banking," Harvard Business Review, January/February 1979,
153-70.

7. Eccles and Crane, Doing Deals, 92.

8. Company brochure (Spear, Leeds & Kellogg, undated).

9. Ron Chernow, The House of M organ ( New York: Atlantic Monthly Press,
1990), 89.

10. Robert Wilson suggested that this idea would apply to accounting firms in
"Auditing: Perspectives from Multi-Person Decision Theory," Accounting
Review 58 (1983): 305-18.

11. Chernow, House of M organ, 600-01.

12. Eccles and Crane, Doing Deals, 116.

13. Chernow, House of M organ, 704. 14.

14. Ibid., 628.

15. Bruck, Predator's Ball, 32-33.

16. Chernow, House of Morgan, 516.

CHAPTER 14

1. Frederick Lewis Allen, The Great Pierpont M organ (New York: Harper &

2. Row, 1965).

3. Dennis Weatherstone, from remarks made at the annual meeting of stock-

holders, May 13, 1992.

4. Dennis Weatherstone, from remarks made at Columbia University, Graduate

School of Business, New York, January 28, 1992.

5. Henry Clay Alexander, speech at officer's meeting, May 25, 1959.

6. From regulation Y, section 225.25, Bank Holding Company Act of 1970.

587
CHAPTER 15

1. See Peter Grant and Marcia Parker, "Hurtling toward Scandal," Crain's New
York Business, June 1-7, 1992, 3ff.

2. Eccles and Crane, Doing Deals, 155f.

3. Michael Lewis, Liar's Poker (New York: Norton, 1988).

4. Judith Ramsey Ehrlick and Barry J. Rehfeld, The New Crowd: The Changing of
the Jewish Guard on Wall Street (New York: HarperPerennial, 1990), 65.

5. Brokers quoted in Beth McGoldrick, "Salomon's Power Culture," Institutional

Investor, March 1986.

6. Ibid., 74.

7. Ibid., 75.

8. Martin Meyer, Nightmare on Wall Street (New York: Simon & Schuster,
1993), 71.

9. Editorial, New York Times, August 22, 1991, A26.

10. See "Collusion, Price Fixing Have Long Been Rife in Treasury Market,"

11. Wall Street Journal, August 19, 1991, 1.

12. Meyer, Nightmare on Wall Street, 236.

13. Martin Mayer, "Antitrust the Real Issue in Salomon Scandal," Wall Street
Journal, August 22, 1991, A13.

14. John Gutfreund, quoted in the Wall Street journal, August 19, 1991, 1.

15. Fuerbringer, New York Times, D16.

16. See "Sullied Solly: Hubris Led to the Downfall," Wall Street Journal,
August 19, 1991, 1.

17. Ibid.

18. See Laurie Cohen and Michael Sicosolfi, "Salomon Forces Wachtell to
Resign as Outside Counsel," Wall Street Journal, September 3, 1991, 1, C9.

19. See Warren Buffett, "Salomon Inc.: A Report by the Chairman on the
Company's Standing and Outlook," Wall Street journal, October 29, 1991,

588
 4-5.

20. Ibid.

21. See Clifford Smith, "Economics and Ethics: The Case of Salomon Brothers,"
Journal of Ap plied Corporate Finance 10 (1993): 23-28.

22. Susan Antilla, "Ex-Salomon Trader Gets Four Months," New York Times,
December 15, 1993, D2.

23. John Gutfreund, interviewed by Gilbert Kaplan in Institutional Investor,

Februa ry 1991, 54.

CONCLUSION

1. For a more elaborate discussion of how reputation factors into competitive

dynamics, see Violina Rindova and Charles Fombrun, "The Dynamics of
Competitive Advantage: Moving Targets on a Shifting Terrain" (New York
University, Stern School of Business, Working Paper, March 1995).

2. Andrew Grove, Internet letter, November 27, 1994.

3. Ibid.

4. Faxback Intel Support #51, "Intel PentiumTM Processor: Floating Point

Unit Information," December 6, 1994.

5. IBM, Internet West Site, Horace, December 12, 1994.

6. Andrew Grove, quoted in Jacob, "Corporate Reputations," 64.

7. Dwight Lemke compiled these jokes from the Internet.

8. Fombrun and Shanley, "What's in a Name?"

9. Charles W. Roll and Albert H. Cantril, Polls: Their Use and Misuse in Politics.
(New York: Basic Books, 1972), 77.

10. Ibid.

589
590
ABOUT THE AUTHOR

D
R. CHARLES J.
FOMBRUN was
Research Professor
of Management at the Stern
School of Business, New York
University when he
published the 1st edition of
this book in 1996. He
remained on the standing
faculty there from 1984 to
2004 when he retired to
devote himself to reputation
research and to growing
Reputation Institute. He was
previously on the faculty of The Wharton School (University of
Pennsylvania) from 1979-1984. Dr. Fombrun holds a doctorate
from Columbia University and undergraduate and graduate
degrees from Queen's University (Canada). He has written
numerous academic and practitioner articles on management
topics and is the author of two books on how companies adapt to
changing environments, Turning Points and Leading Corporate
Change. He is also co-author of Fame and Fortune and Essentials of
Corporate Communication (with Cees van Riel), and The Advice
Business (with Marc Nevins). He was a Founding Editor of
Corporate Reputation Review, the academic journal he created with
Cees van Riel, and served on the editorial boards of Administrative
Science Quarterly, Strategic Management Journal, Human Resource
Management, and Human Resource Planning. Dr. Fombrun is now
Chairman Emeritus of Reputation Institute.

591
“For years we’ve been saying that intangibles have value. Here’s a lucid book
that tells us precisely how much and why. Reputation is an absolute must read
for executives who need to understand the hidden value of a company’s identity
and reputation, and who want to learn how to exploit them.”
Clive Chajet, Chairman, Lippincott & Margulies

“In a commercial world characterized by formula marketing of undifferentiated

products, Reputation provides an insightful look at companies that understand
how action translates to reputation — and that good reputation yields
marketplace advantage.”
Dwight C. Minton, Chairman/CEO, Church & Dwight Co.

“While reputation is fundamentally the same concept that it was 20 years ago,
our understanding of how to build, protect, and sustain it over time has
surpassed anything I could have imagined so many years ago as a doctoral
student. To say our research on reputation has built a lasting positive reputation
in the eyes of our key stakeholders would be a great understatement.”
Suzanne Carter, Director, Executive MBA Program, Texas Christian University

“The event that dragged me into the world of reputation was no doubt the first
conference on Corporate Reputation, Image, And Competitiveness in New York
in 1997.”
Majken Schultz, Professor, Copenhagen Business School

“Our own work in Manchester has shown clear links between reputation and
sales growth and there is no doubt in my mind that reputation is both a cause of
financial performance and is influenced by it.”
Gary Davies, Professor, University of Manchester

“Charles and I had front row seats as the nascent science of reputation evolved
from a ripple on the business horizon to a tidal wave sweeping across every
region and every company on earth. Over the past 10 years alone, mentions of
the term ‘reputation’ increased 2,600%, according to Google. All this was
foreshadowed by Charles’ seminal work… and was spurred on by the work of
the Reputation Institute and its application of the groundbreaking Reputation
Quotient model (RQ) –which subsequently evolved into the RepTrak® System.
The field of corporate reputation now demands our undivided attention.”
Leslie Gaines-Ross, Chief Reputation Strategist, Weber-Shandwick