The 18 Immutable Laws of Corporate Reputation: Creating, Protecting, and Repairing Your Most Valuable Asset

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PREFACE

Associate yourself with men of good quality if you esteem your own reputation, for 'tis better to be alone than in bad company.

— Maxim from George Washington's "Rules of Civility and Decent Behavior in Company and Conversation"

Corporate executives of good repute must feel rather lonely these days.

Scandals have brought down or tarnished company after company, as executives became obsessed with short-term profits and ever-rising stock prices and lost sight of reputation, their most valuable long-term asset. They lived for today and destroyed their corporate reputations.

All of the corporate malfeasance not only showed how precious and fleeting reputation is, but it also demonstrated how one company's misdeeds can taint an entire industry — and even the whole of corporate America. The scandals and increased government oversight have created a corporate environment in which extra vigilance is required to protect reputations. Some businesses with superb reputations have found themselves unfairly lumped with the pack of fraudulent companies. A news report about an investigation into alleged problems at a Johnson & Johnson pharmaceutical plant in Puerto Rico put J&J into the company of the accounting-fraud scoundrels. The company requested a retraction.

Ron Sargent, the CEO of Staples, told me about having visited a high school in suburban Boston to talk with students and being appalled by a couple of their questions. "How much money do you make?" one teen asked, while another wondered, "Do you have a $6,000 shower curtain?" a reference to the extravagant purchases that Dennis Kozlowski, former CEO of Tyco International, allegedly used company funds to pay for. Unfortunately, many corporate officials have been unfairly tarred by the accounting fraud and executive greed.

The business world, ever more global and more competitive, has become even more difficult to navigate. In this new climate of suspicion and scrutiny, a good reputation is more important than ever and provides one of the few safety nets companies can count on.

It is my hope that this book will guide you in creating that good reputation. Toward that end, I have drawn upon my coverage of corporate reputation and branding over the past twenty years, as well as my experience as a marketing columnist and editor at The Wall Street Journal. The book is also based on my interviews with dozens of corporate executives, market researchers, communications experts, and academics over the past two years.

Whenever people learned that I was writing a book about managing corporate reputation, they automatically assumed it was a response to the Enron blowup and the corporate scandals that followed. That reaction is understandable, but in fact, I began planning in summer 2001, long before any of the corporate abuses came to light. My project was briefly interrupted by the September 11 attack on the World Trade Center, which forced the Wall Street Journal staff to evacuate its offices in the nearby World Financial Center, where all of my reputation files lay amid dust and debris. But my files were recovered, and the book proposal was completed and approved before Enron even filed for bankruptcy protection in December.

Long before the scandals broke, I had sensed that companies were beginning to understand how important — but neglected — their reputations were. Whenever I wrote an article about reputation for The Wall Street Journal, I received calls and e-mails from managers hungry to know more about the subject. They asked me questions about how to get their arms around the concept. They didn't understand how to define reputation, how to measure it, or, most important, how to manage it. "Your package of articles today regarding corporate reputations is excellent," the senior vice president and director of corporate communication at PNC Financial Services Group wrote me in an e-mail message. "I'm sharing it with all of my advertising and PR colleagues here as we wrestle with the factors that impact reputation and what to do about it."

Reputation management is more of an art than a science, but there are definite guiding principles that constitute the eighteen immutable laws. Divided into three parts, this book is a road map to maximizing the benefits of your most priceless asset. Through detailed examples, I demonstrate the benefits of a good reputation, the consequences of a bad reputation, and ways to protect good reputations and fix bad ones. I explain that every company must learn to measure its reputation, appoint senior executives to nurture it, and understand who among its many constituencies can do its reputation the most good — or the most harm. I deal at length with some of the hot-button issues, such as ethics, corporate citizenship, and the Internet's impact on reputation. How, for example, can you both use the Internet as a tool to improve perceptions of your company and guard against its many dangers? How can you strike the best compromise between gratuitous publicity and getting the word out about your company's good deeds? These are just a couple of the tough issues that every company should be grappling with.

The book also includes a number of rankings of best and worst reputations, and it examines the companies making the headlines, such as how Merrill Lynch is struggling to mend its image and what lessons can be gleaned from the harm Martha Stewart inflicted on her company. The scandals, of course, offer many cautionary tales about reputation pitfalls. But the majority of the book is devoted to companies that weren't major players in the corporate chicanery. There is much more to learn from companies that have long valued their reputations and work hard every day to preserve them. I believe their stories clearly show the value of reputation management — how Johnson & Johnson inculcates a sense of integrity throughout its global workforce, how DuPont vigilantly monitors its 200-year-old reputation, how IBM projects a consistent corporate image, and how Timberland and Levi Strauss make social responsibility the essence of their corporate cultures.

I do dwell on one company with a negative reputation — Philip Morris — but less because of its troubled image than because it is working so hard to improve it, from changing its name to writing a new ethics code. Whether or not you believe Philip Morris, now known as Altria Group, deserves a better reputation, the company still provides a unique and fascinating case study of a business trying to sell a legal but demonized product in a more responsible manner.

While I focus on corporate reputation in this book, many of the same lessons apply to any organization, whether or not it produces a profit. After all, poisoned reputations aren't restricted to corporate America these days. Just consider the recent damage to the reputations of the Roman Catholic Church, Major League Baseball, and even the Boy Scouts of America. The Catholic Church, for instance, violated Law 17 by being defensive rather than dealing with the problem of pedophile priests openly and honestly. The Boy Scouts of America could have learned from Law 3 that an organization needs to understand and try to cater to all of its many audiences. It didn't seem to realize how many of its loyal backers would be offended by its antigay membership policy and withdraw financial aid and other support. And Major League Baseball, whose image has suffered from the labor strife between the owners and players, could benefit from Law 10, Make Your Employees Your Reputation Champions, and Law 15, Fix It Right the First Time. The message of Law 15: Three strikes and you're out!

Read on and use these eighteen immutable laws to write your own playbook for managing your most valuable asset.

Copyright © 2004 by Dow Jones & Company, Inc.

LAW ONE: MAXIMIZE YOUR MOST POWERFUL ASSET

As Bill Margaritis drove back to FedEx Corporation's headquarters after lunch, his stomach grew queasy. It wasn't a reaction to the spicy calamari he orders whenever he dines at Memphis's Pacific Rim restaurant. He had just answered his cell phone, and the message on the other end had unnerved him: a FedEx truck was in flames on a highway near Saint Louis. Already pictures of the fiery truck adorned with the brightly colored FedEx logo had shown up on national television. Some news programs were spreading rumors that the driver had fallen asleep — or had been the target of a terrorist attack.

Such news coverage didn't bode well for FedEx's carefully nurtured reputation. There was no time to waste as Margaritis sped to the "war room" back at headquarters to start the reputation damage control. Once there, Margaritis, the corporate vice president for worldwide communications and investor relations, joined a team of lawyers, security officials, and media relations managers in a spacious conference room equipped with an array of telecommunications and computer equipment.

Meanwhile, in Pittsburgh, the base of FedEx's ground delivery business, managers were busy trying to determine the circumstances of the fire and how much damage it had caused. The first order of business was finding out if a bomb had been involved and if there were any dangerous materials in the truck's burning cargo. At the same time, workers arrived at the crash scene to try to conceal the company's logo on the truck with stickers and orange spray paint. The less exposure, of course, the better for the corporate reputation.

Once the crisis team learned it could rule out terrorism, the public relations staff was on the phone pronto to CNN, Fox News, and the news departments of other networks. They relayed the correct version of the accident: a FedEx tractor-trailer had collided with a highway sign near Saint Louis, rupturing its fuel tank and causing the blaze.

FedEx contacted the governor's office in Missouri to enlist credible third parties there to help dispel rumors about hazardous cargo and a sleeping driver. Margaritis and his team also made sure that government regulatory agencies and the company's sales and customer service representatives received updates throughout the day. And e-mails were sent to all of the company's employees, detailing the facts of the accident.

Margaritis was well aware that misinformation is hard to correct once it begins circulating via the news media and the Internet. "We defused the speculation quickly, and coverage immediately waned," he says. "We kept it off the major evening news programs and out of the leading daily papers." Mission accomplished for Margaritis and colleagues.

There's no better example of dedication to corporate reputation than FedEx. Containing the truck-fire crisis in fall 2002 was all in a day's work for Bill Margaritis, who has become an evangelist for reputation management. Beyond nurturing FedEx's reputation, he has written articles about reputation management for an academic journal and become a member of the Reputation Institute, a New York City-based research organization.

He credits FedEx's frequent crisis simulation drills and contingency planning with helping it maneuver through the truck fire. FedEx prepares for virtually every possible emergency situation, from earthquakes and terrorism to snowstorms and Internet attacks, because it's the rare crisis that doesn't touch its shipping service in some way. "The reputation management process is like a mosaic that I help bring together in a cohesive fashion," he says. "I galvanize the investor relations, employee communications, and public relations departments to operate under the same game plan." It's important that all of those groups report to Margaritis to achieve consistency in internal and external messages. What employees see on the internal FXTV network should align with what FedEx founder and CEO Frederick Smith is telling an interviewer on CNBC.

Margaritis's authority at the company is clear. He reports to an executive vice president but has Smith's ear whenever he needs it. While Margaritis is the day-to-day point man for reputation, Smith is an equally ardent champion of reputation management, another reason for FedEx's image-building success. It's critical that a corporate CEO understand and value reputation, and Fred Smith really does. He sees the global corporate brand and FedEx's sterling reputation for service as its most treasured assets.

Smith and Margaritis have proselytized so well that virtually every FedEx executive and manager speaks about his job in terms of its impact on corporate reputation. It isn't simply an issue for managers, either. FedEx tries to turn all of its employees into corporate ambassadors. FedEx realizes that its reputation is affected by every employee encounter with every stakeholder, from customers to investors to government regulators. "We're not like Coca-Cola, where people buy the product off the shelf or in a vending machine and don't see a Coke employee," says Joan Lollar, manager of corporate public relations. "With FedEx, you always see a face representing the company. Many people see their FedEx guy every day."

Loyal FedEx workers talk about the "purple blood" coursing through their veins, a reference to the purple part of the company logo. And FedEx rewards workers who go above and beyond their job responsibilities and enhance its reputation. For example, it bestows its Golden Falcon awards on employees such as Darren Docherty, a senior manager in Minneapolis who drove three and a half hours to personally deliver a heart catheter that had been lost in the FedEx system, just in time for emergency surgery. Those are the experiences that deepen the emotional connection between the public and the FedEx brand. They also motivate other employees to excel. When 10,000 workers troop into the FedEx facilities at a major airport hub operation at midnight to begin the package-sorting process, they pass television monitors running stories about heroic employees or delivering an inspirational message from Fred Smith. "We must provide superior service, and we can't do that without motivated employees," says Mr. Smith. "If we achieve both of those goals, a good reputation naturally follows."

The company constantly reinforces the importance of well-groomed, smiling employees who cater to customers. If a customer looks nervous about whether a package will arrive on time, FedEx employees are supposed to make copies of his shipping form and call him the next day to let him know the delivery was completed. If customers wait too long in line at a FedEx office or a package arrives late, FedEx has begun giving them inexpensive gifts, such as a pen-and-pencil set. A pristine office reflects well on FedEx, too. "Employees must keep an office professional-looking and make sure it smells good," says Glenn Sessoms, vice president of FedEx Express retail operations and strategies. "We don't want any pizza or chicken smells." Training videos urge employees to "let customers hear you smile" when they call, develop an "energized attitude," and provide "extreme service" so that customers will spread the word about FedEx to friends, family members, and coworkers.

FedEx has developed measurement systems to assess the service quality of its operating teams and rewards them with monetary bonuses based on their scores. For example, a team is penalized fifty points if it loses a package and ten points if a package arrives a day late.

Research is one of the first steps in maximizing corporate reputation, and FedEx keeps a close eye on the perceptions of all of its major stakeholders and the impact of media coverage on reputation. The company measures reputation on a variety of attributes to determine its weak spots. For example, it has earned high marks for the quality of its products and services and for its emotional appeal but received lower scores for such factors as vision, leadership, and social responsibility. On all three counts, the company believes its performance exceeds the public's perceptions. The company redesigned part of the FedEx Web site to include more information about its philanthropic activities and the corporate vision. "Fred Smith created an entire industry when he founded FedEx, so we really should score higher on vision and leadership," says Lollar. "But we're not communicating the message well enough."

Reputation management is a global proposition. Reputation strategies must be tailored to fit different cultures. For example, FedEx has determined that social responsibility drives reputation more in Europe than in the United States. And in Japan, financial performance and leadership count more heavily than social responsibility and emotional appeal.

FedEx's global reputation management is divided into three layers: the Americas, major foreign countries such as Germany and China, and local markets with large operations such as the Philippines and Indianapolis. FedEx also segments its strategy based on whether it considers a market mature or emerging. It gives more attention to competitive differentiation and new services in older markets such as Britain, while emphasizing brand awareness and a positive reputation more in newer markets such as China.

FedEx understands the reputation value of being an upstanding corporate citizen. It knew it was simply the right thing to do when it flew donated clothing and other supplies to earthquake victims in El Salvador and transported pandas from China to the National Zoo in Washington. But FedEx was also well aware of the public relations value of such deeds with the many government officials it must deal with as it seeks to expand its international business.

FedEx tries to manage its media image carefully, too. For example, the internal FXTV operation produces video news releases and stock footage of FedEx planes and trucks for television stations. That way there's less risk that a local station will go out and shoot its own footage of a FedEx driver with his shirt hanging out. There's also "the truth squad" assigned to provide "proof points" to correct inaccurate stories. Corporate executives frequently meet with editorial boards to promote FedEx's strategy of complete transportation services. And during times of crisis the PR staff tries to divert media attention to more positive stories. For example, when FedEx pilots threatened to strike in 1998, Margaritis's department managed to generate national stories about Fed Ex's technology, operational expertise, high employee morale, and confident customers.

FedEx is always on guard for threats to its reputation. A huge danger emerged by the end of 2001 in the form of Arthur Andersen, FedEx's accounting firm. Andersen's involvement in the Enron Corporation scandal set off the company's reputation management radar almost immediately. "We knew early on it was going to be a debacle," Smith says. "It was clear that Andersen would bring into question the integrity of FedEx's financial statements." FedEx began shopping around and announced that it would fire Andersen and replace it with Ernst & Young on March 11, 2002. Three days later, federal prosecutors charged Andersen with obstruction of justice, setting into motion the firm's demise.

Although FedEx has become almost a generic term for fast delivery — people talk about "FedExing" their packages whether or not their mailrooms actually use FedEx — the company believes there is much untapped potential in its corporate brand. To maximize the benefits of its enviable reputation, FedEx constantly tries to increase its corporate brand exposure. That's why the company paid some $200 million to plaster its name throughout the Washington Redskins football stadium and why it teams up with Amazon.com to rush the latest Harry Potter book to hundreds of thousands of eager children. Such corporate brand promotion sparks free media publicity and strengthens FedEx's goodwill with customers.

While FedEx protects its image like a precious jewel, it doesn't always play it safe. Imagine a company agreeing to let a Hollywood studio cast its product or service as the victim of a disaster. Sounds like reputation suicide. But that's exactly the risk FedEx took. The movie: Cast Away. The star: crowd-pleasing actor Tom Hanks. The plot: A FedEx plane crashes into the Pacific Ocean, killing all of the crew members aboard except Hanks, who survives for four years as a modern-day Robinson Crusoe on a remote island.

"We discussed the risks, but I was confident that people could separate fiction from the reality of FedEx," says Smith, who felt he could trust the screenwriter, Bill Broyles, a longtime friend. Smith even ended up with a cameo appearance in the film, playing himself. FedEx was nervous about the plane crash, of course, and it also had to give in on other objectionable parts of the script, including a scene of FedEx employees drinking wine from a paper bag on the jump seat of one of its planes and a shot of a filthy FedEx truck driving through the streets of Moscow. Not quite in sync with the squeaky clean FedEx image. The company did manage, however, to persuade the film director to edit out an exterior shot showing the FedEx plane plunging into the ocean. Margaritis didn't want to worry that a disgruntled FedEx customer or ex-employee would lift the scene from the movie and start circulating it on the Internet.

The movie proved to be a box-office hit and earned Tom Hanks an Oscar nomination. All of the attention put FedEx in the limelight, too. In the end, the company considered the movie a boon to its reputation because it depicted Hanks as a FedEx pilot obsessed with delivering customers' packages on time and in perfect condition. He even rescued one waterlogged package after the plane crash and delivered it upon his return to civilization. "The movie showed that FedEx employees treat every package as if it's the golden package," says Margaritis. "We do business in more than two hundred countries, and Tom Hanks' international appeal was a big plus for us." FedEx invited customers throughout the world to parties for preview showings of Cast Away and promoted the company's starring role in the movie to employees to instill corporate pride.

Clearly, you must take such chances from time to time to maximize your reputation. But reputation management generally calls for less daring and more due diligence. Every major business decision at FedEx involves an assessment of its impact on the company's reputation. After the air express company expanded into ground, home delivery, and freight transportation to compete more aggressively with United Parcel Service, it weighed carefully whether to put the FedEx name on its new businesses. On the one hand, FedEx's positive image could help the company sell its new delivery options and attract new employees. A robust reputation typically pays big dividends whenever a company expands into new lines of business.

On the other hand, FedEx had to determine how elastic its corporate brand really was. It feared its new ground service might damage its reputation for reliable overnight air delivery and exceptional customer service. What if its network of trucks couldn't meet the same standards for on-time delivery that are expected of its air fleet? FedEx knew it had to be careful not to overpromise and then fail to meet expectations. "White trucks with the bold FedEx logo make for great billboards on the nation's streets and highways," says James Clippard, staff vice president for investor relations. "But they significantly increase the risk to reputation when something negative happens involving a truck."

Before stamping its valuable name on the trucking companies that it acquired for its moves into ground and freight service, FedEx conducted both quantitative and qualitative research with current and prospective customers, asking if such a branding decision made sense to them and what their expectations would be of trucking companies bearing the FedEx name. The company concluded that it could in fact satisfy customers, as well as maintain and perhaps even embellish FedEx's reputation. So the company proceeded to create a new corporate "brand architecture" for the various business units, all connected by the same FedEx logo design but in different color schemes. The company thoroughly trains drivers and keeps its trucks sparkling clean, but it realizes that its ground delivery business is vulnerable to hazards that may be beyond the control of its managers. FedEx's reputation couldn't endure too many incidents like the Missouri fire or pedestrians being struck and killed by its growing fleet of delivery trucks.

Ultimately, the proof of successful reputation management is in the numbers. The bottom line is that FedEx places in the top ten of both Fortune magazine's most admired companies list and the consulting firm CoreBrand's ranking of the best corporate reputations. Those surveys reflect the views of corporate executives and financial analysts. But FedEx placed out of the top ten — at number 12 — in Harris Interactive's 2002 Reputation Quotient ranking, which reflects the general public's opinion. That's nevertheless a strong performance, but it's also a signal that Margaritis still has work to do to make the most of FedEx's reputation potential with the American public.

Like it or not, every individual, every company, every organization develops a reputation that is based on people's perceptions of it over time. Though reputation takes years to form, it can be ruined in an instant. Just consider how quickly Enron Corporation, the accounting industry, Wall Street, and the Catholic Church fell from grace. As they all stunningly learned, nothing is more priceless or fleeting than a good reputation.

The key question for companies is whether they will passively let others form opinions about them or actively manage and maximize their most valuable asset. Put most simply, a good corporate reputation attracts customers, investors, and talented employees, leading to higher profits and stock prices. And over time, companies that nurture their reputations enjoy a halo effect that makes people trust them and give them the benefit of the doubt during rocky periods.

In tending their reputation, companies must fully understand the large cast of players that influence it and must measure the perceptions of those many stakeholders. And of course, they must walk the talk. Their product and service quality must be par excellence; their behavior must be above reproach; their financial results must show consistent growth; and they must be likable and trustworthy. Companies as diverse as FedEx, Johnson & Johnson, and Harley-Davidson clearly have mastered the art.

Government officials and economists believe reputation is becoming an ever more significant asset. "In today's world, where ideas are increasingly displacing the physical in the production of economic value, competition for reputation becomes a significant driving force, propelling our economy forward," Federal Reserve chairman Alan Greenspan said in a 1999 commencement speech at Harvard University. "Manufactured goods often can be evaluated before the completion of a transaction. Service providers, on the other hand, usually can offer only their reputations."

Indeed, the accounting industry had been considering how to add corporate reputation to the asset side of the balance sheet. But in this post-Enron environment, there's been less talk of that lately. Perhaps accounting firms have decided they had better get their own reputations in order first.

What shapes corporate reputation? In these days of near daily scandals, many people mistakenly equate reputation with corporate social responsibility and ethical behavior. Though certainly of growing importance, ethics and social responsibility are but two elements of the equation. Financial performance, the workplace environment, the quality of products and services, corporate leadership, and vision also figure into reputation. There's also that elusive emotional bond between a company and its stakeholders that is central to the most enduring reputations. A company's good name can be affected for better or worse every time a customer sees a company truck, makes a phone call to a corporate office, or signs on to its Web site.

Of course, the CEO's own reputation affects a corporation's reputation, too. The imperial CEO may be a dying breed in this new era of greater accountability and corporate distrust. But the behavior of high-profile top dogs such as Bill Gates, Jeff Bezos, and Carly Fiorina still affects their companies' image. And who can forget Martha Stewart's devastating effect on her company's reputation? Or Dick Grasso's $139.5 million payday and the toll it took on the New York Stock Exchange's good name?

A 2003 survey by the public relations firm Burson-Marsteller found that respondents believe that fully half of a company's reputation is attributable to the CEO's reputation. That's up from 40 percent in 1997, when Burson first conducted its CEO survey with corporate executives, financial analysts, institutional investors, board members, the business media, and government officials. "The CEO is the ultimate spokesperson for the organization, the embodiment of the brand, and the official storyteller who knits together the company's past, present, and future," says Leslie Gaines-Ross, chief knowledge and research officer at Burson. "As reputations rise and fall dramatically today, CEOs are the designated guardians and are expected to pass that reputation along to the next generation of leaders in even better condition than they received it."

Boards of directors are giving more weight to reputation management skills when choosing new CEOs, and reputation is becoming a factor in measuring CEOs' performance and awarding compensation. Yet it is still the rare company that realizes the full value of its reputation. "Companies have to recognize that a diminishing reputation is a serious problem," says John Gilfeather, vice chairman of market research firm RoperASW. "But some CEOs still say this is fluff."

They do so at their peril. Never have companies needed guidance more in protecting their image. They are constantly exposed to scrutiny through the Internet and 24-hour all-news television channels. Business is truly global, and information, especially gossip, travels fast.

Some companies seem to bruise their reputations regularly. Ford Motor Company seriously damaged its reputation in the furor over the hazards of its Explorer sport-utility vehicles, which were equipped with Firestone tires. More recently, the company hurt its credibility with environmentalists after reporting that the fuel economy of its sport-utility vehicles had worsened. The disclosure was at odds with Ford's earlier pledge that it would reduce fuel consumption by the maligned, gas-guzzling SUVs. So much for Ford's "green" reputation.

Before the accounting trickery and other abuses surfaced, a few of the worst offenders had ironically fooled some people into believing they were quite reputable. In hindsight, such reputations were clearly bogus. Enron, for example, was ranked as the most innovative company in a survey of executives, directors, and securities analysts by Fortune magazine just months before the energy company was exposed as a fraud. Ahold, the Dutch supermarket company, placed first in a 2001 study of corporate reputation by Harris Interactive and the Reputation Institute but later came under government investigation for massive accounting irregularities.

More responsible corporate governance and more stringent accounting supervision may help reduce the public's skepticism about the business world. The Sarbanes-Oxley Act to improve corporate governance, the Public Company Accounting Oversight Board, and other regulatory policies and organizations are potentially significant because they should force companies to be more open and honest. After all, trust is the cornerstone of reputation. But to attain a truly outstanding reputation, corporate America must aspire to go well beyond government regulations. What the law demands and what the public expects are often two very different things.

In fact, a strong reputation carries with it extra responsibility. Customers hold FedEx to a higher standard than some of its competitors. Slogging through to deliver packages in the worst weather is a badge of honor FedEx has earned through the years. But when it fails to live up to that image, customers judge it more harshly than they do other delivery services.

Carmakers face the same dilemma. Once they have earned a strong reputation for quality, they suffer more than other manufacturers when they must recall a model because of defects. A study by a doctoral student at Stanford University and a professor at the University of Texas found that market share drops following recall announcements, particularly for companies known for reliability, such as Toyota Motor Corporation and Honda Motor Company.

If they ever hope to maximize the value of their reputations, companies must make reputation management a fundamental part of their corporate culture and value system. Companies must spread the message of reputation management throughout the organization and make employees cognizant of how each and every one of them affects reputation on a daily basis. Reputation must be central to the corporate identity, not merely clever image advertising and manipulative public relations ploys.

A company that enjoys a rich heritage and revered leaders can successfully tap its past to instill a greater reputation consciousness among employees, whether it be General Electric and Thomas Alva Edison or IBM and Thomas J. Watson, Sr. A proud history can motivate employees to uphold the corporate reputation and continue the traditions. Indeed, in the 2002 Harris Interactive study of corporate reputation, most of the top ten companies had deep roots, with some, such as General Mills and Eastman Kodak, dating back more than one hundred years.

For reputation management to truly permeate the culture, companies need much more than a passive caretaker. No doubt the CEO must set the tone and be ultimately accountable for reputation. But reputation management is a 24/7 job. Companies must designate certain managers or departments to be the primary guardian, as FedEx has done with Bill Margaritis.

At GlaxoSmithKline, the reputation watchdog is Duncan Burke. "I'm trying to get people to think about reputation systematically, to remind them to take it seriously all the time," says Burke, vice president of corporate image and reputation. "People tend to focus on reputation when there are troubles and forget about it in good times." He works closely with the pharmaceutical company's media relations department and with employees throughout the company. He tries to keep employees informed of the company's perspective so they can answer tough questions about why executive pay seems so high, why Glaxo performs animal research, and why it charges more for medicine than many people can afford.

"Big pharmaceutical companies are seen as pariahs right now because of the issue of access to medicine at a reasonable price," says Burke. "So it's especially important that there's one person in my position to reflect on how the world thinks of Glaxo and how we want the world to see us."

Another company committed to a reputation-oriented culture is Alticor, the parent company of the Amway direct sales business. For years, it had suffered from negative media coverage as the Federal Trade Commission investigated its sales tactics and it became embroiled in a customs dispute with the Canadian government. But it wasn't until 1996 that Amway made image enhancement a top priority.

Still struggling to overcome misconceptions that it's a cult engaged in a pyramid-style selling scheme, Amway wanted to impress on its managers the importance of embracing reputation management. Amway began with corporate image conferences and progressed to a more thorough indoctrination at "Reputation University," an intensive three-day series of panels that attracted eighty senior managers from around the world.

Reputation University included lectures on reputation theory by academics and an explanation of the company's reputation measurement system. The highlight of the curriculum was a case study on how to build reputation in a fictitious country called Trevador. Through that exercise, Amway managers learned to deal with such reputation issues as the legality of its direct sales approach, perceptions that its salespeople are too pushy, and questions about the effectiveness and value of its products.

"Reputation University has had lasting impact," says Mark Bain, Alticor's vice president of corporate communications. "It's no longer necessary to explain the theory and process of reputation management; now we're simply doing it." He acknowledges that it isn't always easy to keep everybody working with the team. "You must work in a highly integrated and aligned manner across job functions and markets," Bain adds. "Not an easy task given budgets, turf, silos, and egos. But it is the only way. The alternative is as futile as herding cats."

Reputation is certainly something companies covet and brag about. "Our reputation stands behind them," an ad for Bose radios and CD players declares, while an ad for Knight Trading Group asserts that it is "committed to our clients, to earning a reputation of trust."

But how does the intangible asset called reputation produce tangible benefits? Some effects are quite clear-cut. Customers naturally gravitate to companies with a positive reputation for product and service quality. They become loyal consumers and are even willing to pay a premium price. It was Microsoft Corporation's reputation for top-quality computer software that helped it move into video-game systems against established players Sony Corporation and Nintendo Company.

A good reputation can also result in a higher credit rating and make it easier — and cheaper — to tap the capital markets. Investors almost certainly will snap up the stock of a company with a good record of financial performance and leadership. It's difficult to accurately quantify, but companies have no doubt about the intangible asset's impact on Wall Street's perceptions. "You always have to deliver the numbers," says James Clippard, head of investor relations at FedEx. "But if your reputation is not good, the numbers will be suspect and marked down somewhat." FedEx periodically surveys investors to gauge their feelings about the company and detect any problems it needs to address.

Several academic studies have attempted to show a relationship between corporate reputation and investment appeal. An analysis of 216 companies found that there was a premium on the stock values of companies with stronger reputations for social responsibility. And a study of 10 portfolios of companies indicated that investors were willing to pay more for the companies with stronger reputations and presumably less risk, thus lowering the cost of capital.

Enduring corporate reputations also can bolster employee morale and performance, be a magnet for talented executives, and strengthen relationships with regulators, advocacy groups, and local communities where companies operate offices and plants. A case in point is Public Service Enterprise Group (PSEG). Its reputation precedes it when it acquires or builds new power plants. Having developed a positive environmental record in New Jersey, the company has found it can secure faster government approvals, stronger community support, and better tax treatment when it ventures into other states.

For example, when PSEG purchased the Albany steam generating station in Bethlehem, New York, along the Hudson River in 2000, it received support from a number of environmental organizations, including the American Lung Association of New York, the Natural Resources Defense Council, and Scenic Hudson. They endorsed the company's plan to replace the old power plant with a new facility that would reduce air emissions and Hudson River water usage. "I call it our environmental afterglow," says Mark Brownstein, director of environmental strategy and policy at PSEG. "Being able to move nimbly through the regulatory process is a significant competitive advantage."

A mighty corporate reputation also can trickle down to product brands. DuPont found that 24 percent of the people who felt very favorably about the company would definitely buy its Stainmaster brand of carpeting, compared with only 4 percent of those with less favorable feelings. Similarly, more than half of consumers in the "very favorable" camp were very likely to believe Stainmaster's advertising claims, compared with 22 percent of those less favorably disposed.

When companies are firing on all cylinders, they build up "reputation capital" to tide them over in turbulent times. It's like opening a savings account for a rainy day. If a crisis strikes or profits shrink, reputation suffers less and rebounds more quickly. Ardent fans are always willing to overlook minor faults and forgive major offenses — as long as the company does the right thing. Bill Margaritis of FedEx puts it well: "A strong corporate reputation is a life preserver in a crisis and a tailwind when you have an opportunity."

A crisis or other negative development will certainly tax any reputation and rob a company of some of its stored-up reputation capital. But a long history of public goodwill enables companies to bounce back much faster from a calamity. That's why Coca-Cola rebounded so fast after its ham-handed response to a soft drink contamination scare in Europe, as well as a widely publicized racial discrimination lawsuit in 1999. Reputation capital also helped Volvo maintain its image for safety, even after being exposed for rigging a commercial in the early 1990s to try to demonstrate that its vehicles were virtually indestructible. The ad showed a monster truck rolling over a Volvo without crushing it, but the company later admitted that the ad had been faked. Nevertheless, the company continues today to capitalize successfully on its safety image with ads that promote its "SUV with a conscience" and tout such features as a gyroscopic sensor to detect an impending rollover and inflatable side curtains for head protection in an accident.

A surprise asbestos scare inflicted no lasting scars on the image of Binney & Smith and its century-old Crayola brand, thanks to plenty of reputation capital. When a news story in 2000 reported that tests had showed asbestos in Crayola crayons, it conjured up a frightening image: innocent children coloring pictures and being exposed to a serious health hazard. Binney & Smith's reputation was clearly on the line.

To head off widespread panic, the company issued press releases the day the story broke in the Seattle Post-Intelligencer and ended up in virtually every newspaper and on every television news program. Binney & Smith said its own testing hadn't detected any asbestos but vowed from the first to change the ingredients in its crayons if experts and government regulators deemed it necessary.

Even with Binney & Smith's rapid-fire response, some schools still decided to play it safe and pull Crayola crayons out of all of their students' desks. Worse, some schools and day care centers even issued press releases to allay parents' concerns. "We can never be too cautious when it comes to the safety and well-being of the more than 80,000 children in our care," Angie Dorrell, curriculum director of La Petite Academy, said in announcing the school's plans to remove all crayons from its classrooms.

Binney & Smith called in Cone, a crisis management communications firm in Boston, for help in monitoring the media, training employees for media interviews, and counseling the CEO. The company's vigorous response reassured people long enough for the U.S. Consumer Product Safety Commission to conduct its own tests and conclude that it could find only a scientifically insignificant trace amount of asbestos in two Crayola crayons. At the commission's suggestion, however, crayon makers did agree to reformulate their products to eliminate any asbestos traces and asbestos-like fibers. The combination of reputation capital and smart reputation management protected Binney & Smith during the crisis.

But reputations can crumble fast for companies without such a strong legacy. Many of the companies scarred by the accounting-fraud scandals may never fully recover. That's because they had little if any reputation capital to begin with, and whatever they might have had is now all used up. People won't be willing to give WorldCom the benefit of the doubt in the future. Never mind that it's now called MCI. They will still remember that it was dragged through the mud for its massive accounting fraud, filed for bankruptcy protection, and caused severe financial pain to its employees and stockholders.

Reputations can be lost in a flash. And companies that have failed to nurture and protect their reputations invariably learn a painful lesson: that a wounded reputation isn't easily or quickly repaired.

Companies simply can't be too watchful. They must always be alert to identify possible threats to their delicate reputations and develop defenses — policies, procedures, and allies — to preempt or quickly overcome them. New reputation challenges constantly arise. Who would have thought that fast-food restaurants and food manufacturers would be blamed — even sued — because someone became obese from wolfing down too many Oreo cookies and Big Macs? Although many people believe such litigation is ludicrous, the food industry nevertheless realizes that a serious reputation problem is in the making. Rather belatedly, McDonald's Corporation is concocting better-tasting salads, while Kraft Foods plans to cut the calorie content and portion sizes of such fattening fare as Oscar Mayer hot dogs and Velveeta cheese. Such moves at this point seem like defensive PR ploys and may not enhance reputation much.

But better late than never. The fallout from a seriously damaged reputation can be extensive and long-lasting. Following the Enron implosion and revelations of questionable accounting and trading practices at other energy companies in 2002, the electric power industry's reputation sank and access to new capital was shut off. Investors were spooked and lacked confidence in many of the energy companies.

Even innocent employees can suffer from their company's battered reputation. People who have been laid off or resigned from scandal-plagued companies such as Enron and Arthur Andersen are finding corporate recruiters leery of hiring them.

How long does it take to recoup from reputation damage? Burson-Marsteller surveyed "business influencers" from companies, Wall Street, government, and the news media to estimate the recovery time and came up with an average of 3.65 years.

It is of course difficult to generalize in this fashion since the recovery time can be much longer. It took Audi a full decade to reverse a sales slide that began with reports about an alleged defect that caused its 5000 series models to surge out of control. Audi maintained that the unintended acceleration problem was a result of driver error, not mechanical problems. Nevertheless, Audi faced such pressure that it recalled the cars to install a mechanism to prevent the driver from shifting gears if his foot wasn't on the brake. Ultimately, Audi was vindicated when the government concluded that in fact drivers were mostly at fault for accidentally pressing the gas pedal rather than applying the brakes. But the reputation — and sales — damage was done. Audi would probably have fared better had it not blamed its customers but instead announced an immediate recall. Passing the buck to drivers clearly backfired.

No one can really predict how long it will take before a company can start reaping the benefits of its good name again. Every reputation problem is different. Yet some companies seem to believe they can declare that their reputations are on the mend with just a little positive news. Xerox Corporation CEO Anne Mulcahy announced in July 2003 that the embattled copier maker had turned the corner and its troubles were past. "The chapter is closed on our turnaround story," she said in releasing quarterly earnings that exceeded Wall Street expectations. But her statement followed by less than two months a decision by the Securities and Exchange Commission to force six former and current Xerox executives to pay $22 million in fines and other penalties to settle fraud charges. Many stock analysts, investors, and other stakeholders will need more proof before they'll begin to accord Xerox the benefits that come with a solid corporate reputation.

Copyright © 2004 by Dow Jones & Company, Inc.