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Why reputation is important – Mary T. O’Sullivan
By Mary T. O’Sullivan, MSOL
“The reputation of a thousand years may be determined by the conduct of one hour” – Japanese proverb
According to Ethical Corporation, an online newsletter, “corporate reputation impacts business results and as such should be treated with as much vigor as other business risks”. The Hill and Knowlton International Corporate Reputation Watch (CRW) recent study focused on Wall Street’s perspective: the opinion of 282 buy and sell-side analysts.
The analysts offered opinions on various issues involving what type of corporate behavior influences their impressions of corporate reputation. Because of the importance of a corporation’s reputation (or branding) to Wall Street, analyst opinions are essential in a company’s financial success. By contrast, another CRW survey of CEOs demonstrates a disconnect between what the CEOs said was the value of corporate reputation and what their organizations did to establish and influence reputation. Similarly, a later CRW study revealed the opinions of 434 MBA students worldwide. The survey results indicated the significance of a company’s reputation in attracting top talent.
Corporations find value in such surveys in identifying perceived gaps in reputation and in implementing recovery plans. These surveys provide those firms who wish to see it, a 360-degree view of how their reputation influences shareholder value. For many companies, and the whole of the defense sector, corporate reputation is absolutely key to success. A global leader in technology-driven solutions a company can be a technology and innovation leader specializing in defense, homeland security and other government markets throughout the world, with sales over $25B, and thousands of employees worldwide and still be subject to reputation scrutiny.
If the mission is to defend the defenders, the warfighters, with complete confidence, and the tagline assures 100% mission success, the reputation of the company needs to be pristine.
Moreover, customers often will cite the company’s reputation as the reason their products were selected: “The new system adds momentum to the incredible transformation we are undertaking to modernize the airspace,” said the director general of an important customer. “Based on the system’s performance and company’s reputation, it seemed natural to select their system to replace our aging system.”[1] In short, the company’s products must work 100% of the time. The missile must fire, the radar must detect, the torpedo must find its target. However, peeling back the onion, it is apparent that the reputation of the company is far more tied to product performance than any other issue.
The CRW survey response of analysts implies that stock price is driven by reputation. The survey concluded that “Nearly all [analysts] think a company’s reputation can have some effect on financial performance.”
However, in April of 2006 the CEO, admitted to plagiarizing much of his book, “Unwritten Rules”. There were several weeks of controversy surrounding this event, and most employees and the local Boston media were convinced the CEO would have to resign. However, an analysis of the company stock prices for that period reveals that there was little or no impact on stock price and by the end of 2006, the stock price rose. When viewing this episode through the eyes of the analysts, it’s easy to see why the CEO neither resigned nor was fired. The company reputation for outstanding product performance was not in play, and the CEO’s transgressions, while counter to the stated company values, were not a factor.
The company model of superior product performance reputation makes an interesting response to the actual survey question: “Agree or disagree with the following statement: A company that fails to look after the reputational aspect of [financial] performance will ultimately suffer financially”. It’s clear that CEO behavior had far less impact on company analysts than if a Tomahawk Cruise Missile had hit Tehran instead of Baghdad or if a Missile Launcher had missed one too many Scuds. This assessment also somewhat negates the statement, “CEO’s reputation is crucial”. In this company’s case, the question posed “how important or unimportant is the reputation of the following executives…” does not seem to apply. Indeed, the company Investor Relations and Public Relations Departments seemed to smooth over the controversy and retain the company’s equilibrium.
Conversely, in the case of a former CEO, questionable activities which impacted profits, cash, and share value led to his demise. The CRW analysts’ survey found “that quality of management is the critical top-of-mind factor to analysts’ recommendations”. This CEO’s case supports this finding in that during his tenure, profit and shares forecasts were further reduced as was confidence in his management abilities. Quotes from analysts of the period suggest that the CEO’s management capability was closely tied to analysts’ estimations. ”People are shocked,” said Caivon Rumohr, an analyst with S. G. Cowen & Company. ”The estimate has come down a huge amount, and it’s very hard sitting on the outside to sort out how much of this is lack of control.” Additionally, “Several Wall Street analysts who participated in a conference call with company executive were less than sympathetic to the company’s explanations [for falling profits and share price]. They’ve got a real credibility problem,” said Charles Gabriel, senior vice president at Prudential Securities. ”They need to regain confidence from management that these are not permanent problems.”
However, this CEO’S issues with accounting indiscretions did not impact him in his new position as Chief Compensation Officer for another large company. Three years after his resignation in 2003, he agreed to a $1.75M fine, and partial return of his bonus for questionable write offs: “The alleged accounting irregularities took place in the company’s troubled commercial aircraft division from 1997 to 2001 and concerned the timing of losses recorded by the company. The S.E.C. said that the company had overstated its 2001 losses and that its aircraft subsidiary should have charged up to $240 million of a $693 million loss in 2000 instead.”
Nonetheless, his new bosses at his new company, expressed confidence in the CEO. And the analysts seem to agree that his situation had little impact on his former company. “Paul Nisbet, a military industry analyst with JSA Research in Newport, R.I., said the CEO’s agreement was “somewhat unusual” but that it “doesn’t mean much” for the former company. In fact, it seems that the CEO’s former CFO, was slated to be investigated by the SEC as a guilty party in the scandal.
As stated earlier, the findings indicate that the CEO’s reputation is crucial to analysts’ rating. The Street’s poor perception of the former CEO’s management capability in maintaining company profitability and shareholder value cost him his job as CEO, as it reflected his personal reputation and his “Quality of Management”. Ironically, in his case, the findings are reflective of his demise as CEO, but not in his capacity at his new company, as CCO.
In the case of our first CEO, his ability to survive the plagiarism scandal seems to be tied to successful company performance. The opinions of the analysts didn’t waiver. His moral misjudgment had no impact on the Street’s perception of either his management ability or his reputation.
A November 2009 Investor Relations Report to the Company Board of Directors shows the current Street sensitivity:
- Solid predictable performance: organic growth and margins
- Trusted leadership
- Competitive strategy; diversification of risk
- International content and potential opportunities
- Strong balance sheet; prudent capital allocation
- Current valuation
My prediction: CEOs like the one in our first example will have lifetime employment if profit and shareholder value stay in positive territory, or until a merger, acquisition or forced retirement at a more convenient time takes place.
“One can survive everything, nowadays, except death, and live down everything except a good reputation”. Oscar Wilde
Connect with Mary:
www.encoreexecutivecoaching.com
https://www.linkedin.com/in/marytosullivan/
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Read all Mary’s columns here: https://rinewstoday.com/mary-t-osullivan-msol-pcc-shrm-scp/
Mary T. O’Sullivan, Master of Science, Organizational Leadership, International Coaching Federation Professional Certified Coach, Society of Human Resource Management, “Senior Certified Professional. Graduate Certificate in Executive and Professional Career Coaching, University of Texas at Dallas. Member, Beta Gamma Sigma, the International Honor Society. Advanced Studies in Education from Montclair University, SUNY Oswego and Syracuse University. Mary is also a certified Six Sigma Specialist, Contract Specialist, IPT Leader and holds a Certificate in Essentials of Human Resource Management from SHRM.