Last month’s article checked on two companies that have lived under a cloud. Dow Chemical ($DOW) recreated its image in part through its dazzling Human Element commercials. Career Education ($CECO) remains in a heavy fog. Its shares have been falling since 12 attorney generals opened began new probes earlier this year. CECO’s slippage proves once again that ethical lapses damage market capitalization. The New York Times (February 19, 2014) recently ran a scathing piece exposing Premier Education Group, another for-profit chain accused of ethical lapses.( Readers will note that the Myth Buster’s February article preceded the New York Times. Such copycats!)
Putting out fires and blowing away smoke devours considerable corporate time and effort. Aside from a few companies that make so much money they do not care about their image, corporations with doubtful images work hard to clean up how investors see them.
Two organizational patterns appear. One is the effort to achieve something notable that a competitor lacks. The second is to provide evidence of ethical excellence to counteract bad news.
The Myth Buster has found some interesting approaches to providing companies with a clean public image. Imagine how much effort is expended by companies hoping to be on lists of excellence. Many surveys set apart the excellent: Best Companies to Work For, Most Admired Companies, etc. The cynical might say those that rank high in these surveys have more money than their competitors. For example, CNN Money ranks Apple as number 1 among Most Admired Companies. Exxon Mobil ranked 25th in the same survey. Google, Starbucks and Coca Cola do well also. While Exxon Mobil must be annoyed that they lack the savoir faire of the others, money has something to do with being on the list.
Rankings Possess Value
The survey winners bask in admiration, watch their market capitalization rise and receive thousands of job applications. They can luxuriate in clichés such as,“we hire the best and the brightest” and “we are committed to improving the world,” etc. Corporate rankings have become an industry, a bit like the Academy Awards. The candidates are nominated and voted upon. Making the list is heralded as a great achievement.
A think tank called The Ethisphere Institute produces an annual list of the World’s Most Ethical Companies. According to an article in Forbes, some of the companies nominate themselves and the number of nominations has increased significantly.
How might a company benefit from such a listing? In the home improvement area, at least on the east coast, Benjamin Moore paint, a part of Warren Buffett’s holdings, stands out as the homeowner’s favorite. Imagine how many times angry customers have asked for this iconic product at Home Depot ($HD) only to hear that they do not carry it. Imagine also the angry stares when Home Depot employees ask, “Would you like Behr paint? It’s just as good.” So special is Benjamin Moore’s image that they often manage their own paint stores. They also achieve an astounding 38% gross profit margin. How can Benjamin Moore’s competitors PPG ($PPG), Sherwin-Williams ($SHW) and Valspar ($VAL) possibly compete with its superior image and profits?
Sherwin-Williams has found one way. It is listed as one of the most ethical companies by The Ethisphere Institute. In fact, they are also doing very well on all financial measures: revenue, profit and cash on the balance sheet have skyrocketed in the last three years.
A separate category of companies that strive to be listed for their excellence includes those that seek evidence of their fairness and honesty to counteract bad news and a bad image. General Electric is also on the list of world’s most ethical companies is. As great as it is, General Electric ranks first among American corporations in number of lawsuits. The lawsuits are of many types from the frivolous to the serious and many are proving nasty and expensive. According to Civil Procedure & Federal Courts Blog, GE “is currently involved in about 14,000 lawsuits globally, about 60 percent of which [i.e., about 8,400] are in the United States.”
And yet the long history of nasty lawsuits has not toppled GE. In fact, they are among the nation’s most profitable and admired companies. While the company has built up many achievements, its ethical ranking provides evidence that its core is truthful. GE maintains a strong image while bad news has rattled Toyota allowing Ford (also on the Ethisphere Institute list) and General Motors to edge upward.
This look at the “Where There’s Smoke There’s Fire” myth reveals that ethical disasters may or may not hurt a company. Aggressive action may help enormously in protecting the corporate image and market capitalization. This article also shows that several attributes go together: massive profit, placement on a list of best companies and a solid public image. A significant effort can blow away a good deal of smoke. The next article will examine more myth evidence.
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Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.
