rebuilding reputation: the buck starts with the CEO

Dory Gasorek and Jeff Resnick, RRC

The old saying “the buck stops here” has never been more true for CEOs and other “top brass” in the American electric power industry.

In the wake of high profile disruptions from the Enron debacle to the blackout of 2003, the overall reputation strength of the industry has shown clear signs of weakening. And, amid the turmoil, senior managements that had long been comfortable in the shadows of a once tranquil industry are being held accountable.

Duke Energy Corp., TXU Corp., FPL Group, Progress Energy and Southern Company have replaced or are seeking new CEOs, while more than half of the leading power producers have changed senior management in the past two years. At the same time, surveys by Rating Research LLC (RRC), among others, are showing that the CEO’s office is playing a significantly larger role in forming stakeholder perceptions of corporate reputation.

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In today’s electric power industry, then, it is fair to say that the buck starts with the CEO. The obvious question now is this: How can CEOs use their newfound visibility to rebuild the reputation strength of their firms?

A first step is to look at the facts. Earlier this year, RRC conducted 350 in-depth interviews with key constituencies in the U.S. electric power industry, focusing on senior industry executives and financial analysts who follow the industry. That followed a similar base-line study in 2002.

Over the period (as shown in figure 1), we found an 8 to 11 percentage-point decline in respondents’ answers to three key questions RRC uses to measure reputation strength. In 2004, for example, 28 percent of respondents agreed or strongly agreed when asked whether they would be “personally willing to invest in the company.” That was down from 36 percent in our 2002 poll. When asked whether they would be “willing to support the company in times of controversy,” only 20 percent agreed in 2004, down from 28 percent two years earlier. And, while about one-third of respondents on average agreed that each firm surveyed is “an excellent company,” that measure of confidence was down from 46 percent in 2002.

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At the same time (as illustrated in figure 2), we found that corporate reputations can change quickly-for worse and for better-in turbulent times. Coupled with fundamental analysis of each company, RRC’s 2004 survey resulted in the downgrade of seven reputation strength ratings of the 18 power providers rated. But, RRC research is also showing that well-prepared firms are not doomed to follow industry trends. FPL Group, Dominion Resources, PPL Corp. and PG&E Corp. were able to buck those trends, and their ratings were upgraded accordingly this year.

key drivers of reputation

In addition to helping companies and industry constituencies to track changes in corporate reputation strength, RRC research is structured to get at the underlying reasons-and thus to pinpoint actionable areas for improvement.

In both the 2002 and 2004 studies, RRC asked how respondents would rank each company on the key “drivers” or “dimensions” of reputation strength. That included some 40 questions polling their opinions in such areas as the effectiveness of each company’s marketing, their trustworthiness and ethical behavior, and their ability to offer customer-focused products. Using RRC’s reputation strength model, the answers to those questions factored out into nine key drivers of reputation for electric power producers.

Here, in order of importance, are the top five among those drivers in the eyes of senior industry executives:

“- effective marketing. Topping the list this year (and in our 2002 poll), respondents stated that they would be more inclined to invest in and support a company with effective marketing in place. Specifically, they like to see products and services that are innovative, of high quality and that meet the needs of the company’s markets. Along the same lines, the company’s offering should successfully differentiate it from competitors and have a positive impact on the community it serves.

“- trustworthiness. Respondents stressed, however, that excellent products and services alone are not enough. The company should also have an organizational culture that promotes a perception-and a reality-of trustworthiness, openness and honesty with the public, and ethical business practices. In both 2002 and 2004, respondents said that reputation strength in this dimension will be stronger for companies that are customer-focused, have loyal customer bases and are seen to be environmentally conscious.

“- financial stability. The predictability of financial performance has long been key to reputations of utility companies generally, but in the deregulating electric power industry that dimension slipped to third place in both RRC studies. To maintain a perception of financial stability in today’s environment, respondents say they are looking for recognized leaders, companies that are “well positioned for the future” and companies that “can survive downturns in the industry.”

“- leadership. It is no surprise that the biggest change in our survey results for 2004 is the appearance of a new driver that speaks directly to the leadership of CEOs and other top management. In a turbulent industry, key electric power constituencies give the most credit to companies that are “led by highly talented management” and companies that can “quickly adapt to market conditions.” More than offering innovative products and services, respondents also state that the ability to communicate those offerings and the strengths of the company to the marketplace is an increasingly critical component of corporate reputation in the electric power industry.

“- social responsibility. Among other drivers relating to a firm’s safety record, its regulatory relations and its ability to build positive strategic alliances, stakeholder perceptions of a firm’s social responsibility stand out. In that regard, respondents give higher marks to a company that “treats employees fairly,” “has built a diverse workforce” and “supports charitable causes.”

what makes a leader?

A look at 2004 results for two companies illustrates how strength or weakness in these dimensions can make a firm a leader-or a follower-in the area of corporate reputation.

One is Dominion Resources, which has been upgraded to upper-medium-quality A from medium-quality BBB. At a time when industry participants and analysts are telling us that they would generally be less willing to invest in electric power assets, Dominion showed a significant jump in that measure, and more respondents said that they view Dominion as an “excellent company.”

Drilling down into the reasons for that jump, RRC found a nearly 30 percentage-point rise in perceptions that the company is led by “highly talented management,” along with a 16 percentage-point rise in views that Dominion “has effective sales and marketing”-two elements that are highly correlated with the “leadership” driver of reputation. Along the way, RRC found significant increases in views that the company now has a reputation for “offering products and services that meet the needs of its markets,” for adhering to ethical business practices and for treating employees fairly-all components of reputation that can help a company to maintain or improve support of key constituencies in challenging times.

By contrast, stakeholder perceptions of Duke Energy have fallen sharply over the past two years, leading RRC to downgrade the firm’s reputation strength rating to the A level-still very respectable by industry standards now, but down from Duke’s high-quality AA rating in 2002. Weaker perceptions that the company is financially secure and a perception that it is less able to provide customers with competitive electricity pricing played a strong role in RRC’s rating judgment.

At the same time, the new rating incorporates the significant declines in perceptions that Duke is led by highly talented management (down 15 percentage points) and that it is “open and honest with the public” (down 18 percentage points).

time to act is shortening

The overall declines in the last two years should give pause to CEOs who may believe that “soft” variables such as corporate image, reputation or goodwill do not deserve a high place in their management priorities. Research by leading public relations firm Burson-Marsteller gives further reason to question that assumption.

In its most recent study, Burson-Marsteller found that 50 percent of a firm’s reputation was linked to CEO reputation in 2003, up from 40 percent in 1997. The reason for the increase, says Burson’s chief knowledge and research officer, Dr. Leslie Gaines-Ross, is that “CEOs are now being called upon to make far more difficult decisions.” In today’s post-Enron environment, she adds, “they also remain the organization’s public face and ethical compass.”

Moreover, the time that new CEOs have to build their reputations is shortening. And with the average CEO tenure at five years or less, there is little forgiveness for mistakes. Citing the same research, Dr. Gaines-Ross estimates that CEOs now have only 18 months to prove their effectiveness, down from about 20 months five years ago.

The good news in all this is that there has been an increased focus in recent years on both CEO reputation and corporate reputation, resulting in the development of new sources for assistance in the way of training, guidance and market research.

Exactly what plan of action is right for each firm will, of course, depend on each company’s situation. But, innovative tools of market intelligence focusing specifically on tracking and identifying key drivers of reputation strength can help CEOs to assess their standing and to build market confidence and a positive competitive presence, even where market conditions are as challenging as they are today.

Gasorek, C.F.A, is rating committee chair of Rating Research LLC (RRC). Resnick is RRC’s chief research officer. For further information on RRC’s current ratings and research relevant to the US electric power industry, see RRC’s reports, “Electric Power Industry Study, 2002-2004: Tarnished Reputations, Shining Stars, June 2004” and “Methodology: Electric Power Industry, June 2004.” Both reports and further information about RRC may be obtained on the firm’s Web site at www.ratingresearch.com or by calling Ashley Burleson at 813-837-6166. For more on Burson-Marsteller’s CEO research, see Leslie Gaines-Ross’s book CEO Capital: A Guide to Building CEO Reputation and Company Success.

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