How - Dov Seidman [104]
MISMANAGING REPUTATION MANAGEMENT
In late 1983, in a conference room at brokerage house Drexel Burnham, five members of their high-yield bond department, including its head, Michael Milken, brainstormed an idea that would land on the global business community like a cluster bomb. Drexel decided to finance hostile takeovers of corporations using so-called junk bonds, low-rated, high-yield promissory notes, secured by the assets of the target company.6 At that time in business history, hostile buyouts were rare and treated delicately. To take over a company against the wishes of the people who ran it was a highly aggressive play that, in fortress capitalism days, made you many enemies. The barriers to do so were commensurately high. Financing such deals was the province of conservative, white-shoe investment banks. Aggressors were usually large companies that used bank loans to take over smaller ones. Drexel’s idea turned this model on its ear. Under their plan, many more companies and creditworthy investors, no matter how large or small, could take over another company, even one much larger than themselves, using the target company’s assets as collateral for the high-yield bonds Drexel would sell to raise the money.
When they announced this new deal, in early 1984, it dramatically altered the structure of corporate endeavor forever. Suddenly, old-line, established corporations built on sound value over time saw their own assets used against them. Value was no longer the play; instead, short-term shareholder value became the dipstick by which every company was measured. Many of the prevailing attitudes in business (and many corporate downfalls) derive from this single, fateful action.
When the enormous fees that playing this new junk bond game could earn became clear, many rushed into the game, including most of the major brokerages and many corporations, large and small. But there were two noticeable exceptions to this orgy of short-term profit taking: investment bank Goldman Sachs announced it would not fund hostile takeovers, and Johnson & Johnson (J&J) decided it would never do one.7 The reason for both decisions?
Reputation.
“Our CEO and president, Jim Burke, decided J&J would never do a hostile takeover,” Roger Fine of Johnson & Johnson told me when we caught up one day in New York. Fine is a truly admired leader and someone with whom I have had the privilege to work closely since the early days of LRN. “He wanted us to have the reputation of never giving anyone else a bear hug, and never doing anything that the management of another company that we coveted didn’t want to do. Now don’t think we were pussycats; J&J is an aggressive acquisitive company that wants to benefit from the opportunities of the marketplace as much as the next company. But Burke’s theory was that if we established our reputation for never pursuing this kind of transaction, people would come negotiate with us as a matter of preference versus people they couldn’t trust.”8
Though reputation, like trust, is not a new concept in business, there has been an explosion of interest around the subject since the mid-1990s. Companies now see what J&J and Goldman Sachs recognized back then: Reputation is a competitive advantage. Their reputations for straight dealing and respect for the companies they sought to acquire closed the Certainty Gap between them and their negotiating partners and allowed the deals to close more quickly, with less friction and more cooperation. Now these advantages are becoming plain to all. In 1998, Harris Interactive, a major corporate and public interest research firm, in association with Charles Fombrun, executive director of the Reputation Institute at the Stern School of Business at New York University, designed something they called the Reputation Quotient (RQ), a research tool that captures