LEADERS OF THE MOST ADMIRED What does it take to get rated tops in FORTUNE's latest reputations survey? Let a biochemist, a soft-spoken Scot, a tub-thumping Ohioan, and a legendary investor from Omaha show the way.
(FORTUNE Magazine) – HOW DO YOU build a winning reputation? In FORTUNE's annual survey, the foundations are the eight attributes listed on the opposite page. To rise to the top, a company must rate highly in each, in the judgment of peers and the analysts who follow its industry. Merck, this year's No. 1, took first prize in four categories. Runner-up Philip Morris won in two. The stories that follow take a closer look at those eight building-blocks of reputation. To probe the widest range of industries, we have in four cases examined companies that ranked second behind either Merck or Philip Morris in a key attribute. The corporations profiled appear in the order they fall in our overall ranking, starting with No. 1 Merck and winding up with No. 16 Berkshire Hathaway. For an overview of America's most admired corporations, including the top and bottom ten, see page 58. A list of all 305 companies and their scores ! begins on page 66. Tables showing how they rank in 32 separate industries start on page 72. And for a look at how the most admired got that way, read on.
ABILITY TO BUILD TALENT ''There are plenty of good people around, but I wouldn't send them to Merck,'' says Virgil Baldi, vice president of the Korn/Ferry International executive recruiting firm. ''I send Merck only people with world-class reputations.'' Merck's chairman, Roy Vagelos, 60, a physician and biochemist, has been passionate about attracting great minds since he became research chief in 1976. When Merck hit a new-product drought in the early 1980s, he recruited hundreds of research scientists to reignite the company's labs. Vagelos does not rely solely on search firms. He acts as his own chief talent scout as he travels the world, and makes a special point of firing up interest in Merck on college campuses. ''I discuss the discovery of new drugs, and that is very exciting to young scientists,'' he says. Merck has introduced a remarkable ten major drugs since 1981; each accounts for at least $100 million in annual sales. Among them: Mevacor, which cuts cholesterol levels as much as 40%, and Primaxin, a powerful antibiotic. Vagelos expects the stars he hires to pull in other stars. He often greets his managers with: ''Who have you recruited lately?'' Dr. W. John Powell, vice president for clinical research, boasts that he recently enticed Merck's new head of infectious diseases away from Yale medical school. ''Merck has some people of higher quality than you can find at the best academic institutions,'' says Powell, a cardiologist who taught at Harvard for 21 years before joining the company in 1986. ''Research universities of the caliber of Harvard and MIT are trying hard to get our top scientists back.'' It won't be easy. Unlike often strapped academic labs, research facilities at the company's headquarters in Rahway, New Jersey, are lavishly equipped. Merck plows more dollars into R&D than almost any other pharmaceutical company. In 1989, R&D expenditures were some $755 million, or about 11% of sales. Says Dr. Paul Friedman, yet another transplanted academic: ''My sense of accomplishment is far greater in this setting than when I was at Harvard. My basic research is immediately applied to developing medicines.'' There are also fewer distractions at Merck. For one thing, scientists don't have to campaign for federal and foundation research grants as they do at most universities. Vagelos allows his stars a lot of freedom. He tolerates and even encourages extracurricular projects: Dr. Donald J. Hupe, for example, spends about 15% of his time working with the National Cancer Institute on potential anticancer drugs. Other staffers contribute time to high schools and colleges to help students grasp the importance of science and math. ''We think it is vital to make the U.S. competitive in technical fields,'' says Vagelos. One hallmark that particularly endears him to employees is his penchant for promoting them quickly, sometimes skipping several rungs on the ladder. Says Vagelos: ''Developing people as fast as possible is the way to have a vibrant and exciting organization.'' - Faye Rice
VALUE AS AN INVESTMENT At first it may seem odd that Philip Morris should rank so high among America's most admired corporations. The Surgeon General reports that one- sixth of all deaths in the U.S. are from cigarette-related ailments, and Philip Morris is by far the leading cigarette producer. But in two years the company has risen from No. 7 in our survey to No. 2, largely by giving shareholders exactly what they want: an outstanding return, year after year after year. Measured by its value as a long-term investment, Philip Morris ranks No. 1 in the survey. That's particularly impressive, since for much of the decade, tobacco company shares have traded at a lower price to earnings multiple than the average share on the New York Stock Exchange. Says CEO Hamish Maxwell, 63, a soft-spoken and charming Scot: ''We have been correcting for that, to some extent, by having better than average earnings growth.'' And how! During the 1980s, Philip Morris produced annual increases in earnings per share of roughly 20%. By comparison, stalwarts of similar size such as IBM and Ford had gains averaging less than 7% and 16%, respectively. True, it is easier to sell smokes than cars or computers. Because most customers find the habit hard to kick, they tend not to resist price increases that outpace inflation. During the past decade, that allowed tobacco industry sales to grow and margins to fatten despite 2% annual declines in cigarette consumption. By increasing its market share from 28% to 40%, Philip Morris gathered more of these riches than anyone else. Now the company, which acquired the Kraft food giant in late 1988, is working wonders in another business. Last year Maxwell goaded executives at his foods unit to raise profits 30%, mainly by cutting costs. In the previous five years Kraft had produced average earnings gains of only 12%. Wall Street expressed its approval -- both of those results and of Philip Morris's new, healthier source of earnings -- by bidding up the price of its stock 63% during the year, to a recent $41.50 per share. With that kicker, the company's ten-year total return to investors averaged just over 30% a year -- tops among the 305 companies in our survey. Chief executive since 1984, Maxwell is proud that Philip Morris's managers are not your everyday gaggle of MBAs. Several key executives don't even have college degrees. Some, like the boss himself, are immigrants. ''By and large, they have to try a little harder,'' says Maxwell. If Philip Morris's success has a secret ingredient, that just might be it. - Stratford P. Sherman
QUALITY OF PRODUCTS Don't expect Stanley C. Gault to find it unusual that a maker of plastic household items like toys and ice cube trays could win a reputation for some of the best-made products in the U.S. Hint that plastics were once synonymous with junk, and the chairman of Rubbermaid will launch into an energetic speech on the virtues of his polyethylene and the intricacies of his injection molding. It is a tub-thumper of a speech -- literally. Gault, a vigorous 64, will whomp one of his enormously popular garbage cans and invite you to do the same to a flimsier competing version that stands nearby. ''Feel that!'' he says. ''Look at that,'' shifting his scorn to a limp Brand X laundry basket and then to a knockoff food storage bin with an (ugh!) crooked label. ''On quality I'm a sonofabitch.'' Ten years ago Gault was one of six top General Electric managers in the running to become the next CEO. When he sensed he wouldn't get the job, he quit and went to Rubbermaid in Wooster, Ohio, the town where he grew up. In three years the new boss reshuffled, fired, and hired so many executives that only two of 172 key Rubbermaid managers still held their original jobs. But he transformed what was once a modestly successful company into a superstar. Since 1980 sales have quadrupled and earnings have risen eightfold. Rubbermaid is third this year in overall reputation (it has been among the top seven companies for the past five years) and ranks second, after Merck, for the quality of its products. Solid manufacturing only partly explains that positive perception. Just as important are providing superb customer service and designing attractive, useful gadgets. Gault, whose true passion is marketing, pays as much attention to how even simple products look and work as he does to the ultraviolet inhibitors in their resins. Sales of big garbage cans jumped 20% when he told engineers to whip some up in a specific shade of blue, instead of the ordinary brown. To make housewares look attractive on dealers' shelves, Rubbermaid adds antistatic chemicals to the plastic so products won't attract dust. Gault never stops acting as his company's No. 1 quality controller. In 1986 he was walking in Manhattan when he overheard a doorman muttering and swearing as he swept dirt into a Rubbermaid dustpan. ''Stan whirled around and started grilling the man on why he was unhappy,'' recalls treasurer Richard Gates. Gault came away persuaded that the lip where the dustpan meets the floor was too thick, leaving a line of dirt, and told engineers to redesign the product. He is precise and methodical. Gault still visits several stores a week to see how Rubbermaid products are displayed and to inspect the quality of workmanship. ''My wife has come to accept that I will never pass a hardware store without going in,'' he says. If he finds an ill-fitting lid or wrinkled label, Gault buys up the offending goods and then summons his senior managers to attend a vigorous lecture. ''He gets livid about defects,'' says Walter W. Williams, the chief operating officer. But ultimately it's Gault's infectious pride in Rubbermaid's products, rather than fear of his wrath, that motivates the troops. When it comes to encouraging quality, passion at the top counts as much as engineering precision at the bottom. - Brian O'Reilly
ABILITY TO INNOVATE Ever since those long afternoons spent tinkering with his junior chemistry set in the basement of his parents' Sioux City, Iowa, home, Allen ''Jake'' Jacobson has had a hankering for innovation. It shows. During his four years as CEO, the 3M corporation has pumped out new products at a rate of about 200 a year. Many are modest variations of such ordinary but ubiquitous industrial and consumer items as masking tape or sandpaper. But 3M is also a leading maker of high-tech medical diagnostic equipment and computer imaging systems. Among U.S. companies only Merck is rated as more innovative than 3M in this year's survey. Naturally, being inventive earns the company something beyond praise. Since last January, 3M's stock has risen 29%. 3M functions as a kind of corporate petri dish that fosters the spirit of innovation in its scientists and engineers. Technical people are encouraged to swap information and ideas in the halls. Once a year the company holds its own private trade show. Each of its more than 115 research labs sets up a booth displaying the latest technologies, and for three days scientists, like hucksters at a fair, try to ''sell'' their work to each other. A corporate committee of 3M scientists oversees all research, making sure there is no duplication and cross-pollinating new ideas among divisions. Jacobson gives technical people all the resources they need. In 1988, 3M spent 6.5% of sales, or $689 million, on R&D, twice the average of U.S. industry. Jacobson believes that top managers go astray if they try to impose too much of their own thinking. Says he: ''You've got to sponsor your people's ideas. You've get to help them along.'' At 3M researchers are encouraged to spend 15% of their time pursuing projects that will pay off only far down the road. But that carrot hides a stick: Jacobson also insists that 25% of each division's annual sales come from products developed in the prior five years. The company holds scientists and engineers in particularly high esteem. The lab-coat crowd accounts for half of 3M's 135 general managers. A two-tier promotion system allows inventors who don't want to manage to rise to the equivalent of vice president -- pay, perks, and all. Jacobson, 63, a chemical engineer, pushes his researchers to put customers first. ''Innovation works from understanding consumer needs,'' he says. A few notable failures overseas -- one was a tape gun that the Japanese wouldn't use because it was shaped like a weapon -- have taught him to pay more attention to those who are closest to local markets. That's why he's glad that in the past decade 3M has doubled the number of scientists and researchers working abroad to 2,000. He believes that if 3M and other American corporations are to keep their innovative edge, the country will have to produce more engineers. Says the father of three: ''It has to start in the second grade. Unless you make a home environment where a child can get interested in math and science, you'll never get anywhere.'' - Brian Dumaine
QUALITY OF MANAGEMENT In the sluggish retailing industry, Wal-Mart Stores stands out as one of the few players with any adrenaline. Its first stadium-size store opened in the Arkansas boondocks just 27 years ago. Today Wal-Mart's profits as a percent of sales are already higher than those of its largest competitors, Sears and K mart. Revenues, which topped $25 billion in 1989, may well outstrip both by 1995. Since Wal-Mart made its debut among America's ten most admired in 1988, it has continued to bushwack the competition. This year the company places second only to Philip Morris for quality of management, the trait our judges deem the most important factor in shaping reputation. But don't give billionaire Sam Walton, Wal-Mart's charismatic founder, all the credit. That lofty ranking is also a tribute to the man he designated as his successor two years ago, David Glass, 55. To some outsiders, CEO Glass looks almost invisible. But that may be because this 13-year Wal-Mart veteran sees no reason to fix what ain't broke. Says security analyst Margaret Gilliam of First Boston: ''One of the things that makes David so brilliant is that he never questions the principles laid down by Sam.'' In matters of style Glass is no Walton clone. While Sam drives a pickup and is a fanatical hunter, this quiet, intense Missourian sticks to his four-year- old Mercury station wagon and unwinds by working out in a corporate fitness center. But as a manager, Glass, like Walton, relies on the 1980s mantra, participation. ''We have no superstars at Wal-Mart,'' he says. ''We have average people operating in an environment that encourages everyone to perform way above average.'' To stay in touch with employees -- or ''associates,'' as they're known in Wal-Martese -- Glass and his lieutenants at the company's out-of-the-way headquarters in Bentonville, Arkansas, rely on a communications network worthy of the Pentagon. It includes everything from a six-channel satellite system to a private air force of 11 planes, mostly turboprops. Says Glass: ''We believe nothing constructive happens in Bentonville. Our grass-roots philosophy is that the best ideas come from people on the firing line.'' Glass himself spends several days a week visiting the stores. To heighten associates' sense of mission, the new boss hands them plenty of responsibility. Glass, who pushed Walton to install computers in every store in the mid-1970s, expects managers for each of the 34 departments within a typical Wal-Mart to run their operations as if they were running their own businesses. The managers are supported with detailed financial statements that show costs and profit margins. Says Glass: ''Instead of having one entrepreneur who founded the business, we have got 250,000 entrepreneurs out there running their part of the business.'' Having peppered the South and Midwest with stores, Wal-Mart is slowly invading the Northeast. Glass promises, ''We will continue to push the perimeters.'' Just as Sherman did through Georgia, no doubt. - Sarah Smith
FINANCIAL SOUNDNESS If you think smart marketing is the key ingredient in Coca-Cola's sparkling performance, think again. The most noteworthy change under Chairman Roberto C. Goizueta has been a shift in focus from boosting sales to maximizing shareholder returns. While President Donald Keough maps out marketing moves, Goizueta, 58, says that he wrestles over how to improve value and financial stability ''from the time I get up in the morning to the time I go to bed. I even think about it when I'm shaving. But I use an electric razor, so I think I'm safe.''
So do FORTUNE's judges. This year they rated Coke second only to Merck for its financial soundness. A Cuban-born chemical engineer, Goizueta has boosted return on shareholders' equity from 21% in 1981 -- the year he took charge -- to an estimated 32% in 1989. One impressed shareholder is investor extraordinaire Warren Buffett, who recently spent about $1 billion acquiring nearly 7% of Coke's stock. Says Buffett: ''There is no more heartfelt compliment than when I sign a check.'' CEO Goizueta's winning formula: Lower Coke's dividend payout ratio from 60% in 1981 to 41% and vigorously use that savings to buy equity positions in independent bottlers. These investments -- almost $1 billion in 1989 alone -- benefit shareholders because Coke increases sales and attacks bottling inefficiencies. Goizueta certainly has not weighed Coke down with debt. The company ended 1989 with some $400 million in long-term debt, a mere 10% of capitalization. Even that may seem excessive to some old hands: Remember, this is a company that never borrowed a cent until 1980, when it spent $100 million building a new campuslike headquarters in Atlanta. But while he professes greater boldness -- Goizueta says he would be willing to increase debt to 35% of total capital -- his actions suggest he remains about as devout a worshiper of clean balance sheets as his predecessors. In nine years as chief, he has lifted year-end debt as high as 20% just once. As a result Coke today sits on some $2.7 billion in cash, including $1.1 billion in proceeds from its recent sale to Sony of a 49% interest in Columbia Pictures Entertainment. Goizueta likes it that way. Says he: ''You never know when opportunity will knock.'' Meanwhile, he plans to spend some of that spare cash on new international bottling joint ventures. Why? ''Why did Willie Sutton rob banks?'' he says. ''That's where the money is.'' Goizueta is frugal in his personal life as well. For over 20 years he and his wife, Olguita, lived in the same house that he had bought as a middle manager. They moved to a larger but still modest new home in 1988 to accommodate their six grandchildren, who visit often. Owning a sugar refinery had made Goizueta's parents wealthy, but the family lost everything when Fidel Castro seized power in 1959. Goizueta fled to Miami the next year with a job at Coke and little else. His considerable fortune -- some $80 million -- is based entirely on options and shares he earned at Coke, few of which have been sold. The first shares Goizueta ever bought are still parked in the same New York bank where he opened an account 36 years ago. To ensure that Coke's operations managers think like the top brass about the cost of the money, Goizueta insists they use a calculation he calls ''economic value added.'' He defines that as after-tax operating profits minus the cost of capital employed to produce those earnings. In recent years each of Coke's 19 division presidents has had to present annual three-year projections of the ''economic value'' he expects to add to the corporation. Says Goizueta: ''Adding economic value to the company is the key to rewarding shareholders in the 1990s.'' - Patricia Sellers
CORPORATE CITIZENSHIP CEO Ralph Larsen likes to tell the troops at Johnson & Johnson about his time as a trainee in one of the company's baby-shampoo factories. One morning he attended a meeting where managers argued over whether to ship a large batch of shampoo that was safe but didn't meet J&J's ''no tears'' standard. The decision: Take the loss.
That kind of dedication to customer and community service hasn't kept Wall Street from weeping with joy: Over the past year J&J's stock has risen nearly 40%. And it has won the medical products company top honors for community and environmental responsibility in this year's survey. Says Larsen, who became chief last April: ''If we keep trying to do what's right, at the end of the day we believe the marketplace will reward us.'' The key to understanding J&J's unusual corporate culture is the Credo, a 44- year-old, 309-word statement created by Robert Wood Johnson, son of the founder. The Credo stresses honesty, integrity, and putting people before profits -- phrases common to most such documents. What's unusual is the amount of energy J&J's high executives devote to ensuring that employees live by those words. Every few years, in a kind of conference of bishops, the company gathers senior managers to debate the Credo's contents, a process meant to keep its ideals fresh. On his globe-trotting tours Larsen never fails to mention the document. ''I tell employees they have to be prepared to take the short hit,'' he says. ''In the end, they'll prosper.'' As an example, Larsen cites the tragic Tylenol case in which eight people died from swallowing poisoned capsules. Although J&J believed someone altered the pill in the stores, not the factory, it recalled all its product and quickly lost $240 million in earnings. That swift action persuaded consumers to stay loyal, and today Tylenol remains the nation's leading brand of painkiller. When he talks about the credo, Larsen comes off a bit like actor Pat O'Brien playing Knute Rockne: He has the same hefty build, bald head, and wildly enthusiastic eyes. The son of a Brooklyn electrician and a Hofstra graduate, Larsen is currently reading William Manchester's biography of Winston Churchill, The Last Lion. Not surprisingly, he admires the British statesman for ''his ability to do what's right under adversity.'' Larsen maintains J&J is doing just that in South Africa. Despite constant pressure to divest, J&J has refused to budge, arguing it can do more good by staying put. The company finances housing for many of its 1,400 employees, most of them black, and helps build schools and hospitals in the townships. When Larsen visited there a few months ago, he told the government that he abhorred apartheid, but he insists, ''We'll stay as long as we can be a force for peaceful change.'' J&J extends similar generosity to employees at home; it's opening a new day- care center for them this year. Such largess draws criticism, even within the company. But Larsen is sticking to his golden rule. ''The Credo shouldn't be viewed as some kind of social welfare program,'' he says. ''It's just plain good business.'' - B.D.
USE OF CORPORATE ASSETS At age 11, Warren Buffett made his first investment, three shares of Cities Service preferred. Forty-eight years later -- and several billion dollars richer -- the man from Omaha runs one of the most successful conglomerates ever. Since 1964 the per share book value of Berkshire Hathaway, which he controls with a 42% stake, has grown from $19.46 to about $4,300 -- a rate of 23.7% compounded annually. Last year alone, its net worth rose by $1.5 billion, or 45%. In February, Standard & Poor's gave Berkshire its AAA rating. And now the company has collared a new honor: In its first year in our survey, Berkshire wins first prize for wise use of corporate assets. (Classified previously as a service company, it was too small to be included.) Though it is considered a publisher according to the government categories that FORTUNE uses, Buffett has no doubts about his real line of work. ''I'm in the capital allocation business,'' he says. ''My job is to figure out which business to invest in, with whom, and at what price.'' Buffett approaches that task with a flexibility most CEOs lack. ''I'm not like a steel executive who can think only about how to invest best in steel,'' he says. ''I've got a bigger canvas, simply because I have spent my life looking at companies, starting with Abbott Labs and going through to Zenith.'' Even today, Buffett still searches for investments by browsing through Value Line from A to Z every week. He also reads ''hundreds and hundreds of annual reports,'' as well as plenty of business magazines and newspapers, and he much prefers such solitary research to having hot tips delivered in person. Says Buffett: ''It's easier to throw away magazines than throw somebody out of my office.'' Ever the maverick, Buffett became a disciple of the late Benjamin Graham's investment theories long before they were fashionable. He still hews to Graham's advice to ignore the financial market's ups and downs and only buy shares in companies whose intrinsic value is higher than their stock price. Each of Berkshire's operating companies is an easily understood gem producing returns on equity capital averaging about 67%. Buffett refers to them as ''the Sainted Seven,'' and they are: See's Candies, Nebraska Furniture Mart, Buffalo News, World Book Encyclopedia, vacuum cleaner maker Kirby, manufacturer Scott Fetzer, and uniform maker Fechheimer Brothers. In addition, Berkshire has rich stock investments in a number of corporations, which Buffett judges on the same criteria as the companies he buys outright. Among them are Capital Cities/ABC, Geico, Washington Post Co., and Coca-Cola. In an era of Trump-size egos and hostility, Buffett is low key and friendly. He is seen as so benevolent that Wall Street has dubbed him a ''white squire.'' This impeccable reputation has recently helped him get some very good deals. CEOs eager to avoid hostile takeovers have taken to offering Buffett convertible preferred stock with a high dividend, confident that he will never mount a hostile raid. Last year Buffett bought such shares in USAir Group, Gillette, and Champion International and took a seat on the Gillette board. He continues to make a lot of investors rich. How rich? Well, in November 1988, Berkshire moved from the Nasdaq market to the New York exchange. The shares began 1989 at about $4,700, and by the end of the year the stock had climbed nearly 85%, to $8,675. Now eat your hearts out: An estimated 80% of the stock is held by owners who paid less than $100 per share. - S.S.
CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: THE EIGHT KEY ATTRIBUTES OF REPUTATION