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Rethinking Reputation

December 6, 2006
Related Topics: Ethics, Featured Article, HR & Business Administration
Benjamin Franklin said, "Glass, china and reputation are easily cracked, and never well mended." His aphorism anchors a school of thought that corporate reputation plays a crucial role in motivating, retaining and recruiting employees.

    But if the recent spying scandal at computer giant Hewlett-Packard and the ongoing dust-up over stock option backdating are signs, the conventional wisdom about the importance of corporate image may be off base—or at least outdated.

    In an era of widespread cynicism about corporations and other institutions, a company’s misdeeds may not matter to workers or potential job candidates. At the very least, less-than-ethical behavior among executives and board members is often seen as irrelevant to daily work life.

    "In the past, given the chance, you’d want to work at a reputable company," says Kim Berry, a former software engineer at HP and currently president of the Programmers Guild, a professional association. But in today’s dog-eat-dog world, HP’s invasions into the privacy of board members, reporters and two of its own employees aren’t likely to faze other employees or job seekers, Berry says. "No one in their right mind would turn down a job at HP because of this," he says.

    Mike Cherenson, vice president of recruitment consulting firm the Cherenson Group, agrees that the bar has been lowered when it comes to what employees expect from corporations. But, he says, smart firms will do even more to build a trustworthy reputation. Top performers in particular care about working at a place with a spotless name, he says, because they want to keep their own track record clean.

    "Even if trust has eroded," Cherenson says, "what a great opportunity for a company to exceed expectations."

Widespread distrust
    Consultants often talk about the importance of a company’s "employment brand." And a number of studies have made the case that reputation is vital to an organization’s ability to attract or motivate workers. In 2002, Cherenson’s firm found that 78 percent of adults said they would choose to work at a company with an excellent reputation that paid a salary meeting their needs rather than a company that paid a higher salary but had a poor reputation.

    In another 2002 study, this one by the Society for Human Resource Management and the Council of Public Relations Firms, 91 percent of employees agreed that there is a link between a company’s reputation and employee job performance.

    Since 2002, however, the public may have become more cynical about large corporations. New scandals have flared up. CEOs from WorldCom and Enron have been convicted. Executive pay is stratospheric. According to research firm the Corporate Library, median compensation for CEOs at about 1,400 public companies rose 16 percent last year to just under $3 million.

    A separate study by the Financial Times found that pay packages of U.S. chief executives are rising faster than corporate earnings and shareholder returns. And as typical workers tread water financially, they face the prospect of layoffs and cutbacks in health and retirement benefits.

    A report on trust earlier this year from public relations firm Edelman suggests that people tend not to expect much from corporate chieftains these days. The study, conducted in a variety of countries, found that in the U.S., rank-and-file employees are considered more credible spokespersons than corporate CEOs are.

    CEOs and CFOs have gained in credibility in America since 2003, according to the survey. Still, just 27 percent of U.S. respondents judged information about a company coming from a CEO or CFO to be "very" or "extremely" credible, compared with 42 percent for regular company employees.

    According to research firm GlobeScan, trust in global companies dipped from 2002 to 2005, to the point where 52 percent of people surveyed around the world had "not much trust" or "no trust at all" in those organizations.

    HP’s spying flap may well push the level of distrust higher. The venerable computer company has long touted its "HP Way," understood to be a culture of integrity, innovation, accountability and respect for the individual. But in trying to pinpoint who on its board of directors leaked information to the press, the company trampled on the privacy of directors, journalists and employees. Among the probe’s tactics were physical surveillance and "pretexting"—using false pretenses to get phone records.

    The botched probe led to a grilling from Congress, felony charges against HP board chair Patricia Dunn and four other defendants, and an executive shake-up. Among the casualties were Dunn, who resigned from the board, and general counsel Ann Baskins, who quit the firm.

    CEO Mark Hurd, who has been lauded for getting HP on track financially since he took the reins in early 2005, has promised to get to the bottom of the spying matter and return the company to its roots.

    "I pledge that this company will regain not just its reputation as a model citizen with the highest ethical standards," Hurd told Congress, "but we will [also] regain our pride."

    It may not be clear for months or years exactly how the spying controversy will affect HP’s workforce productivity, retention or recruiting. The scandal hit in early September, and it will likely garner more headlines as the criminal charges play out.

    Already, though, some observers have speculated that HP will suffer in the HR realm for its rogue behavior. Consultant and Workforce Management columnist Dr. John Sullivan recently argued that the scandal has tarnished HP’s image as an employer. He also chastised the company for not addressing the spying matter on its jobs Web page.

    "Is the once great HR function at HP living in a dream world where it hopes potential job applicants haven’t read about the scandal, or hopes those candidates don’t have questions about it that must be answered before they are willing to apply for a job?" Sullivan wrote in Workforce.

    HP declined to respond directly to Sullivan’s comments. But in a statement, the company said it sees no sign that the scandal is having a negative impact on recruiting and retention. The company said it received 102,000 external job applications in September, compared with 44,800 in November 2005. "As of October 19, HP had already received 65,700 job applications [for the month]," the company said.

    Morale also seems not to have suffered, HP said in the statement. The company said materials on the board-leak investigation are posted on its internal Web portal, including e-mail and webcast updates from CEO Hurd. Employees have not been using the firm’s "Ask HP" service to raise many questions about the leak probe, the company said. In September, HP’s 150,000 employees used the service to ask a total of 24 questions about the topic.

In today's dog-eat-dog world, HP's invasions into the privacy of board members, reporters and two of its own employees aren't likely to faze other employees or job seekers.
"No one in their right mind would turn down a job t HP because of this."
--Kim Berry, former HP
software engineer

    One way employee morale can tank at a public company is when the firm’s share price sinks. But that hasn’t been the case at HP. In fact, HP’s stock has risen since news of the misguided probe broke, and is trading at a higher price than it has in years.

    Meanwhile, interest in working at HP appears unchanged at one of the major feeder schools of tech talent in Silicon Valley. Interviews with several engineering students at San Jose State University recently showed that most hadn’t paid much attention to the scandal, or considered it largely irrelevant to their career plans.

    Arash Shokouh, a senior at the school and vice president of the Society for Computer Engineering, says corporate surveillance probably would never affect entry-level engineers, and HP’s tactics aren’t shocking given the broader climate of snooping in society.

    "There’s so much spying going on nowadays, I’m not really surprised," he says.

    Sigurd Meldal, chair of the computer engineering department at San Jose State, says the roughly 1,500 students in his department tend to focus on workplace culture matters, such as employee perks and stimulating projects, when evaluating prospective jobs. Ethical lapses by executives, like the recent ones at HP, do not have a big impact on students, he says.

    "They see it as, ‘That’s just corporate America going amok every so often,’ " Meldal says.

    Midcareer techies too can look past corporate wrongdoing these days, says Berry of the Programmers Guild. Waves of job cuts, offshoring and the use of foreign guest workers to handle technical tasks have caused many coders to place little value on working at a firm with a spotless reputation, he says. Of much greater importance to software professionals are whether a company is stable, growing, pays well and can offer interesting work that advances a person’s skills and makes them more employable in the future, Berry says. "You’ve got to look out for No. 1," he says.

Unfazed by backdating
    The mushrooming scandal related to the backdating of stock options can be seen as another test of how important company reputation is to workers. Options backdating refers to the granting of stock options with an exercise price lower than that day’s market price by making it seem like the grant was made on an earlier date. Backdating allows option recipients—often top executives—to realize bigger potential gains without the firm having to report it as compensation, in violation of accounting and tax rules.

    The U.S. Securities and Exchange Commission has said it is investigating more than 100 companies on possible fraudulent reporting of stock option grants. Criminal charges related to backdating have been filed against former executives from tech firms Brocade Communications Systems and Comverse Technology.

    Meanwhile, many companies have announced internal probes into the practice, and heads have been rolling. CEOs including UnitedHealth Group’s William McGuire and Monster’s Andrew McKelvey have resigned in the wake of inquiries.

    Among the companies caught up in the backdating flap is KLA-Tencor, which makes equipment for the semiconductor industry. In May, the company said it had received subpoenas from the U.S. Attorney’s Offices for the Eastern District of New York and Northern District of California requesting information related to its past stock option grants. Last month it said it was terminating the consulting work of former CEO Kenneth Schroeder as a result of an internal probe. KLA-Tencor also announced the resignation of other officials, including founder and board chairman Kenneth Levy.

    One KLA-Tencor employee, who asked not to be identified, says the backdating fallout is not negatively affecting employee motivation.

    Employees at the San Jose-based firm generally trusted a new management team brought on this year and appreciated management’s candor about the options issue, the employee says. The employee also likens options backdating in the technology industry to a common, less-than-alarming infraction. "It’s kind of like, do you get angry at someone going 70 miles per hour in the fast lane?" the employee says. "Everyone else is going 70 too."

    A KLA-Tencor representative declined to comment on morale at the company.

    KLA-Tencor isn’t the only firm where workers appear to be taking the backdating scandal in stride. Internet media firm CNET Networks recently said that CEO Shelby Bonnie and two other senior leaders were leaving their posts after an internal probe found instances of backdating.

    One CNET employee, who spoke on condition of anonymity because employees were asked not to discuss the options matter at the company, says colleagues in her department and a few people she has spoken with outside her unit "either are taking a wait-and-see attitude or don’t really care."

    A corporate restructuring plan under way at CNET is of much greater significance to employees at the moment, the employee says. Still, she says she and some of her colleagues care about whether CNET executives are guilty of more than an accidental oversight. And her own devotion to the job will be affected by how the matter settles out.

    "Part of working at a company is believing in the people who lead it," she says. "If we can’t trust the people who are running the show, then why be there?"

    A CNET representative declined to comment on morale at the company.

Attitude toward workers
    The fact that some workers care a good deal about the propriety of companies and their leaders while others don’t reflects a kind of crossroads for firms and employees today. On one hand, people such as Programmers Guild leader Kim Berry have come to see employment as almost exclusively an exchange of labor for wages, benefits and a chance to learn skills. This attitude corresponds closely to the "global-competitor corporations" model of management that authors Edward Lawler and James O’Toole describe in a book released this year. In The New American Workplace, Lawler and O’Toole say firms using this model may pay employees well and offer opportunities to develop new skills, but the relationship between employer and employee is "transactional, not one based on loyalty."

    Another approach, according to Lawler and O’Toole, is the "high-involvement" company. Such firms provide workers with challenging jobs, a voice in the management of their tasks and a commitment to low turnover and few layoffs. In addition, employees in these firms tend to share in company profits or from gains in productivity, and enjoy generous benefits.

    High-involvement, or "high-road," companies tend to care about their reputations, and they attract people who want to work for an upstanding firm, says Amy Lyman, co-founder of the Great Place to Work Institute, the research firm that compiles Fortune magazine’s annual list of the 100 best American employers. In Lyman’s view, momentum is growing for companies to want this classification—in part because of data showing that high-road firms such as Starbucks are top financial performers. The number of companies that apply each year for the Fortune list of the best American employers, for example, has climbed from about 300 in 2001 to more than 450 this year.

    Attention to great employers in recent years has made it more likely that people will demand to work at a company with a great reputation, Lyman says. "More employees understand that this is an option," she says. "It’s setting up the virtuous circle."

    At the same time, Lyman concedes that forces are pushing in the opposite direction, leading workers to expect less.

    "The scandals and the inequity in CEO pay hurt," she says. "They do feed cynicism."

    At San Jose State, at least one young person is idealistic about future employers. Shazia Hakim, an industrial and systems engineering student, says HP’s privacy violations have made her think twice about wanting to work at the firm. "It’s kind of tainted my opinion of them," she says.

Workforce Management, November 20, 2006, p. 1, 22-26 -- Subscribe Now!

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