BEST AND WORST CORPORATE REPUTATIONS Nothing lasts forever -- just ask Merck, no longer No. 1 in our survey. A shakeup in the rankings shows that good reputations are hard won and easily lost.
By Tricia Welsh REPORTER ASSOCIATE Joyce E. Davis

(FORTUNE Magazine) – ''WE WERE the first company to be selected No. 1 seven years in a row. My plan is that we'll be the first company to bounce back.'' So says Dr. P. Roy Vagelos, CEO of Merck, no longer America's most admired corporation. A year of economic turbulence, plus a far more extensive survey of companies, has produced a new crop at the top, with half of America's ten most admired corporations newcomers to that elite group. The long-reigning king is deposed, relegated to No. 11. Rubbermaid assumes the throne, only the third company in 12 years to hold that position (IBM was the other, a four-time winner). For this year's survey of corporate reputations we broadened the field to get a fuller portrait of America's most and least admired companies, and that accounts for much of the reordering. We added industries we hadn't covered before -- computer services and entertainment, for instance -- and divided others into their components -- for example, transportation into airlines, trucking, and railroads. In all, we increased the survey by 93 companies, for a total of 404. Several of these newly added companies turned out to be exceptionally admired. Of this year's top ten, Home Depot, Microsoft, and Walt Disney are new to the survey. Doesn't anything remain constant amid the tumult? Yes, indeed. As always, the most admired turned in outstanding financial performance, which has been the primary determinant of reputation since the survey began. And nearly all the top ten are premier innovators. An admirable trait anytime, it's especially valuable these days, with the world economy dragging. Explains L.D. DeSimone, 3M's chief executive: ''There are a lot of components to growth, but with so many slow economies, it's even more important that you have more innovation.'' Exhibit A in the case for innovation: Rubbermaid, the new No. 1, which also ranks first in innovativeness. It introduces an average of one new product a day. Running at a slightly slower pace, Microsoft has introduced close to 100 new products in the past two years. Domination of the software market for office PCs yielded revenue and earnings growth of a mere 35% last year, down from 50% previously. So the company is moving aggressively into the next hot market, software for the home and children. Says CEO William Gates: ''Software is an industry sparked by innovation and fueled by change. Most of the products released before 1990 are already outdated.'' You might not think of Walt Disney as a new-product machine, but it is. Its products are characters and songs and stories that it merchandises without mercy in seemingly endless forms. Last year you saw an awful lot of Aladdin and friends -- at movie theaters, later on TV and home video; as toys, books, lunchboxes, and other products in stores; walking around Disney theme parks; and in many other forms. Says Disney CEO Michael Eisner: ''Opportunities constantly arise in one area of the company that in turn ignite opportunities in other areas.'' That synergy is possible because Disney focuses on a single theme: entertainment. Despite the blow of Disney's first major financial disappointment in ages, at Euro Disney outside Paris, the company still makes magic for most consumers. Home Depot, America's largest home-improvement retailer, has revolutionized its industry. Don't fix it till it's broke? Not at Home Depot. Observes Donald Trott, an analyst at Dean Witter: ''They say unless you keep fixing it, someday it will break.'' The company is making stores bigger and presumably better by adding more profitable specialty items and garden centers. It's also expanding into Detroit, Chicago, and Canada, with plans to add 60 stores to the 270 open now. Investors have been thrilled with the best long-term total return to shareholders among the most admired, 31.5% annually over the past ten years, and customers obviously love the concept, which is built around them. As CEO Bernard Marcus tells his 53,000 employees, ''You can never do enough for a customer.'' A couple of companies moved into the top ten the old-fashioned way, by climbing. They're also outstanding innovators. Motorola moved up 12 spots to No. 6 with the largest total return to shareholders by far in 1993 among the top ten, 77.6%. After spending billions over the past decade getting ready for the wireless information revolution, the company is reaping the benefits as the world leader in cellular telephones, pagers, and two-way radios. Says Drew Peck, an analyst at Cowen & Co.: ''With many of its technologies still in their infancies, and cellular penetration only 4% in the U.S., Motorola's long-term growth prospects are excellent.'' As usual at Motorola, much of its earnings are going toward future innovation. Says Gary Tooker, Motorola's new CEO: ''If we weren't successful in technologies from past years, we wouldn't have the funds to invest in things like Iridium.'' So far the company has spent two years developing this new system, which will use 66 satellites to connect calls anywhere in the world, even in remote locations with no cellular infrastructure. Motorola lent a hand to UPS, which jumped seven places to No. 10. The company dramatically improved its package-tracking capabilities last year with the help of Motorola's cellular technology. While most competitors employ older radio technology, UPS's drivers in the U.S. and Canada use an electronic clipboard to send a signature instantly to its telecommunications center in New Jersey. From there, delivery information can be provided to customers around the world. Says CEO Oz Nelson: ''It's the first time this technology has been used, and it has vastly improved our service and set us apart from our competitors.'' Adding 93 companies to our survey would naturally have the effect of moving some companies down in the rankings, even though their scores haven't diminished. Levi Strauss's score was actually higher than last year, and Boeing's barely changed, but both fell out of the top ten to Nos. 12 and 18, respectively. Liz Claiborne, No. 8 last year, moved this year from the apparel category into our newly created wholesaler category, which more accurately reflects its operations (it contracts out almost all its manufacturing). But in that group its revenues were not among the ten largest, so it fell out of the survey. The most noticeable tumble from the top ten -- Merck's -- isn't hard to understand. The pharmaceuticals industry became one of the villains in the picture of America's health care system as painted by the Clintons, and it's a hard fact that when the President and his wife are mad at you, you're probably in trouble. The company lost two key managers, including its president and heir apparent, and its stock fell. Steven Gerber, an analyst at Oppenheimer, points out another factor: ''Merck had such a phenomenal run of new-product launches in the Eighties and early Nineties -- it's not possible for any company to sustain that growth.'' Will Merck go the way of IBM, which held the No. 1 slot for four years and is now No. 354? It's certainly trying hard not to. The company has hatched new marketing strategies to increase sales, such as offering a money-back guarantee on a new prostate-reducing drug, Proscar. Merck also plans to spend more than last year's $1.2 billion on R&D this year. New products slated for introduction in 1994 include the first chicken-pox vaccine ever, a new asthma treatment, and the next generation of Vasotec, Merck's market-leading drug for reducing high blood pressure. Merck's fall from the top ten was the splashiest but not the farthest. That distinction goes to Wal-Mart Stores, a member of the top ten for the previous six years, which dropped from No. 3 to No. 37. Says Steven Kernkraut, an analyst at Bear Stearns: ''They still have one of the best management teams around, but their numbers used to be spectacular, and now they're just excellent.'' It's that old devil, size -- how long can a $67-billion-a-year company keep growing nearly 25% annually? The least admired companies have plenty in common -- debt, big losses, and bankruptcy. The low scorer, Brooke Group, a tobacco company, has much of that, with recurring losses, piles of debt, and a net worth of negative $500 million. Brooke achieved the notable feat of scoring in the bottom three on all eight attributes of reputation in the survey. Leslie Fay sought bankruptcy protection last year after disclosing an accounting fraud that had inflated profits for the past several years. TWA, Northwest, and Continental have all been hammered in the airline wars, piling on massive debt and racking up big losses. TWA and Continental were resurrected from bankruptcy. Stone Container and Crystal Brands are drowning under deep debt, and Gitano has been struggling for years to refocus its apparel business and make money. IT'S WORTH NOTING that the bottom of the list isn't necessarily the gateway to oblivion. Just two years ago Chrysler and Sears were down there. Now Chrysler, on the uptick for three years running, has pushed up its market share and apparently earned more in 1993 than GM and Ford combined. Sears, voted the least innovative overall just three years ago, restructured its businesses last year, selling several of its noncore financial operations, halving its debt, and posting strong gains in profits. Both companies are among this year's biggest gainers in reputation. The stock market seems to think one bottom dweller -- Glendale Federal Bank -- is on the mend. Its share price rose 171% last year. Preserving a good reputation is an unending struggle. Procter & Gamble CEO Edwin Artzt says the best way is to ''preserve your values but change the way you operate.'' UPS's Oz Nelson agrees. ''We were seen as old-fashioned and not responsive to customers, so we changed,'' he says. ''But we still have a total commitment to quality and dependability.'' Oh, and one other thing: Don't forget about the stock.

BOX: HOW IT WAS DONE

The 12th annual Corporate Reputations Survey includes 404 companies in 42 industry groups that appeared in the 1993 FORTUNE 500 and FORTUNE Service 500 directories. More than 10,000 senior executives, outside directors, and financial analysts were asked to rate the ten largest companies (or sometimes fewer) in their own industry on eight attributes of reputation, using a scale of zero (poor) to ten (excellent). The attributes were quality of management; quality of products or services; innovativeness; long-term investing value; financial soundness; ability to attract, develop, and keep talented people; responsibility to the community and the environment; and wise use of corporate assets. FORTUNE 500 companies are assigned to a group based on the activity that contributed most to their 1992 industrial sales; Service 500 companies to a group based on the activity contributing most to their service sales. An index to the companies ends this section.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: AT THE TOP & BOTTOM OF 404 COMPANIES THE MOST ADMIRED A new No. 1, Rubbermaid, replaces Merck, now No. 11. Home Depot, Microsoft, and Disney are new to the expanded survey. Note the three tie-ins for Nos. 3, 6, and 8.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: AT THE TOP OF & BOTTOM OF 404 COMPANIES THE LEAST ADMIRED An accounting scandal helped push Leslie Fay into bankruptcy and the bottom ten. Stone Container, Crystal Brands, and the airlines struggle under tons of debt.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: EIGHT KEY ATTRIBUTES OF REPUTATION QUALITY OF MANAGEMENT QUALITY OF PRODUCTS OR SERVICES FINANCIAL SOUNDNESS VALUE AS LONG-TERM INVESTMENT USE OF CORPORATE ASSETS INNOVATIVENESS COMMUNITY AND ENVIRONMENTAL RESPONSIBILITY ABILITY TO ATTRACT, DEVELOP, AND KEEP TALENTED PEOPLE

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: HOW THE INDUSTRIES STACK UP WHAT THEY DID FOR SHAREHOLDERS BIGGEST GAINERS AND LOSERS