AMERICA'S MOST ADMIRED CORPORATIONS Merck leads the pack for the fifth year running. Philip Morris takes a dive. The judges are increasing their emphasis on product quality and corporate responsibility.
By Alison L. Sprout REPORTER ASSOCIATE Jung Ah Pak

(FORTUNE Magazine) – TOUGHER CONSUMERS at home and millions of potential customers abroad make a good reputation more valuable than ever to U.S. companies. What does that reputation consist of? Every year more than 80% of the respondents to FORTUNE's survey pick quality of management as paramount. But other criteria have been growing in popularity. The quality of a company's products or services, considered the second most significant factor ever since the survey began nearly a decade ago, is narrowing the gap with management. And the number of respondents citing responsibility to the community and environment as the most important standard for judging a corporate reputation has doubled. Says Procter & Gamble CEO Edwin Artzt: ''People have become far more concerned with their impact as consumers on the quality of life in their communities. Inevitably they look to the supplier to provide environmentally safe products.'' For the fifth year in a row, Merck, the world's largest maker of prescription drugs, earned the highest rating out of 306 major corporations. Runner-up Rubbermaid bounced back to the No. 2 slot after a one-year hiatus in third place. Some old friends rejoined the two champs at the top. Johnson & Johnson, last seen among the top ten in 1986, rose four notches to No. 8. Boeing finally launched its new 777 and flew home to roost at No. 9, up from No. 11 last year. Eli Lilly, the only newcomer, leapfrogged 19 places to tie for tenth place with Liz Claiborne. The biggest surprise of the survey was Philip Morris's dizzying descent from No. 2 to No. 79. The reason: Having acquired Kraft in 1988, it has switched categories from tobacco to food, which now accounts for over 50% of sales. More than 8,000 top executives, directors, and security analysts are asked to rank companies in their industry group, and Philip Morris's new judges in the food business didn't think much of its best-known product -- cigarettes. The director of one food company put it bluntly: ''Anyone in the tobacco business must be severely downgraded.'' Another executive wrote, ''I downgraded companies with political action committees, products that kill, and those insensitive to 'green' issues.'' Philip Morris's scores for product quality and community and environmental responsibility fell accordingly, accounting for most of its drop on the list. Spectacular profits don't guarantee a sterling reputation -- Philip Morris's net income for the first nine months of last year was up a dazzling 28%. Analysts anticipate that Anheuser-Busch's earnings will be up 10% this year, instead of the 13% to 14% they would normally expect had the company not made the disappointing Sea World acquisition. The King of Beers took a header from No. 9 to No. 22. Declining earnings don't burnish the image much either. Du Pont slid from No. 10 to No. 13 after profits for the first nine months slipped 8% in response to slowing demand for some chemicals, textiles, and carpet fibers. The roster of the ten most admired changes every year, yet a mere 29 companies have joined the club since the survey began. The computer and pharmaceutical industries shared the spotlight in the original 1982 poll, with three companies apiece in the top ten, including Digital Equipment, now a dismal No. 185. No industry was so heavily represented again until Anheuser- Busch joined PepsiCo and Coca-Cola to stage a beverage coup last year. Today two of the original ten most admired, Merck and Johnson & Johnson, form a pharmaceutical triumvirate with newcomer Eli Lilly. The fortunes of the once stellar computer industry have faded. In the first survey John Opel, then IBM's CEO, cheerfully noted, ''We chose the right industry to be in.'' Not anymore. Computer makers Wang, Unisys, and Control Data now rank among the ten least admired.

MERCK IS THE only company to remain in the top ten for the entire life of the survey. What keeps it coming back? Consistent sales and earnings growth, fueled by blockbuster products such as Vasotec and Mevacor, the top-selling drugs for treatment of high blood pressure and high cholesterol. The company's commitment to research and development is huge: $855 million last year, about 11% of 1990's sales and nearly 10% of the entire U.S. pharmaceutical R&D budget. A willingness to spend that kind of money attracts the brightest minds in the business. A joint venture with Du Pont, announced last July, to develop and market drugs internationally has added 1,500 scientists to Merck's research team. Says P. Roy Vagelos, who has been CEO since 1985: ''This project with Du Pont is an opportunity to have people thinking along different lines but with similar objectives. The competition in our field is enormous, and the more original thinkers we have, the better I like it.'' Silver medalist Rubbermaid and No. 4 Wal-Mart Stores, the only companies in their industries ever to make the top ten, keep striking it rich for their shareholders with the group's highest average annual returns over the past ten years, 33% and 42% compounded, respectively. Wal-Mart's CEO, David Glass, and Stanley Gault, Rubbermaid's chief, also share a belief in close collaboration between suppliers and retailers -- a good thing since Wal-Mart is Rubbermaid's biggest customer. Wal-Mart has spent $500 million in the past five years on state-of-the-art technology, including a computer system that links the company to its suppliers, lowering costs of inventory and increasing efficiency. Last year Rubbermaid introduced 309 new products. Some of its fans aren't likely to shop for them at Wal-Mart, Middle America's favorite store. President Bush works out with a Rubbermaid basketball hoop, the company says, and Prince Andrew's two children cavort in a Little Tykes playhouse. Says Gault: ''We're traveling in some pretty good circles these days.'' Boeing and 3M succeed by involving their customers early in the design and assembly process. Says 3M CEO Allen ''Jake'' Jacobson: ''Our people get close to the market, close to their customers, see what their problems are, and then come back to the laboratories and solve them.'' For example, four years ago engineers from 3M returned from visiting BMW in Germany with an idea for some new double-sided tape to attach weatherstripping to car doors. Result: It's now a product with significant growth potential. As it worked closely with key customers like United Airlines, Boeing's product quality improved. James Guyette, head of United's operations, tells the story of a Boeing 757 he wasn't satisfied with because of a slight defect on the surface of one wing: ''They put 45 people on it immediately. The plane was fixed and the solution was taken back to the production line within a week.'' TO STAY AT THE TOP, the most admired must be able to compete internationally. Procter & Gamble, No. 3, is growing nearly as fast overseas as it is at home, and Johnson & Johnson, No. 8, is growing faster. Some 40% of P&G's sales growth in fiscal 1990 came from international business, with new products such as Pert Plus shampoo, Always sanitary napkins, and compact detergents sold in 30 or more countries. As for J&J, international sales are up 23% for the first nine months, and CEO Ralph Larsen boasts, ''We can move more product around the world faster and better than anyone else in the industry.'' In the battle of the beverage titans, PepsiCo beat archrival Coca-Cola for the fourth year in a row, placing No. 5 to Coke's No. 6 tie with 3M. Long-term investment value was Pepsi's greatest strength, even though Coke has had a slightly higher total return to stockholders over the past ten years -- an average 29% annually vs. Pepsi's 28%. Says Coca-Cola CEO Roberto Goizueta: ''Increasing shareholder value over time is the bottom line of every move we make.'' Some of America's most admired get there by bucking industry trends. In a tough retail environment, Liz Claiborne continues to deliver the goods. Sales for the first nine months of 1990 were up 22%, and the apparel company offers cash-strapped department stores discounts nobody else will match. Some critics say women will tire of Liz Claiborne, since the clothing takes up about 40% of the floor space at some stores. But retail analyst Walter F. Loeb disagrees: ''Liz Claiborne will succeed by expanding in stores that are doing well, while an excellent design studio keeps them in step with what the customer wants.'' New to the top ten, Eli Lilly posted one of the strongest score gains of the year, a gazelle-like leap from No. 29 to No. 10. Earnings per share increased 22% in the first nine months, driven largely by worldwide sales of the antidepressant Prozac, which doubled from $350 million to $775 million. Several unresolved lawsuits claim Prozac can increase suicidal tendencies, but the FDA says the drug is safe and is evaluating its use for treating obesity and bulimia. WHEREVER THERE are winners, there are sure to be losers. The bottom ten has always had at least one airline and one metal company, and this year is no exception. No. 301, Continental Airlines Holdings, and No. 298, LTV, which owns LTV Steel, are repeat offenders, and both are in Chapter 11 bankruptcy proceedings. Mack Trucks, No. 300, was purchased by French automaker Renault soon after FORTUNE's survey was mailed in September. The four savings institutions that sit at the bottom like yesterday's coffee grounds are Meritor Savings Bank, No. 302; CrossLand Savings, No. 304; Great American Bank, No. 305; and Goldome, No. 306. They also stand a chance of being acquired -- by the government. Three don't meet the strict capital requirements imposed on savings institutions, and they've all been selling off branches, their most valuable assets. Says savings and loan consultant Kenneth Thomas: ''It's really hard to be optimistic about any of them.'' A corporate reputation, once lost, can be restored over time. This year Texaco and BankAmerica led the most-improved list for the second time in a row as both of their scores went up by 12%. Texaco did it by paring debt and raising its profit per barrel of oil through a lucrative refining joint venture with the Saudis, while BankAmerica dramatically improved its loan quality. Some good sports look at their low rating as a challenge to do better. Wang CEO Richard Miller, whose company ranks No. 303, has hit bottom before. He was a senior executive at RCA when it was one of the least admired in 1982, and in 1984 when it made the most-improved list. Miller's rallying cry: ''You don't need to stay on the bottom. It's possible to improve people's perceptions.'' He adds: ''When you turn a company around, you often use adversity as a motivator. I'll use these results to tell our people how much more we need to change.''


The ninth annual Corporate Reputations Survey includes 306 companies in 32 industry groups that appeared in the 1990 FORTUNE 500 and FORTUNE Service 500 directories. We polled more than 8,000 senior executives, outside directors, and financial analysts. They were asked to rate the largest companies -- defined as those with sales of at least $500 million -- in their own industry on eight attributes of reputation, using a scale of 0 (poor) to 10 (excellent). The attributes were quality of management; quality of products or services; innovativeness; long-term investment value; financial soundness; ability to attract, develop, and keep talented people; community and environmental responsibility; and wise use of corporate assets. Companies are assigned to a group based on the industry or service that contributed most to their 1989 sales, and all made public filings of key financial information.



CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: WHAT THEY DID FOR SHAREHOLDERS MOST ADMIRED LEAST ADMIRED Total return is stock price changes and dividends. Companies marked N.A. were not public for the full decade. Liz Claiborne, public since 1981, returned an average 43.6% annually.


CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: HOW ALL 306 COMPANIES RANK Here are their scores, covering eight attributes, on a scale from zero, least admired, to ten, most admired.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: HOW COMPANIES RANK IN 32 INDUSTRIES Industry groups are based on U.S. Office of Management and Budget categories. Companies are assigned to a group according to the industry or service that contributed most to 1989 sales.