Who Sees the Halo?

The pharmaceutical industry's ethical reputation has improved during the past year, at least according to pharma professionals and the financial analysts who watch industry stock prices. But most of those gains are lost on the general public, according to the latest research on ethics reputations by Rating Research. RRC, as the company is usually known, says the bad news is confined to just a few companies.

Despite the challenges stemming from problems with COX-2 inhibitors, industry peers and financial analysts gave the industry an average rating of E2, indicating a "high quality" ethical reputation, in 2005—the same grade it earned in RRC's 2003 study. (See "Ethics Beyond Corporate Governance," Pharm Exec, September 2003.)

Definitions of Ethics Rating Levels

Once again two biotech firms, Amgen and Genentech, secured RRC's "highest quality" rating—an E1—for ethical reputation (see Figure 1). Both industry insiders and financial analysts gave the firms high marks when asked about their performance in the key components underpinning ethics reputation.

RRC Ethics Reputation Ratings [Pharmaceutical Industry]

On another positive note, survey respondents upgraded the ethics ratings of Eli Lilly and Johnson & Johnson to E1. Each company moved up from a "high quality," E2, in RRC's last study.

Eli Lilly improved so dramatically that, in the eyes of industry insiders, it tied with Genentech for top rankings from those respondents (see Figure 2). The company scored strongly in the areas of corporate governance, financial transparency, and being open and honest with the public. In addition, financial analysts awarded Lilly a solid sixth-place ranking, up significantly from the previous year.

Rankings of Pharma Company Reputation, 2005 [Executives vs. Analysts]

For its part, Johnson & Johnson has shown solid, sustainable support from both executives and analysts, each of which gave the company a fourth-place ranking in ethics reputation. Its strongest performances were for CEO leadership and corporate governance.

The controversies surrounding Merck since late fall of 2004, however, sent the company's ratings plummeting—from first-place, in the opinion of industry executives in 2003, down to ninth-place currently. Financial analysts, on the other hand, maintained Merck's second-place ranking in the RRC ethics scores. But even the analysts' vote of confidence was not sufficient to prevent Merck's overall rating from sliding to E2, from E1.

Meanwhile, Bayer showed a significant drop in the estimations of both groups of respondents, as its ethics ranking dropped to number 17 (out of 19), in the eyes of industry insiders, and to 16, from the viewpoint of financial analysts. As a result, Bayer's ethics reputation rating slid to E3, from E2.

Improving Stakeholder Perceptions

In the current media environment, where ethical breaches by corporations and their CEOs are in the news almost daily, it is not surprising to see ethics driving corporate reputations across America. Indeed, RRC's most recent study of reputation in the pharmaceutical industry found that ethics is now the most important driver of reputation, ahead of other key dimensions, such as workforce quality and financial stability. (See "The Rise and Fall of Pharma Reputations,"

Pharm Exec

, February 2005.)

To find out more about stakeholder perceptions, RRC used its Ethics Reputation Model to assess which factors are most closely aligned with strong or weak ethics reputation (see Figure 3).

Distribution of Rankings Across Ethics Components, 2005

The 12 components on which ethics rankings are determined remain the same over time, but their relative importance, as cited by survey respondents, often varies dramatically from year to year. On average, RRC found the strongest increases this year in the component "led by talented management," followed by "positive relationships with vendors and suppliers," and "positive relations with regulators."

Further supporting its strong overall ethics reputation, the industry scored well across the 12 components. Figure 3 presents the industry's average performance on each component, ranked by quintile, with the first quintile representing the highest quality.

The industry performed well on the following components: having talented management, strong CEO leadership, and being open and honest. Most companies earned scores of E2 on the majority of components; very few came in at E4 or below. One notable exception was Schering-Plough, which scored poorly on almost half of the component questions, suggesting significant ethical weakness and a risk of ethical default.

A Troubling Disconnect

Now the not-so-good news. In an effort to find out more about the opinion of the pharmaceutical industry's other key stakeholders, RRC worked with its affiliate, Opinion Research Corporation, to learn how the American public perceives the pharmaceutical industry in today's challenging environment. The results point to a troubling disconnect between the views of industry insiders and consumers.

In a nationwide poll conducted in early February, only 44 percent of 1,000 Americans surveyed said they agreed (or strongly agreed) that the senior leadership of major drug companies "engage in ethical business practices." By comparison, 65 percent of executives interviewed in RRC's latest survey expressed confidence that senior leadership of the major drug companies "adhere to ethical business practices."

In the same survey, consumers ranked the ethics of drug company managers well below average in corporate America. Half of the respondents said they are "very" or "somewhat" confident in the ethical behavior of senior leaders of American companies generally. To take an example from another industry, about 57 percent of the same respondents said they are confident in the ethical behavior of electric power companies.

Understand, Then Act

What difference does this make? Companies burdened with an unrealistically low public image may underperform others with stronger reputations, ultimately affecting their bottom lines.

Commenting on these findings, Professor Stephen A. Greyser of the Harvard Business School cautions that with such a difference in opinion, one of these groups—either executives or the general public—must be wrong.

"If it is the executives [who are wrong]," says Dr. Greyser, "then the industry must think more deeply about the perceptions of its ethical behavior to get a more precise understanding of the sources of the public distrust, and then act on that assessment."

"On the other hand," he adds, "if it is the public that is mistaken, then industry leaders must do a much better job of communicating the true basis of their ethical grounding to the general public."

Doretta Gasorek is principal for Rating Research. She can be reached at doretta.gasorek@ratingresearch.com.