Martha Stewart's Case

Companies can measure the reputation with the stakeholders through custom research and published rankings. Research reveals that good reputation has a direct relationship with companies profit and stock price. Companies that do have a great reputation do perform really well financially. However, companies can perform very well and yet have a generally poor reputation. Harris Interactive research clearly shows that the public would rather buy products and services from companies with good reputation, and investors would rather invest there too. Good corporate reputation can enhance the business in good times and can protect the business in a crisis (Yoon, 2004).

Martha Stewart's case was a great example of what the reputation can do to a business. Before the scandal revealed in June 2002, Martha's business was blooming but did she had a great reputation? To a great extent her reputation prior to 2002 was a superficial image of perfection. It was not a secret that many people did not like her personally, even though Martha Stewart's products were associate with quality products. The lack of great reputation was based partially on the fact that she and her company were not involved in any major philanthropic or social activities (Yoon, 2004). The quality of company's products and services can contribute to a great corporate reputation, but that alone is not enough to build a business- the core of a good reputation is to create a bond between people and the company, to be able to give something back to the society. Even though Martha Stewart Living Omnimedia (MSLO) products are stylish and distinctive and with consistently high level of quality, the corporation lost its reputation after the Martha Stewart's conviction.

Let see how the company reached its pick and the plunge it took after the 2002 scandal. Though Martha Stewart bought the company bearing her name from Time Warner and incorporated it in 1997, her business started two decades earlier. In 1976 Stewart founded her own business in Connecticut- a catering company that by the late 1970's was a successful, upscale business on the East Coast. At the same time Martha Stewart began contributing articles to The New York Times and House Beautiful. In 1982, Stewart published her first book, Entertaining, which established her as an authority on taste and by mid 1990s the book has sold over half million a copies. That book proved to a blueprint for how Steward would build her image and she continued to think big while maintaining a perfectionist's attention to detail. The next step in making Martha Stewart a nationally known brand name was when in 1987 she signed a $5 million five-year consulting contract with Kmart to create home products, paint, bath and bedding products. It turned out that, Kmart did not need her as consultant but needed only to use her name.

Another big step was the beginning Martha Stewart Living magazine in 1990, which by 1995 was selling over a million copies per issues and was voted "Magazine of the Year" by Ad Age. In 1993 Steward convinced Time to fund a television show based on the magazine, also called Martha Stewart Living. The weekly show covered home decorating, entertaining, gardening, cooking, and featured Stewart as a host and was broadcasted in 84 percent of the nation's markets. The new ventures and the growing popularity of her magazine led Stewart to renegotiate her relationship with Time and in 1997 she bought the company bearing her name from Time Warner. The circulation of her magazine by the time had grown to 2.3 million a 30 percent higher than in 1996, and the total year company revenue for 1997 was $132.8 million, with earnings of $13.9 million.

In 1998 the company's new and established ventures were going very strong and consumers helped MSLO bring its revenue to $177.2 million with net income of $23.8 million and October 1999 MSLO went public on New York Stock Exchange with initial public offering of over 8.28 million shares for $18 each. The offering generated more than $132 million and the company becomes a favorite of Wall Street and consumers and the stock prices rose as high as $50 per share. The same year Martha added a half-hour cooking show to be aired to Food Network and the company reported the record revenue of $229 million for 1999. Steward expanded further into home furnishing through a deal with Bernhardt Furniture Company for a Martha Stewart Signature collection in 2001. We see that every venture has been working perfectly well for the company, and MSLO had gained not only recording revenue but also millions of fans, mostly young women.

MSLO created a brand that was heavily reliant upon the reputation of Martha Stewart, the company's founder and CEO, and the company used Stewart's image and name to promote a host of home products, publications and media. The company understood that all MLSO business segments were very sensitive to Martha's reputation because consumers identified Martha Stewart's product with Stewart's wholesome and conscientious "hearth and home" image. It was clear that the success of the MSLO depended exclusively on Martha Stewart public image and no one expected any adverse action to damage that image (Hays, Rozhon, 2002).

Then in June 2002, when the public and the MSLO shareholders learned about the ImClone insider trading legal investigation and Martha Stewart involvement, was clear that her image is compromised. What really drove the customers away was the fact that Martha Stewart actually lied in order to hide her involvement with ImClone stock shares. Her initial story was that she had an agreement with her broker, Peter Bacanovic, to sell her shares it they dropped below $60 per share, and she did not talk to him prior to execution of the sale. If she had stuck to this story, she possibly could have avoided the Security and Exchange Commission (SEC) investigation. Even if she had received insider confidential information from Sam Waksal or Peter Bacanovic, her trades would be self-executing and she could have argued that she is not liable of insider trading because even if she had material, non-public information, she was not directing the sale. She would not have breached any fiduciary duty because she was not an officer of the ImClone Company and had no obligation to the other investors.

However, Martha Stewart changed her story on June 12, 2002 when Sam Waksal was