and your stock price is dropping like a stone. Do you panic? Or immediately put into action your crisis management plan? Your answer could determine whether the long-term impact of the crisis is negative or positive.
Good crisis management is all about creating positive perceptions from what may look like a bottomless pit of negative comment. That holds true whatever the crisis and whatever the audience. For IR practitioners the onset of a crisis may well mean careful consideration of audiences outside of the financial community in order to influence the latter’s perceptions of your corporate strengths.
Take a few examples. It’s no good banging on about strong financials to reassure hard-nosed analysts and fund managers if newspaper headlines are screaming blue murder about environmental concerns. Such issues may not be at the top of the financial community’s hit-list but can easily become important if allowed to linger in the media.
Likewise, the recall of a minor product can reflect badly on stronger brands if there is a lack of clear communication to consumers. Put simply, crises which in pure financial terms should have little effect on a company’s share price can spiral into an investor relations nightmare if there is a perceived failure to communicate with the affected audiences. An appreciation of the importance of all stakeholders – employees, consumers, local communities and suppliers – is the key to the management and prevention of an investor relations crisis.
The nature of business crises is changing, too. According to the Kentucky-based Institute for Crisis Management, the stereotypical business crises – fires, explosions, oil spills and the like – are declining as other issues become more likely to generate negative media comment.
ICM’s analysis of over 56,000 business crisis news stories in the last year shows that the real problems executives should be prepared for are labour disputes, white collar crime and inept management. Those issues have generated more than half of the negative business news coverage in the 1990s to date. Labour strife was the most significant for US companies during 1995 with Boeing, Caterpillar, the big automakers, and the Baby Bells all on the receiving end of negative news coverage in this area.
The top five industries falling victim to negative coverage in 1995 were, in descending order: security brokers and dealers, auto manufacturing, aircraft manufacturing, commercial banks, and software companies. IROs in those industries should brush up on their crisis management skills if they have not yet been forced to do so.
ICM predicts that more companies are likely to fall victim to crises in the fastest growing categories of negative coverage in the near future. These are class action lawsuits, executive dismissals, hostile takeovers and sexual harassment cases. All of these categories have doubled their ability to generate negative news coverage since 1990.
The report warns: ‘The news stories on these management crises were small in number compared to white collar crime, labour disputes and mismanagement. However, they invariably get the media’s attention because of the gut wrenching personal and professional problems that surface.’
ICM argues that coverage of business crises is likely to escalate throughout the rest of the decade. ‘With the number of 24-hour news channels and increased emphasis on business news, millions of viewers, especially customers and investors, will be painfully aware of any business crisis.’
The ICM report recommends that executives ensure they have an early warning system in place within the business to bring such situations to their attention. ‘There should also be a realistic process for evaluating the severity and potential of a crisis going public at an early stage so the most cost-effective options can be undertaken. Executive egos have to be put aside.’
Edward Nebb, partner at New York-based consultancy Morgen-Walke, adds the following three points of advice to any IR professional reviewing their crisis management operations. First, do a full ‘crisis inventory’ identifying possible areas of weakness and working out how to respond should one of those points give. Next ensure that there is a consistent approach to responding to enquiries in the event of a crisis. Nebb warns that although many crises emerge on a local level, if the company does not have a corporate-wide strategy for dealing with enquiries, that localised event can quickly turn into a corporate crisis. ‘It sounds basic, but a consistent approach is vital,’ says Nebb.
Finally, should a crisis arise, decide early on the message to be given out and move from a reactive to a proactive stance. Formulate a message which will be credible and able to stand up to in-depth enquiries.
Nebb agrees that there will be a growth of crisis situations in the labour field in the next few years as more unions get tough with management. That can take the form of strikes or – increasingly – a public airing of the union’s viewpoint in an attempt to embarrass management. That might include running advertisements aimed at the financial community in publications like the Wall Street Journal. ‘We’re seeing the unions go to the investors,’ says Nebb.
He adds that the problem of missed financial expectations is likely to continue in the future with the ‘softness’ in the economy. ‘Obviously, the best approach is to create a communications strategy before those missed expectations arise: communicate as early as possible and articulate a vision to remedy the situation,’ says Nebb. ‘Failure to do so means that management may need to polish up their resumes.’
The case studies covered in this survey should give readers some pointers. General Motors’ labour difficulties in the US; the resignation of Discreet Logic’s CEO in Canada; UK-based Farnell Electronic’s acquisition of Premier in the US; and Coles Myer’s corporate governance problems in Australia.
Whatever the IR crisis, it’s worth bearing in mind the advice of Bob Cowell of London consultancy Makinson Cowell: ‘Don’t let a crisis situation be the first time you have paid your respects to major institutional shareholders for three years or more. Constant communication over a long-period will stand you in good stead should a crisis situation occur.’
Coles’ Mire
Australian retail giant Coles Myer provides a good example of how not to handle an investor relations problem: letting it rumble on until it eventually reaches crisis proportions.
Questions over the company’s poor corporate governance record had been raised by shareholders and the press for a number of years. The 1992 annual general meeting had to be adjourned because of questions over the disclosure of directors’ conflicts of interest. So the company thoughtfully rescheduled the meeting for Christmas Eve. But the situation was brought to a head last autumn with the sacking of recently appointed CFO Philip Bowman and the promotion of Solomon Lew, the company’s largest shareholder, from non-executive to executive chairman.
Bowman sued the company, claiming that his investigations into a deal back in 1990 had raised questions over the propriety of directors and related party transactions. Coles Myer refuted the allegations but the promotion of Lew – who was a major supplier to the company through other business interests – was too much for institutional investors to bear. The ensuing argument helped depress the company’s share price.
The board was already seen as executive-heavy with only three of the eleven directors deemed to be truly independent non-executives. The negative publicity surrounding the company led to a proposal from Lew that he would revert to non-executive chairman and reorganise the main board committees with more non-executives.
That wasn’t enough to satisfy the institutions, however. They were prepared, if necessary, to launch a proxy fight to ensure their demands over board composition were met. In early October Bankers Trust Australia, AMP and the State Super Corporation took the unusual step of going public with their concerns over the board’s composition following a number of meetings with Coles Myer. Lew had proposed a break-up of the company as a way of improving shareholder value and eliminating the public perception that directors had their hands in too many related pies. The press and shareholders largely dismissed Lew’s restructuring notion as a diversionary tactic to cover up the corporate governance crisis.
In a strongly worded missive the three institutions said Lew had rejected their demands for a majority of independent non-executive directors and an independent non-executive chairman. ‘Accordingly, we will propose a number of independent non-executive directors to replace some of the existing directors,’ said the release. ‘Our objective is clear: to allow all shareholders to vote to obtain a working majority of independent non-executive directors on the board who can, without perception of conflict, oversee the business and consider options to enhance value for shareholders.’
Elizabeth Bryan, general manager of investments at State Super Corporation, says that the decision to go public with their concerns over directors’ conflicts of interest wasn’t taken lightly. ‘The Australian press had been very vocal on the situation for a long period of time,’ says Bryan. ‘And that certainly put the institutions into the front line. It was an issue of public concern.’ She says that it was a problem which State Super and its institutional colleagues considered did not have the momentum to resolve itself. Pressure for change was needed. ‘There certainly were a lot of meetings with the company but those talks didn’t lead to a resolution of the fundamental problem – directors’ conflicts of interest.’
Following the intervention of the Coles and Myer families, Solomon Lew eventually bowed to the pressure from institutions and the press and stepped down as chairman in mid-October. His closest allies on the board, Lindsay Fox and Will Bailey, also resigned. The company announced that it would seek a new non-executive chairman and would appoint five new non-executive directors after consultation with major shareholders. Nobby Clark, former chairman of Foster’s Brewing and CEO of the National Australia Bank, was appointed chairman. This met with favourable reaction in the market. With the agreement of the major institutional investors, Lew remains on the board as vice chairman although a company spokesperson admits that his role remains ‘rather unclear’.
Coralie Tournier, an analyst at Institutional Investor Services who followed the Coles Myer debacle, says that the crisis could have been avoided if the company had responded to shareholder concerns sooner. ‘A proxy fight was imminent and it had to make changes to avoid that,’ she says. ‘The company really wasn’t responsive until their backs were against the wall.’
Perhaps Coles Myer has learnt its lesson and has a more enlightened future ahead under the leadership of its new chairman. The company released a fairly comprehensive statement of corporate governance principles in March of this year; and it recently announced that Solomon Lew’s smokescreen plans for ‘disaggregation’ are now off the agenda.
Tournier again, on the new corporate governance announcement: ‘We applaud their efforts as a step in the right direction. It remains to be seen how they implement it.’ Elizabeth Bryan is of a similar opinion, saying that the early signals from the restructured board – including the corporate governance statement – are quite good. She adds: ‘We don’t feel forced by the press to take a governance stance which isn’t appropriate and necessary. But there may well be other cases where institutions are a trigger point for bringing about change.’
You have been warned.
Electronic Voting
What Farnell Electronics described as ‘the deal of a lifetime’ turned out to be a big deal of trouble for the electronics distributor earlier this year.
The furore started in January when the UK-based company announced its intention to buy Premier Industrial Corporation of the US. The 1.85 bn deal was to be financed by a rights issue and cash and would create the world’s third largest electronic components distributor. But if Farnell’s management was confident of the industrial logic of the deal, a minority of major institutional shareholders were not. And some of them weren’t afraid to come out and say so. Pretty rare stuff in the rarefied atmosphere of the UK investment community.The shareholders’ concerns revolved around a number of issues, in particular the size and price of the transaction. At the time of the announcement, Premier was capitalised at around 1.32 bn – nearly one and a half times that of Farnell at 950 mn – and the UK company’s proposal put a 40 per cent premium on top of that figure.
There were also fears that the deal would considerably dilute earnings in the future and would put undue financial strain on the group with over 430mn in net debt. Finally, some doubted the ability of the combined group’s management to run such a large global business.
An EGM for Farnell’s shareholders to decide whether the deal stood or fell was set for February 15, giving management a month to persuade wavering institutions of the merits of the deal. The stakes were high. Three-quarters of those voting had to support the deal if it was to go ahead. And with average voting at EGMs in the UK rarely exceeding 35-40 per cent of shareholders, press reports of a ten per cent minority block against could feasibly have scuppered the transaction.
In fact, only two institutions stuck their necks out to state publicly their opposition to the deal. Standard Life and Legal & General had combined holdings of around 5 per cent of Farnell when the deal was announced, although L&G reduced its stake from 3 per cent to around 1.5 per cent prior to the meeting.
Graham Wood, head of UK equities, at Standard Life, was the first to go public, arguing that the $2.8 bn price tag for Premier was simply too high. He could see ‘no financial justification for shareholders to support this deal’. David Rough, director of investment at L&G, joined in the public fray after becoming concerned that Standard Life was being castigated for its actions.
‘There needed to be another voice out there to encourage discussion,’ says Rough. ‘It’s not something we do lightly but this deal had the connotations of 1980s excesses. There was no problem with the industrial logic but Farnell was paying an extremely full price for the business.’
The public debate meant a lot of legwork for management to reassure jittery investors. Howard Poulson, Farnell’s chief executive, and his executive colleagues held over 60 meetings with institutions in the run-up to the EGM, returning to some investors two or three times.
Premier’s shareholders in the US were also on tenterhooks, fearing a share price collapse if the deal was rejected. Not surprisingly, with such a high premium on offer the US company’s shareholders gave their side of the deal the thumbs up. As Rough notes: ‘They thought it was Christmas.’
The UK side wasn’t so secure but Andrew Fisher, Farnell’s finance director, says that the company never deviated from its original plan of carefully explaining the industrial logic and financing behind the deal. The company had grown steadily in the past few years but management did not believe it could continue into the foreseeable future on its current footing. This was a deal which would leapfrog ten years or so of organic growth in one move.
That message evidently worked. Around 77 per cent of Farnell’s shares were voted in total – enough to ensure that the 16 per cent of total holdings which voted against the deal did not win the day and cause a crisis of epic proportions for both companies.
‘It was a large transaction and, quite rightly, the shareholders took time to digest the deal,’ says Fisher. ‘It was important to us that they understood the reasoning. The vast majority of institutional investors are rational and make up their minds on how they see things. The only reaction we found difficult was the public airing of views. At the end of the day a small and vociferous minority did not influence the rational thought of the majority of shareholders.’
Discreet Manoeuvres
Discreet Logic could not have foreseen the nasty investor backlash greeting a double whammy of announcements on February 13. The Montreal-based visual effects software developer, whose systems were used to create special effects in movies like Forrest Gump and Gulliver’s Travels, saw its stock plummet 53 per cent in one day after it announced that CEO David Macrae had resigned and warned of weaker than expected quarterly earnings. Shares dropped $14 to a low of $9 3/4 before staggering back to close at $11 1/4. The massive sell-off knocked $334.8 mn off Discreet’s market capitalisation, bringing the stock back to around the price level at which it went public last year.
‘Missing a quarter and losing the CEO are obviously going to make investors jumpy,’ explains Gene Munster, analyst with broker Piper Jaffray in Minneapolis. ‘It was a big surprise, but the market overreacted. Fundamentally, Discreet is still a great story and one of our strongest buy recommendations.’ Munster believes market impact would have been the same had Discreet separated the announcements instead of issuing them together.
A high flying IPO last June 30, Discreet was started by former executives of Softimage, a Montreal maker of special effects software that was acquired in 1994 by Microsoft. Discreet has quickly become a major player in the fast-growing computer animation market. Its stock leapt 57 per cent on the first day of trading, split two-for-one in October, and hit a 52-week high of $32 1/4 in November. Among those shocked by February’s freefall were institutional investors who bought into a secondary offering of 3.2 mn shares in November at $30 1/4. Discreet stock is currently trading around $15.50.
Discreet’s earnings problems stem largely from an announcement by Silicon Graphics in the last week of January. New hardware confused customers who then delayed buying or upgrading their Discreet software, forcing the company to offer discounts that squeezed its profit margins. The surprise for investors was that Discreet expected to earn 2 – 4 cents per share for the quarter, compared with analysts’ forecasts of 12 cents. Revenues of $25 mn were expected, $5 mn below previous estimates.
In fact, the bad news had nothing to do with the company’s product, demand for that product, or its growing market share, according to Munster. ‘We see it as a wonderful buy opportunity whenever a stock gets depressed at no cost to the fundamentals,’ he adds. ‘Now there is an opportunity for a new crop of investors to get a piece of what is still a sexy story. Discreet stock will rebound surprisingly quickly.’ That new crop of investors is likely to be a new breed, adds Munster, more concerned with long-term growth than momentum.
Munster says Discreet did a good job in communicating during the crisis. Management held a conference call right away, with chairman Richard Szalwinski confidently calling the crisis a hiccup. The company then attended a Piper Jaffray multimedia conference in New York the same week, at which Szalwinski and CFO Douglas Johnson made a presentation to investors, followed by over an hour of Q&A.
Two weeks later Discreet was showcased at an investor conference held by San Francisco-based Robertson, Stevens & Co, which was one of its underwriters. ‘A lot of companies in Discreet’s position would have stepped back from the plate,’ Munster surmises. ‘Attending conferences and being open with Wall Street were great moves in terms of crisis management.’
GM’s Tough Stance
‘The bigger they are the harder they fall.’ When the combatant in question is General Motors, the thuds and blows of battle reverberate far indeed.
In March, the auto maker stood strong in the face of an 18-day strike by United Auto Workers’ (UAW) union members that not only crippled its American operations but threatened to shave the nation’s GDP growth by up to three-quarters of a percentage point. Economists, still reeling from December and January employment figures skewed by federal furloughs and winter snowstorms, had to juggle the results of over 175,000 General Motors lay-offs and thousands more jobs idled at suppliers.
‘What’s good for GM is good for the country,’ it has also been said. The possibility that the opposite was also true concerned many observers as they tried to calculate the effects of the strike, considered the worst since the 1970 GM strike which nudged the country into recession. Even President Clinton was part of the crisis management team, offering federal mediators to help solve the dispute, and later publicly declaring a happy ending to the episode when it was all over.
To GM’s credit, Wall Street was not left in the dark during the crisis. The result was that the company’s stock held steady and even gained during the course of the strike. As the effects of the stoppage by 3,000 Dayton, Ohio brake plant workers began to spin out of control, the company issued regular releases by news wire, Internet and telephone. GM held a meeting for analysts in the second week of the strike that virtually brought cheers from Wall Street. This was a dispute over principle not jobs, GM’s top officials declared. Chairman Jack Smith and Richard Wagoner, head of North American operations, were there to explain how the company’s tough stance now would make it more competitive in the future.
The message was received and passed on with enthusiasm. Analysts and investors rallied to GM’s defence and endorsed its strategy. As talks between GM and the UAW ground on, often round the clock, many analysts confirmed strong buy recommendations even while revising their earnings estimates downwards. The strike, which hinged on GM’s preference for, and the union’s opposition to, outsourcing parts making, was viewed by the Street in the same light as corporate restructuring: as an example of taking losses in order to lower production costs and improve competitiveness in the long-term.
So trading in GM stock stood firm, as did secondary market trading in the company’s debt. Indeed GM staunchly placed two new debt issues totalling $679 mn, refusing to let the strike, then in its second week, dampen its plans. S&P affirmed the company’s A-minus senior debt and BBB-plus preference stock ratings, thereby confirming the agency’s view that the conflict would be resolved before adverse consequences warranted a ratings adjustment.
‘Faced with a declining pool of members, unions are becoming much more confrontational,’ concludes Lawrence Rand, senior partner at New York-based Kechst & Co. ‘Yet companies like GM are becoming skilled in handling such conflicts, remaining forthright with all the company’s constituencies: shareholders, customers and employees. As long as the issues are fully explained, shareholders are willing to take a short-term impact on earnings in return for long-term benefits.’
Crisis Management Kroll Style
Rebel forces overrun a major international hotel. An extortionist threatens to kill the president of a large corporation. An explosion destroys a major petrochemical complex – sabotage suspected. Product contamination demands a company investigate the incident quickly, provide authorities with accurate information, and deal with the press.
Does all this sound like the realm of investor relations? Or is it the domain of James Bond? In fact, these are real crisis management cases handled by Kroll Associates, international private investigators.
As managing director of Kroll’s crisis management group, Richard McCormick provides a timely worldwide response to kidnapping, product tampering and emergency evacuation incidents. Still, McCormick, a steely-eyed former US Marine Corps captain and FBI agent, much prefers prevention to cure and to that end he offers clients vulnerability surveys, threat assessments and crisis management plans.
Since taking over the crisis management helm in 1994, McCormick has handled some 70 kidnappings and over 50 product related incidents. April 1995 had him juggling ten kidnappings at once, mostly in Brazil. ‘Kidnapping is big business in many places,’ he says. ‘Fortunately, we haven’t lost a client yet. Victims generally come back in good shape – even if they’ve been held captive in the jungle for up to a year.’
