Every IR professional should have a written plan to deal with crisis. Some may have a well-thumbed guide coupled with a well-practiced drill on what to do when a crisis occurs as their company lurches from one type of mayhem to another. Others may be less familiar with the problem and have a crisis plan that only merits a couple of pages, collects dust or serves handily as a coaster for a coffee mug. Whichever your situation, given the current economic environment where even supposedly stable companies are retiring to bankruptcy courts, now is the time to assess whether you and your company are well prepared for a financial crisis.
It is entirely in the realm of possibility that strong companies unable to weather the winter of an economic downturn may steer towards the shelter of Chapter 11. According to the Administrative Office of the US Courts, business bankruptcies jumped 13 percent in 2001 to 40,099. The word bankruptcy no longer has a high-pitched, emotional resonance in the corporate world, where it can be used as part of a business strategy. The US oil company Texaco carried on business as usual when it filed for bankruptcy in 1985 after it was hit with a $10 bn judgment to pay rival Pennzoil.
However, the word still evokes, and rightly so, nightmarish associations of failure and lost value among jittery shareholders – visions not in the least helped by Enron and Global Crossing’s big splash in the bankruptcy pool. Accusations of fraud and pending criminal charges against these companies have cast a long shadow on other companies now entering Chapter 11.
Generally companies seeking the shelter of bankruptcy in the US do it to protect themselves from creditors. This contrasts greatly with the insolvency laws of other countries like the UK, France and Germany where there is a stronger pro-creditor and anti-debtor regime in place. In the UK, for example, there is usually a trustee, such as an accounting firm or bank, hired by the secured party to take over the company and either run it or liquidate it for the benefit of the secured party.
However, this state of affairs is slowly changing, as witnessed by recent events in Germany with construction giant Philipp Holzmann. In the past, banks would ride to the rescue of ailing companies mired in debt, offering bail-out loans or restructuring debt, rather than have them face bankruptcy. Philipp Holzmann was no exception, and German banks and the government have snatched this company from the jaws of corporate death twice over the last five years, the last time back in 1999. A brief three years later, Philipp Holzmann is being spurned by creditors who have lost patience, and now it looks likely to become the latest victim washed up on the bankruptcy shore.
Chapter 11 gives a US company time to reorganize and reposition itself in the market or bring in new management. But it can still mean the end of a company if it liquidates. The basic principle in most bankruptcies is that debt takes precedence over equity; before equity survives, all debt must be paid. Bankruptcy is a financial crisis which impacts multiple audiences; and it’s an extraordinarily complex communications challenge.
No solace
‘The investor relations officer is in the unfortunate position of having to deal with financial audiences who, in the case of the equity holder, will lose all of their value,’ says Tom Franco, the president of corporate communications firm Broadgate Consultants. It’s hardly an easy situation. ‘Those equity holders are going to be extremely unhappy but there is no solace to offer them. On the other hand employees who are working in factories, for example, have to be motivated and reassured that bankruptcy does not mean turning off the lights and locking the doors.’
Gerard Corbett, a vice president of corporate communications at Hitachi America, notes that IROs will be required to operate in line with the SEC’s Fair Disclosure rules. The size of the company will determine how much of the legal, financial and communication aspects of bankruptcy the IRO will have to coordinate. So, for instance, an IRO in a larger company may only focus on analysts, investors or bond holders while in a smaller company they may be expected to multi-task.
Fruman Jacobson, chairman of bankruptcy practice Sonnenschein Nath & Rosenthal, says an IRO would also be keen to learn whether the bankruptcy court has allowed an equity committee to be formed because they can be satisfied that at that moment in time equity will survive. If there looks to be residual equity, shareholders can get together and ask the court to appoint an equity committee that can hire its own counsel and advisors to represent their interests.
Workable planning
For an IRO to deal with bankruptcy effectively it is helpful to have a communications plan that can be put into operation immediately. As Stacie Byars, an account manager at Seattle-based IR firm Cereghino Group, says, ‘I think it would be incredibly difficult to enter into an Enron or a Global Crossing situation without a plan.’
An emergency is not the time to figure out where the escape route is. Preparation beforehand will give you a greater fighting chance. Jennifer Sheehy, director of the crisis communications center at Boston-based PR firm Clarke and Company, recommends creating a plan that identifies key audiences and determines their information needs and concerns, as well as developing messages and strategies to deliver them.
In today’s business environment the possibility of stable companies being hit by bankruptcy no longer seems as far-fetched as it once might have done. ‘In particular given the conditions of the dot-com bubble, 9/11, Enron and Global Crossing and the general economic conditions around the world, it would be a shame for an IRO not to have a really good communication plan in place right now,’ recommends Byars.
We all know dealing with the unexpected is in the normal course of duties for an IRO, says Byars. But a crisis like bankruptcy doesn’t erupt in a single moment, so there is time to implement a communications plan. Sheehy says the key to a communications plan is making sure you understand all the information needs of your various audiences. Then the investment community needs to understand what this means – how we got here, what we are doing, moving out of Chapter 11 as quickly as possible and what it will mean in the longer term.
A workable plan doesn’t have to be a full manual replete with diagrams. It can be a simple bullet-point guide listing the steps you plan to take at different stages of the bankruptcy. A plan is only as good as the ability to modify it as you go. There is no way to anticipate what can go wrong – or right for that matter – particularly in a crisis situation. Even having the phone numbers of the key players at your fingertips, recommends Byars, will help you through a crisis.
Sheehy is emphatic that a plan is integral to effectively handling any crisis including bankruptcy. However, she takes it one step further and adds, ‘Many companies have crisis plans in general for situations like product recalls or tampering and executive reorganizations, but a lot of them don’t pay as much attention as they should to the communications part of it.’
So having a workable plan is only one phase of the process; you then have to proceed to communicate it to your intended audience – the shareholders. When it comes to dealing with bankruptcy, a communication strategy would be more effective if bolstered by a company’s credibility. Credibility, according to Byars, should be part of the core character of the company pre-crisis. If this is in place the IRO is in a position to achieve a better end result and may have an easier time helping shareholders to swallow the bitter pill called bankruptcy.
Balance sheet bother
Christopher Farage, a director of corporate communications marketing at Ohio-based PolyOne Corporation, says it’s in a crisis that an IRO’s communication talents really come to the fore. He says ultimately the way a crisis is handled depends on the skills of the communications professionals who decide what has to be done, when and by whom.
If an IRO has built a reputation for integrity by regular, clear and honest communications over time, disclosing the company’s performance both good and bad, then delivering the bad news may be easier when bankruptcy is unavoidable. It’s about being proactive when there is information that is important and not having to wait until you’re forced to respond to questions from the financial community or press.
Integrity is important especially during Chapter 11, Farage adds, because it will help IR professionals remember there are real people behind the investment community – with real money and real needs. ‘It’s a serious matter,’ he says. ‘There are investors that have lost a great deal of money. And IROs have got to keep that in mind because during a bankruptcy, for the most part value is destroyed and people are trying to judge whether they are going to get that value back again.’
In a bankruptcy, ‘The number one communications objective is to separate the operational issues from the financial issues,’ according to Franco. The fact that the company has a capital structure that is inappropriate does not necessarily mean the business is bad. It could be that the business is very good but that the balance sheet does not support it. It’s a fundamental message that has to be delivered to all constituencies: ‘good business, bad balance sheet.’
Look no further than recent stories in the press about Kmart to see how well the CEO is communicating with the investment public, says Sheehy. She says Kmart’s CEO, Charles Conaway, seems to be saying, ‘We’re trying to get through this as quickly as possible. We are going to be repositioning. Perhaps going head to head with Wal-Mart was never the best strategy and we are going to come out with a new identity.’
Even if Kmart does come out of its bankruptcy as a stronger company, it may not have the same equity base as it had before. Chiquita Brands International recently emerged from Chapter 11, issuing 40 mn shares of new common stock and 13.3 mn warrants for the purchase of new common stock. Old equity holders receive 7.1 shares of new stock for each 1,000 shares held, plus warrants allowing the holder to buy 119 shares of the new stock.
This isn’t always the scenario. More often than not, says one security lawyer who does not want to be named, shareholders may find themselves with reduced ownership and/or less share value: ‘The reality is, if your company is filing for bankruptcy, the IR officer doesn’t get the easy part to play.’ Communicating to equity shareholders that they are at the very bottom of the priority list in order of who gets paid first is not a straightforward task, and when speaking to employees who are also shareholders, a fine balancing act needs to be performed.
Messaging consistently and factually will make a big difference in the long term if the company emerges from Chapter 11 a stronger enterprise. Some companies may enter bankruptcy a few times. Such was the case with the supermarket Grand Union and the airline TWA. It makes sense that you don’t have to start from scratch to rebuild the investing public’s trust in the newer company.
Don’t spin
Still, maintaining control of negative publicity can be tough, particularly if you are getting bad press. Take UK telecoms company Energis. It recently saw a precipitous slide in its share price because of growing worries that it would not be able to restructure its debt, and as a result the press was predicting its demise. JP Morgan analysts were quoted saying there would be minimal value for equity shareholders unless the company found a buyer for its European assets – a scenario they found unlikely.
A London corporate communications professional comments on Energis: ‘The whole thing is about managing shareholder expectations, and trying not to have any surprises. But its presence in the press has been widespread. There has been little room for dialogue and it’s been very difficult to get everyone to stand back and look at the longer-term picture; and that’s everyone from the investor to the analyst through to the company staff.’
Difficult as the job may be, it is essential that IROs communicate factually, directly and honestly about shareholder prospects, which can mean admitting you don’t know what the prospects are. When you’re talking to shareholders, obviously make sure that everything that you say is true. You have to be complete in what you say.
‘I think that a good answer is to say that in a bankruptcy case it is very difficult – if not impossible – to predict what the participation of equity will be until the company finally comes out of Chapter 11,’ advises Jacobson.
It is a monumental mistake to adopt the guiding principle, ‘We have a bad situation and we have to figure out how to spin it and make it look like a good situation.’ That is absolutely the wrong approach, urges Farage. The right approach, he says, is this: ‘We have had a bad situation and we are going to tell the owners of this company what the situation is and what we’re doing to fix it.’
An IRO will have to explain to shareholders, first, that equity may not survive at all; and second, if it does, what its value might be. Finally, honesty requires conceding that until there is a reorganization plan, it’s virtually impossible to accurately predict that value.
