The front-page corporate scandals kicked off by Enron have forced IROs to rethink their crisis communication plans. Nowadays, if a company doesn’t come clean at the first hint of trouble, investors pull the trigger first and ask questions later. ‘Disclose information as soon as possible’ is the mantra for companies in a tight spot. How you handle a crisis makes the difference between long-term damage to shareholder value and a temporary dip in stock price.
Ironically, a crisis can give management the opportunity to prove their mettle, while IROs earn serious Street cred by keeping the information flow going. Companies taking the ostrich approach usually get punished for it. Look at Adelphia Communications, which clammed up when senior management was accused of fraud. No wonder it ended up in Chapter 11, points out Scott Cleland, CEO of independent research firm Precursor Group. ‘Get the news out because no news is suspicious,’ he says.
‘It will not get any better with the passage of time so it’s best to tackle the tough facts up-front,’ advises Michael Wagner, a Baker & McKenzie partner specializing in litigation and crisis management. ‘People will be much more willing to forgive – even if the market won’t in the short term – an honestly acknowledged shortcoming that is being capably addressed than to reward a bad fact that has been concealed.’
That was certainly true for Allied Irish Bank, a company that impressed the Street by responding quickly to a case of massive fraud. In February 2002 AIB found out that a rogue trader in Baltimore had hidden around $750 mn in losses at the bank’s US arm, Allfirst. Within 24 hours AIB’s crisis team informed investors of the bank’s estimated losses, affirms Alan Kelly, head of IR.
‘Our credibility is called into question when a fraud like this is discovered because it raises doubt about the quality of our controls,’ Kelly notes. ‘The only thing to be done in a situation like that is to be very honest and open with the market and your investors. That’s a key learning point and certainly it was the tack we adopted from day one.’ AIB also commissioned an independent investigation whose findings were later made available to investors.
In April this year AIB took home three awards including the grand prix at the first annual IR Magazine Ireland Awards – not despite the scandal but perhaps because of it. As one investment pro said in the awards survey, ‘AIB did so well in difficult circumstances – a textbook approach that paid off.’
Jari Laaninen, director of group treasury and IR at Perlos Corp, tells how when an unexpected walkout at three of the Finnish company’s four factories halted production, it immediately put out a press release to prevent rumors spreading. By limiting the number of spokespeople to two, the IR department ensured that one consistent message reached both investors and the media.
‘We managed to get through the facts so the incident did not create any strong negative publicity,’ concludes Laaninen.
Indeed, IROs should play a central role in developing the public response to a crisis, always cognizant of the danger of management singing without a hymn sheet. Hank Boerner, managing director at the New York-based IR agency Rowan & Blewitt, insists that channeling information though one voice eliminates discrepancies and guarantees that disclosures are consistent with Reg FD.
At least say something
Even in the most serious crisis situations, there is value in communicating what few details you can. Lawyers who once put the brakes on PR and IR at crisis time now see that ‘no comment’ can scar investor trust for years to come. Even when ‘no comment’ is unavoidable, says Craig Roeder, another Baker & McKenzie partner, you should keep communicating and explain to investors the internal risk controls coming into play.
Sometimes people read more into a situation because they are lacking information, Roeder explains. A simple statement saying the company is cooperating fully with regulators and will make announcements when there is more information sits better with investors, he concludes.
This was HealthSouth’s approach when the SEC and the Justice Department launched an accounting probe in March. It fired off a press release describing how ‘agents from the Federal Bureau of Investigation served a search warrant at the company’s corporate headquarters,’ emphasizing it was cooperating fully with authorities.
Of course the criminal investigation meant HealthSouth’s crisis team couldn’t say much publicly. Instead the focus was on reassuring employees, insurance contractors, patients and physicians that services would continue uninterrupted. Coincidentally, just a week earlier HealthSouth had hired Euro RSCG Life NRP, a New York healthcare marketing communications agency (formerly Noonan Russo). Ernie Knewitz, a senior vice president at the firm, found himself HealthSouth’s appointed spokesman when the crisis hit and stayed on as IR and PR counsel until April 2003. He says press coverage from the first two weeks proves the effectiveness of a proactive communications strategy. ‘The theme we wanted to get across was that HealthSouth is committed to patient care,’ he recalls. Knewitz reckons he was quoted over a 100 times saying, ‘We need to continue to have patients coming in for their treatments and we need the insurance companies to realize that as well.’
HealthSouth’s key messaging didn’t necessarily cater to the investment community, but the IR team still played a central role. ‘What was important from an IR point of view was to be very forthright and thorough about what we knew and didn’t know,’ says Susan Noonan, president of Euro RSCG Life NRP. ‘Investors really appreciated that because there was no way we were going to spin this into a better situation. It was very important to be factual.’
A 24-hour hotline was set up to centralize communications and deal with media and for the first few weeks the management team held three meetings a day to analyze media coverage and develop its message to the press and investment community.
At the helm
When emotions run high, making your CEO more visible can help to calm both the investment community and the media, says Paula Norton, director of IR at United Parcel Service. If the CEO shuns the media spotlight at a critical time, ‘It looks like they are hiding for some reason or downplaying the importance of [a crisis] by having less responsible people in the company handle the problem,’ she adds.
Norton is no stranger to crisis communications. Around nine years ago, while head of IR and corporate communications at Terra Industries, an agricultural firm, there was an explosion at one of the company’s manufacturing operations, killing four people and injured 18 others. Burt Joyce, then CEO of Terra Industries, stepped up to the plate and properly conveyed his concern for victims and their families through the media. His leadership throughout the crisis helped the company weather the storm, says Norton. Joyce had good media relations in place prior to the accident so he was willing to be primary spokesperson.
Joyce’s media presence and Norton’s ability to communicate quickly and openly had a direct impact on shareholder value. Indeed, says Norton, Terra’s stock price ended up higher the week of the accident.
Be prepared
The old boy scout motto, Be prepared, pays off for a crisis team, especially the IRO. Having a pre-crisis plan in place is the second most important factor for weathering a corporate storm; the first is keeping a very open communications culture, says Blair Christie, senior director of investor relations at Cisco. She says Cisco’s crisis team runs mock drills of corporate or product crisis situations so they can be fully prepared for the real deal.
When the press got wind that Cisco was considering laying off workers two days before its planned announcement back in April 2001, the crisis team was able to develop the message plan quickly and get the word out. ‘We were on the phone at midnight,’ reports Christie. ‘We put in place a step-by-step plan to contact the financial community prior to the market opening the next day, making sure all the information was out there and that the analyst community and investors got a proactive phone call from the investor relations group so they understood exactly what was entailed.’
Mark Aaron, vice president of investor relations at Tiffany & Co and chairman of the National Investor Relations Institute (Niri), agrees that IROs should have a crisis plan in place, just in case. ‘Whether the plan is formal or informal, people should know what to do and how they need to swing into action,’ advises Aaron. And, he adds, being able to inform the chief executive or the CFO of issues that might have caused the crisis, or of potential issues that might arise and continue to create problems, is an essential challenge for investor relations professionals.
Openness pays off
A crisis reputation study by Oxford Metrica, a global independent strategic advisor, shows a correlation between companies with open communication policies and shareholder value. Oxford Metrica looked at the share prices of Air France after the Concorde crash and Japan’s Bridgestone after it recalled 6.5 mn tires, which have since been linked to 174 deaths and hundreds of injuries. The goal was to discover why some companies recover from a reputation crisis better than others.
Both crises happened in summer 2000 and involved many deaths. Both companies also had strong public brands. But there were four key differences that may have influenced stock values in the ensuing months. First, the Concorde crash was sudden but Bridgestone tires had apparently produced complaints for several years. Second, the crash took place on home soil while the Firestone accidents happened far away from Bridgestone’s Japanese headquarters. Third, there was no similar substitute for Concorde travelers but there are plenty of other quality tires. Finally, the crisis communications initiatives taken by Air France and Bridgestone were very different. Air France’s chairman, Jean-Cyril Spinetta, was highly visible and communicated effectively in the aftermath of the accident. He went straight to the crash site and made sure all Concorde jets were grounded, establishing clearly that safety was his main concern. Spinetta also showed concern for victims’ families by attending funeral services. Within a few days of the crash Air France’s stock had only dropped 5 percent and it continued to rise thereafter.
Bridgestone, on the other hand, declined to comment following its tire recall. In the first 50 days of the crisis Bridgestone’s stock plunged 50 percent. As one analyst said, ‘A more consumer-oriented executive was required to improve communication with customers and US federal agencies.’ That’s one reason why Bridgestone president Yoichiro Kaizaki resigned January 2001.
