Lessons Learned from the Top 10 Crises of 2002
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Lessons Learned from the Top 10 Crises of 2002

The year 2002 was a year in which individual companies suffered catastrophic crises, but it was also a year in which American business as a whole suffered a chronic crisis, as constituents began to question whether the entire system was corrupt.

Paul Holmes

The year 2002 was a year in which individual companies suffered catastrophic crises, but it was also a year in which American business as a whole suffered a chronic crisis, as constituents—shareholders, employees, regulators, the public at large—began to question whether the entire American corporate system was hopelessly corrupt.

Ordinarily, such an epidemic of ill-considered corporate behavior would have elevated the role of the senior corporate communications executive to a permanent place in the CEO’s inner circle, and provided a bonanza of new business for public relations firms. But in 2002, those gains conspicuously failed to materialize.

“The past year was filled with what seems like an unprecedented number of very widely publicized and unusually intriguing crises,” says Craig Martin, managing director of the Washington, D.C., office of Ruder Finn. “Corporate giants Enron, Tyco, and Worldcom tumbled, and cultural icons Martha Stewart, Jack Welch and Augusta National were humbled, albeit to varying degrees. 

“But the circumstances that separated the fatally wounded from the bruised-but-still-standing in a few of these cases may have been largely outside the communication professional’s area of control.”

Certainly, there was no way to spin the kind of outrageous personal and institutional behavior that gave rise to these crises. (And many of the executives involved were more concerned, rightly, with staying out of jail than with defending themselves in the court of public opinion.)

Says Sam Singer, president of San Francisco-based Singer Associates, “Enron, WorldCom, Tyco, Martha Stewart, Sandy Weill and Jack Grubman: this group of crises stand out from other years because corporate malfeasance and wrong-doing was their cause. There is no proper way to spin these stories. The question is not if the scandals damaged Wall Street—and Main Street—but how bad and how long the damage will last.”

Loretta Ucelli, who heads the crisis practice at Edelman, agrees: “The major crises of 2002 can definitely be viewed as part of one big story with separate elements. Americans lost faith in 2002—faith in corporate America, faith in religious and spiritual leaders.”

But the proper role for public relations professionals in these crises—at least after the fact—was often unclear.

Says consultant Sam Ostrow of Ostrow & Partners, “Tyco was not a public relations disaster; it was theft. Enron was not a public relations disaster; it was fraud. Jack Welch’s divorce was not a public relations problem; it was adultery. The Catholic Church’s problem is not a public relations problem; it is pedophilia. When our profession thinks of theft, fraud, adultery and pedophilia as problems to which our discipline can be applied, we have lost our ethical compass.”

But if there was little public relations people could do after the fact to defend the indefensible, there are questions about whether public relations people were doing their jobs before the crises occurred. In at least some of the cases described below, it seems clear that a decision making process that balanced stakeholder concerns with operational, financial, and legal consideration could have helped companies stay out of trouble.

Having said that, the crises of 2002 provided a reminder of some of the old lessons of crisis management. Says Martin, “It is quite clear that those organizations and individuals that seemed to fare the worst in weathering their respective disasters were those that failed to quickly and credibly explain the behaviors in question, demonstrate any remorse, or seek to rectify their actions in any meaningful way without being forced to do so.  

“This left the media and an increasingly fearful public free to speculate about the actions and motivations of those involved, and in turn pushed policy makers and investors to inflict strong punishments….  A lawyer’s stern warnings not to apologize or take responsibility in any way may be reasonable advice for the courtroom, but it’s a losing strategy in the court of public opinion.”

At the same time, there was evidence that the conventional wisdom of our profession does not apply in all situations.

“One overarching take-away from the last year is that the generic rules of crisis communications, and indeed public relations, don’t always apply,” says Careen Winters, who heads the crisis practice at The MWW Group. “Take the issue of CEO branding, long thought to be a sound strategy for every business. The events of the past year call into question whether having a CEO who is the company is always a good thing. Do the problems of a specific CEO, if they are large enough, hurt a company and its image more so that a low-profile CEO? Does putting that personality out in front always work? 

“We would argue that it doesn’t. Take the case of Martha Stuart, happily chopping her vegetables or Mrs. Ken Lay’s tearful Today Show appearance. These certainly didn’t help their companies’ causes.”

Yet there may not be much corporate public relations people can do about the cult of personality, which is driven by the media as much as by the CEOs themselves.

“It is interesting to note that the usual run-of-the-mill-recalls, brand issues, and product contaminations that crisis managers usually deal with are notably absent from this year’s list,” says Al Tortorella, a crisis communications specialist at Burson-Marsteller. “The list is personality driven, rather than institutionally driven. 

“This is important because it suggests the media instinctively understands that what happened at most of the organizations will never be understood by the overwhelming majority of Americans. Therefore, the media features the personalities involved as being ‘the problem,’ and, paradoxically, also responsible for ‘the problem’—which, of course, is hardly ever explained except superficially.”

Ucelli agrees. “In most cases, the failures of the people became the story—overshadowing the larger problems with the system,” she says. “But in some cases—Martha Stewart, the Catholic Church, Arthur Andersen—admitting to their mistakes could have eased the crises and placed the leaders in question on a more proactive path to recovery.”

The following are the top 10 crises of 2002, as ranked by media analysis conducted by New Hampshire research firm KDPaine & Partners.

1. Enron, Worldcom, Tyco and beyond

It all began with Enron, one of the highest of all the high-flying corporations of the 1990s, an energy trading company that had catapulted into the upper reaches of the Fortune 100. At the beginning of 2002 it had already become apparent that the enormous profits Enron had recorded in recent years were a fiction, that the company was in fact mired in billions of dollars of debt.

Aided and abetted by accounting giant Arthur Andersen, Enron had hidden its debt from the investing public through a series of about 3,000 subsidiary companies called “special purpose entities” that served as repositories for assets and debts that would otherwise have shown up on Enron’s balance sheet. As the Byzantine fraud became apparent, senior executives who had hobnobbed with Presidents found themselves facing tough questions from same legislators who had been their accomplices in dismantling the regulatory mechanisms that could have contained the crisis.

Enron was the biggest bankruptcy in U.S. business history, but it was only able to hold that title for a few months before being eclipsed by WorldCom, which restated $3 billion in earnings that turned out to be non-existent, and then somehow found an additional $7.3 billion in fictional earnings to secure its place in the business hall of shame.

“When… actual earnings faltered, WorldCom’s top management resorted to a smorgasbord of manipulation to falsely inflae… earnings,” according to a report by former U.S. attorney general Richard Thornburgh, appointed by the bankruptcy court to untangle the mess left behind by charismatic CEO Bernie Ebbers and his team.

But at least Ebbers (and Enron’s Ken Lay and Jeffrey Skilling) have so far, somehow, avoided criminal prosecution. The same can’t be said for Tyco International chief executive Dennis Kozlowski and his CFO Mark Swartz and general counsel Mark Belnick, all charged with looting the company of a phenomenal $600 million.

Tyco was “really two interrelated stories,” says Chris Atkins, who heads the corporate practice at Ketchum. “The Dennis-Kozlowski-corporate-treasury-as-personal-piggybank story, and the unprecedented abdication of responsibility by the Tyco board of directors. Between the two, they did more to damage the perception of business than the robber barons.”

Clearly, there was a massive failure of morality within the three companies—and several others that failed to make quite as many headlines—but there were also failures of communications. When investor and public relations professionals are used to lie to various stakeholder groups, even unknowingly, they become part of the problem. If they are mere mouthpieces for management, they forfeit the right to be called counselors and become mere flacks.

All of the companies involved in these crises seemed to share a contempt for their stakeholders, and for the need to communicate with them.

Jonathan Bernstein, who heads crisis communications specialist Bernstein Communications, says one mistake was that Enron management did not appear to have begun crisis management work until after the situation became public. When it did address the issue publicly “it treated the media like the enemy and addressed only the facts, not the feelings of those impacted.”

In an era of transparency, such an attitude is untenable.

“These cases have taken what was traditionally a corporate story and turned into tabloid fodder,” says Winters. “From a public relations, all corporations face greater scrutiny and skepticism of their communications from financial news to corporate activity. This is raising difficult questions for communications counselors developing strategies in the aftermath of these cases. How successfully should a CEO be branded, and how closely should he or she be tied to the corporation?”

The final lesson from these crises, perhaps not so obvious, is that communicators need to be advocates for a balanced, stakeholder-driven approach to management. Enron, Worldcom, Tyco and the rest all suffered from a philosophy of management that elevates shareholder interests—or, more accurately, quarterly results—above the interests of other constituents. An approach that took a more long-term perspective, that balanced employee, customer and community needs with those of shareholders, would undoubtedly have led to a different management approach.

For their handling of their respective crises, Enron, Worldcom and Tyco earn a collective D-.

2. The Divorce of Jack Welch

“It raised shareholder eyebrows anew to learn the extent of GE-paid services that Mr. Welch is entitled to, from cars and airplanes to financial planning, home gadgets and use of a GE apartment,” the newspaper article observed. “What? No retinue of grape peelers? These goodies are in addition to the vast bundle he took home in stock options, a conventional retirement package and an ongoing consulting relationship under which GE pays him $86,000 for five days of work a year. He couldn’t offer free advice if successor Jeffrey Immelt called?”

It would be one thing to read that kind of scathing assessment of the world’s most admired CEO in a bastion of the liberal media, but those words appeared in The Wall Street Journal, a pretty profound indication that the national mood had turned unsympathetic toward over-compensated CEOs—even those with stellar track records now enjoying their retirements.

In fact, the story of Jack Welch—caught in an adulterous affair with a Harvard Business Review editor and then sandbagged by his wife, who revealed all the details of his severance package in divorce papers—resonated to such an extent that it got more media coverage than any other single crisis in 2002: 787 stories in major media, according to research by Katie Paine of KDPaine & Partners.

The crisis taught two important lessons. The first is that celebrity CEOs (and Welch was one even before he shared his business philosophy in the best-selling Straight From the Gut) are likely to be held to a higher standard. Says Singer, “This was simply the best soap opera of the year. Game set and match go to Mrs. Welch. You have to love a good fight and a great fighter. She and her attorneys should run the next presidential campaign.”

The second is that even the best performing CEOs will be held accountable if they are perceived to be exploiting their positions for excessive personal gain.

Having said that, Welch scores high marks from most practitioners for his swift response to the crisis, which included a decision to give up many of the perks to which he was contractually entitled.

“Too many CEOs lose their story when managing the crisis,” says Thomas Barritt, who heads the crisis management practice at Ketchum. “By contrast, you see someone like Jack Welch, who enjoyed many years of good will, only to be caught up in the negative media backlash against corporate figures in 2002. While you can debate the pros and cons of the criticism against Welch, he is clearly one who understands what it takes to protect reputation and stop the bleeding. Within a few short days, Welch took control and was appearing in the media presenting his solution, which addressed the criticism and neutralized the story. 

“Welch provided one of the best examples of taking charge and changing the direction of a story among the many reputational crises of 2002.”

For doing the right thing in the face of criticism, Welch gets a B+.

3. Augusta National Golf Club

When Martha Burk of the National Council of Women’s Organizations wrote Augusta chairman Hootie Johnson to challenge the clubs, she was swiftly and publicly rebuffed. Pro golfers quickly made it clear that they were not going to sacrifice the opportunity to play in the Masters in order to end the apartheid at Augusta, and when the Burk threatened to take her case to sponsors, Johnson trumped her by ending the tournament’s relationship with Citibank, Coca-Cola, and IBM.

So now Burk is targeting CEOs who enjoy membership privileges at Augusta, a group that includes such luminaries as Warren Buffet, Bill Gates, and Sandy Weill—as well as William Harrison of J.P. Morgan and Chris Galvin of Motorola, who were honored with leadership awards by the Business Women’s Network and Diversity Awards.

In a letter to those CEOs, Burk warned that membership “sends a message to your customers that [your] company’s statements on discrimination are hollow and insincere.” The NCWO later launched a website, www.augustadiscriminates.org, featuring a Hall of Hypocrisy that includes companies such as AT&T, ExxonMobil, Ford, IBM, and Viacom.

As far as the CEOs of these companies are concerned, “It’s only a crisis if they feel it’s a crisis,” says Geduldig. “I know guys who’d rather sell their first-born than have to resign from Augusta.”

John Snow, recently nominated as treasury secretary, resigned publicly from the club in an effort to disassociate himself from the club’s negative image, as did Sandy Weill of Citigroup. It remains to be seen whether others will follow as the pressure mounts.

But the very fact that pressure is being brought to bear on member CEOs indicates one of the new rules of crisis management, which is that companies no longer get to choose whether an issue—or a pressure group—is legitimate. In today’s environment the legitimacy of a stakeholder group is defined not by the company, but by the group’s ability to influence the company’s success or failure. And stakeholders get to choose the issues they consider relevant.

It remains to be seen whether customers, shareholders, and employees of Microsoft and Motorola consider discrimination at Augusta to be a serious issue in which those companies have a responsibility. But that decision will lie with the stakeholders, not the CEOs, and the story is a big one, with 769 articles in major media, according to Paine’s analysis.

Meanwhile, Augusta is getting mixed marks for its handling of the crisis. “This has become a battle of the stereotypes,” says Winters. “Boorish boys club versus shrill feminists. Each side has been reasonably effective at rallying its constituency, but Burk has been more effective at capturing the support of the media.”

Says Sue Silk, president of Chicago-based Citigate Communications, “Rather than addressing the public’s concerns, and explaining its reasoning behind the policy, the club had ‘no comment.’”

That helped to perpetuate the story, which has so far resulted in 769 articles in major media.

For Geduldig, however, the deciding factor will be whether Augusta can “weather the storm without compromising its values.” To this point, the club earns a surprisingly solid B for its management of the crisis. The CEOs who retain their membership at Augusta will be evaluated next year, depending on whether the issue has traction.

4. Sandy Weill and Jack Grubman

When the full story of this year’s corporate scandals is written, the deal under which Citigroup CEO Sandy Weill helped analyst Jack Grubman get his twins into preschool at Manhattan’s 92nd Street Y probably won’t merit much more than a footnote. But PR people have been scrambling to either deny or explain the sordid trade-off, not exactly covering themselves in glory in the process

Citigroup donated $1 million to the Y, and shortly thereafter, Grubman’s kids were accepted into the exclusive preschool. What seems likely, based on a flurry of e-mails, is that Citigroup’s generosity stemmed from its desire to see Grubman upgrade his rating of AT&T, probably in order to win the backing of AT&T CEO Michael Armstrong—who is on Citigroup’s board—in Weill’s battle for control with co-chairman John Reed.

The Y denied any impropriety and its PR director told The New York Times, “Every child—every child—goes through the same rigorous admissions process. The implication that a large donation—and it is by no means one of our largest—can grease the process is just not true. The only thing the Y takes into account is the children themselves.”

But Friedman’s denial came at the same time Citigroup issued a statement acknowledging that the donation was absolutely intended to help Grubman. “From the outset we have tried to make it clear: Mr. Grubman sought Mr. Weill’s help for the twins in the fall of 1999, and the contribution we ultimately made in the summer of 2000 grew out of that request,” read the statement.

That would have been wholly inoffensive had it ended there, but the company spokeswoman went on to claim there was nothing remarkable about Citigroup’s involvement: “This request is similar to many we receive from our employees asking for support for the community organizations in which they are involved.”

The contention that the average Citigroup employee—or even the average Citigroup exec—could walk into Sandy Weill’s office, express support for a worthy charity, and walk out with a $1 million check was frankly incredible. More to the point, Grubman was not just an employee but, in theory, an objective observer upon whom Citigroup customers depended for sound advice. The quid pro quo compromised his integrity.

Even worse, Weill appears to have used company funds for his own personal ends. The manipulation of Armstrong did not aid Citigroup; it aided Weill in his bid to control Citigroup, which earns a C- for its evasive—and frankly incredible—answers to questions about its CEOs motives.

5. Martha Stewart’s Insider Trading

It’s far from clear whether Martha Stewart will ultimately be found guilty of any wrongdoing as a result of her trading in ImClone stock, but there’s no doubt her reputation has taken a battering as a result of insider trading charges—and that many of the wounds are self-inflicted.

Martha Stewart’s response to the scandal was “a classic case of crisis management avoidance,” says Ketchum’s Barritt. “The domestic diva has left out a key ingredient in the crisis management recipe—there has been no management in Martha’s crisis management response.  From the moment the story broke the company’s message has been ‘no comment.’

“That’s unfortunate because until the scandal hit, Martha had been obsessively focused on the positioning of Martha Stewart Omnimedia as an arbiter of style and leading deliverer of ‘how to’ content for the home. Instead the story became one of ‘embattled CEO,’ and Stewart hasn’t offered an alternative that has refocused the discussion on the core attributes of the company.”

Given Stewart’s personal profile, untangling her fate from that of her company has been almost impossible, and the company seems to have tried—unsuccessfully—to keep itself out of the story. MSO missed an opportunity when speculation intensified that Stewart would step down. According to Barritt, the company should have issued a statement to the effect that “Martha has been the creative force behind this company from the beginning, and is critical to the future vision of the organization in developing and marketing creative ideas for living.

“Instead of playing to Stewart’s strengths, they’ve chosen to try and dodge the criticism,” Barritt says. “But all that’s left in the minds of shareholders is the negative press.”

According to Bernstein, Stewart is “another person who thought her reputation, alone, would carry her through unscathed, and who failed to address how her stakeholders might feel, who didn’t address their concerns but who simply responded with categorical denials and lack of cooperation with both the media and investigators.”

If Stewart is guilty as charged, he says, “a mild mea culpa delivered right away, and stated humbly, could have averted all but legal consequences and probably would have mitigated those to some degree as well.” If she is innocent, “she still needed to acknowledge and address the emotional impact on her stakeholders and fans.”

The main problem is that Stewart’s view of public relations appears to be out of date, says Richard Wolff, who heads the U.S. operations of U.K.-based public relations firm Huntsworth.

“Her experience with communications professionals has probably been extremely limited—largely to PR flacks who book her on TV shows and set up magazine interviews. Having a strategic communications consultant involved in her business in an on-going way would have meant that a decision not to be completely forthcoming would have been challenged internally.”

Stewart gets a D+ for her personal handling of the crisis, while Martha Stewart Omnimedia gets a slightly better C.

Continued here

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