Rating the Top 10 Crises of 2003: Part II
Charting the future of public relations
Holmes Report
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Rating the Top 10 Crises of 2003: Part II

Paul Holmes

4. The Kozlowski Trial

In 1998, L. Dennis Kozlowski, then chief executive of Tyco International, moved into a Boca Raton mansion complete with pool, tennis court and fountain. Kozlowski was one of America’s best-paid corporate executives, but he didn’t have to spend a nickel of his own money on the new residence. Instead, he paid for it with a $19 million, no-interest loan from Tyco. In 2001, the company reportedly forgave the entire loan as part of a “special bonus” program, then to cover Kozlowski’s income taxes on the forgiven loan, the company even kicked in an extra $13 million. (The sweetheart deal was not disclosed to Tyco shareholders.)

Kozlowski resigned on June 2, 2002, the day before the Manhattan district attorney charged him with evading more than $1 million in New York state sales taxes on his purchases of art. He pleaded not guilty to those charges. But since then, critics have charged that more than $135 million in Tyco funds went to benefit Kozlowski, largely in forgiven loans and company payments for real estate, charitable donations and personal expenses.

Now Kozlowski and Mark Swartz, Tyco’s former chief financial officer, are on trial in New York State Supreme Court in Manhattan, charged with improperly using company funds to enrich themselves and others. They have become the poster boys for the corporate greed that led to the accounting scandals of the past two years, Each faces up to 30 years in prison.

The highlight of the case so far was a videotape of a lavish party thrown by Kozlowski for his wife. The tape featured scantily-clad models in Roman-themed attire and Kozlowski telling guests, “It’s going to be a fun week. Eating, drinking, whatever. All the things we’re best known for.” Prosecutors contended that Tyco footed the bill for most of the $2 million, weeklong party. Kozlowski’s lawyers say Tyco business was conducted at the party, making it a legitimate business expense.

But whether the video is legally defensible, it’s a public relations nightmare for defenders of the laissez-faire economy.

“Not even greed poster boy Gordon Gecko appeared as wanton as former Tyco International CEO Dennis Kozlowski after a videotape of his wife’s Sardinian birthday party was screened for jurors in New York.” Says Fineman. “The event served to further promote American business as corrupt and the refuge of scoundrels.”

The media coverage is intense, in part because reporters were among those who fell for the Kozlowski hoopla when he was riding high.

“I am generally a very strong supporter of our friends in the financial press and respect the professional job they do,” says Abernathy’s Steve Frankel. “But boy did they miss this story. For years, Dennis Kozlowski—serial acquirer—was the greatest CEO since Jack Welch. He could do no wrong in the media’s eyes.  Then, of course, when all his financial shenanigans, his extravagant lifestyle, and the extramarital affairs came to light, the media had a field day at his expense.

“The lessons here are one, don’t believe all your press clippings; two, just because the media misses the story for awhile doesn’t mean they won’t eventually find out what you’re up to; and three, don’t do anything you wouldn’t be embarrassed to read about on the front page of The New York Times.”

To its credit, Tyco itself has been quietly reinventing itself, under new management that emphasizes ethics and integrity. And it has been building a strong communications team—including public relations, public affairs, and investor relations staff—that gives the company a fighting chance as it moves forward: although distancing itself from the Kozlowski story will be difficult.

Meanwhile, as far as the former CEO is concerned, the worst may be yet to come.

“From the pre-trial publicity to the daily ‘Kozlowski Show’ in the courthouse, one has to wonder whether the high spot for the defendants will end up being the Roman-toga party tape,” says Tortorella.

Grade (Tyco): A-
Grade (Kozlowski): D-

5. AARP’s Medicare Revolt

One of the ways to identify an organization that has lost its ethical compass is to look for signs of intellectual dishonesty in its communications. If you buy that premise, you have to acknowledge that the AARP (formerly the American Association of Retired Persons, but now merely an acronym) is in some serious trouble.

The AARP made a lot of headlines when it decided to support a Republican proposal for Medicare reform that will expand prescription drug benefits for some older citizens, but which also seems designed to undermine Medicare over the long-term, possibly paving the way for a privatization of the system.

There are questions, obviously, about whether the elderly will benefit from the reforms, but you wouldn’t know that from the AARP, which fielded and then publicized a survey designed to show that most of its members supported its position. For example: “Even if this plan won’t affect you personally either way, do you think it should be passed so that people with low-incomes or people with high drug costs can be helped?”

If the people who were being surveyed were familiar with the bill, that might not be such a bad question, but 62 percent of those polled said they were either completely unfamiliar or not very familiar with the specifics of the Bill. Given their unfamiliarity, they had to take AARP’s word for it that the bill would, in fact, do what the question said it would. But that’s the very point that’s under debate.

So when the organization put out a statement claiming that “a resounding 75 percent of AARP members polled… said that the proposed Medicare legislation should be passed because it will help low-income elderly and those with high prescription drug costs,” it was using one of the sleaziest techniques in the business. You don’t do that if you have an intellectually defensible position.

In the week after its announcement, 15,000 members quit the group over its position, and many more say they plan to do so when they come up for renewal. They have come to recognize that the AARP these days is less a member association than just another big insurance company. Perhaps it’s not a coincidence that it’s being run by Bill Novelli, who as a PR guy represented the pharmaceutical companies that are such big winners in the GOP’s “reforms.”

This is a true crisis of values for the AARP, which looks more and more like a just another big insurance company than a membership organization.

“Regardless of the merits of AARP’s decision, the organization’s journey was strewn was missed opportunities and what, from the outside, looks like a poorly thought out campaign to tell its story and set the stage with their angry, confused, and frightened members,” says Schannon. “In effect, AARP allowed its opponents to paint it as industry and Republican tools before it was able to present its side of the story.

“When attacked from all sides, they didn’t respond simply, aggressively, and continually—three essential ingredients for a successful defense.  Language such as, ‘Though far from perfect, the bill represents an historic breakthrough and important milestone in the nation’s commitment to strengthen and expand health security for its citizens at a time when it is sorely needed,’ is policy-wonk speech. Worse, it doesn’t do anything to ease the emotional trauma of their members.”

Grade: C
 
6. Chevron-Texaco

No matter how small and apparently powerless your opposition may be, they can still cause serious disruption to your business. That’s one lesson oil giant ChevronTexaco is learning from its ongoing troubles in Ecuador.

In fact, impotence is a form of power. What groups like the Huaorani Indians who made their way up the Amazon to the courtroom to hear—and give—evidence against the U.S. company lack in wealth and the influence to sway politicians, they more than make up for in moral authority, the ability to earn a sympathetic ear from the media and from the public at large.

ChevronTexaco stands accused of polluting the rain forest. (From 1964 to 1992, Texaco Petroleum Company—a subsidiary of Texaco—was a minority partner in a government-owned oil consortium. Petroecuador, the state oil company of Ecuador, was the majority partner. After 10 years of unsuccessful litigation in the U.S., a group of lawyers has now brought a lawsuit against ChevronTexaco in Ecuador alleging damage to the rainforest.)

In its legal defense, ChevronTexaco has repeatedly made the case that it broke no laws. “We did everything that we were supposed to do,” Ricardo Reis Viega, the company’s general counsel for Latin America told a news conference last month. “We have been released [by the Ecuadorean government] of any additional work that might be necessary.”

That argument might be sufficient for the company to prevail in a Latin American courtroom, but it’s a shameful defense to mount in the court of world opinion. The standard to which western corporations should be held accountable—and increasingly are being held accountable—is whether they behave in developing countries any differently than they would in their domestic markets. Would ChevronTexaco have dumped so much oily waste in California? Would it then have felt no obligation to the community to clean up after itself?

Critics of multinational corporations who fear that globalization will make them stronger and more pervasive fail to appreciate the impact that global transparency can have. Today, global media are able to shine an unprecedented spotlight on the overseas activities of large companies, and increasingly American consumers are showing their displeasure.

That’s the other lesson from this crisis: companies that operate overseas are increasingly being held to American standards of behavior, ethics, and social responsibility, regardless of local laws. Child labor may be legal in some companies, but don’t expect American consumers to continue to buy from companies that exploit that fact. Environmental laws may be more lax in other countries, but don’t expect American consumers to rein in their outrage when companies take advantage of those lax laws.

Grade: B-

7. Don Carty’s Departure from American Airlines

When Don Carty took over as chief executive of American Airlines in 1998, one of his priorities was repairing the fractious relationship between the nation’s largest carrier and its employees.

Carty was not the most charismatic leader in the airline industry—colleagues have described him as “distant” and difficult to get to know on a personal level—but until this tear ago it looked as though he was succeeding in building a more collaborative culture at American, convincing the unions that management and labor could work together to save the company from following competitors like US Airways and United Airlines into bankruptcy.

Hammering away at themes such as “shared sacrifice,” Carty had convinced labor leaders that “we are all in this together.” And by March 21, the union bosses had accepted a package of concessions that would hopefully be enough to keep the airline out of Chapter 11. It was a triumph for management, but one that was short-lived. Within days of the vote, labor leaders learned that at the same time it was asking their members to make sacrifices, American was putting in place huge retention bonuses—up to twice their base salary—for seven top managers and creating a special trust to protect the pensions of 45 senior executives.

“Carty’s ploy demonstrated the need for core values and internal brand messaging,” says Fineman. “You don’t get loyal, repeat purchase consumers unless they trust the brand. Similarly, without a foundation of earned trust, workers won’t cooperate or provide support for management initiatives when they are most needed.”

Workers were outraged, and by the end of the week John Ward, president of the Association of Professional Flight Attendants had sent American chairman and chief executive Don Carty a letter telling him that the union intended to re-ballot its membership. Given that the airline’s plan was approved by the slimmest of margin, and that workers’ confidence in Carty and his team must now be about zero, it’s quite possible the flight attendants will now reject the plan.

There’s certainly room for debate about whether the retention bonuses were appropriate. They are not unusual in these circumstances, and are often justified on the grounds that key personnel might otherwise be lured away from a troubled company. On the other hand, they are rarely tied to performance, and they undermine the notion that “we are all in this together,” which is key to motivating employees to rally around.

But there’s no room for discussion about the company’s failure to be up front about the bonuses. Executive compensation is one of those topics on which there ought to be total transparency, because it has the potential—as seen here—to completely undermine the relationship between an organization and its employees.

If management doesn’t believe it can convince employees that its compensation is justified, the chances are it isn’t. (The other possibility is that management doesn’t have confidence in the ability of its communications professionals to present its case effectively.)

To his credit, Carty quickly announced that he was scrapping the executive compensation plan (though not the pension protection scheme) and admitted that failing to disclose it during the negotiations was a big mistake. Not surprisingly, Ward was unimpressed: “No doubt, this cancellation is only a result of the fact that they were caught with their hands in the cookie jar,” he said.

And so Carty was forced to step down at what could have been the moment of his greatest triumph. “It is now clear that my continuing on as chairman and CEO of American Airlines is still a barrier
that, if removed, could give improved relations—and thus long-term success—the best possible chance,” he told reporters.

The big question remains: where were the public relations counselors who—if they were involved in the decision-making process, and if they had the courage to give appropriate counsel—could have told Carty he was making the biggest mistake of his career?

Part III

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