The most striking aspect of last year’s largest corporate crises was the frequency with which they cost the CEOs involved their jobs.

The list of deposed CEOs includes Martha Stewart, Dick Grasso of the New York Stock Exchange, Don Carty of American Airlines, Phil Condit of Boeing, and a host of mutual fund chief executives caught up in the investigation of shady dealing in that industry.

Those looking for evidence that managing corporate reputation is one of the most important tasks for a modern CEO need look no further.

“These crises reinforce the importance of the CEO to an organization’s reputation,” says Thomas Goodwin, president of Step One Communications. “PR practitioners should be every more wary of emerging situations in their organizations that signal a blurring of the interests of the enterprise with the interests of its CEO or leadership.

“In the cases of Freddie Mac, Martha Stewart, the NYSE, Tyco, American Airlines and the mutual funds—and possibly the AARP—the CEO appears to have forgotten forgot who he or she was working for—or allowed others to do so.  The resulting adverse publicity and consequences fundamentally altered the infrastructure of each enterprise.”

CEOs have always been held accountable for the way their organizations responded during crisis, of course, but recent changes in technology, in corporate ownership, in transparency, and in societal expectations have made the margin for error incredibly slim—and the pace of retribution unbelievably fast.

“What surprised me over the past year is not the frequency of scandals but the speed with which they unfolded,” says Chris Atkins, who heads the corporate practice at Ketchum. “Phil Condit was gone practically overnight, and the mutual fund industry went from the shining city on the hill to a bunch of self-dealing scalawags in a couple of weeks. There is an intensity that the media bring to corporate scandal that was once reserved for the more salacious Michael Jackson, O.J. Simpson, JonBenet stories.”

Michael Weiser, president of The Weiser Group, a boutique communications consulting firm with considerable crisis experience, believes broader share ownership has changed the rules for businesses and their CEOs. “While greed and hubris have always been part of American business, widespread ownership of stocks has not,” he says. “Indeed, what separated the most recent market downturn from the scores that preceded it is that 90 million people participated in this one. That turned financial regulation, corporate governance and executive compensation from Republican issues into populist ones.

“CEOs, fund managers and others who otherwise would have expected political cover from a pro-business administration, find themselves exposed to crusading attorneys general, an empowered financial press and members of Congress with little choice but to act on behalf of the constituents who elected them.

“This climate is unlikely to change any time soon. The enactment of Sarbanes-Oxley and resulting SEC rule-makings have done much to democratize the running of public corporations by empowering those who represent the interests of investors.  Just as open primaries made the selection of presidential nominees by their respective parties a far more transparent process, open boardrooms will allow Eliot Spitzer, Phil Angelides, Nell Minow and many others to have profound impact on the decisions made by corporate management. 

“Life in the fishbowl is just beginning.”

1. The Mutual Fund Industry

After exposing the glaring conflicts between research and investment banking and engineering a $1.4 billion global settlement with Wall Street’s most powerful firms, Eliot Spitzer set his sights on the mutual fund industry and “left no doubt about his terrific political instincts,” says Abernathy MacGregor managing director Steve Frankel.

“Since half of all Americans own shares in mutual funds—either directly or through 401k and pension funds—Spitzer found an issue that resonates with nearly every ‘Average Joe.’  If the mutual fund companies had been paying attention when the investment banks were being raked over the calls for giving first dibs on IPO shares to their favorites clients—mostly CEOs—they could’ve pre-empted this crisis and realized that they can’t play favorites among their clients and give the biggest players—hedge funds in this case—preferential treatment.”

In September, Spitzer charged that several mutual-fund firms allowed a hedge fund to book millions of dollars in profits at other clients’ expense through improper trades. Canary Capital Partners, a fund led by Edward Stern, agreed to pay $40 million to settle charges, although it did not admit or deny wrongdoing.

That triggered an investigation by the Securities & Exchange Commission and by several states, and the scandal widened. Bank of America fired several employees for their role in the Canary Capital incident, and Bank One announced an internal probe after learning that employees may have helped Canary “market time” trades.

(Market timing is one of the abuses brought to light by the probe. Investors make rapid trades of mutual-fund shares, which depletes other shareholders’ returns. Though the practice is not in itself illegal, most fund firms have policies in place to discourage timing. The other problem is late trading, which occurs when an investor buys fund shares at a given day’s price after the close. Late trading is illegal because it allows the trader to profit from information not available to others.)

The scandal has since engulfed some of the biggest names in the mutual fund industry. Janus Capital fired several employees who believed there was nothing wrong with market timing, and accepted the resignation of a senior executive who had authorized rapid trading. Charles Schwab says an in-house investigation found evidence of market timing and possibly also late trading. And Putnam Investments became the first mutual fund firm charges in the scandal, settling with the SEC over rapid trading, although Spitzer’s office continues its own investigation into the firm.

Meanwhile, Congress has announced plans to introduce legislation that could increase the criminal penalties associated with the abuses, and force increased disclosure; the cofounders of Pilgrim Baxter were accused of civil fraud and breach of their fiduciary responsibility; and Wal-Mart became the latest large company to announce it was dropping one of the tainted funds from its 401(k) plan, severing all ties with Putnam.

“The pervading perception stemming from news coverage of latest scandals is that mutual funds are no longer a trustworthy place for individual investors,” says Rich Torrenzano, chief exeucitve of financial communications specialist The Torrenzano Group. “The industry and individual companies are not taking control of how they are perceived—the first rule of communications during times of crisis or significant challenges.”

Interestingly, “the transgressions have not been illegal, at least in the case of market-timing,” says Financial Dynamics managing director of media relations Brian Maddox. Former Putnam chief executive Lawrence Lasser “tried to make the case that standards were not fixed but actually rising, and therefore past actions shouldn’t be measured against today’s standard. This argument helped sink him because it seemed like a dodge. We even got press calls asking us to agree his communication strategy was wrong-headed.”

Lasser compares the attack on the mutual fund industry to a small town speed trap “where the cops post a low speed limit and then nab you.” One key learning for FD, which has worked with several firms in the sector: “We have found that the regulators and public authorities have huge PR machines, and many of the players are vying for election in public months.  The media has not fully grasped this broader aspect of the situation.

“Regulators ought to have spelled out the rules, and enforced them, rather than allowing practices to go unchecked and then swooping down on an entire industry, guns a-blazing.”

But that doesn’t let the companies off the hook for their slow response. There has been little sign of leadership from the industry. The companies under fire appear to have been in reactive mode; those not yet tainted by the scandal appear to believe that keeping their heads down is the best approach.

“One would think that by now business would have learned from past disasters that silence is not golden: it’s lead,” says Mark Schannon, president of Schannon & Associates and former head of the Washington operations of Ketchum. The crisis presented “the perfect opportunity for the industry as a whole, a company, or even the government to take the high ground and create a transparent system that protected consumer rights.

“Instead, the debate became dense, technical, and inexplicable to anyone more than a few blocks from Wall Street. No one was speaking in language consumers could understand, no one seemed to be doing anything to ease consumer fears, and the issue became so complex that most people probably stopped following the story once they decided that the mutual fund companies were screwing them.”

Grade: C

2. Martha Stewart

It’s a lesson learned by presidents from Nixon to Clinton: the cover-up almost always creates more of a problem than the original crime.

The crisis had its origins on December 27, 2001, when Stewart received a call from Peter Bacanovic, her broker at Merrill Lynch. Bacanovic said something about the stock of ImClone—it’s not clear whether his comments involved insider information—which prompted Stewart to sell her 4,000 shares. The next day the stock went in the tank.

Eighteen months later, ImClone chief executive Waksal pled guilty to inside-trading charges and was sentenced to six years, three months in prison—although nothing in his conviction suggested Stewart was guilty of the same crime.

However, an assistant broker at Merrill Lynch has pleaded guilty to a misdemeanor—accepting gifts in return for his silence—and others have apparently told prosecutors that after the FBI investigation began, Stewart asked her executive secretary to alter her phone logs to eliminate all record of the call from Bacanovic (she later had a change of heart and asked for the log to be changed back to its original state).

Meanwhile, Stewart’s original response to FBI investigators—that she had a standing order to sell that kicked in automatically that day—is raising eyebrows. For one thing, no one can produce the standing order, and for another, it looks like a heck of a coincidence.

So now Stewart is being prosecuted not for insider trading, but for making false statement about the sale.

Public relations experts appear divided (like the public) about whether Stewart is the victim of excessive prosecutorial zeal or her own arrogant, inept response to the crisis.

Jason Karpf, who heads the crisis communications practice at L.A.’s Tellem Worldwide, is among those expressing his amazement. “Here she is one of the richest women in the world, and she takes a fall over a couple hundred thousand dollars. In interviews—I remember one with Barbara Walters—she came off cold and non-contrite, even when I saw a tear or two. I say again, as I have recommended to so many clients, stay off TV: it sees right through you.”

According to Tom Gable, president of San Diego-based GCS Public Relations, “The Martha Stewart case is perhaps the saddest because of its pettiness—how much has been lost to shareholders, including Martha, over such a petty transaction? The crisis could have been resolved quickly. Take responsibility, admit a mistake, apologize, commit to community service, pay a fine and move on in positive new directions. 

“Apologizing might also have humanized Martha more, to the benefit of the brand and building future reputation.”

Even so, there’s some sympathy for the domestic goddess. Says Atkins, “Half of America thinks she’s innocent and the other half doesn’t care. Memo to the Department of Justice: Find something important to do.”

Ivan Alter, president of Alter Strategic Communications in New York, agrees: “Unable to mount a case against her for perjury or insider trading, the U.S. attorney has attempted to recast Stewart’s public protestations of innocence as lying to investors. The fact that her stock rose a few ticks after her plea of personal innocence now forms the basis of new charges against her. Imagine, merely protesting innocence may now be grounds for federal fraud prosecution.”

Still, even Alter concedes that Stewart made mistakes—many of them long before the current crisis erupted.

“Perhaps more than any other CEO, Martha Stewart’s image is inextricably tied to her corporation’s success,” he says. “To make matters worse, Martha Stewart’s image was perfection itself. Indeed, to the extent America loved to hate her, it was largely because she seemed to complete in an hour projects that no mere mortal would attempt in a week with a staff of six.

“There are few things more irresistible than watching the mightily arrogant fall. When it appeared Martha Stewart had cheated and taken shortcuts, the public was all too eager to crucify her. It should not have come as a shock that once her image of personal perfection was tarnished, Stewart’s company also foundered. Its foundation had been shattered beneath the weight of her broken halo.”

There’s a general feeling, however, that Stewart has turned things around.

“I think Martha may survive this because women see her differently than men, and they like her and her products,” says Karpf. “When people see men who were caught doing the same thing they are more likely to say, “Aha, corporate greed!” With Martha they don’t see a corporate pillager like a Ken Lay.”

Says Jim Angstadt, senior account executive at Philadelphia’s Tierney Communication, “Securing the high-profile 20/20 interview with Barbara Walters to change the public’s perception of your executive is only half of the equation. Media training your executive thoroughly so she looks better coming out of the interview than when she went in is the other half.”

And according to Al Tortorella, head of the corporate practice at Ogilvy Public Relations Worldwide, “Stewart’s recent ‘out and about’ publicity offensive, coupled with the recent press profiles of some who will be testifying against her, may be beginning to seed the idea to the general public that perhaps this case is overkill by the government. If so, a ‘not guilty’ verdict may be headed her way.”

Grade: B-

3. The New York Stock Exchange

After the corporate scandals that dominated the headlines two years ago, bringing down some of the biggest names in American business, every company in the country could read the writing on the wall: governance would be a sensitive issue for some time to come; executive compensation would be under intense scrutiny; board independence would be increasingly important.

So how did the New York Stock Exchange, the board on which most of the largest companies are traded, remain oblivious to the changing public mood? How did it allow itself, only months later, to become embroiled in a controversy involving an astronomical payment to its CEO and apparently lax oversight from a board of dubious autonomy?

Those were the questions public relations professionals were asking after NYSE chief executive Richard Grasso was forced to resign as questions about his compensation—and his handling of those questions—made his position at the helm of one of the world’s largest and most financial institutions increasingly untenable.

Ultimately, there even more questions, as critics of the Exchange began to ask whether its trading model was fundamentally flawed.

“Dick Grasso’s downfall was the assassination of the Archduke Ferdinand,” says Michael Weiser, president of The Weiser Group. “It was the opening competitors and critics of the NYSE have been waiting for. The NYSE’s historic opposition to trading floor automation, its heavy-handed approach to competitive issues, controversial regulatory issues and questionable governance decisions had created a long list of those willing to pounce when the opportunity arose.”

“The dual roles of the NYSE, attracting companies to list on the exchange and policing their conduct, are hopelessly conflicted,” says Ivan Alter. “Add to this the temptation of millions of dollars in spoils and a total lack of oversight and the disastrous outcome is all but assured. Institutions need to recognize and resolve such conflicts before they spiral out of control.”

The Grasso story was far more complex than the simple morality tale that played out in the media, according to FD’s Maddox. “There was no flagrant law-breaking, only liberties taken within a structure of extremely weak corporate governance. Grasso’s abuses extended well beyond how he paid himself and into his regulatory role.” Maddox says an FD client, an owner of more than 100 seats on the Exchange, was told to name a specific individual as president. “His intervention in corporate matters went far beyond his role as regulator, and was a conflict of interest.”

Such practices ensured that when the scandal broke, detractors were all too happy to voice their criticisms of Grasso’s leadership style.

“Grasso’s abuse of fiduciary trust has caused the NYSE serious image trouble here and abroad,” says Maddox. “As the largest market in the world, with an enormous pool of capital, the NYSE has many would-be competitors. They have swooped down on the opportunity afforded by his abuses, cranking up their PR machines.  State pension funds attack the NYSE because it makes good headlines, and many of their leaders have an eye to public office. Large mutual fund companies like to be seen as advocates of shareholder interest, not least because of their other woes in the mutual fund scandal, and they have piled on en masse.”

Grasso’s response when the crisis hit did little to help.

Says Michael Fineman, president of San Francisco-based crisis management firm Fineman Associates, “Grasso’s negative performance appeared to be built on a sure-fire formula for public outrage:  greed, secrecy, arrogance and denial. With public perception of corporate greed and shenanigans at an all time high, and with so many investors having lost so much from the dotcom and tech collapse, Grasso’s timing and response couldn’t have been worse.

“ The appearance of the NYSE as just another corporate fiefdom, subject to minimal Board oversight and insensitive to shareholder accountability, compromised the Exchange’s blue chip reputation and integrity.”

And the board, which had awarded him his outrageous compensation package, did even less to cover itself in glory. Rather than taking responsibility, board members claimed they had never understood how much the CEO was making.

“It is axiomatic that the NYSE requires investor confidence to survive,” says Alter. “The events of the past year have certainly challenged that confidence and investors will be watching and hoping for effective new leadership to restore it. Courageous leadership that thoroughly cleans house, resolves the conflicts of the past, offers greater transparency, and provides meaningful oversight will restore the public trust and be rewarded with renewed confidence and increased investment.

“By contrast, ‘business as usual’ strategies may be disastrous. Already, lame excuses from compensation committee insiders claiming they didn’t know about Grasso’s obscene earnings not only ignore the investors’ concerns; they provide new reason to worry. Failure to address the problems may invite someone else, like the SEC, to take the reins.”

Says Frankel, “The lesson of this debacle is two-fold: practice what you preach and don’t delay the inevitable. While Dick Grasso was a great cheerleader for the Big Board and did a tremendous job re-opening the Exchange after 9/11, the corporate governance problems were inexcusable. At the same time the NYSE was recommending best practices on governance to its listed companies, it never bothered to disclose Grasso’s enormous pay package. The lack of transparency and the blatant conflicts of interest were too glaring to be ignored.

“And regrettably, Grasso hung on for weeks when the handwriting was on the wall. Not until the treasurers of the largest state pensions funds publicly called for his resignation and certain members of the Board finally asserted themselves behind the scenes did he finally throw in the towel.”

Grade: C

Part II