It is undeniable that investors are losing faith in big business. What can PR do to help restore public confidence?
"Real success, both for big business and the public, lies in large enterprise conducting itself in the public interest and in such a way that the public will give it sufficient freedom to serve effectively. This is done by telling the truth, proving it with action, listening to the customer, and conducting public relations as if the whole company depends on it."
The sage words of Arthur W. Page - vice president of AT&T from 1927 to 1944, and the man most often credited with founding the corporate affairs function as we know it today - have been a mantra of many a communications professional over the years. But they have surely never been as prescient as they are today when corporate America faces the possibility of a total meltdown in the trust and confidence that are its lifeblood.
"Total meltdown" might sound a bit strong. When Enron's wrongdoings were uncovered, there was an argument that this was just a rogue company that had strayed a long way from the straight and well-tended path followed by its Fortune 500 peers. In a similar vein, some felt Andersen had simply been sucked in, a victim of a commonplace accounting-firm business model that emphasizes selling auditing and consulting services to the same client.
President Bush declared this a case of a couple of "bad apples," while anonymous CEOs were quoted blaming the media for creating a witch-hunt atmosphere in which the mere hint of an accounting error could wipe billions off a corporation's value. Despite these failures, many business leaders maintained, more regulation was unnecessary - the market, as always, would right itself.
But now, even members of the ostrich club are having to take their heads out of the sand. We are no longer just talking about the complex and deliberately deceptive financial maneuvering of Enron and its accounting accomplice, nor are we thinking solely about the indictment of Tyco International CEO Dennis Kozlowski or the accusations of illegal wheeling and dealing by ImClone CEO Sam Waksal. The net is now being cast much wider than that: Some of America's most reputable companies - including such one-time darlings as Xerox, Microsoft, and IBM - have been forced to restate their financials lest they be tarred with the Enron brush. And with the news that WorldCom misstated $3.8 billion in operating cash flow, doubt has been cast on the most basic financial measures - measures used by almost every company.
Crisis of confidence
That is to say nothing of the growing - though more intangible - feelings that the investment banks have scant respect for private investors, that CEOs have shown even less respect for their shareholders, and that greed has overrun the system of checks and balances that was meant to regulate the free market.
PR academic James S. O'Rourke, professor at the University of Notre Dame's Mendoza College of Business, agrees with the conclusion of SEC chairman Harvey Pitt, who admitted on NPR's All Things Considered that "this is a genuine crisis of confidence."
"There's a strong suspicion that people who have inside information, privilege, and advantage are using the markets in ways likely to undermine not just confidence, but the markets themselves," says O'Rourke. "They knew more than we did in the '80s and '90s, when stocks headed up, so they became rich. Now they know more than us about stocks that are about to tank, so they sell and keep their gains, while ordinary investors buy high and sell low.
"There is also a strong suspicion that auditors and public accountants don't work for the market, but for whomever is twisting their arms at the moment," O'Rourke continues. "With huge incentives to consult and participate in public offerings, professional services firms look to be as corrupt as their masters. And the investment banking firms seem to have collaborated with the other parties to reap enormous profits from public offerings that are never as public as they appear."
Recent Gallup polls support O'Rourke's argument, showing public confidence in Big Business at its lowest since 1981, while a 10% drop in the Standard & Poor's index - although not disastrous - is more than a hint that the confidence crisis is translating to an exodus of investors. Tom Martin, SVP of corporate relations at ITT Industries, describes the current feeling as being "a crisis of confidence unmatched since the 1929 stock market crash."
"This is well outside the direct experience of any of us," says Martin. "It is far worse than the market drops in the late 1980s. The recovery from those experiences was far quicker, and in hindsight, more of an interruption to a bull market that lasted almost 20 years, from the beginning of Reagan's term to March of 2000."
Is the media to blame?
PR pros, who live their professional lives at the intersection of media, politics, and business, do not believe that the blame lies with the media. "It's clearly not the media's fault," says Jack Bergen, SVP of marketing and corporate affairs at Siemens. "It's a very real problem. Since the earliest days of the markets in the village square, trust between buyer, seller, and intermediary has been crucial to the success of the marketplace. Because that trust has broken down, the corporate markets that depend on that trust will suffer, particularly investment and employment. The media is not responsible for that."
Elliot Sloane, CEO of Sloane PR, feels that the media is fanning the flames. "They relish their role in this, which is to investigate stories that, in hindsight, question the integrity of the very companies and the very CEOs that a year ago they put on their publications' covers and lauded as heroes." But despite this, Sloane says, the problems are inescapable, and not the media's fault.
"It is not just the sheer accounting fraud and potential criminal activity that went on in the go-go industries," Sloane comments. "The other issue is that visibility in other businesses is limited, and many companies simply cannot predict how fast the recovery is coming and, if there is a recovery, how their businesses will operate."
Judi Frost Mackey, chairman of Burson-Marsteller's corporate financial practice, agrees that there is a confluence of factors at work here. "The current fear over companies' accounting has certainly delayed a recovery, but the issues go much deeper," she says. "The economic boom and internet bubble created an extremely competitive environment and drive toward consolidation. The pressures to perform started back then, and unfortunately, since then a number of companies have made decisions that have backfired."
Preventing further decline
How, then, can corporate America stem the exodus of investors and prevent a downward spiral that would see the dollar weaken, the slowing of growth, and rising unemployment?
Clearly, rules and better regulation will have to be imposed. SEC chairman Harvey Pitt has already ordered the CEOs and CFOs of the 1,000 largest US companies to attest personally to the accuracy of financial statements. The NYSE has proposed new rules on corporate governance requiring that a majority of board members be independent, and that shareholders get the right to vote on executive compensation. President Bush has proposed increased jail time for criminal fraud and tougher laws criminalizing corporate document shredding and preventing corporate officers from receiving company loans. In addition, the Senate Banking Committee has just passed a tough accounting oversight bill that should go a long way to reforming the accounting profession.
But there are many who feel that such changes may be insufficient, and the Democrats who seek permanent legislative reform are making much of the fact that President Bush's only proposed amendments to corporate governance depend heavily upon corporations volunteering to abide by the new guidelines. In addition, there is no saying that - especially as the proposed reforms are subjected to the scrutiny and sniping that an election brings - they will restore the trust of fearful investors.
That is where PR and public affairs have to step up to the plate. "We know capitalism as a system is sustainable, flexible, and productive, and has helped us create a vibrant, free society," says Dave Drobis, chairman of Ketchum, and current chair of the Arthur Page Society. "There has always been and always will be a need for reform and change in the system that will better it. That is the message that we, as PR people, need to convey. Today's new buzzwords of honesty, openness, credibility, and transparency are not new for public relations - they are our credo."
If you buy into Drobis' ideology, and most top PR professionals do, then corporate communicators and public affairs officers have a big role to play in the cleanup and credibility-restoration operation.
"Firstly, companies need to find out if they are vulnerable," says Siemens' Bergen. "Audit committees of boards should conduct independent investigations of everything from the relationship with accounting, consulting, and investment banking firms, to the transparency of financial reporting." At that stage, says Bergen, the IR and financial communications staffs need to release the results to investors as part of the annual report. Bergen also suggests that hotlines be set up so employees and investors can ask questions about company policies.
ITT's Martin agrees. "Now is the time to come clean with any questionable accounting practices. There are so many shoes falling, it feels like spring cleaning at Imelda Marcos' house. With a new revelation every week, one is left with the feeling that this news cycle will never end, and everyone must be corrupt. Now is not the time to sit on bad news, waiting for things to blow over. Companies that have disclosable issues best do it now - there is no reward for withholding."
Martin also suggests that now is as good a time as any to reexamine executive compensation practices, taking a dim view of interest-free loans, repriced options, and other compensation schemes that result in CEOs, CFOs, and others receiving tens of millions of dollars in a given year. "At virtually every one of the companies in the hot seat, you will find lavish pay benefits at the top," he points out.
New era of transparency
Beyond these remedial actions, American corporations will need to enter a new era of transparency and open communication. At the World Economic Forum earlier this year, the CEOs of 36 global companies issued an unprecedented document. Called "Global Corporate Citizenship: The Leadership Challenge of CEOs and Boards," the report is a call to action to business around the world, outlining the strategic imperatives that CEOs should pursue to improve their companies' mark on society and their relationship with stakeholders. Drobis points out that the CEOs declared open and honest communication as being key to maintaining or improving trust in big business. The report says companies should "build confidence by communicating consistently with different stakeholders about the company's principles, policies, and practices in a transparent manner."
While corporate communicators have long understood this need, CEOs and boards now, surely, must be more receptive to these basic PR principles. "American corporations have to understand that the best thing they can do right now is communicate: completely, honestly, transparently, and often," says O'Rourke. "If more CEOs sounded like Defense Secretary Donald Rumsfeld in their briefings, we'd all be better off. If things aren't good, say so and explain what you're going to do about it. If they're fine, tell us the good news, and explain how it got that way."
PR professionals have a major role to play in creating those Rumsfeld-style CEOs, and ensuring their visibility. Few business leaders have wanted to speak out up until now. Goldman Sachs CEO Henry Paulson has become the poster child for better governance of stock options and tougher rules on insider trading, but he can't reassure investors on his own.
Burson's Frost Mackey comments, "There are more than 8 million CEOs in the US. Our job is to steer the media toward the CEOs who have continued to articulate clear strategies steeped in the values of their own organizations, who have focus on sound operations and long-term growth, and who have successfully motivated their employees to execute on the strategy."
Scott Sobel, communications director at Levick Strategic Communications, and a former Fortune 100 PR leader, agrees: "CEOs have to come forward as spokespersons on TV and comment on the current crisis in a way that discloses their own sound practices and those of most of their colleagues. 'Here's what they did wrong, and here's what the rest of us are doing right.'"
Sloane adds, "It's funny. We get asked by reporters all the time if any of our clients want to go on the record about the changes they are making or their feelings about the accounting scandals, but in this current environment, it's tough to persuade clients to go near these stories. We have to get the media to acknowledge which companies are doing the right thing, which are being unfairly tarnished, and identify leaders in these areas. It's difficult because that doesn't make for good copy, but - alongside cultural and operational change - it would help restore trust in big business."
Dave Armon, president of PR Newswire Americas Group, has watched his company's wire services swamped with scandal-related stories, and has been surprised to see so few CEOs come out and counter those tales with their own stories of honesty and integrity. "There are so many honest, trustworthy CEOs out there who have not spoken out. To restore confidence in the market, some of them need to come forward. Corporate communicators should be encouraging them to lay out their companies' honest fundamentals. They need to get the CEOs out there on video, because investors and potential investors like to see the management in whom they are placing their trust. They need to ensure they are webcasting their announcements, and they need to include a level of interactivity around their announcements. For example, they should encourage people to ask questions via the internet before their results announcements. They need to take the road show to the people.
"Naturally, companies are skittish about their news being associated with the scandals," continues Armon. "But there is a real void of good news, with a lot of reporters having been redirected to cover the ethics issues. And you have to believe that - if your business is solid - you'd be better off in an article about ethics than staying quiet. Investors are searching for companies they can trust right now, so it makes sense."
Taking measures internally
The increased communication must apply to internal audiences too, says Frost Mackey. "It is not only crucial that the CEO balances transparency and realistic expectations in his or her external communications, but also that employee communication is strong. There has never been a more important time to talk with them, to motivate them, to let them know where the company stands in relation to its strategy, and to explain the role the employee can play in executing that strategy," she says.
Drobis agrees: "Employees are the critical link to building and changing attitudes. Part of PR's role is to ensure they are good ambassadors for the brand and corporate reputation."
PR pros will also need to take a lead in setting ethical and corporate governance standards, and in communicating their companies' efforts in this area. At a recent Conference Board event, it was argued that the Chief Ethics Officer role within corporations should shift from legal to public affairs. As the eyes and ears of a company, the public affairs or corporate communications pro is best positioned to anticipate potentially damaging issues, and to give the CEO a read on the way that employees and investors are feeling about the way that big business conducts itself.
Setting new standards
There are some strong moves afoot to create corporate governance standards that will allow the investing public to compare one company with another. Gavin Anderson, founder of the global PR and IR firm of the same name, is taking a lead in this area by looking to launch a governance rating system. Similarly, the influential Institutional Shareholder Services has introduced corporate governance quotients. "Corporate communicators and financial relations execs should be asking how their companies are performing according to these kinds of quotients," says PR Newswire's Armon. "I think we'll see them releasing information on their corporate governance ratings."
Beyond pushing for increased transparency, more proactive communication, and better governance, communicators should also be doing what they can to shift their companies' focus - and, accordingly, the media's reporting on their companies - toward the longer term. Al Bellenchia, chair of Fleishman-Hillard's financial communications practice, says, "The debate over the relative value of the markets is normal, if not terribly productive. Of more long-term importance will be the response of corporate America to the conflict between building their business over a long period, or fixating on their stock price in the short term. It has to be the former, because companies that can't demonstrate and communicate their value to those who reside beyond the canyons of Wall Street will be the casualties of this first battle of 21st-century capitalism."
ITT is one corporation that seems to have succeeded in this respect, its stock having risen sharply in the last 12 months. And ITT's Martin believes strongly in a shift toward long-termism. "At the root of many of the problems we're seeing now is the hard truth that the investment community has only looked as far as the next quarter's earnings in judging the competency of a management team. The punishment for missing earnings by a penny has been too harsh, the temptation to stretch rules to deliver on analyst expectations too great. As we are seeing now, many of the analysts didn't believe their own reports anyway. Executives should be accountable for delivering value over years, not simply from quarter to quarter."
Martin knows that such a trend is not easily reversed, but as he has been part of communicating this shift internally and externally at ITT, so he believes PR pros can achieve similar results for other businesses.
And they can. The current crisis of confidence asks questions that PR pros can answer. It calls for the ethics and openness that communications executives have considerable experience delivering. As O'Rourke puts it, "If the 1990s were an exercise in delusion - mistaking a bull market for real brains - then the early years of this century are an exercise in sobriety. Sunlight, honesty, and candor will go a long way toward fixing what's wrong with the NYSE and Nasdaq."
In other words, good communication is no longer just a valuable asset - it is a must-have.