MARKET FOCUS: IR - Enron: An epiphany for IR. The Enron quake hassent moral tremors throughout the IR community. Finger-pointing aside,how can IR help restore trust in the financial system?

I believe that each of us, and our organizations, must engage in a collective period of introspection and self-examination as we work to restore the confidence of all of our stakeholders - employees, regulators, investors, and customers - in the integrity of the free enterprise system in which we serve.

I believe that each of us, and our organizations, must engage in a collective period of introspection and self-examination as we work to restore the confidence of all of our stakeholders - employees, regulators, investors, and customers - in the integrity of the free enterprise system in which we serve.

In many ways, ITT Industries has seen some unanticipated benefits from this period of uncertainty. Two years ago, our stock was suffering from the effects of the dot-com sector sucking investment away from industrial companies. During that period, fundamentals like earnings and cash flow seemed to be out of favor. Investors were instead flocking to companies with big ideas that promised huge revenue and earnings potential at some point in the distant future.

At that time, ITT was focused on improving its operating margins, cash generation, and earnings with a portfolio of businesses that manufactured untrendy things like pumps and valves, night vision goggles, and cell phone components. Over a three-year period, we showed improvement in earnings, operating margins, and free cash flow.

As a result of these improvements, along with a welcome rotational shift in the market to companies with real earnings and cash flow, our stock has risen well in excess of the S&P 500 in the last three years, while many companies that were media darlings have lost virtually all of their market value.

But the current shift we're seeing is obviously not just about financial results. What investors and employees are seeking more than anything from their companies is confidence in the integrity of management - and it begins at the top.

At a recent meeting of ITT's top 450 executives from around the world, Lou Giuliano, our CEO, devoted a significant portion of his keynote address to the subject of ethics and values. He reminded our leaders of the importance of following our code of conduct in all situations, even if that meant walking away from business. He also stressed that our interest in this topic predates recent events. It's something we've talked about regularly, and we have lived by and trained to our code of conduct for years.

"Not only should we not cross the bright line that serves as the boundary for ethical behavior,

Giuliano said, "we should not even get into the gray area. Each of us shares in protecting the reputation of our company. If we have learned anything from these recent events, it is that the actions of a single individual can imperil a company's reputation, and even its very existence."

Credibility in the system can only be restored through the individual convictions, actions, and behavior of each of us in leadership positions.

We must take the time to clearly state our companies' ethical beliefs and ensure that this message is reaching every employee. We must work with operating management to ensure that our day-to-day actions mirror these stated principles.

Perhaps one additional lesson we can take from this tragic situation is that unbridled arrogance, greed, and self-absorption can be the undoing, not just of individuals, but of entire organizations and all of those who depend on them for a secure future. Corporate humility ... now there's a novel idea.

Tom Martin is SVP of corporate relations at ITT Industries.


Deciding to leave a company when its ethics don't agree with you is easier said than done, says Mark Steinkrauss.

But four years ago, he did just that I'd been working with Fruit of the Loom for five-and-a-half years, and I wasn't sleeping well. Mentally and physically, I wasn't myself. I was nervous all the time.

Fruit of the Loom was and still is a wonderful company that employs a lot of people, 99.9% of whom are hardworking, conscientious individuals.

But there had been some changes in senior management, and I didn't think some of the new people were as knowledgeable or, in some cases, as thoughtful as they might be. Some of the issues at hand, which are all public knowledge now, were four very poorly executed acquisitions the company ended up writing off, abuse of executive compensation, a number of personnel issues (in which other senior managers were treated very badly), corporate assets used to the ultimate benefit of the shareholders, and some ill-conceived efforts to break off part of the company (which never happened, but sucked up a lot of assets and management time). There was also the issue of reincorporating the company outside the US for tax purposes.

I know other companies do that, but it would have put an additional tax burden on individual investors, and I felt that - while perfectly legal - reincorporation was not in the best interests of all the parties involved.

I wrestled with it for months.I talked to my wife about it a lot, and there were a few confidants I've known for 20-odd years I knew I could talk with about my dilemma, and they would keep the matter to themselves.

I asked if I was overreacting, whether I was being naive. The feedback was universal and quite emphatic: They said I was in a delicate position, and should think about changing jobs.

I thought about it for a couple of weeks, and labored over the most professional way to do it. I had seen people make mistakes resigning from the company - not being as professional as they could have been, or burning bridges behind them. I did not want to hurt anybody or burn any bridges. So, I spent a couple of weeks putting together a resignation letter, typed it up, put it in an envelope, and told my supervisor - the EVP and CFO - I wanted to speak with him. We met early on a Sunday evening, at 6pm.

I handed him the letter, he read it, and the rest is history. I didn't say why I was leaving. I simply said I decided to take a position at another company in another industry. I think he and everyone else was surprised.

So I moved to my current job, six blocks away. It was difficult. There's always an element of risk when you go into a new environment. I was firmly ensconced at Fruit of the Loom, and there was no pressure to leave. In fact, they made a counteroffer when I resigned. Was I a little bit uneasy?

Was I afraid to leave? Of course. But four years later, I am still in my wonderful position with Telephone Data Systems, an ethical, conservative, Chicago-based company that is very conscientious about its accounting principles.

For people who might want to do what I did, I urge them to go to their confidants and ask them what they think. Usually, though, you know what's right and what's wrong. If you've got that gnawing feeling in your gut that something is inappropriate, I wouldn't waste time quizzing yourself on whether it's appropriate or not - take action. Have the guts to make a decision quickly, but be professional, and don't burn any bridges. Don't get emotional, even though it's an emotional issue. After I left, I got many calls from people wanting to know what had happened, but I went out of my way not to hurt the company's reputation.

It's easy to say a person should stick to his ethics and leave a bad situation, but it's a lot harder to do it. It's even harder today, because the job market isn't as good. I empathize with people. But for what we do, we are in many ways only as good as our credibility. If our audiences don't think we're telling the truth, our reputation gets tarnished, and our viability is not as good. Sometimes, walking away is the best career decision you can make.

Mark Steinkrauss is VP of corporate relations at Telephone Data Systems.

Some IR practitioners hesitate to place their profession in the realm of blame for the high-profile implosion of energy company Enron.

"This was not an IR issue; it was an issue of fraud,

insists Jeffrey Zack, SVP of special projects at Morgen-Walke Associates, who calls Enron a latter-day Ponzi scheme.

But other IR officers are not so forgiving toward their brethren.

"A strong IR officer would have been able to alert Enron's management early on about the risks associated with the firm's aggressive accounting tactics,

charges Brad Wilks, MD of Ogilvy PR's Chicago office, and president of the Chicago chapter of the National Investor Relations Institute (NIRI).

"If management refused to follow this advice, the IR officer should have resigned immediately."

The IR department at Enron would not comment to PRWeek. However, a PR representative from the company explains that a deluge of media requests is mostly going unanswered by what she says is a two-person IR department struggling to complete normal tasks related to a bankruptcy - with no time left over to speak to the press.

But the destruction of the company has reverberated throughout the IR community, reinforcing many old beliefs and casting new ones. Some in the profession blame analysts for not catching Enron's hocus-pocus accounting, while others say it's the job of the IR officer to keep numbers transparent.

Still others argue that IR people are not accountants - they should not have to re-audit the numbers they are given by management.

Some communications experts go so far as to deem Enron the IR profession's first large-scale crisis of confidence. In a recent survey by Investor Relations Business and Business Wire, 78% of the 259 IR officers polled said the analyst and media communities hold them in higher regard than they do PR executives; 83% said senior executives at their companies attach more importance to their roles as a result of widening coverage of IR issues. To match those perceptions with reality, members of the profession say they will have to reassure their audiences of investors, analysts, and the financial media that Enron was an outlier in a financial system that still deserves investor trust.

To do so, IR officers say they are straining to release clear, simple earnings numbers that won't trigger jumpy reporters to cast aspersions on "the next Enron."

"This is not the press release for patting yourself on the back. No one wants to read it, and they're going to think you're avoiding the issue," says Elliot Sloane, CEO of Sloane & Company. "This is one of the times people in the room need to be attorneys, accountants, and IR pros."

Damage control is also a technique IR officers are finding more important this earnings season. For example, Krispy Kreme's stock tumbled nearly two points when a Forbes magazine article directly compared the doughnut manufacturer to Enron. Krispy Kreme has no IR department, so Deborah Darrell, SVP of agency LaForce & Stevens, called the reporter to explain errors in fact.

"Something must have gone wrong for this to happen,

she says of the article. "In the period of full disclosure, it's easy to answer questions without asking what the person is working on, and the angle. Sometimes when you have a high profile, you have to be hyper-vigilant."

Other high-profile companies are systematically reviewing their IR practices in light of the chaos produced by Enron.

At UPS, a 95-year-old company that only went public two years ago, the IR department recently met with management to discuss the mistakes made at Enron. The company is similar to the failed energy giant in that UPS' shareholders are primarily past employees. Kurt Kuehn, UPS' VP of IR, says he was gratified to see that UPS management shared his goal of transparent financial reporting.

"We all hate to see the kinds of things that happened with Enron through opaque reporting or overly aggressive management teams,

he says, "but UPS has always focused on integrity."

However, Kuehn adds that with all investors jittery about corporate earnings statements, UPS plans to go into more detail on its next annual report.

"We may open a little more detail so questions get answered right off the bat,

he explains. "We have a good story to tell, so we may as well shed a little more light on it."

Rethinking disclosure practices

A recent study by Wall Street Reporter magazine backs up the decision to make a company's story easier to understand. Of the survey's 322 investment industry respondents, 18% said they have completely stopped buying stock in companies with complicated financial reports, 43% said they were concerned about the potential for widespread financial reporting fraud, and 67% said Enron has prompted them to do more due diligence.

In response, large companies such as General Electric and IBM have pledged greater disclosure - not because of any previous subterfuge, company representatives explain, but because shareholders and analysts have requested the additional information. Some companies won't even go so far as to tie the increased disclosure to Enron.

"The changes we're making in our reporting have been under consideration for a while,

says Carol Makovitch, VP of worldwide media relations for IBM. In its next annual report, the company has elected to provide additional information about intellectual property income, the impact of gains and losses from investment, the effect of amortization of goodwill from acquisition, gains of sales in real estate, and the performance of the IBM pension plan.

The biggest immediate change to result from Enron, though, may not be degrees of disclosure. The NIRI's board will vote later this month on revisions president and CEO Lou Thompson says will give sharper teeth and more specificity to the group's 32-year-old code of ethics. Thompson calls Enron a catalyst to change, and says the new code will give IR officers backbone to stand up to management or, if necessary, quit their jobs (see sidebar).

"I think Enron has really caused people in IR to reflect on the roles of IR,

says Thompson. "One of the key roles of IR, in my view, is reducing investor risk, and if investors can't see clearly what a company is about, they're subjected to a much higher degree of risk in their investing. In a situation like Enron, if you know as an IR person what the Street needs to evaluate the company, and management refuses to give it to you, then you've got a decision to make. I know people who have taken that walk."

The need to effectively serve two masters - management and investors - is something that IR people say has always weighed on their minds. Mark Aaron, VP of IR at Tiffany & Company and incoming NIRI chairman of government and media relations, says the role of the IR person has always been to be the liaison between the company and the investor. But Aaron says the nine-year boom in the US economy created a larger pool of investors than ever before, while not necessarily giving them the analytical skills investors need when the markets are not posting new, record gains.

"Investors are saying they want to understand the company they have ownership in,

Aaron says. "There is greater scrutiny right now, and investors have a degree of scrutiny regarding what certain companies are disclosing. This is raising the profile - the importance - of investor relations."

Many IR officers say they plan to use their increased importance to demand what they say should be standard in the profession: entry into high-level executive meetings.

"I believe this is an opportunity for IR professionals to insist on greater access to the executive suite and the board,

explains Donni Case, president of the Financial Relations Board, who says corporate spokespeople, including IR officers, need to participate in high-level information exchange, not just receive marching orders.

Case, however, echoes a common IR response to Enron by adding that it is also incumbent upon IR officers to comprehend management's complex financial language, not just report it.

"Being blindsided by ignorance is not acceptable,

Case says. "IR specialists definitely need more knowledge of finance and accounting in order to provide meaningful guidance to management. They don't have to be accountants or bankers, but they do need to be conversant in the concepts and language."

Injecting education

Some IR specialists, including Ken Makovsky, president of Makovsky & Company, predict that hiring practitioners with MBAs or degrees in accounting will help the profession gain the knowledge it will need. But Scotty Andrews, director of the Sanford Ziff Placement Center at the University of Miami, says in the three years he has held his position helping newly minted MBAs find jobs, only one company has come to him looking to fill an investor relations post.

"It's not so much that students are not interested in it as a profession, but there are no majors in the business school in investor relations. I don't know if it's even covered in any of the courses," says Andrews, who urges companies or IR agencies who want to hire MBAs, in addition to contacting career centers, to give classroom lectures or offer paid internships.

However, Robert Ferris, executive MD at RF Binder Partners and leader of the agency's IR/capital markets practice, cautions that his peers must not forget the importance of solid communications skills. "The mosaic of perspectives,

as Ferris explains cross-discipline skills, is important to a group equally charged as confidants, watchdogs, spokespeople, and finance gurus. "We need to be more fully grounded and interested in corporate communications, securities analysis, corporate finance, accounting convention, public relations, corporate governance, securities law, etc.,

explains Ferris.

As corporate IR officers turn inward to reevaluate their companies by post-Enron standards of transparency and clarity, and as agency IR professionals work to increase the quality of their counsel, both groups say companies will make changes - by choice or through new regulations - that will help investors learn to trust Wall Street again. Their task is to keep companies stable through the current wariness on Wall Street and earn back investor trust, never again taking it for granted.


It's tempting to sit back and comment smugly on all that Enron and Andersen should have done differently. But that would miss the point, says Tom Martin.

We are all on trial here. Anyone and everyone involved in the corporate world - and that includes all of us who work in the PR and reputation management fields - should be looking carefully at how this period is redefining that world. What's on trial is the very validity of private enterprise and the credibility of the professions it supports. Who can you trust?

The impression being created by Enron-Andersen, Global Crossing, Tyco, and who knows how many others, is that corporate management can't be relied upon to deliver believable financial results. The audit firms they hire can't be relied upon to ensure the integrity of the numbers they report.

Wall Street analysts can't be relied upon to report honestly and independently on the financial prospects of the firms they cover. And the boards of directors, who are presumably in charge, really aren't.

The investing public, and the millions employed by large companies, are now looking at these pillars of industry as they might look at a carnival tent full of bearded ladies, alligator boys, and sideshow barkers. The long-term prospect of this collective lack of trust is chilling.

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