Bankruptcy need not damage corporate reputation

"Bankrupt." To the layman, the word sounds nasty - and final. But sophisticated managers know that corporate reputations - and valuable brands - can emerge stronger than ever from bankruptcy.

"Bankrupt." To the layman, the word sounds nasty - and final. But sophisticated managers know that corporate reputations - and valuable brands - can emerge stronger than ever from bankruptcy.

Indeed, that's one of the appeals of restructuring under Chapter 11.

A corporate reputation is built through well-planned, persuasive communications to specific sets of stakeholders. The timing and content of these messages, and the credibility and skills of the messengers, are crucial for any company's success.

With the recent bankruptcies of Northwest and Delta, the situation of an airline is a case in point. Among all the choices a consumer makes, few require more faith than the purchase of a plane ticket. Travelers need to feel confident that a carrier will get them where they want to go-on time and safely. Maintaining a strong brand is essential to an airline's long-term success. The case of United Airlines offers valuable insights.

As United Airlines prepared to announce its entry into Chapter 11 proceedings in December 2002, management had to be first to deliver detailed messages for three key audiences: employees, suppliers, and travelers.

Chapter 11 typically allows a company to renegotiate elements of its contracts with employees. Cutting pay and benefits, of course, can make employees unhappy, and they, in turn, can make customers unhappy. United's managers around the world held meetings with their teams on the day of the announcement. Regular, personal, and electronic communications from senior management were an essential part of inspiring employees to work harder for the airline.

Suppliers might be reluctant to continue doing business with a company that's looking to modify or cancel certain contracts. But good communications helped United's suppliers understand that it was in their best interests to help the firm restructure, and that the result would be a stronger, better customer and business partner.

Today, while United is not the lowest-priced carrier on many of its routes, it is enjoying its highest load factors ever. That's convincing evidence of consumers' continuing faith in the company and its service.

In contrast, the past weighs heavily on Philip Morris USA and its parent company, Altria. Personal injury attorneys have had success bringing suit against the firm by using its past behavior - captured in communications - to convince juries and judges that the company needs to be punished. A jury in California, for example, awarded a cancer-stricken smoker, Richard Boeken, $3 billion in punitive damages on top of $5.5 million in compensatory damages in 2001. The trial judge reduced the punitive damages to $100 million, a figure he called "reasonable."

Some 20 million Americans currently smoke Philip Morris USA's brands, such as Marlboro, and tens of millions more are former smokers. No one knows how many could become ill and sue the company in the years to come, but paying them $100 million each could easily lead to bankruptcy.

Besides fighting in the courts, what is the company doing about the threat of ruinous lawsuits? Legislation to protect the company from ruinous suits is a non-starter in today's antismoking environment. So the company is changing its approach to health and addiction issues.

The about-face has been dramatic. The company asserts on its web site, in TV and radio ads, and to the media that tobacco is not only addictive but that it causes lung cancer, emphysema, and heart disease. It is also rewarding retailers who prevent cigarette sales to minors.

Will jurors and judges be convinced that the company is now part of the solution, not the problem, and that it has learned the lessons of the past? Only time will tell, but no jury has handed down a billion-dollar punitive damage award in a personal injury claim against the firm since 2002.

 

These companies and the challenges they face are very different, but they both seem to be succeeding. We believe they share key elements:

  • The firms have a deep understanding of their key audiences and tailor their messages to answer those groups' specific concerns.
  • They choose and train spokespeople who understand their audiences and can consistently deliver the relevant messages.
  • They plan their communications well in advance and reach out proactively, rather than waiting for news to get ahead of the messages.
  • Because they understand that communications are essential and that persuasion takes time, they direct significant resources to their communications efforts.
  • Bankruptcy need not damage a company, its reputation, or its brands. And a good reputation may help some companies avoid bankruptcy altogether. What's required is doing the right thing and talking to the right people about it in the right way at the right times.
  • Montieth Illingworth is head of office for Gavin Anderson & Co.

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