Will the trust return?

Scandals continue to rock the image of corporate America.

Scandals continue to rock the image of corporate America.

One year after the Enron and WorldCom scandals shook the nation's faith in corporate America, trust in business remains shaky, according to surveys of public sentiment. A recent study by Golin/Harris International found that 40% of consumers say they trust business less than they did a year ago. Just 9% said their trust in business has jumped during the last 12 months, and only 37% said that business is heading in the right direction to rebuild that trust. Furthermore, an Edelman focus group found that while Americans are more likely to put faith in smaller companies, just 31% trust "global corporations." "This has been like Watergate for corporate management," says Peter Verrengia, co-chair of Fleishman-Hillard's corporate-credibility practice. "There will never be the level of trust in the CEO or CFO of a public company that there has been for the past two of three generations." More scandals breaking But the task of rebuilding trust is made even more daunting by the fact that the scandals just keep coming. Healthcare provider HealthSouth is the most recent to show signs of unraveling in an Enron-like fashion. Nine months after the SEC enacted a regulation requiring CEOs and CFOs to publicly certify the validity of their financial reporting (and almost eight months after the passage of the Sarbanes-Oxley Act, the largest piece of corporate-reform legislation in seven decades), HealthSouth issued a press release stating that its past financial reports "should no longer be relied upon." HealthSouth's problems come on the heels of accounting shenanigans at drug maker Bristol-Myers Squibb, which recently issued a 12,408-word, two-part press release on March 10 detailing a restatement of its financials dating back to 1999. Nine days later, the company said it would also have to restate earnings for 1998 and 1997 as well. And Dutch supermarket giant Royal Ahold, the third-largest operator of supermarkets in the US, has admitted to an accounting scheme that reportedly led it to inflate profits by $500 million during the last two years. "What's made this situation difficult is that almost every day a new disclosure, a new resignation, comes out of another company," says Tom Martin, SVP and director of corporate relations at ITT Industries. "Right now, HealthSouth is the crisis du jour. But as long as [crises] continue to surface, it is going to be hard for people to believe that all the bad news is out." A study recently published by accounting firm Huron Consulting Group bolsters the case that these problems run deeper than a few screaming headlines. The survey found that the number of companies restating their prior year's financial results due to accounting errors has been on the rise for five years, jumping to 330 in 2002. That is more than double the 158 reported in 1998, and a 22% spike from 2001. While such restatements are often the result of good-faith errors and not outright deception, such findings would seem to undermine people's faith in one of the bedrocks of the financial markets. Another trend the Huron study uncovered is that larger companies represented a much greater percentage of the restatements in 2002. Those with annual revenues of over $1 billion comprised 22% of corporate restatements in 2002, up from just 14% in 2001. With such numbers - not to mention consistent headlines made by firms like HealthSouth and a brutally protracted bear market - it's no wonder that individual investors are displaying cynicism about US business. In fact, only 6% of individual investors say they are "very confident" that the senior leadership of publicly traded companies engage in ethical business practices, according to an ongoing survey of investor confidence by Rating Research. The survey also found that 47% of investors are either "not very confident" or "not at all confident" in senior leadership's ethical business practices. Nevertheless, many corporate-reputation experts say the task of rebuilding trust is being made harder by a stubbornly weak economy that has made people feel less secure about their personal finances. In recent months, consumer confidence has fallen to its lowest level in a decade as companies continue to shed payrolls and many people have seen their retirement nest eggs dwindle. Some say that as Americans experience Darwinian capitalism, it becomes more difficult for business to mend fences. "I think people would be generally less trusting of what companies say if we only had the drop in stock prices without the frauds," says Verrengia. "But the frauds obviously have an accelerating effect of the erosion of trust, and because a much broader group of individuals now own stock - many through retirement accounts - people feel they have a real stake in corporate America in a way they didn't a generation ago." Others say the perception that corporate chieftains can play the system at the expense of investors and average workers has also soured many about the fairness of the corporate structure. For instance, Sprint handed its two top executives a big increase in salary and bonus last year despite a declining stock price, a loss of market share, and a minor scandal that forced the two executives to leave the company. Last year, there was also the case of bankrupt Global Crossing, where former chairman Gary Winnick walked away from the ruined company with over $700 million. "I think that with the economic mood such as it is, people are getting a little bitter with all these layoffs," says Al Golin, cofounder of Golin/Harris. "And at the same time, they read news about CEOs taking huge pay packages upon leaving - it's made layoffs an even more touchy subject." So will the much-discussed Sarbanes-Oxley Act help restore confidence in corporate conduct? Not likely, say most respondents in a recent PriceWaterhouseCoopers survey of senior executives. Just 31% thought the legislation would restore investor confidence. And many seemed to resent the added regulatory measure altogether: 58% described the act as either "well meaning but costly," or "hasty and ill-considered." The more recent scandals will only bolster that feeling, at least in the short term. "When you have something like a HealthSouth rear its head in a post-Sarbanes-Oxley world, it's hard to imagine that it doesn't affect people's views," says Matthew Harrington, president of Edelman's Eastern region. Understanding Sarbanes-Oxley Others say that companies are still grappling with all the implications of the legislation, and are unsure of exactly how it may ultimately affect their business practices. "The rules continue to evolve, and it's going to take a while for that legislation to really take hold and to have people really feel like they know what it means, and how it should be applied across their communications," says ITT's Martin. "Understanding all this has become part of our jobs now." Yet not all the survey data is bad. The Edelman focus group found that 71% of Americans still trust the companies they work for. Furthermore, 53% of respondents to the Golin/Harris study gave the upbeat prediction that "business has learned its lesson," and will be more "trustworthy in the future." "There's some receptiveness to the idea that business can do better in the future," says Mark Rozen, SVP and director of research at Golin/Harris. "I think there's something positive to point to that number." ----- Do we trust anyone at all? "I just don't know who to trust anymore. From now on, I'm going to be more careful and cynical about what I believe." A whopping 69% of respondents to the Golin/Harris International trust survey either "strongly agree" or "somewhat agree" with this statement. Another study by Edelman found that a mere 7% think corporate communications professionals are a credible source of information, ranking them lower than lawyers, congressmen, and union representatives. Only celebrities received a lower rating. "I don't think that's so surprising when one looks at how PR folks are portrayed, not only in the news media, but also in movies," says Tom Martin, SVP and director of corporate relations at ITT Industries. "I don't think this is something we need to wring our hands about, though. What's more important is how our leaders - our CEOs - see what we do and realize our importance as a corporate function, and how we are a major touch point through which a company can enhance its reputation." Others say that corporate PR executives' credibility problem stems from the fact that they are often the public face of the company during a time of crisis, while at the same time their ability to influence important changes in the corporations during such a crisis is limited. "Unfortunately, I don't think PR people are currently in a position to influence what companies do, and not just what they say," says Alan Towers, president of PR firm TowersGroup. "And that's the big challenge facing our industry - making companies align what they do to what they say. We need people in our profession who can walk into the boardroom and say, 'We have to change what we're doing here. This is bigger than the question of how you want me to spin it.'"

Have you registered with us yet?

Register now to enjoy more articles and free email bulletins

Already registered?
Sign in