Managing Bad News in the Era of Instant Communication

MANAGING BAD NEWS IN THE ERA OF INSTANT COMMUNICATIONŠ
A Presentation By
James E. Lukaszewski, APR, Fellow PRSA
CANADIAN INVESTOR RELATIONS INSTITUTE
Monday, May 28, 2001
Whistler, British Columbia, Canada
As Published in Executive Speeches, August/September 2001

Thank you, Tom, and to Canada NewsWire Ltd. for both sponsoring this special presentation and for that wonderful introduction. Barbara and I are delighted to be back in Canada where we have many friends and clients throughout the country. In fact, we came here to Whistler from Nimmo Bay, a truly incredible fishing resort off northern Vancouver Island, reachable only by helicopter. We got to do something I've always wanted to try since my first visit to British Columbia - fly into Vancouver harbor by seaplane. It was awesome.
Good afternoon, everyone. We have some very important things to talk about in a very limited amount of time. So let me begin.
Today's topic is about managing bad news where instant communication is becoming a requirement. I mean:

Faster than prompt.
Faster than timely.
Quicker than quick.
Faster than fast.

The market today is increasingly demanding what amounts to real-time communication, especially when the news is adverse. We will talk about some important topics today in addition to this issue, including the latest news on the new U.S. government, the impact of the new rules on Full Disclosure in Canada and the United States, and how all this plays in the mind of the CEO these days.
The context whenever I talk is always bad news. So, let me begin by defining what I believe a crisis to be from your perspective. This will help give you a sense of where we are headed in our discussion today.
What are some examples of crises?

Stock price drop of 50 percent in 24-to-48 Hours.
Indictment of a CEO and others.
Activists attack outside - on the board.
Rumors . . . founded and unfounded
Acquisitions/mergers/takeovers (all acquisitions and mergers are takeovers anyway)
Anti-corporate government actions.

There are four types of crises: operating, non-operating, the combination of the two, and virtual.
Operating crises result from what the organization does as a matter of a day-to-day business. More than 90 percent of all organizational crises are operational in nature. This also happens to be where the organization's greatest skill and expertise happen to be.
Non-operating crises, which are approximately five-to-ten percent of all corporate crisis situations, tend to cause 120 percent of the damage to reputation and other aspects of a company's relationship with its constituencies. Examples include crime, environmental threats, malfeasance, stupidity, sexual harassment, violence, unexpectedly bad behavior by management - the kinds of issues the executive is unlikely to learn how to manage at MBA school.
Crisis can be combinations of operating and non-operating events. For example, a rail car of chlorine is spilled outside a plant. A cloud of gas billows out into nearby neighborhoods, necessitating an evacuation. Trees are defoliated. Citizens are angry. The municipality requires immediate public hearings, enormous reparations, and even threatens criminal prosecution. This is a combination crisis event. There are both operating and non-operating problems to resolve.
The fourth type of crisis is a circumstance we are seeing all too frequently. This is the Web-based attack on a corporation's reputation, its products, and often its leadership. If you are a big brand, you are a big target. Some targets, like McDonalds, have literally hundreds, perhaps thousands of negative sites trying to get the world's attention for their perspective and point of view. Of all the four types of crises, it is the virtual crisis that is the most puzzling, the most difficult to forecast, and, therefore, the most challenging to respond to - or just deciding to respond to at all.
But, before I talk about these in more detail, let me share three news items from south of the border.
First, this is the week the earth moved under President Bush with the shift in power in the U.S. Senate. The affects of that transition will be felt in Canada for some time to come and may determine the success of Mr. Bush's presidency. Here are some pluses and some minuses:

Legislation will be delayed because a lot of senators are looking for new office space. This is probably a good thing.
New democratic chairmanships will mean new agenda's.
George W. Bush will need to become more Clinton-like (that is willing to negotiate and make deals) and, in fact, make the American democracy truly work the way it's supposed to. Had the Republican majority remained in Congress, Bush would probably be a much less successful President. It's hard to make deals when everyone knows where all the bodies are buried. When government is divided, we get better government.
Businesses will need to re-hire promptly some of those discarded Democratic advisors they detested, but needed. We have a new government in the United States.
There will be more regulation, not less.
There will be more exposure and disclosure, not less.
Presidential election politics will start earlier than ever.

Keep in mind:

More than 20 U.S. Senators are over age 60. Things could change suddenly again.
George W. Bush was selected rather than elected president, but he is the President none-the-less.
Washington, D.C. remains the theme park of American democracy. Watch the show, be entertained by what happens inside the Beltway, but remember what is happening in the real United States happens outside of Washington, D.C. - every single day of the year.

The second news item is about disclosure. It is coming to Canada, probably not as comprehensively or as determined as in the United States, but portions of it are here already. It is in the interest of investors for all honorable companies to expand disclosure.

Full disclosure will alter the way all of us provide information. Full disclosure is really about equal access . . . if access isn't equal for all those affected, it is not full disclosure.
Full disclosure will dramatically alter the behavior and the tasks of analysts by exposing their obvious conflicts of interest, by establishing analyst codes of conduct and other behavior-controlling mechanisms, which further restrict the kinds and types of recommendations analysts can make without additional evidence or proof. It's also likely that analysts' ability to make stock recommendations will be much more heavily regulated.
Analyst's habits and recommendations will be tracked and analyzed in real time, just like the stocks they talk about: The argument that full disclosure can overload shareholders and others with too much information is foolish and wrong. It is up to the information provider to help the investor understand both the value and availability of information provided. If that's not what your company is interested in, then it will fail the test of full disclosure.
Full disclosure rules and requirements in the United States will get tougher and more expansive. The same will happen in Canada. You're just now seeing the very beginning of this concept of full disclosure
Moor's law will apply to full disclosure as it does to the expansion of computer technology: Every 24 months the quantity and specificity of information disclosure will significantly expand. Incidents like the Nortel collapse and the Air Canada merger will push disclosures limits in Canada.
Before long we may see disclosures occurring before significant events take place. The ultimately destination of full disclosure is having companies knowledgeably speculate about their worst fears and concerns

The third item of interest I bring you is the growing reality that being a CEO is becoming less and less like it used to be. Recognizing these new circumstances will change and enhance our relationship with the CEO if we are ready. Here is some interesting data:

Average tour of U.S. CEOs is now under 30 months. By contrast, most strategic plans are for 60 months or more. Obviously there is a disconnect here that needs to be corrected.
Compensation packages of enormous size allow CEOs to drop out before they are forced out. If forced out, they can move on with their lives quite easily.
More and more non-business issues, i.e., globalization, human rights, public policy analysis, are intruding into management's time. These topics, which seem soft and distractive, often require moral rather than monetary or business judgments.
CEOs have yet to be formally measured on their moral and belief systems, but that's coming and faster than you think.

The question you're obviously asking is what does this have to do with urgent financial communication?
The inverse of Moor's law applies here: The more sensitive, the more damaging, the more victims the situation creates, the less time is allowed before the public expects positive action and massive communication to be underway. Instant response and instant explanations are the expectation.
We have entered the era of instant communication, faster that timely, faster than promptly, now . . . virtually instantly.
From the perspective of crisis management, crisis communication combines five important communication elements. The first is instant analysis involving key issues, scenarios, communication objectives, and exposure analysis. The second is strategic response:

Solving the problem.
Dealing with victims.
Communicating with employees.
Communicating with the indirectly affected.
Dealing with the self-anointed, self-appointed - those who opt into the situation on their own such as the media, activists, and critics.

The third, tactical ingenuity consists of those extraordinary actions we can take, which allow us to communicate instantly. Included among these are:

E-mail, now available in blast formats that can reach thousands simultaneously in seconds.
Web casting technology, which is improving every day.
Media partners/messengers working with those who reach specific audiences about as fast as one can with the right messages.
Effectiveness checks, increasingly trying to determine who actually receives the message and evolving towards instant responses in real time:
CEO leadership/decisiveness since all tactical ingenuity depends on what the chief strategist in the organization intends to accomplish.

The fourth is strategic preparation:

Identify likely scenarios.
Establish relationships.
Test your response plan.
Used outsiders where appropriate.
Establish whereabouts structures.
Stay on top of response technologies.

Fifth, manage the response process:

Everyone has equal access.
The story is properly scripted.
Ground rules need to be set for everyone and every audience.
Manage the media dimension if there is one.
Aggressively get information to everyone, even if they don't have E-mail.
Aggressively listen . . . the boss needs to understand that perception is being created as actions are taken. Perception building is a two-way process.
Use the Web as a way to monitor critiques and commentary, answer questions, to comment, and to be a major repository of information for easy access at the convenience of any one who cares to look.

The fact is there are new strategic communication realities that now affect public companies. Some of the most important are these:

"After the market closes" has disappeared. Trading and disclosure are now 24/7.
News deadlines in the dot.com world no longer exist. Deadlines are now.
Communication functions have to come together during crises. Make that happen; test to eliminate surprises; work to consolidate stories effectively.

The CEO and his/her decisions are your general focus in crisis situations. The CEO needs four kinds of information:
1. Data:

Sense of the market.
Temperature of investors.
Emotional state of the organization.
Identification of known patterns that fit the strategy.

2. Perception assessment:

Continuous candid assessment is essential because perception can become reality if the situation is not managed.

3. Real-time response options:

Management confidence is built on useful real time response options. One example: IBM recently conducted company-wide employee meetings where as many as 52,000 people on a single telephone conference call. Employees need to hear things in real time so they can communicate in real time. Time consuming development of written materials, even E-mails, versus verbal communication can be the difference between preserving or at least defending the reputation of the company and serious reputation damage.

4. The CEO wants to know what to do next, what's going to happen next. When trouble comes, the marketplace expects seven messages or behaviors:

Candor: What happened.
Explanation: The why of the situation and what you learned (even partial information.)
Declaration: Conclusive remedies or steps to be taken to prevent the situation from reoccurring.
Contrition: Continuous verbalization of regret, empathy, taking appropriate responsibility (this limits both news value and litigation vulnerability.
Consultation: Collaboration with those directly affected, critics, government, agencies, employees, and victims. Some independent oversight may be useful in preventing similar situations or stimulating earlier warnings.
Commitment: Public promise that to the best of your ability similar circumstances will not ever happen again without warning and pre-emptive action.
Restitution/penance: Actions that restore and build investor confidence because someone pays the price.

From the most practical of perspectives, the advisor to the CEO:

Has exceptional verbal skills.
Communicates effectively in real-time, on the spot, because that's how managers make decisions.
Focuses on what is truly and indisputably important.
Provides valuable, useful, applicable advice beyond that which the boss already knows.
Provides well-timed, truly significant insights (the ability to distill wisdom and useful conclusions from contrasting even seemingly unrelated information and facts).
Understands patterns of events and problems and can plan against them.

There are four crucial tests that ideas, concepts and recommendations must pass to be useful to management, especially the most senior managers:

Ideas must help the boss achieve his/her objectives and goals.
Ideas and suggestions must help the organization achieve its goals.
Ideas and suggestions must be truly necessary (and pass the straight face and laugh tests).
Without acting on the recommendations, some aspect of the business will fail or fail to progress.

If I could manage your thinking today, there are six things I would have you remember from today's presentation:
First, investor relations and crisis response managers have joint responsibilities to help and direct management in the two-way communication response process. Manage the perception process, understand the nuances of each audience's perception of the situation, and be responsive to each.
Second, technology is the success driver in real-time communication: Web space for information flow; E-mail technology down to the individual shareholder; real time mechanisms such as phone/Web combinations and streaming video technologies that allow important real-time communication. Stay technologically strategic . . . prepare for more technology to meet and execute new requirements for disclosure in the near future.
Third, as my American friend and colleague Jennifer Weichert often advises, utilize messengers. This means editors, reporters, analysts who can either validate the perceptions you are trying to manage or whose feedback will build your awareness of what is really being said out there. Either way, the boss is going to want this information. Employees are key messengers in almost any urgent circumstance.
Fourth, understand the patterns of the events. No matter what can happen in a negative way, it has absolutely happened to someone else, somewhere else. Understand the story of the problem, then the sources of the problem, then the phases of the problem, and then the elements of the problem. Then develop appropriate communication response remediation strategies accordingly.
Fifth, remember the environment of the CEO. To understand it, one has to recognize the four general divisions of tasks the CEO faces daily, alone:

Soft intrusions
Hard obstacles
Nagging problems
Career-defining moments

Soft intrusions include negotiations with employees; anti-corporate government action; poor sales; nagging negative news; personal, professional, corporate embarrassment.
Hard obstacles are situations such as a 50% stock price drop in less than 30 days; job actions and walkouts; major product market loss; product failure.
Nagging problems include activist attacks on individual executives and board members; rumors; unfounded and founded allegations; mergers and takeovers.
Career-defining moments include a 50% stock price drop in a 24-hour period; criminal indictment; serious people failure; serious, high-profile product failure; continuing bad product performance; embarrassing, needless, obviously stupid events.
The CEO is completely dependent on his/her organization for success. Organizations are composed of essentially two kinds of people - those who lead the organization and manage its future, and those who are watching and counting what these leaders and managers do everyday.
Most CEOs soon learn one of the most fundamental lessons of their tenure: There is a difference between leadership and management.
Managers are generally those who run the organization by the numbers. The manager's goal is to make the bullet as forecast or exceed it, to achieve the targets as forecast or exceed them; to stay focused on producing primarily tangible results or exceeding expectations.
Leadership depends on verbal skill and personal example. Leaders lead through inspiration, motivation, verbalizing strategic vision, conducting strategic evaluations and questioning, and solving people problems.
Sixth, today when trouble comes, people are likely to be betting against you. Your ability to understand and communicate with confidence in real time with constituents will be the key to winning the perception struggle that crisis always creates.
For more information on what goes on in the mind of the CEO, please check my Web site at www.e911.com. Click on the yellow tab "Articles and Monographs." Under "Articles" scroll down to "Strategy, Supplement to pr reporter, 2001," and click on No. 14, "Inside the Mind of a CEO." I think you'll find it extraordinarily helpful and useful as we all work to serve those who employ us in better, more effective ways.
Thank you again for inviting me. Have a wonderful conference.

Copyright Š 2001, James E. Lukaszewski. All rights reserved.