Dealing With Bad Corporate Relationships

Lessons from Enron and Arthur Andersen

Presented by: Dawn Yankeelov,ASPectx and Robert L. Brown,

Greenebaum Doll & McDonald PLLC

The Enron Debacle

Sunday, Feb. 3

Courier-Journal

Enron Issues: What It Is Not

1.Not Just a Public Relations Matter

2.Not Just an Accounting Matter

3.Not Just Greed in Top Management

4.Not Just a Story Told For Scandal

5.Not Just an Energy Industry Issue

Enron/Arthur AndersenStory Highlights

1. Corrupt Accounting Practices

2. Bending and Breaking of Sound Deal-Making Practices and Known Laws

3. Greed in Top Management and Politics

4. CoverUp Issues—Shredding Sins

5. Panic in Public Relations and Lies

6. Overuse of Pleading the 5th

7. Economic/Political Impact for America

8. Ultimate Change Management in Business Accountability, Pensions, and any businesses touched by Enron

Endless Analysis and Articles

Too Much in the Balance

Politics As Usual?

Enron/Arthur Andersen Lessons:Good News For You

•Firsthand Look at What Brings a Company Down

•Opportunity for Change Management

Within Your Ranks

•Opportunity to Examine Public Relations Tactics

•Formulate and Review Crisis Management Plans

•Ethics in Your Industry: Draw Your Own Lines

•Social Responsibility as a Key Manager

•Learn the Success and Failure of the “No Comment” Philosophy

Proper Planning & ExecutionHands-On Managing Communications

1. Align Communications and Business Strategies

• Interview Senior Management

• Review and rewrite Corporate Business Plan

2. Analyze Perceptions of Communications

• Conduct Communications Audit—look at each department’s collateral materials for internal/external use

• Interview employee groups, customers, media, and determine perception of the organization

3. Strategize and Plan

• Review major forms of communication and plan for execution—employee relations, MARCOM, media relations, etc.

• Write plan for each as if budget was unrestricted

Proper Planning & ExecutionHands-On Managing Communications

4. Organize Your Resources

• Limited Budgets can Lead to Department Head Participation

5. Make It Happen

• Put Into Motion That Which is Planned

• Prioritize Tactics

6. Establish Accountability

• Use Evaluative Skills and feedback opportunities

Key Point:

Stay out of Reactionary Mode in Communications

Questions to Ask Yourself•Has your company or department ever experienced a crisis situation?

•Do you think it might someday experience a crisis?

•Have you ever played a part in managing a crisis?

•Do you wonder why some crises seem to come and go, while others take on a life of their own?

•Do your instincts tell you that something should be done now to help prevent a crisis in your company?

Key Quote: “Managing serious problems in business is not an art or a science. It’s more like playing golf.”

—Jeff Caponigro, “The Crisis Counselor: A Step-By-Step Guide to Managing in a Business Crisis

Examples of Crisis

• Employee layoffs/downsizings• Financial results below

expectations• Poor employee morale• Product defects/quality

problems• Mistake in technology• Violent threats by former

employee• On-the-job accidents• Sudden deaths of senior execs• Loss of a major account• Government Probes

Keeping the Business Safe

Prevention of Crisis

TheCrisis Itself

Monitoring and Evaluating Reactions

Planning for a Crisis

Communication during Crisis

Identifying and Assessing Vulnerabilities

Assess Vulnerabilities: Note the Warnings

Tipoffs in the Press• Fortune article in Jan. 2001

– Bethany Mclean, reporter, wrote, “The company remains largely impenetrable to outsiders. How does Enron make its money? Details are hard to come by because Enron keeps many of the specifics confidential…”may increase the chance of a nasty surprise…”—Stock had jumped 90 percent, story died

• WSJ in May 2001– Political meetings were covered in WSJ—Lay meeting with

Cheney• Big Plays Came in Oct 2001

– Media experts say the regulatory angles did not come up until Enron fired CFO Andrew Fastow in October 2001 for overseeing questionable partnerships overstating profits by $600 million

Vulnerability or Recycling at Its Finest?

Preventing the CrisisLow Marks: Shredding versus Saving• Hiding the Mess Doesn’t Make it Go Away

– Oct. 12, 2001-- In-house lawyer at Arthur Andersen emails the lead partner in the firm’s Houston office to remind him of the firm’s document-destruction policy

– Oct. 23, 2001-- David Duncan, lead Enron Auditor at Arthur Andersen calls urgent meeting to organize a shredding effort

Timely Remarks: Arthur Andersen CEO Testifies• An Error In Judgment Discussed

– Dec 12, 2001--Arthur Andersen CEO Joseph F. Berardino gives testimony at a congressional hearing saying there is “a crisis of confidence in my profession” and that “real change will be required to regain the public’s trust.”

Planning for a Crisis

• “Pass the Blame” Tactic– Arthur Andersen’s CEO Points a Finger at Enron’s Business

Model reported by Houston Chronicle, Jan. 21, 2002• “An important point here is people want to focus on the

accounting, and I think that’s fair game, but a company has failed. And, it’s failed because the economics didn’t work,” Joseph Berardino, CEO of Arthur Andersen

• Fact: Enron paid Andersen $52 million for auditing and consulting services

• Fact: Documents show Andersen officials in February 2001 discussed dropping Enron as a client but noted fees could go to $100 million

– Kenneth Lay’s wife on the Today Show crying and saying they have lost their liquidity—Over $30 million in assets, especially homes

The Crisis Itself

• Congressional Action—Jan. 10, 2002--Justice Department confirms that a criminal investigation of Enron’s collapse has begun

• Also, in January: Numerous Congressional committee investigations including—

– Senate: Banking, Commerce, Energy and Natural Resources, Finance, Govt. Affairs, Govt. Affairs Subcommittee on Investigations, Health, Education, Labor, and Pensions

– House: Education and the Work Force, Energy and Commerce, Energy and Commerce Subcommittee on Oversight and Investigations, Financial Services

• Fact: Enron has written campaign checks to ¾ of all senators and 1/2 of all House members

Communication During the Crisis

Jan.

25,

2002

CJ

Communication During the Crisis

Jan. 26,

2002

NYT

Former Vice Chairman J.

Clifford Baxter found dead in Mercedes—

Voiced Concerns at Enron in May

2001

$60 Million in Govt.

Contracts to be

Reviewed

Communication During the Crisis

Feb. 4,

2002

NYT

Mr. Lay’s lawyer, Earl J. Silbert, said, “Judgments have been reached and

the tenor of the hearings will be prosecutorial.”

Monitoring and Making Adjustments

Expected Changes…

--Pension fund reform and more rules and regulations to protect employees

--Gone: Inside/Outside Auditors being the same

--Overhaul of Accounting Practices and Limits on Consulting Scope

--Tightening of SEC Regulations

--More Investigations into Energy Trading Operations

--Debates and Redefining of Corporate Ethical Business Conducts for Senior Executives

--Investigation of Political Investigations

Sign of the Times

• Bond analyst Jon Cartwright said there is "fear out there" among investors that they might own the next Enron. – "The Enron problem has spread beyond the energy group and

become a corporate bond issue. Bidding is drying up." – "Companies that have financial statements that are even the

most remotely confusing are traded down. Companies with off balance sheet entities are traded down too," said Cartwright. "Investors fear they are missing something or accountants may have missed something."

– --taken from Power Engineering magazine on Williams Cos. stock going down,2/05/02

Lessons: Before a Crisis• Do an extensive crisis audit of your entire organization. The goal

should be to know in advance every major crisis waiting to happen.

• Expose as many secrets about your organization as possible. The goal is to know the worst about yourself before others do. In a major crisis, everything about your organization will be exposed.

• It is not enough to know the worst about oneself unless one is willing to do something serious to correct it as soon as possible. The media will not only want to know what you knew when, but what you did, and did not do, about it and why.

• Get media training for all of your top executives before a major crisis occurs.

• Reward and do not kill the messengers of bad news.

--excerpted from Managing Crises Before They Happen

Lessons: During a Crisis• Fire the "spin doctors!" Get rid of communication professionals that

are only interested in reacting to a crisis with "spin," rather than finding and preparing for potential crises.

• Tell the worst about yourself as soon and as completely as possible. The truth will come out anyway and will only prolong and worsen the crisis.

• Do not blame others, it will only worsen the crisis.

• Do not give statistics as to why you acted or did not act the way you did. Statistics are not only meaningless to most people, but they are cold and, therefore, an indication of guilt and callowness, especially if there were deaths and serious injuries.

• Remember that above all you will be judged on your moral character.

--excerpted from Managing Crises Before They Happen,

By Ian I. Mitroff

Best Bets: Crisis Communications

• If in a crisis situation, your half of the story has not been told, then solid public relations can work to bring out the facts.

• Honesty is the best policy to “get it over with.” Apologies can speed up the attention-getting phase and bring the crisis to a conclusion.

• When you can personalize a story in the media, it can be convincing, if there is credibility in those doing the telling.

• When a mission or a goal is questioned and needs to be reaffirmed to move forward, public relations can assist.

• When explanation of actions is warranted and can be seen in a positive light, public relations can preserve relationships.

Be an Effective Change Leader

1. Commitment to a Better Way. See change as exciting, worthwhile, and essential to the future success of the institution.

2. Courage to Challenge Existing Power Bases and Norms. Do not fear “failure” and look for the lessons learned to move forward.

3. Personal Initiative to Go Beyond Defined Boundaries. Take action and evaluate the changes for pros and cons.

--taken from Real Change Leaders by Jon Katzenbach, and others

Be an Effective Change Leader

4. Motivation of yourself and others. The power to motivate and inspire is seductive.

5. Care about how people are treated and their performance. Being fair-minded and sensitive to issues is critical without manipulation.

6. Keep low-profile and toot the horn of others in the organization. Self-promotion and crusading are ways that managers undermine credibility.

--taken from Real Change Leaders by Jon Katzenbach, and others

Trying Not to Be the Next Enron

“Anytime something like the Enron situation happens, it creates a gut-check time for CEOs and boards, a time to be sure you can pass the red-face test.”—William Zollars, CEO of Yellow Corp., a trucking company

“The degree of due diligence and self-reflection is heightened,”—Alan J. Lacy, CEO of Sears, Roebuck & Co.

NYT, Jan.26, 2002

Trying Not to Be the Next Enron

• A new PricewaterhouseCoopers survey suggests that CEOs are very little influenced by their own managers or employees when it comes to matters of corporate responsibility. (1-26-2002)

• Primary influencers are members of the board, shareholders and customers (ranking 1st).

Trying Not to Be the Next Enron

• “On the one hand, companies plead for liberalised markets…but this must also be accompanied by accountability, by transparency, business principles, environmental policy, and by corporate social responsibility.”

—Antony Burgmans, Chairman of Unilever quoted in Bangkok Post, Jan. 26, 2002

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Robert BrownGreenebaum Doll & McDonald PLLC

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Louisville, Kentucky  40202Office:   502-587-3562

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