While economists debate whether the current recovery is sustainable, many business leaders remain in the fight of their lives as they wrestle with the implications of an uncertain economy.

Some leaders, unable to reverse negative performance, will be removed. A Booz Allen Hamilton study released this spring noted that "nearly 100 of the CEOs of the world's 2,500 largest companies were replaced last year, almost four times the number in 1995." Executives at other troubled companies will turn to the protection of bankruptcy reorganization. ABI-published data indicate that the number of chapter 11 cases being filed in 2003 is on pace to surpass the 10,000 mark for the third consecutive year.

For companies in transition, especially those facing bankruptcy, it's a stressful time. A company's stakeholders—employees, lenders, suppliers, customers, partners, regulators, legislators and others—want to know how they'll be affected. It's a leader's job to tell them.

By communicating effectively with those groups of people connected to a company in chapter 11, it's possible to preserve the value of the enterprise while preparing it to emerge from bankruptcy protection.

The Value of Effective Communication

Failure to communicate effectively can cost a company plenty of money, and worse, its reputation. "We can afford to lose money—even a lot of money," Warren Buffett has told his top managers. "We cannot afford to lose reputation—even a shred of reputation."

A Wharton study published last year concluded that "a 10 percent change in CEO reputation is estimated to result in a 24 percent change in a company's market capitalization."

Look no further than the Martha Stewart imbroglio for proof of this phenomenon. She awaits trial in January concerning her stock-trading actions. Meanwhile, her company's stock has lost more than 40 percent of its value, earnings fell 86 percent in the second quarter of 2003, and an article in the Aug. 25 issue of Advertising Age reports that there are at least 10 advertisers "whose spending topped $1 million in 2002 but have yet to spend a cent in Martha Stewart Living through July." Stewart may ultimately win in a court of law, but for now, she's losing in the court of public opinion.

A communication plan cannot turn bad facts into good ones. You can't talk your way out of something you behaved your way into. But a well-conceived and well-executed communication program can change the way an issue, person or company is viewed, which affects public opinion—which affects behavior and, ultimately, the bottom line.

Seven Proven Elements

A communication plan should articulate the strategy and actions for achieving a company's legal and business objectives. Operating without a plan increases the risk of significant short- and long-term damage to a company's reputation and market value as it proceeds through the bankruptcy process.

While no two communication plans are alike, the best bankruptcy communication plans share these seven proven elements.

1. Establish key messages that tell the company's story. There are two sides to every story, and your side must marshal the facts and shape them into a message that communicates effectively in and out of the courtroom during the bankruptcy process. It's critical for lawyers, management, the board and PR pros to craft the story, to always tell the truth and to agree on the core message. This is not a time to hedge, sugarcoat or speculate. But it is a time to make certain a company's positions are known and understood. Tell stakeholders what's happening, why, what's being done and (to the extent possible) what the future holds. When CoServ's expansion from an electric utility co-op into telecommunications was hit by the telecom meltdown, lender support faded and a $1.1 billion note was called. Chapter 11 protection was sought, but it threatened constituents' confidence in the immediate wake of Enron's collapse. One message explained that market conditions in the telecommunications industry had led 44 other telecommunications companies across the United States and in Texas to seek bankruptcy protection during 2001. Another emphasized the commitment to maintaining high levels of service for CoServ's 64,000 customers during the bankruptcy. These messages were effective in assuring customers that CoServ remained in business, customer service would continue and outstanding bills should be paid—all of which contributed to preserving CoServ's cash flow and, ultimately, enterprise value throughout the reorganization process.

2. Anticipate scenarios. Outline all possible scenarios that may occur in the course of preparing for, filing and moving through the bankruptcy process. Understand and prepare for the implications surrounding each scenario. Set objectives, rank priorities and agree on what's critical and what's not. These scenarios and "trigger events" may be within the company's control, but are just as often outside it. They include:

• layoffs, closures and likely future actions to preserve cash flow
• impact on customers, vendors and third-party partners
• likelihood of regulatory involvement
• anticipated competitor response
• nature, timing and scope of media scrutiny.

3. Develop the plan for communicating with stakeholders. Communicate with all of a company's constituents—not just lawyers and lenders—to help them understand the issues and the legal process of bankruptcy. In the CoServ matter, materials were developed for 14 separate constituencies. The sequence of communicating with these groups is key and should take an "inside-out" approach. Furr's Restaurant Corp., whose workforce included a significant number of Hispanic workers, prepared internal materials in English and Spanish. Designate roles and responsibilities, including identifying a single spokesperson. The CEO is the likely candidate, but he or she must be prepared to anticipate a range of questions and be skilled at returning to the key messages.

4. Keep communicating. Public companies must do so and are well served to fulfill disclosure obligations strategically, not just routinely. American Pad & Paper, a major office products provider in North America, had embarked on a turnaround strategy that evolved into a chapter 11 bankruptcy filing. Communications for this publicly traded company exceeded routine disclosure requirements in order to maintain customer and vendor relationships, retain key employees and support the sale of the company's subsidiaries. Private companies should keep communications lines open and resist the urge to stop communicating once the filing has occurred. Never communicate trade secrets, but remember that someone else will fill the news vacuum if your company doesn't. Proactive communication demonstrates openness and progress, so make sure people that should be kept informed are kept informed. Counter negative publicity and public concern, but avoid fights with people who buy their ink by the gallon and paper by the ton.

5. Be consistent. A company can reduce some of the anxiety related to the uncertainty of a bankruptcy by sticking to facts, integrating these facts into key messages and staying "on message." It may seem boring, but it works. At the same time, speak frankly about what is known, not known and what cannot be divulged. Credibility is key, so always tell the truth.

6. Know the boundaries. Remember the stated objectives and priorities, and know how hard to push if and when a confrontation escalates. It's smart to know at the outset of the proceedings what those writing the checks are willing to risk in order to win. A company's culture will help guide these decisions when its survival is at stake.

7. Expect the unexpected. There's usually a surprise or last-minute twist, so be ready for it. "Flexibility" is the watchword, and time is always of the essence.

Chapter 11 places the reputation of a company and its leaders at risk. A communication plan developed and implemented in concert with legal and operational initiatives can help minimize the risk of significant short- and long-term damage to a company's reputation and help preserve market value throughout the bankruptcy process.

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Footnotes

¹ Greg Bustin is president of Bustin & Co., a firm specializing in helping companies address the communication implications of bankruptcy, litigation and other crises. Return to article