It's your worst nightmare come true. Regulators called yesterday to inform of their investigations into your firm's practices, and already some of the toughest news reporters in the industry have called for comments --some more than once. You are still trying to absorb the information, figure out what's what and find out who did what, when, and why?

What do you tell those persistent reporters, your worried mutual fund investors, the concerned financial intermediaries that sell your funds, your loyal employees, your outside vendors, and maybe even your corporate shareholders if you are a publicly traded company?

Public relations and corporate communications executives differ somewhat in their approaches when advising clients as to what to do -- or not to do -- in the face of a crisis situation or scandal.

But all unanimously agree that companies should first take a few basic steps to remedy the offense and/or sanction the offender. Quickly and carefully assess the situation, determine if your company is at fault, and, if so, prepare a thoughtful and direct message to all constituents explaining the situation and detailing what actions will be taken and by whom.

Even if it has not yet been determined if your company is at fault, the thing to do is to say exactly that and to begin communicating even before an investigation has been completed, according to the experts.

The worst thing company executives can do in the face of a crisis is either out-and-out lie, or simply do nothing, crisis management experts told Money Management Executive.

"If they cover up, stone wall or flat out lie, they are doomed," said Larry Smith, president of the Institute for Crisis Management, a for-profit crisis management consulting firm in Louisville, Ky. "Reporters love to catch those who are pulling a fast one."

"Trying to dance around the issue or use spin is a cardinal sin," said Scott Tanner, founder and principal of Millennium Media Consulting in Alexandria, Va. "Journalists are so enterprising, they are going to get the story, anyway. If you have done something wrong, trying to cover it up is the worst thing you can do," he said. "Tell the truth. Be candid and forthright."

FRAGILE: Handle with Care

Whether it is an executive who has suddenly died, a tragic accidental event, a product recall, a class-action lawsuit, insider trading allegations, an ex-employee filing charges, or any other crisis event -- the current fund scandal notwithstanding -- company executives need to take a deep breath and address the problem head on. And they need to do it in the most ethical and direct way.

"It's not the crisis itself but the way that it is managed that will determine the outcome," said Robin Cohn, president of Robin Cohn and Company of New York, and author of The PR Crisis Bible (St. Martin's Press, 2000). Whether in the corporate world or the investment management universe, a company that doesn't do anything --often on the advice of legal counsel -- may face greater challenges, Cohn added.

"A company that is caught in a crisis has already hurt itself, but it can be even worse if it doesn't respond," she said. "And if a company doesn't appear candid, it can be terribly damaging."

"The natural reaction is to circle the wagons and batten down the hatches," said Jody R. Lowe, principal of the Wauwatosa, Wis.-based financial communications firm that bears her name, and a former mutual fund industry public relations executive.

While a gag order is often driven by attorneys whose job it is to protect their clients' interests, she explained, executives should take the exact opposite route and proactively get out in front of the news. Executives should understand the concerns of legal staff, but work to find the right balance between their desire for sealed lips and the proper disclosure for the firm, Lowe added.

Spitting out a pat "no comment" is also a mistake, she added. "A no comment' says that I am more concerned about handling how this crisis affects us than in communicating with clients," Lowe explained. Even a minimal response is a better idea, she added.

Furthermore, not returning reporters calls for comments is a bad move. "You're managing relationships with reporters," Lowe noted. If you cannot respond, call the reporters back and tell them that you cannot respond at this time, she suggested.

"The crisis will become public whether you respond or not," Lowe added.

"Every executive has to understand that there are two courts: the court of law and the court of public opinion," Smith said. "While it may take the court of law three years to decide if you are guilty or innocent, the court of public opinion will make up its mind in three hours to three days," he said.

The first thing a company can do once a crisis strikes is assemble a crisis management team that includes senior representatives from management, compliance, legal and the public/media relations department, said Bill Blase, president of W.T. Blase & Associates, a consulting and communications firm in New York. "The first thing to assess is: What did we do, how long ago did it happen, who is involved and what is our exposure?'" Blase counseled.

But the team must guard not to get caught up in finger pointing or in looking for heads to chop, he added. "They need to focus on what is the problem and how do we fix it," Blase noted. And their first concerns should be how to make restitution to investors who were harmed, and how the firm will rapidly communicate with all factions, he noted.

Just as disaster recovery teams and contingency plans became the business standard after the terrorist attacks of Sept. 11, firms are smart to prepare, in advance, for a crisis, Smith said. "You need to develop a plan before a crisis occurs so that if something goes wrong, everyone knows what they will do," he noted. That doesn't just mean an operational plan that will kick in if stuff hits the fan, but a plan as to who will say what and when, he added.

"In the future, every firm will have a crisis communication team in place," Tanner said. Even if, ideally, a firm never has to deal with a real crisis. That's akin to building a well before you get thirsty, he said.

"Companies of all sorts need to be more prepared for unexpected situations that can badly disrupt their business or even kill their business," said Erick Kanter, president of Erick Kanter Associates in Arlington, Va., and former head of the Investment Company Institute's public information department. The problem is that in a highly regulated industry with few past blow-ups to learn from, there hasn't been a perceived need for full-blown crisis preparedness, he added.

Some companies may be tempted to overdo it and prepare a really elaborate, voluminous crisis management policy that is tucked into a big binder, Kanter said. "But if something goes really wrong, you won't have time to go through the pages. You need it boiled down to who speaks and what do they say," he added.

Those companies that can often stem huge client defections tend to be the ones that "are out there quickly with a State of the Union' address," said Dan Sondhelm, vice president and partner with SunStar, a strategic communications firm in Alexandria, Va. "They will say, "Here's where we are.' We may have screwed up, and if we did, we'll pay investors back." he noted. The company needs to be able to address specific issues, focus on making their points simple and figure out what their story is, Sondhelm added. "If you were wrong, admit it."

"The single most important thing to do is effectively communicate with shareholders and clients by using timely, accurate information," said Ivy McLemore, a public relations executive with AIM Investments in Houston.

The most important thing for executives to realize is that there is no quick fix. "You have basically lost trust, and once that trust has been betrayed, it will take even longer to regain it," Cohn said.

As for those companies that have not been implicated in the mutual fund scandal, crisis-management experts suggest that those companies keep a slightly low profile, but proactively reassure investors that they have policies and procedures in place to prevent the types of abuses others are mired in.

While some clients have asked if they should build a campaign around being squeaky clean, Blase counsels them not to. "People will have a better perception of you if they don't think you are exploiting others' problems," he said.

The Psychology of an Apology

So what about a wide-reaching apology that says that you're sorry to many different audiences in one felt swoop? That's what Putnam Investment Management of Boston did when it plastered a public letter across the pages of several high-profile newspapers last November and promised reforms (see MME 11/17/03).

But the problem with apology ads of this type is that often, the company says it is sorry without actually taking clear responsibility for anything, said Brian K. Jorgensen, associate professor of marketing at Westminster College in Salt Lake City."An apology with no teeth" is often driven by concerns over sparking or pending litigation, he added. Still, a public apology is certainly better than a company hiding or denying any wrongdoing, Jorgensen noted.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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