Communicate Effectively to Preserve Enterprise Value During Bankruptcy

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.

</p><p>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.

</p><p>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.

</p><p>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.

</p><h3>The Value of Effective Communication</h3>

<p>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."

</p><p>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."

</p><p>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 <i>Advertising Age</i> reports that there
are at least 10 advertisers "whose spending topped $1 million in 2002 but
have yet to spend a cent in <i>Martha Stewart Living</i> through July." Stewart may ultimately win in a court of law, but for now, she's losing in the court of public opinion.

</p><p>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.

</p><h3>Seven Proven Elements</h3>

<p>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.

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

</p><p>1. <i>Establish key messages that tell the company's story.</i> 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.

</p><p>2. <i>Anticipate scenarios.</i> 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:

</p><ul>
<li>layoffs, closures and likely future actions to preserve cash flow
</li><li>impact on customers, vendors and third-party partners

</li><li>likelihood of regulatory involvement
</li><li>anticipated competitor response
</li><li>nature, timing and scope of media scrutiny.
</li></ul>

<p>3. <i>Develop the plan for communicating with stakeholders.</i> 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 <i>CoServ</i> 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.

</p><p>4. <i>Keep communicating.</i> Public companies
must do so and are well served to fulfill disclosure obligations strategically,
not just routinely. American Pad &amp; 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.

</p><p>5. <i>Be consistent.</i> 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.

</p><p>6. <i>Know the boundaries.</i> 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.

</p><p>7. <i>Expect the unexpected.</i> 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.

</p><p>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.

</p><hr>
<h3>Footnotes</h3>

<p>^{<small><a name="1">1</a></small>} Greg Bustin is president of Bustin &amp; Co., a firm specializing in helping companies address the communication implications of bankruptcy, litigation and other crises. <a href="#1a">Return to article</a>