The Dynamics of Public Trust and Corporate America: The case for compliance communicationsJerry Johnson, Executive Vice President, General Manager, Brodeur Washington, D.C. / New Yor
“Boards of directors are like subatomic particles – they behave differently when they are observed.”Nell Minow
Boards of directors and executive officers have a lot of people looking over their shoulders these days. A seemingly unending series of scandals and corporate malfeasance have prompted lawmakers around the world to put in place a mind-numbing list of rules, regulations and reports.
So if you are an American corporate executive the daily lexicon has changed from brand value and market growth to Reg FD, HIPAA, the USA Patriot Act, Gramm-Leach-Bliley, H-1B visa, and the now famous (or infamous, if you have to abide by it) Sarbanes Oxley or SarBox.
Indeed, compliance with the new battery of regulations is a preoccupation of today’s corporate boardroom. At a recent meeting of Brodeur’s Advisory Board in Boston, more than one executive mused that corporate boards are spending less and less time advising the company on how to make money, and more and more time advising the company on how to avoid becoming the subject of a government investigation.
How did all this happen? How have companies gone from a traditional focus on quality and innovation to an obsession with compliance and regulatory paperwork? And how has that, in turn, impacted the way companies operate and communicate? What does it mean for companies having to communicate with government regulators, business partners, and customers?
The initial cause of the last five years of regulatory explosion seems straightforward enough. Over the past decade, a series of well publicized corporate bankruptcies and financial shenanigans caused lot of people to lose a lot of money.
If you want to get the attention of government and regulatory bodies, have millions of taxpayers and voters lose billions of dollars.
The scandals first turned up in the United States and emerged at the same time Americans were experiencing the aftermath of “irrational exuberance” and a runaway stock market. As stock prices melted, so did corporate financial structures. At the end of the day for many companies there was not much left that was “rational”, only an assortment of corporate improprieties and financial misdeeds.
Soon enough, what many called an “American disease” spread to Europe. Alongside the names of Enron, WorldCom, and Tyco were companies with the names of Royal Ahold, Vivendi, and Parmalatt.
Indeed a quick review of scandals over the past ten years yields an impressive list of companies of every size, shape and sector caught engaging in all sorts of questionable activity. From 2002 to 2004 we counted some thirty companies implicated in some form of corporate scandal. Using published reports we estimate that the thirty companies listed in Table One ended up paying roughly $4 billion dollars in fines and legal settlement plus just under $1 billion in legal fees. Our rough estimate of losses in current and potential U.S. market capitalization runs somewhere above $1 trillion.
By anyone’s calculation, a lot of people lost a lot of money in a very short period of time.
Figure 1 
So it was no wonder that legislative and regulatory authorities moved quickly moved to erect structures that would prevent future scandals. Sarbanes Oxley, the most sweeping regulatory reform of corporate America since the great depression, was drafted, debated, passed, and enacted into law in a matter of weeks. In the courts, angry shareholders and employees demanded, and in some cases got, corporate executive accountability. Many U.S. business executives traded golden handcuffs for real ones. And for every Frank Quattrone, Martha Stewart, and Bernie Ebbers there were scores of lesser known top-tier executives who took early retirement to a jail cell. In the case of Enron, Adelphia and others, entire families were under prosecution.
These scandals, however, had a much more profound impact than a simple loss of money. They precipitated an unprecedented crisis in public confidence in corporate institutions and finance. And it is a crisis in confidence that will be very difficult for any company operating in the U.S. to overcome.
Consider one of the benchmark measures of public confidence, the Harris Survey of American Institutions. Started nearly fifty years ago, the Harris confidence measures for basic U.S. institutions rarely change more than a percentage point or so each year. Indeed one of the significant findings of the Harris Survey has been that American confidence in institutions – be they labor unions or religious institutions – typically rise or fall very slowly over time.
Not so in the aftermath of the last five years of corporate scandal. The loss of U.S. confidence in the enterprise and corporate finance has been seismic.
Ever since World War II, a steady one-third of Americans said they had a “great deal” of trust in corporations and their financial engine, Wall Street. This steady and firm degree of trust in the basic institutions of public capitalism was the underpinning of continued economic growth and moderate financial and regulatory oversight.
But in the span of just a few years, from 2000 to 2004, American’s confidence in Wall Street was cut in half. Confidence in corporate America fell even further. Indeed, public confidence in corporate institutions is at its lowest level since the Harris Survey of American institutions was launched.
Today, Americans have less confidence in major corporations than they do in Congress. This is the definition of crisis.
The size and scope of the recent scandals can’t alone account for this dramatic drop in public confidence. The United States has gone through tough economic times before. There was the painful restructuring of American corporations in the 1980s during which hundreds of thousands of white collar Americans lost their jobs. Prior to that was the recession of the late 1970s. Amidst those and other economic ups and downs there were bankruptcies and questionable corporate activity. But the actions over the last five years have left a mark on the general public like no other. Why?
The answer may lay in the rise in America of the investor nation. Over the last ten years, the financial profile of the average American has dramatically changed. The biggest change has been the move from traditional corporate funded retirement programs to individual retirement accounts. As late as the 1980s, nearly one-half of large American corporations offered employees traditional retirement pensions. But today, traditional retirement plans are disappearing. Increasingly they are being replaced by tax incentivized personal retirement accounts, most popular being the 401k account. That, in turn, has led an increase in the percentage of Americans whose retirement and personal wealth is dependent on the U.S. stock market.
According to Congressman Oxley of Ohio, co-author of the Sarbanes Oxley Act, Americans have “moved from a nation of savers to a nation of investors.“ Justifying the stringent requirements implemented following the Enron, Congressman Oxley noted, "When I came to Congress in 1981, 19 percent of American households owned stock. Today, it's 52 percent." In 2003, more than 41% of U.S. households owned a 401k or other personal stock-based retirement account with more than $2.3 trillion in assets.
So when the scandals of the last five years hit, they had an impact that reverberated far beyond the employees of Enron and WorldCom. It directly affected the retirement plans of nearly half of the American population. It was not just those working in the private sector that lost big. The scandals hit the traditional retirement funds of the public sector. The retirement plans of California state employees lost an estimated $1.2 billion just from the failure of four companies alone – Enron, WorldCom, Tyco, and Global Crossing.
In the 1980s the painful restructuring of American corporations cost many their jobs. The scandals of the last five years cost Americans not only their jobs, but also a good portion of their net worth.
The result? An unprecedented loss of public confidence combined with an unprecedented set of severe and some would say onerous regulatory requirements.
So what has this meant for the beleaguered CEO and their corporate boards? Several things, none of them particularly attractive.
First, companies are finding it increasingly difficult to recruit good talent for corporate boards as well as the C-suite. According to reports from executive recruiters in the New York Times, an increasing number of executives are deciding that the headache and liability of being a chief executive is no longer worth it. Typically recruiters have to go through at least ten qualified executive candidates to find one qualified executive that expresses interest in a C-level position. Today recruiters have to go through twenty qualified candidates to find just one who will consider a board position. What used to a process that lasted several months can now take well over a year.
Another challenge is work force recruitment. The best professional candidates are asking tough questions or their corporate employers. Candidates are increasingly looking for companies that can demonstrate sound, transparent corporate financials. The same extends to business partners. Both are requiring greater financial and business due diligence than ever before.
Finally, there is the challenge of maintaining good relations with the regulators and elected officials in the public sector. Few U.S. executives want to arrive at the office to find a letter from the New York Attorney General Elliot Spitzer. Corporate executives are finding that they need to spend an increasing amount of time communicating, assuaging, and comforting public officials and regulatory bodies both at the state and Federal level.
So what does this mean for corporate communications? How do companies best navigate an American environment characterized by intense regulatory scrutiny and even greater public distrust?
First, focus on simplicity and transparency. At the end of the day simple facts do matter. Companies need to be able to answer basic questions about their business operations and financial activities in simple, easy to understand language. Did a sale take place? Did a sales contract generate real income? How is the loan going to be repaid? Is the independent board truly independent? Did the audit committee conduct an audit? In today’s world, complicated or convoluted language suggests obfuscation of questionable activity.
Second, invest in communicating to your most important stakeholders, your employees. Employees are every company’s first line of communications to the outside world. They are often a company’s most important investor group. While it may be difficult to impossible to surmount the skepticism of an outside world, companies should be able to build trust and confidence among those who work at the company every day. Today more than ever, employees are the most important building block for building corporate trust and loyalty.
Finally, engage in the public policy and regulatory environment. Corporate business plans come and go; however government regulators tend to stay around for a long time. Business executives ignore them at their own peril. Proactive steps that open a dialogue between the company and its regulatory and public policy counterparts can avert misunderstanding and mistrust. It can help avoid costly litigation and civil action or at least mitigate it when the unexpected does happen.
At Brodeur we view these three elements – transparency, employees, and public policy – as the pillars of a corporate “compliance communications” program. Compliance communications is a company’s concerted effort to differentiate itself in a universally damaged sector. It means going beyond adherence to regulatory limits and embracing best practices in corporate governance. And it calls for communicating those actions and values to employees, investors, business partners and government.
There has been much harm and few good things that have come from the corporate scandals over the last five years. For companies of integrity, we believe the current environment does provide an opportunity. At the end of the day, facts do matter. Sound business and financial practices, ethical business conduct, and honest, open communication should provide the best companies and opportunity to grow and thrive.
But don’t take our word for it. Consider the advice of Deborah Wince-Smith, president of the Council on Competitiveness in the recent issue of the Harvard Business Review:
“The conventional private-sector wisdom is that Sarbanes-Oxley is bad, that it diverts companies’ resources into meeting accountability requirements. My view is that the companies that move quickly to develop superior compliance will have the competitive advantage. I predict that over time, companies will be rated on corporate governance just as they’re rated on other performance metrics. Companies with the highest ratings for governance will reduce their legal exposure and attract investors – both essential to robust innovation.”
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