Maybe CEO pay is not so out of line after all.
Enron found out the hard way this week what its chief executive officer, Jeffrey Skilling, was worth to the company: a staggering $3.5 billion. That’s the value that was wiped off the company’s stock market value the day after it surprised Wall Street by announcing his departure, less than a year after he took the helm at the energy company.
That steep decline came on the heels of a slow and steady erosion of value that began earlier this year. In January, Enron topped $84 a share in New York Stock Exchange trading. On the night before Skilling announced his departure, it closed at $42,93. The next day, it opened trading at $37—losing 10 percent of its value. (Even though Kenneth Lay, the company’s chairman and the chief executive who handed over the reins to Skilling, is stepping back in.)
Wall Street’s reaction was likely less about any unusual admiration for Skilling and more about the fact that it deals badly with surprises. And for public relations professionals it raises serious questions about how best to handle both high-profile executive transitions and unanticipated news.
“You can’t help but think that there must have been a better way to handle an announcement of this magnitude,” says Keith Mabee of Cleveland public relations firm Dix & Eaton, who concedes that it is difficult to know precisely what restrictions the communications team at Enron might have been under. “The results of this announcement were so negative that anyone involved would certainly welcome the chance to re-do it.”
It’s impossible to overstate the importance of getting the initial announcement right, experts say.
CEO changes are viewed as symbolic events of great import,” says Jim Cox, senior managing director at Hill & Knowlton. “After digesting the surface personnel announcement, the big questions follow: What does it mean? Why did it really happen? Was it because of problems within that haven’t been announced yet? Does it signal a change in strategy? It’s critical for the board and the new CEO to answer these questions before the media, investors, customers and others start to ask them.”
Mike Sitrick, president of Los Angeles-based crisis management specialist Sitrick & Company, agrees. “It is important to make sure that you identify and address as many concerns as possible in your news release,” he says. “What void is going to be created? Who is going to fill that void? Is the departure due to lack of confidence in the company—clearly not the case at Enron. Is the departure due to poor performance of the company? Is it a prelude to more bad news coming?”
Those questions were not answered by Enron in its original release, which quoted Skilling saying he was resigning for “personal reasons,” a vague description that raises more questions than it answers. “Stock expressions, clichés such as ‘unspecified personal reasons’ or ‘to pursue personal interests’ just don’t fly, especially with a corporation’s key constituencies,” says Mabee.
In fact, it wasn’t until Friday, when The Wall Street Journal published an interview with Skilling, that any satisfactory explanation for his departure was provided.
In that interview, Skilling said the company’s declining share price was the primary reason for his departure—along with a failure to communicate. “I put a lot of pressure on myself,” he told the Journal. “I felt I must not be communicating well enough with investors. People would say, ‘What is going on with the stock, Jeff?’ I would have to say I didn’t know. It’s been frustrating.”
In most cases, Sitrick says, “You need to make sure that the newly-departed is not going to talk. You need to have not only a non-disparagement agreement as part of his severance package—but I prefer a gag order. You can’t believe how few companies think of this.”
In the Enron case, since Skilling’s departure was amicable, his interview with the Journal was actually extremely helpful, providing not only an explanation for his departure but also an opportunity for him to reaffirm his confidence in the company’s future.
Any company in Enron’s situation needs to make sure the departure is seen in context. That means telling the company’s story effectively on an ongoing basis—not only when the crisis strikes.
One reason for the over-reaction to Skilling’s departure, experts say, is the company’s complex portfolio of businesses. “Enron is a high profile company that is highly diversified and not necessarily the easiest company to understand, given all the moving parts,” says one corporate public relations specialist. “In a situation like this, it might be considered something of a management play, as investors who might not understand the company at least have faith in the management team and use that faith as a surrogate.”
But the bottom line is straightforward. The key to successful communication in a leadership transition—as in all crises—is candor, says Cox. “Candor and openness help a lot in trying to defuse the negative impact of the news story. Anything that a company or the individuals decide not to disclose tends to fuel further media inquiry until the track down the full story. Candor and openness help the company to assert itself as the best and most reliable source for the media, investors, analysts, customers, creditors and employees.”
Fortunately, Enron will have plenty of opportunity to recover from the initial reaction. One good thing about a CEO transition is that it generates interest in the company’s story—and plenty of opportunity for follow-up communication.
In short, companies have to address what’s next. “In many ways, the story just begins with the announcement of the changing of the guard,” says Cox. “At that stage, the company goes under the bright lights of media, analyst and investor scrutiny. More important than the announcement of the CEO change is what follows. It is critical for the company to carefully plan the actions that follow.”