Public Statements: There's No Denying the Dangers of Denying
from
July/August 2003
by Shaun Assael
Ralph Ferrara, the managing partner of Debevoise & Plimpton’s Washington, D.C., office, recently had a stack of old newspapers on his desk, all open to stories in which spokesmen for Tyco International, WorldCom, and Enron were asserting their innocence. As a general counsel to the Securities and Exchange Commission during the Carter and Reagan administrations, Ferrara knows a thing or two about corporate disclosure. Which is why the quotes proclaiming innocence raised his blood pressure. “What’s public relations?” he asked, rising from his seat to rail at the knee-jerk denials. “It’s disclosure. And the SEC is getting ready to administer lethal doses of enforcement when it comes to disclosure.”
In the new world of corporatespeak, to Ferrara’s satisfaction, a press conference can’t be just about spinning the Street anymore. It’s about staying out of court. The “lethal” weapons Ferrara is talking about include new rules that make it easier to remove directors—they now need only be found “unfit,” as opposed to “substantially unfit”—and to prosecute CEOs who certify false financials.
Prosecutors filed charges against 259 individuals or entities in SEC-related criminal cases last year, and the SEC sought orders barring 126 directors from serving, up from 51 in 2001. And just recently the agency took aim at companies that use fuzzy math in press releases, departing from generally accepted accounting principles to make their earnings look better.
As important as choosing the right words for your public statements is the process by which you choose them. What you do behind the scenes can be as crucial as what you say on a podium or in a press release. Nothing makes plaintiffs’ lawyers smack their lips more than the prospect of a paper trail showing a fierce debate about how much to admit, or obscure, in a crisis.
“Corporate insiders like to write too much,” says Joele Frank, whose New York-based public-relations firm advised Walter Hewlett in his proxy fight with Hewlett-Packard. “For example, you want to explain what you’re going to do, but you don’t want to give a timetable for solving it. I’m constantly pulling my clients back.”
Frank also tells clients that her firm’s policy is to destroy all drafts of public statements. That’s perfectly legal, so long as your company has a policy for document retention that explains what can be ditched under what circumstances—and follows it religiously. As Arthur Andersen taught America’s execs, the killer is selective shredding, or keeping a specific category of files in some cases but throwing them out in others. That’s when the SEC starts talking about obstruction of justice and you start looking for your yearbook photo on Court TV.
Michael Rogan, managing partner of Skadden Arps Slate Meagher & Flom in Washington, D.C., warns that “in today’s electronic world, drafts are always retrievable.” What particularly worries some attorneys is freewheeling crisis sessions in which itchy executives let their imaginations go wild. Typical example? A general counsel thinks there is trouble coming, drafts a memo about how to respond to a potential indictment, and is careful not to send it to anyone. When it’s unearthed six weeks later and no charges have been filed, a plaintiffs’ lawyer can nevertheless cry, “Aha! You knew you were in trouble.”
“The best thing a director can do,” says Rogan, is emphasize to the company how important it is to create a careful balance “between being prepared and overanticipating.”
Be sure that the company’s spokesperson is told “to bury the instinct to deny,” says Ferrara. “If you’re proven wrong when the facts come out, you’ll have created a disclosure problem that didn’t exist yesterday.”
Got an explosion ready to go off? The last thing you want to do is dismiss it as a misunderstanding. “It’s too dangerous to put yourself out there claiming that something isn’t true,” warns Steve Lipin, a senior partner at the New York City corporate-communications firm Brunswick Group and a former reporter for The Wall Street Journal. Lipin recommends just saying that whoever you’ve assigned to look into this “can do a credible job.”
The benchmark screw-up came in 1984, when Carnation denied that it was conducting merger talks with Nestlé. After a deal between the companies closed in 1985, the SEC sanctioned the Swiss foodmaker for issuing “materially misleading” information. Carnation later agreed to pay $13 million to settle a lawsuit contending that the company had misled investors and artificially depressed its stock price by denying the takeover rumors. The message was clear: Say nothing or tell the truth.
With so much riding on the right words, what’s a director to do? Ferrara suggests writing down this phrase, just in case 60 Minutes calls:
“We’ve been confident in the way we’ve proceeded in the past, but we’d be arrogant not to see that the world has changed. That’s why we’re taking a careful, hard look at what we felt we did right the first time.”
