Chaos Theory and Corporate Communications

Does the Flap of a Butterfly's Wings in Brazil Hurt Management's Credibility in the U.S.?

Everyone has heard of the Butterfly Effect. Most even have a vague understanding of the term's meaning (a small change in a nonlinear system can result in dramatic variances in end results). Few know that it was discovered by accident when mathematician and meteorologist, Edward Lorenz took a shortcut when running equations on his computer in 1961 and entered a number that was slightly rounded. He had assumed the end result would be the same when in fact it was vastly different. This was the beginning of a new field of study in mathematics, The Chaos Theory.

The Chaos Theory has been applied to everything from biology to physics to determine how small changes ultimately affect anticipated outcomes. When applied to how companies and their management teams communicate with stakeholders the relevance is evident. We have seen numerous situations when seemingly minor corporate news events have caused extreme volatility in a stock’s performance – often referred to as Market Overreaction. It can be as innocuous as rain in a remote region delaying an anticipated shipment’s arrival in a different part of the world, or more alarming like a political revolution impacting the oil supply chain. Whatever the event is, it will have an impact on anticipated results…how it is communicated will determine the severity of the impact on management credibility.

For example, a consumer electronics company has a number of variables outside its control it must monitor that could impact the Company’s ability to deliver new products on time to retailers – ultimately effecting revenue, net income, stock performance and shareholder value. There is an expectation as to how a product will perform over its lifecycle but the launch month is most critical to the Company’s anticipated corresponding quarterly results. However, those expectations can be significantly impacted when unusual events affect the supply chain.

Earlier this year, damage to Japanese factories during March’s devastating earthquakes caused a global shortage of silicon wafer production capacity. These silicon wafers are used in the manufacturing of semiconductors and can be found in virtually all consumer electronic products. This shortage caused a ripple effect throughout the industry as companies were forced to either pass along the increased cost to consumers, potential hurting sales, or absorb the costs and erode margins.

For a company like Apple, the decision was easy. They were able to leverage their influence on parts manufactures to obtain supplies in a timely manner and could absorb the increased costs to not affect consumers or partners. However, most companies experienced increased costs and delays in parts which in turn compounded the issues they were facing.

Turning back to our consumer electronics company, the production delay, capacity shortfall and increased costs directly impacted revenue, margins, and net income. While the management team believed the impact would not be felt over the lifecycle of the product’s sales, the short-term implications caused the Company to miss the Street’s expectations for the quarter. The event that changed the end results was obviously outside the control of the management team and as such, they elected to not make any announcement prior to the release of their financial results. Their simple rationale was that they do not provide quarterly guidance.

When the Company finally announced financial results, The Street was taken by surprise and the operational and financial shortcomings, negatively affected management’s credibility with key stakeholders. The perception was that management did not understand the outside events which impact their business. No communications strategy could have resolved the operational or financial impact caused by the earthquakes. However, management’s credibility could have been preserved or even enhanced through timely, transparent communications. Provided that the Company had strong controls and reporting systems in place, management should have been able to identify the extent of the impact the semiconductor shortage and cost increase would have on production and financial results. This information could have in turn been communicated to all stakeholders, enabling all parties to adjust their expectations and position management as credible leaders.

While hindsight is always 20/20, it is important to fully understand the events that affect outcomes and learn how to manage future negative results through more effective communications. Studying the Butterfly Effect and identifying trends enables us to anticipate the elements within a chain of events that impact companies—helping us know when and what to communicate. We do have the ability to influence the outcome of events outside our control in order to enhance a company’s profile and improve management credibility.

What Communicators Can Learn From Occupy Wall Street

Published November 4, 2011 by PR Week US

As Occupy Wall Street Enters its eighth week, there are many takeaways we can glean from the movement - regardless of your feelings about it.

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Social media: One size does not fit all

Published November 2, 2011 by PR Week US


When it comes to corporate social media programs I have heard it all. "You have to blog." "You have to have a Facebook page." "You have to tweet." "SERM is critical to your success." And the list goes on and on.

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Employee communications key to unlocking value in CSR programs

Published October 31 2011 by PR Week US

Corporate social responsibility is by no means a new concept. It was debated back in the mid 1700s when Adam Smith authored The Wealth of Nations. The idea that a merchant could “trade for the public good" was a foreign concept to the father of modern economics and capitalism.

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Challenging Times Create Communications Opportunities

I have heard all kinds of advice surrounding how to and if you even should communicate during challenging times - everything from “Keep a low profile” to “Do every interview you can” to “Taking out the trash.” The best advice is to use it as an opportunity to be honest. Whether the situation is self-inflicted or the effects of a global economic nightmare, true transparent communications can promote trust and create optimism within an organization and among key stakeholders. During times of challenge you have a captive audience; use that to your advantage. Employees, partners, customers and shareholders alike want to hear from you. They want to hear that you are not just aware of the situation but you are actively adjusting to developments in order to emerge in a position that will help you meet market needs and expectations.

Being honest is easy…what to say and how to actually communicate are the tougher questions in uncertain and challenging times. The first task is to develop a compelling narrative with 2 or 3 key messages and supporting proof points that convey your market opportunities while acknowledging the challenges ahead. Be reassuring, but balance the narrative with the reality of the situation.

It is also important to ensure consistency and credibility in your messages. You cannot deliver one message in an interview with a trade publication and communicate a contradictory message in an employee townhall meeting. The days of different messages to different audiences are long over. There simply is too much cross-pollination of information with the proliferation of the 24/7 news cycle and social media platforms to assume they will never overlap. That archaic strategy will damage your credibility and alienate your greatest advocates – your employees – as well as your loyal customers. Employees and customers can be the best brand ambassadors your company has but you need to provide them with the ammunition to accurately represent the Company’s story.

How you communicate is just as important as what you communicate. One of the pitfalls to avoid is the desire to innovate your communications tools at the wrong time. If you have never tweeted in the past, now is not the time to start. Utilize existing tools to ensure your message reaches the intended audience and that the tool does not become the story. Some effective ways to communicate with employees, customers and shareholders can be to utilize monthly newsletters, townhall meetings, one-on-one meetings, conference presentations, social media (blogs, Twitter and Facebook - if they have already been established as news feeds for your company) and the media (important industry trades, influential business publications and broadcast outlets). Make sure to identify how your key stakeholders digest information and use those vehicles to be more efficient and effective in your outreach.

Don't rely on one person to tell your story – prepare multiple company spokespeople. While during difficult times it is import for the CEO to be very visible, the CEO cannot be the only one trained. Other members of the management who are on the frontlines will need to be able to answer questions from employees and customers in a consistent and compelling manner. To make this process easier it is helpful to have alignment amongst the senior management team when developing the corporate narrative; ensuring all leadership is comfortable with the delivering the messages to key stakeholders.

Challenging times can create opportunities for companies when they are properly prepared to communicate. Remember to develop a clear corporate narrative backed by proof points; know your stakeholders and how they consume information; and train your spokespeople to be true brand ambassadors.

Why We Blog

Leon Berman – Principal, The IGB Group

With the launch of The IGB’s Group’s new website, we started a blog to share with friends and clients of the firm – and with the wider world – our thoughts on the news and issues that affect corporate performance, reputations and valuation. But before we tackle specific issues of concern to corporate communicators, I wanted to briefly comment on why we decided to add our voices to the blogosphere.

So, why do we blog? For the IGB Group, the answer boils down to the deep conviction that we can offer our readers a unique perspective on complex issues such as the valuation of corporate securities, delicate crises and day-to-day challenges in the areas of media relations, message development, perception research and in the craft of managing market expectations about corporate performance. The main distinction of our take on these issues is that it is based on extensive, ongoing first-hand research on the views of the financial community. We regularly conduct financial community surveys and interviews to discern the perceptions of portfolio managers, buy-side and sell-side analysts. This research results in findings not usually available to our readers elsewhere – not in analyst reports, not in media coverage, not in anecdotal insights gleaned from isolated interactions with the financial community. Based in part on our research findings, we offer our readers opinions and advice based on a thorough understanding of the financial community’s perceptions and expectations.

With this goal in mind, we plan to post the following types of blog entries in the coming months:

• Financial Community Sentiment Reports – These reports will provide insights into the financial community’s views of the global economy, capital markets, specific sectors and industries and a variety of regulatory, political and social issues that affect corporate valuations and investor sentiment. Specifically, the next report will focus on the investment community’s outlook on the performance of global financial markets in 2011.

• Controversial Issues – We regularly monitor key capital market trends, including SEC regulations, rulemaking and enforcement actions, SRO and FASB rules and other developments that command the attention of corporate decision makers. We will share with our blog readers timely updates on these and other issues that may affect best practices for corporate and financial communications.

• News of the day – From the BP oil spill to the marginalization of the PE ratio as a barometer of economic performance, we take note of news and trends that move markets and compel corporate communicators to reconsider or reaffirm aspects of their craft. Some of our blog posts will focus on these headline-grabbing stories.

We look forward to sharing our thoughts with you, and we welcome your comments and active participation in the IGB Group blog.

BP: Up or Down? Investors Speak!

The explosion of the Deepwater Horizon drilling rig on April 20, 2010 triggered the largest offshore oil spill in U.S. history, claimed 11 lives, and sparked an international crisis with complex environmental, political and economic dimensions. Much of this disaster’s media coverage focused on issues culpability and the intractability of the spill. BP, the British energy giant, emerged as the central culprit in this tragedy, at least according to the prevailing narrative in the media.

The IGB Group, an independent New York-based financial communications firm, conducted this survey to gauge the global financial community’s perceptions of this crisis, its genesis and repercussions. We conducted an online survey of institutional investors and brokerage analysts. The survey launched on June 11 and closed on June 16, 2010. We received 92 responses: 89 from investors and 3 from sell-side analysts. 74% of the respondents were based in North America, 23% were based in Europe and 3% were based elsewhere. In aggregate, the institutions represented by the respondents own an aggregate of $690 billion of energy-related stocks. Approximately 50% of the institutions are BP holders (source: ThomsonOne data).

The IGB Group has no relationship with BP, and this survey was not commissioned by any company or organization. Periodically, we conduct surveys to bring added clarity to the dominant issues of the day and to amplify the voice of the institutional investor.

Key Findings

Culpability: Respondents overwhelmingly see BP as the primary culprit in this disaster, and a large majority of them (60%) agree that the company has sacrificed standards of safety in pursuit of profit. Respondents urged the company to accept responsibility and not to try to blame contractors.

Does the oil spill reflect a lapse of leadership at BP? Respondents disagreed on this question. Thirty percent agreed with the statement that “This is an isolated event, and it does not reflect BP management’s competence. Accidents happen.” However, 42% disagreed with this statement.

The Future of BP: The overwhelming majority of respondents (79%) expects BP to avoid bankruptcy. The survey revealed a somewhat weaker consensus (69%) that BP will need to reduce or eliminate its dividend. In fact, several respondents said they would want the company to cut its dividend if the move helps ease tensions. In written comments, a few respondents argued that the company should base decisions about the dividend on financial, not political, considerations. (Last week – after the survey closed – BP decided to suspend its dividend)

Although 49% believe that the precipitous decline in BP shares is overdone, several respondents noted that they hold this opinion tentatively, given the intractability of the spill and the uncertainty about the final cost of cleanup and compensation. Forty percent of the respondents were reluctant to speculate about the prospect about BP’s acquisition by another party, and 47% said they did not see this as a likely outcome.

One respondent said: “I think one year from now, this will be a distant memory. The US needs oil, and drilling in the GoM will continue.” Another respondent provided specific suggestions for mitigating the impact of this crisis on BP shareholders: “Suspending half of the dividend as a good faith effort with the intention of paying a lump-sum dividends-in-arrears payment, probably sometime in 2011, might be a strategy. [Also consider] encapsulating the N.A. upstream operations as a stand-alone strategic Ch. 11 unit until this mess blows over.”

Communications: Many respondents (44%) faulted BP for poor communications in the aftermath of the Deepwater Horizon explosion, but 34% agreed with the statement that the company “communicated credibly and consistently during this oil spill.”

In contrast with the criticisms leveled at BP, notably by the Obama Administration, a majority of the respondents believes that it is appropriate for BP to spend money on corporate advertising highlighting the company’s efforts to fix the spill.

Respondents’ PR suggestions to BP management ran the gamut including:

- Stronger expressions of empathy with the people and communities affected by the spill.

- Bolder defiance of political pressure.

- Philanthropic investments in the affected communities.

Media Coverage: Respondents generally hold unfavorable or agnostic views of the media coverage of this oil spill. Only 16% agreed with the statement that “the media has generally covered this crisis fairly and accurately”. Forty-one percent disagreed with this statement. Forty-three percent provided neutral responses.

Negative assessments of media coverage often stem from the perception that the media exaggerates or sensationalizes the impact of events. This was not the case in this survey. Most respondents (69%) either disagreed with the statement that “the media has exaggerated the potential damage from the oil spill” or they withheld judgment on the matter.

Regulations: Fifty-four percent of the respondents agreed that “this oil spill demonstrates the need for tighter regulation of energy companies”, with 30% expressing disagreement.

Reflections and Observations

In a culture increasingly accustomed to pitting Wall Street against Main Street and profit against the environment, we were heartened to find that the responses to our survey, when considered in their totality, present a balanced view that blends empathy and pragmatism. Respondents conveyed deep empathy for the communities affected by the spill; they voiced outrage at the negligence that, some believe, led to this disaster, and they recognized that BP should or will face financial consequences, whether they come in the form dividend cuts or compensation to victims’ families and the expanding span of affected communities. Notably, 54% of the respondents said they would favor tighter regulation of energy companies.

At the same time, respondents believe that BP should be guided by the principle of fairness, not by the desire to appease political elites. In fact, they say, BP should stand defiant against groundless claims for compensation and fiery political rhetoric fueled by populist motives rather than the need for justice. Although they overwhelmingly see BP as the primary culprit and believe that the company should accept responsibility, they also believe it is reasonable for others to examine the complicity or responsibility of other parties including Transocean, MMS and the Department of the Interior.

Nonetheless, considering the gravity of this crisis, respondents’ view of BP’s future seems optimistic. Many respondents believe that the post-explosion drop in BP shares is overdone, and the prospect of a dividend cut may already be factored into the company’s valuation. One respondent expects that, only a year from now, we may look back at this spill as a distant memory. But, as long oil and gas continue to gush into the Gulf of Mexico, this kind of bold optimism seems premature at best.

Disclaimer

Because of the size and composition of the respondent sample, we consider the findings of this survey suggestive, but not conclusive. Although the survey reflects the views of some of the top energy-focused and generalist investors and analysts, the sample is too narrow to warrant definitive conclusions about the global investment community’s perceptions of the GoM oil spill.

By the Numbers

In their Own Words

What message would you like to convey to BP management and board of directors?

I think it should have done a better job of communicating the extent of the spill. In this case, it has underpromised and overdelivered in the wrong direction. I think this has contributed to the hysteria around the stock. Despite communications to the contrary, BP has still not cleaned up its operations from a safety perspective. New management that is not part of the company's current and historical culture needs to be brought in with the goal of cleaning up the company's image, reputation and safety record. Sometimes you can be penny wise and pound foolish. Spending some extra money to improve safety could yield tangible, long-term benefits.

Not having a failsafe engineered design for deep sea oil wells is selfish and totally irresponsible. I hope your company adopts a "fully and solely responsible" stance providing full remediation to all harmed parties.

More TV and less print discussion. Show the team of experts assembled for the job.

I am sympathetic to your problem but you need to find out who authorized going forward with the drilling when there was an obvious problem, and hold that person responsible. You also need to have plans and procedures in place for such an event --which you clearly did not have other than a boilerplate document not specific to this well.

I'm personally sickened by the consequences of the accident and disappointed in BP. A great company has been forever tarnished and great harm has been done to a precious natural resource and all who care for it and all who depend on it. I wish I could simply blame this on an "accident" but BP clearly allowed it to happen despite the warnings of those present. Lives were lost, families were destroyed, environmental damage has been done, financial harm has come to many and I don't know how BP can possibly make it right. I hope you can find a way and I wish you luck in doing so.

As an investor, I don't believe that the spill was a result of a companywide culture of negligence. The extraordinary damage done by the spill, both in monetary terms and to BP's reputation, highlights the disincentive to cut corners on safety. Rather, I believe that the spill was likely the result of bad luck and very poor decisions by a handful of BP and Transocean managers. I think that the company should try to convey that decisions made leading to the spill were an aberration without shirking responsibility for what has happened.

If BP wishes to be a great company in the longer term, Tony Hayward and the Board Chairman should resign once the Gulf recovery is underway. Poor incremental decision-making under current leadership led to this incident. It is hard to see how the Company can restore credibility with investors and other constituents otherwise.

BP should have been better prepared for this and similar problems. BP knew the risk involved in the operation but appears to be ineffective in dealing with the problem. There have been too many serious operating problems in the past that cast doubt on BP's abilities to avert this kind of problem.

Contrition is important to express to American people. Set up scholarships for the families of the 11 dead workers. Ignore demagoguing national politicians. Expedite payments to fishermen (it will be a small part of your total cost). Reward governors and state politicians: it costs relatively little and may gain an advocate. Manage the rest of the company, you'll need the cashflow. Make Wall Street understand actual day-to-day cash generation ability.

You need to mention the vast investment you have made in The U.S. and that you are vital to jobs and energy needs in this country. You can learn from Exxon not to yield when it is not necessary, and you may consider displacing some of the blame from yourselves onto the government. I actually think MMS and Interior have more moral culpability.

Reject idiotic payment requests such as paying salaries of those out of work due to drilling moratorium.

Do not let the media or politicians determine whether or not you continue the dividend. If it is financially feasible, continue to pay the dividend. Ditto with firing the CEO.

I am glad to see BP management and the UK government beginning to stand up against Obama's extortion attempt. Do not be steamrolled by this socialist.

While it is understandable that BP's management team is highly influenced by the risk of legal liabilities and therefore the guidance from its legal counsel, the Company's ability to show more empathy, sincerity, disclosure and transparency in its communication will be much better received and tolerated by the American public - which should bring about a more prudent and reasoned response from U.S. politicians as everyone tries to resolve and clean up after this accident.

Cut the dividend. I think it is generally expected that the dividend will be cut.

Think longer term and quit worrying about quarterly earnings results.

Shareholders should only benefit once the company has met its obligations to other stakeholders affected by the disaster.

Don't sacrifice safety for profits!

This is a very poor example of corporate disaster management and I expect that senior executives will be gone.

I think investors will be looking for more clarity on what actually caused the disaster - was it bad luck, poor workmanship, badly thought out management, ineffective communication, or a combination of various factors? Of particular importance will be any witness accounts/radio transcripts of the immediate lead-up to the blow-out. Was everything going along as normal? Or were there signs that were ignored, or corners cut that may have caused or exacerbated a flaw in the operation?

Any other comments?

I am confident that the company is applying all available technology to end the leak. Unfortunately, these resources should have been applied before the leak. The cat is out of the bag.

Take the company private at $50 per share.

This will be a $20 billion problem with a small fraction of that going to actual clean-up. Exxon Valdez offers a helpful playbook. Not your fault, but certainly your problem. Best of luck to you all.

Were it not for ridiculous US federal government and EPA policies, they [BP] would not have to drill in these dangerous condition ns in the first place. The Feds are at least 50% responsible for this disaster.

The answer is effective regulations, not more. Competence and integrity in government is needed. Obama has embarrassed an ally with a special relationship.

While it is pretty clear that a string of bad decisions led to the explosion, it is not clear why they were made. As careless as the decisions appear, I doubt the engineers were thinking about the profit impact as the cost savings would have been inconsequential. While I do think the share price sell off is probably over done, no one has a clue what the ultimate cost will be.

I think one year from now, this will be a distant memory. The US needs oil - drilling in the GoM will continue.

Comments from workers on the rig before the explosion suggest that BP officials were putting pressure on the drill team to accelerate the well's completion.