Three steps to get bad news out and move on

(Last night I took part in an executive roundtable discussion at the Publicity Club of Chicago. The brief case study I shared provides a good lesson learned that I believe is quite apt for these difficult economic times, and so I'll hit the main points here.)

Following two and a half years of being delinquent in its financials, which didn't win too many points with the SEC and led to a delisting by the NYSE, Navistar scheduled a meeting with more than 200 analysts and media in New York in October 2007. We would disclose a massive restatement of prior financials and take the first steps toward becoming a current filer,

In the wake of Sarbanes Oxley and numerous changes to accounting standards, Navistar was by no means alone in having to restate prior financials. But we had gone an unusually long period without reporting after discovering mistakes that had caused the company to scrap its year-end 2005 analyst meeting. And we were more than a little concerned about the reaction we would get to a restatement that, including tax changes, amounted to a negative $2.1 billion against prior earnings. But we were confident in the company's overall health and in our business strategy for the future.

So we followed a three-part communication strategy:

  1. Fully disclose the problem. Our news release, and the analyst meeting itself, began with a clear and forthright explanation of the restatement as well as an assessment of an under-resourced accounting function and numerous material weaknesses in the company's financial reporting processes.
  2. Commit to fixing the problem. Our CFO detailed steps being put in place to remediate problems, beef up accounting resources and instill rrigorous financial reporting discipline throughout the company. We would steadily work to catch up in our financial filings until we were current, and we would resolve to stay current and accurate.
  3. Stress the soundness of the business and its strategy to capitalize on opportunities ahead. More than half of the release and the presentation focused on future opportunities for profitable growth and how we had exactly the right strategies in place to make the most of those opportunities. We demonstrated that the company's management had not allowed the epic restatement work to distract it from the task of running the business. The company was on track to meet or surpass its growth and profit objectives, and bullish on its future.

By thoroughly and clearly communicating the first two steps, we were able to largely remove them from further discussion. The majority of analysts' questions were on our current and future business, not on our past accounting sins.

The meeting started about an hour before the market opened. When the OTC opened (Navistar was still banished to the "pink sheets" but has since returned to the NYSE), our stock was down just a fraction and we knew we were going to weather the storm. The media was fair to us as well, with much of its focus on the product announcement we made sure to include in our news release.

This formula works well for companies needing to share bad news that doesn't truly change an underlying strong story. An it applies as well for communicating to employees and other stakeholders in this brutal economy: get the bad news out, commit to discipline throughout the business but then spend the majority of time talking about the reasons you know you have the right strategy and your bullish on your long-term prospects.

As I've said in recent posts, confident hopefulness is motivating. Especially when everyone else seems to be incapable of doing anything except wringing their hands.

- Jon Harmon 

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