Learning from A Bankruptcy Crisis: Trust and Transparency

Implementing trust and transparency into company strategy helps create solutions.

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Contributor / Jennifer Thompson

Independent Consultant; Former Executive Vice President, Chicago Lead, Crisis and Risk Practice, Edelman
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The new leaders of a senior-living facility needed to declare bankruptcy to restore its financial stability, but they worried about the fallout among residents, who already distrusted them. High turnover rates among past management had created a toxic environment. The new management team pursued a policy of complete transparency, and in a town-hall meeting, the CEO laid out the company’s bankruptcy plans and made herself available for questions and discussion. Her willingness to make herself vulnerable, and her effort to create open lines of communication, helped repair the broken bond of trust.

Transcript

I worked with a client that was in a senior-living facility in a very populated metropolitan area who had gone through a number of leadership changes in the past couple of years.

There was suspicion and there was a basic lack of trust amongst “management” for this organization. One of the things that the new management team and the CEO realized quite quickly was that the financial situation of this organization was such that they needed to declare bankruptcy in order to restructure their financial agreements and get themselves out of the rut.

And in doing so, they were quite concerned how the term “bankruptcy” would go over with their residents, senior citizens.

So, our goal in working with the management team and the CEO was to create a situation, which, first, built some trust amongst residents and other stakeholders, and then, second, conveyed the facts about the bankruptcy filing and the new financial structure going forward in a way that would not cause residents to flee in droves and would continue the stability of maintaining majority occupancy of this particular center.

Previously, other management teams had had a fairly generic approach to communication, sending out form letters and such to residents but not really taking the time to engage individually with residents and others that matter.

So, we sat down and I worked with the CEO to map out the universe of folks that “mattered” in this regard — not just the residents but their families, the media, certainly the investors and financial community, and then, to some degree as well, other governmental organizations that may or may not play a role in the bankruptcy filing going forward.

But certainly, first and foremost, were the residents and their families. It was interesting because we found that their families were a key constituency who hadn’t been communicated with prior to this particular engagement.

So, we led up to a town hall meeting, which then served as sort of the anchor to state the path forward, again, conveying facts, first and foremost. The CEO herself delivered the message, stayed available for questions and commentary and interaction with the residents afterwards.

And there was some hesitation at first, but the fact that the CEO was willing to lay everything on the line and put herself in a little bit of a vulnerable position helped the residents and the stakeholders build their trust in her because they say that she was really trying to do the right thing and be open and forthright about everything that was going on with them and would be available to be communicating with them about every step in the process along the way.

The first thing folks are often concerned about is, “Let’s get the press release right, and let’s reach out to our consumers,” potentially, and then the investors, of course, as well.

But oftentimes, as you say, when you dig a little deeper, there are other stakeholder groups out there that can be tremendously influential in helping build and foster the trust that you have with your core constituencies.

Those are relationships that companies and institutions should be building, of course, before the crisis hits because you want to have those relationships in place — and those trusted advisors that can speak on your behalf — before you need them.

For the management company of this organization, I think they came through the experience learning three or four really valuable lessons. First of those is that communication with their residents and other stakeholder groups that is tailored to the specific group is imperative for building trust.

They couldn’t just come in and have a blanket, one-size-fits-all approach to communications in general, which was what previous leadership had done.

The second thing that they learned was that being tremendously transparent, conveying facts, and being open and honest was a way that was very important for them to build and gain trust with their stakeholder groups.

The third thing they learned was that they needed a communication strategy that wasn’t just focused on the bankruptcy filing itself and the immediate days surrounding that event, a communication strategy that continued weeks and months into the future to continually engage with their stakeholder groups.

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If you look at the sharing economy, for instance — to a large extent, their success depends on their ability to create trust between third parties, trust between somebody who wants to rent out their apartment and trust between somebody who wants to rent that apartment.

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If I told my wife that the U.S. economy exhibits a lot of trust, she would be very skeptical — rightly so because the history of corporate misdeeds is a long and distinguished one to which we’ve had many colorful, recent, new entries.

But the fact that people get ripped off is not really surprising. What’s surprising is that they’re not getting ripped off more often. What’s surprising is that I can go into essentially any store anywhere in the United States and be reasonably sure that I won’t be sold a lemon. That’s what’s surprising.

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Firms do so in two ways, both of which involve making it costly for themselves to break their promises in the future. The first is that they hire people and are run by people who don’t just care about profits but also care about being trustworthy.

There’s essentially people, if you want, who incur a psychic cost if they break their own promise.

Now, in an age in which many emphasize the cutthroat nature of business, this may sound naïve and quaint, but it’s not, because, in a market in which trust is important, being trustworthy gives you competitive advantage.

A historical example of this are the Quakers in the 18th century, who played a very important role in the British economy at the time, even though there’s only a relatively small number of them.

And it’s often argued that one of the reasons for why they had such an important role in the economy was precisely because they were known to be trustworthy; they were known to follow through with their promises, even if it was not in their immediate economic interest to do so.

And that’s what gave them a competitive advantage; that’s why people seek them out to trade with them.

We see the same thing today with firms like Keller Williams and the like, trying to hire people who are not just skillful but also what they call “ethical.”

I don’t think that that’s just a cheap PR stunt; I think firms try to hire trustworthy employees not just because it’s a moral value that they might care about but because it’s an economic asset in which they can earn a return.

The second is that firms commit themselves to a long-term strategy that emphasizes and importance of repeat in future business — because if I’m not just a pop-up store but I also care about future business, then there’s a cost to me of breaking my promise to you today, which is that there’s going to be less business for me in the future.

So, repeat transactions can serve as a commitment device. For this to work, though, two things have to be true: First, not only me but also my employees have to care about the future enough.

And so, it’s important that I’m providing them with the right kind of incentives — with long-term incentives and not just short-term incentives.

And the other issue is that transparency is important. It’s important that customers are able to observe how I’ve treated other customers in the past.

So, that’s why things like feedback mechanisms in the electronic marketplaces are really useful because, there, if I cheat you, you’re going to go online and write a review, and that’s going to be costly to me. And because I know that, I’m less likely to cheat you in the first place.

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I think it’s rational to trust firms that care about the future, and it’s foolish to trust firms that don’t care about the future.

For instance, it’s foolish to trust a pop-up store. A pop-up store is not going to be around tomorrow, so they have no incentive to keep any promises they are making to you.

Maybe less obviously, firms that are close to bankruptcy — those are run by managers who care much more about today’s profits than about future profits because if they don’t increase today’s profits, they’re going to be out of business in the first place.

Another example would be firms in which employees are being rewarded very strongly for short-term performance — for quarterly earnings or quarterly performance — because, again, decisions are then made by employees who care a lot about the present profits, and they care much less about future profits.

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And equally important, it showed that trust is a key mediator between things that buyers and sellers can do and these wonderful outcomes.

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So, since marketing researchers have found this main finding that trust helps economic exchange, researchers since then have published some really influential papers documenting times and conditions and circumstances when trust may not lead to better economic exchange outcomes.

So, one example is a really influential paper by Atuahene-Gima and Li. They looked at relationships between sales managers and sales people. And what they found is, first of all, that when sales managers make themselves more accessible (they’re around more and they communicate more), the sales person is going to trust more in the sales manager.

And you would think that that would lead to greater sales. You would think that it would lead to great sales, but it turns out it doesn’t.

And what that leads to is the conclusion that a sales manager can build trust in a sales person by being more accessible, but one of the downsides of that is that the sales person starts to learn about the sales managers — the things that the sales manager pays attention to, the thing that the sales manager doesn’t pay attention to.

And as a result of learning about those things, the sales person can use information asymmetry to their advantage. If they know that the sales manager isn’t monitoring certain things like whether they go out on certain sales calls, it means that they can cut corners out in the field, and that will hurt sales.

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But the interesting thing that they did is that they divided the people they surveyed into two groups. One group are people who are subscribers; people who have bought a subscription and who go to the theater a lot. And another group are people who are just individual ticket buyers and they’re probably not going to the theater a lot.

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As a result of that blank check, Oreo went from a revenue of about 200 million dollars outside the U.S. to over a billion dollars in revenue in six years. More importantly, gross margins outside the U.S. were very healthy.

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So, what are the lessons that one can learn from giving blank checks? And again, this is equally applicable to small companies and large companies.

The first is, you get people, you trust people, to do the right thing, and you make them act as owners. The second is that this signal of trust goes all over the organization, of empowerment, but yet they are accountable for results.

And the third is not all blank checks succeed; very often, they fail because if everything is going well, something’s horribly wrong. The important part there is, if a blank check experiment fails, not to penalize the leader or the teams, provided they’ve learned the lessons from the project.

That, again, is a signal of trust — trusting people always to do the right thing and making sure, then, you celebrate not only successes but also celebrate and learning from failures.

Over years of experimenting with blank checks, we found that, in companies, you have a choice: you can either be cozy, or you can trust people and get them to fly.

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