It was Ken Chenault, chief executive of American Express, who might have summed it up best: “We have to remember that reputations are won or lost in a crisis.” CEOs and senior management who were once lionized as being the engines of growth and jobs, especially in Los Angeles and Southern California, are now discredited and seen as bumbling their company’s reputations in this last Great Recession.
As the financial and business markets started to swoon and crash, company executives failed to grasp the importance of one of its audiences: the court of public opinion. Additionally, the democratization of finance and technology had allowed financial systems around the world to become interconnected in such a manner that when the collapse started it created a tsunami effect that still resonates today. Corporate executives ignored the public and media at their peril and the subsequent scenario was that groupthink set in as companies formed bunker mentality strategies of “no comment.”
It was 40 years ago that Yale sociologist Irving L. Janis wrote the book “Groupthink” and talked about how a group of highly intelligent people working together to solve a problem can sometimes come to the worst possible result.
We have seen over and over again that the smartest people in the room can still get it wrong when dealing with a communications crisis under a media microscope. Who is to blame when these highly educated and brilliant business executives and lawyers in all other facets of the business and financial worlds fail to understand that a company’s reputation is its No. 1 asset? I indict the business and law schools.
Professor Paul Argenti, a leading business scholar of corporate communications from Dartmouth University’s Tuck School of Business, agrees that business schools don’t take communications as seriously as finance, accounting and management.
“The problem is that corporate communications only becomes extremely important when there is a crisis that will affect a corporation’s reputation,” he said,” but because this subject is not taken seriously, CEOs and senior management fail in this regard.”
Countrywide Financial in Calabasas is a perfect example of this communications groupthink mentality. Founded in 1969 by Angelo Mozilo, the company became the largest mortgage lender in the country and Mozilo became very wealthy. His company also became the largest corrupt subprime lender in the country, selling toxic mortgages to unqualified applicants. When the housing market collapsed, so did Countrywide.
As things started to collapse, company executives, along with Mozilo, formed a groupthink bunker mentality, refusing to talk with the media. People started to complain to elected officials when they lost their homes and the media started covering this story aggressively. Consequently, because of the media scrutiny, the Securities and Exchange Commission got involved. These are a direct cause and effect of groupthink.
He was eventually charged with mass fraud by the SEC and was headed to trial in 2010, but four days before opening arguments in a Los Angeles court, he settled with the SEC and agreed to pay $67.5 million; he was not given any prison time. Subsequently, Bank of America bought the remnants of Countrywide and still suffers losses from those toxic mortgages.
One L.A. business executive understands this problem and looks for business students who have an educational background that includes more than just accounting, finance and statistics. Earl Feldhorn is senior vice president at Wedbush Securities, one of the largest brokerage and investment banks based in Los Angeles.
Feldhorn, who has been with the firm since the early 1960s, told me: “When I look for graduates now, I’d rather they study English literature, communications or humanities, because just knowing numbers, statistics and finance is not enough. Few of these graduates know how to write or communicate, and that is a problem on Wall Street.”
Was it only a decade ago when the Enron scandal spurred the teaching of ethics classes in business and law schools? But what good is one ethics class if students treat it like just another class they have to take, with no consequences? Business and law schools have to make communications a fundamental skill that is to be rewarded and learned so that future business leaders will understand that groupthink is a thing of the past and harmful to executives, its employees and a company’s reputation.
Famed management professor Peter Drucker once wrote, “Management is a liberal art and eventually the good leaders are those that draw on all of the knowledge and insights of humanities and social sciences.” When added to a rigorous study of accounting, finance and other business classes, this should help mold future leaders in Los Angeles and nationally, creating a corporate climate where groupthink will become less of a factor in boardroom decision-making during a crisis or litigation.
David Silver, APR, is chief executive of Silver Public Relations in Los Angeles and author of the forthcoming book, “Managing Corporate Communications in the Age of Restructuring, Crisis and Litigation: Revisiting Groupthink in the Boardroom.”