Managing a Crisis in Financial Services: Putnam Investments 2003-2004

1. Classroom Slide Presentation Managing a Crisis in Financial Services:Putnam Investments 2003-2004

2. Crisis Management in Financial Services • Putnam Investments case problems and questions • Common crisis characteristics • How to prepare for a crisis • Communication during a crisis • Using communication strategy following a crisis • Putnam Investments case solutions • Postscript

3. “When written in Chinese the word crisis is composed of two characters. One represents danger and the other represents opportunity.” -- John F. Kennedy

4. Crisis Communication • Putnam Investments case problems and questions • Common crisis characteristics • How to prepare for a crisis • Communication during a crisis • Using communication strategy following a crisis • Putnam Investments case solutions

5. Putnam Investments Case Problems • SEC offers no clear definition of market timing • Poor investment performance and image problems prior to crisis • Failure to address crisis proactively • Commodity business where very few distinguish themselves on performance alone – reputation is key • Assets movement is herd-like and heavily influenced by scandal • Putnam senior management failed to appreciate urgency of crisis • Putnam became poster child for reform in mutual fund industry

6. Putnam Investments Case Questions • What are the key short and long-term problems Haldeman faces? • What should Putnam’s communication strategy be going forward? • Identify Putnam’s key constituents. Should the communications strategy and message be different for each constituent base? • What internal strategic initiatives should Haldeman undertake to enhance Putnam’s competitive position in the future? • How could Putnam have avoided this crisis and what could they have done to be better prepared to handle it? • How should Haldeman prioritize his communications and strategic initiatives? What specifically should Haldeman do in his first few days as CEO?

7. Crisis Communication • Putnam Investments case problems and questions • Common crisis characteristics • How to prepare for a crisis • Communication during a crisis • Using communication strategy following a crisis • Putnam Investments case solutions

8. Common Crisis Characteristics • Element of surprise:Haldeman shocked to learn mutual fund managers market timing own funds • Insufficient information:Market timing not well defined and scope of questionable activity unclear • Quick pace of events: Less than 6-weeks after learning of scandal, story breaks in The Boston Globe • Intense scrutiny: Media attention grabs institutional and individual investors creating negative disposition toward Putnam Source: Ray O’Rourke, presentation to Corporate Reputation Conference, New York University, January 1997

9. Reputational Capital in Financial Services • Very few funds consistently “beat” the market. Reptuational capital, therefore, is the critical determinant of success. • Upside example: Strong constituent relationships and positive public image result in asset gathering and retention, even during periods of weak investment performance • Constituency groups are Customers, Regulators, Partners, Employees, Investors and Media • Downside example: Loss of reputational capital comes from these same 8 constituency groups; threats include rogue behavior by employees, defection by partners, and the threat of legal action by regulators

10. Crisis Communication • Putnam Investments case problems and questions • Common crisis characteristics • How to prepare for a crisis • Communication during a crisis • Using communication strategy following a crisis • Putnam Investments case solutions • Postscript

11. How to Prepare for Crises • Assess organizational risk • Set communication objectives for potential crises • Analyze channel choice • Assign different teams to each crisis • Plan to centralize • Create a formal plan Source: Concealed for Page Case Competition

12. Importance of Reputation in Financial Services • The fluctuating value of the company’s reputation has been termed reputational capital and calculated as the market value of the company in excess of its liquidation value and its intellectual capital. It constitutes the residual value of the company’s intangible assets over and above its stock of patents and know how. • “Reputational riskis defined as the range of possible gains and losses in reputational capital for a given firm. • Difficult to quantify these gains but they exist. • “Image is the biggest asset in the money management business.” -Don Phillips, Managing Director, Morningstar Source: The Reputation Institute

13. Reputational Risk (RR) in Financial Services • Commercial Bank Examination Manual says reputational risk “is the potential that negative publicity regarding an institution’s business practices, whether true or not, will cause a decline in the customer base, costly litigation, or revenue reductions…can also cause liquidity constraints and significant depreciation in market capitalization.” • Companies need to manage reputation risks in the same way as operational or financial risks are assessed, audited, and managed.

14. Reputational Risk Management Cycle Opportunity Platform Reputational Capital CorporatePerformance Safety Net

15. Managing the Upside of Reputational Risk

16. Managing the Downside of Reputational Risk

17. Crisis Communication • Putnam Investments case problems and questions • Common crisis characteristics • How to prepare for a crisis • Communication during a crisis • Using communication strategy following a crisis • Putnam Investments case solutions

18. Communicating During a Crisis • Define the problem • Centralize communications • Communicate early and often • Get inside the media’s head • Communicate directly with affected constituencies Source: Concealed for Page Case Competition

19. Crisis Communication • Putnam Investments case problems • Common crisis characteristics • How to prepare for a crisis • Communication during a crisis • Using communication strategy following a crisis • Putnam Investments case solutions • Postscript

20. Corporate Communication Strategy Framework Messages Constituencies Corporation Constituent’s Response Source: Concealed for Page Case Competition

21. Corporate Communication Strategy Framework Messages • What is the best communication channel? • How should the organization structure the message? Corporation Constituencies • What does the organization want each constituency to do? • What resources are available? • Money • Human resources • Time • What is the organization’s reputation? • Who are the organization’s constituents? • What their attitude about the organization? • What is their attitude about the topic? Constituent’s Response • Did each constituency respond in the way the organization wished? • Should the organization revise the message in light of the constituency responses? Source: Concealed for Page Case Competition

22. Crisis Communication • Putnam Investments case problems and questions • Common crisis characteristics • How to prepare for a crisis • Communication during a crisis • Using communication strategy following a crisis • Putnam Investments case solutions • Postscript

23. Putnam Investments Case Solutions • Proactively communicate with key constituents • Work toward immediate settlement with regulators • Put Putnam at forefront of movement toward ethical irreproachability • Re-establish corporate culture with emphasis on ethical behavior and client service • Launch corporate communications campaign to create differentiated, personal bond with key constituents • Install safety net to protect against future crises • Recognize scandal as opportunity rather than threat

24. Key Takeaways • Handle issues of ethicality decisively and hold your company to the highest standards • Strategic communication is critical to success, particularly during crises • Reputation is single most important determinant of success in financial services • Constantly re-evaluate corporate culture and value system • Never justify behavior as industry norm or “acceptable” according to letter of law • Quickest way to rebuild trust with constituents is to admit wrongdoing and take necessary steps to ensure against future problems

25. “The easiest period in a crisis situation is actually the battle itself. The most difficult is the period of indecision - whether to fight or run away. And the most dangerous period is the aftermath. It is then, with all his resources spent and his guard down, that an individual must watch out.” -- Richard Nixon

26. Crisis Communication • Putnam Investments case problems and questions • Common crisis characteristics • How to prepare for a crisis • Communication during a crisis • Using communication strategy following a crisis • Putnam Investments case solutions • Postscript

27. Commercial 1 Commercial 2 Commercial 3 Postscript: Putnam Television Campaign Play Commercial* Play Commercial* Play Commercial* *Note: Embedded multi-media in digital file

28. Source: Boston Globe, January 4, 2006 Postscript: Crisis Averted in 2006 “ PFTC’s [Putnam’s] cooperation consisted of prompt self-reporting, an independent internal investigation, sharing the results of that investigation with the government (including not asserting any applicable privileges and protections with respect to written materials furnished to the Commission staff), terminating and otherwise disciplining responsible wrongdoers, providing full restitution to its defrauded clients, paying for the attorneys’ and consultants’ fees of its defrauded clients, and implementing new controls designed to prevent the recurrence of fraudulent conduct.” Source: SEC Settlement Document, January 3, 2006