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The Media Fuels a Crisis

By David C. Kistle, ABC


Last fall, media reports of illegal trading at two prominent U.S. mutual fund companies, Putnum and Strong, signaled what looked like another round of big business scandals. The Securities and Exchange Commission (SEC) and the Massachusetts regulators have filed civil actions against Putnam, making it the first mutual fund firm to be formally charged with improper trading. Strong Financial Corp has admitted some next-day transactions that are estimated to have yielded as much as U.S. $600,000. Who would be next? How would investors react? Were the firms doomed to tarnished reputations?

As a veteran public relations counselor, I'm a strong advocate of publicity and media coverage. But I have to stop here and ask why -- why is the media so important? One reason is that opinion is formed and shaped by media reports. But is it also possible that news stories affect how we behave? It seems that at a time when top management is focused on measurable results and return on investment, this is a critical question.

When the first media reports of allegations concerning illegal trading practices at Putnum and Strong appeared, it didn't look like a crisis at all. The fact that it was exactly like irregular accounting practices at Enron, Global Crossing and Worldcom went virtually unnoticed.

Measuring Media Effects

In November, the Lumin Collaborative -- an "intellectual collaborative" among five PR firms including Padilla Speer Beardsley -- fielded a national study of investors to answer two questions. First, are mutual fund investors planning to change their investment strategy -- specifically to take their money out of current funds -- as a result of news reports involving Putnum and Strong? Second, is there any evidence that Putnum and Strong have sustained long-term loss of reputation capital as a result of the allegations and subsequent news coverage? In other words, did the media play a role in public opinion as well as consumer behavior?

The study was launched online to a national sample of 1,000 mutual fund investors; 650 questionnaires were completed and included in data tabulation and analysis.

Here's what we learned.

Investors know which mutual companies were in the news:

• Putnum 48%
• Strong 23%
• Fidelity 14%
• Vanguard 0%

Investors are cautious about the future:

• Unlikely to buy mutual funds in the near future 35%
• Keep money in current funds, but not buy more 30%
• Pull money out 15%

The irony in this is that mutual funds -- once the "safe" investment option -- have suddenly become risky.

As for reputation, the evidence is just as clear.

Mutual Funds Must Ride it Out

Since the first reports appeared in October, the Securities and Exchange Commission has filed charges against scores of other mutual funds, including Prudential and American Express for wrongdoing. These charges would not have come as a surprise to survey respondents. When we asked investors to characterize the situation and speculate about the future, two out of five (43 percent) described the situation as "bad" or "very bad"; more than half (51 percent) said, the situation would get "worse" or "much worse" over the next six months.

On the day we launched the study, National Public Radio reported that the State of Massachusetts Pension Fund had pulled U.S. $1.5 billion from Putnum Investments. I called my broker and told him to get me out of Putnum. I doubt losing my small holding had much effect on Putnum, but I didn't want to be left behind if there was a bandwagon in the making.

The survey indicates that investors still invest where performance and reputations are high. However, investor confidence and tolerance of companies that violate SEC regulations have suffered.

• Select funds based on performance 73%
• Select funds based on reputation 57%

• If I thought my fund acted improperly, I'd pull out 72%
• Fund managers make decisions that are in my best interest 40%
  

Take Your Cue from the Media

I like to believe that the media's role in our society is to stimulate thought -- to tell us what to think about, but not necessarily what to think. Since the financial collapse of Enron, Arthur Anderson, Worldcom and Global Crossing, people have become much more skeptical and maybe even a little cynical about business. The media gave us something to talk about with colleagues, family members, neighbors and friends. The ensuing word of mouth amplified the message, and before long, investors took action.

Once the damage is done it's hard to regain the upper hand. If there is a lesson to be learned from the mutual fund crisis, it's to watch the media for clues that there's danger ahead. If Putnum and Strong had only anticipated the media coverage of what may well have been isolated incidents, they may have been able to preserve their reputation and focus on performance. That's the challenge for communicators and PR experts. Some of the best strategic advice you can offer your management may be as simple as paying closer attention to the news and preparing for what's behind the headlines.

David C. Kistle, ABC is senior vice president at Padilla Speer Beardsley, Inc. in Minneapolis, Minnesota where he manages the firm's research and measurement practice. He is also IABC's 2003-04 vice chairman.

The Lumin Collaborative is an "intellectual collaborative" among PR firms Carter Ryley Thomas (Richmond), Padilla Speer Beardsley (Minneapolis-St. Paul), PainePR (Orange County), PepperCom (New York) and Patrice Tenaka & Company (New York).



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