2: The Mea Culpa Defense

The instinctive reaction of executives in times of scandal is to deny, deny, deny--then clam up. In many cases, the smarter response is a heartfelt apology

Investors have lost trillions, popular anger at Big Business is at the highest level since the Great Depression, and foreigners are questioning the vitality of American capitalism. So what do the executives who got us into this mess have to say for themselves?

Jeffrey K. Skilling is "immensely proud" of what he accomplished at Enron. Marc Shapiro, vice-chairman of J.P. Morgan Chase (JPM ), insists his bank's transactions with the Houston energy giant were entirely "appropriate." Duke Energy's (DUK ) round-trip power trades were "well within market rules," says CEO James Donnell, while Martha Stewart calls insider-trading allegations "ridiculous" and chops lettuce.

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With corporate credibility sinking to new lows, managers in the spotlight are stonewalling, denying, and taking the Fifth. Hardly any of them has admitted they did anything wrong or expressed a mote of remorse. And that's only making things worse. If the people in the corner office don't accept responsibility for their misdeeds, there's little reason to believe the deeds won't be repeated.

Why are so many execs acting like corporate villains from central casting? Probably because lawyers are telling them to do so. Apologies are the functional equivalent of guilty pleas--giant, wrapped gifts for opposing prosecutors, regulators, and plaintiffs' attorneys. So defense counselors have traditionally advised CEOs in hot water to play legal hardball; think Big Tobacco or Exxon Valdez. "The first reaction in many companies when there's a big legal feeding frenzy is to hunker down and fight," says New York litigator Philip K. Howard, author of the best-selling The Death of Common Sense. "A lot of times, that just gets them into a bigger mess."

Is there a way out of this trap? Do companies always have to look unrepentant when scandal breaks? Maybe not. A growing number of defense attorneys, law professors, and PR pros argue that CEOs should try a different approach when scandal breaks: going down on bended knee and saying that they are sorry. New academic research indicates that the goodwill generated by mea culpas could more than make up for their legals costs. State legislatures, meanwhile, are quietly passing laws that encourage contrition by making apologies inadmissible as evidence against those making them.

Nobody keeps statistics on whether the level of corporate remorse is rising or falling. But there have been several high-profile mea culpas in recent months. After embarrassing e-mail messages came to light indicating Merrill Lynch (MER ) analysts had told investors to buy stocks that they privately viewed as dogs, the firm issued a public apology in May. And both Ford (F ) and Firestone last year offered expressions of sympathy to rollover victim Donna Bailey.

Apologies can have surprising power when they are delivered well. On July 12, for instance, Joette Schmidt, vice-president for customer service at America West Airlines Inc. (AWA ), went on the Today Show to ask the forgiveness of Sheryl Cole, a passenger who had been thrown off a flight for joking about the company's recent drunken-pilot episode. Ignoring interviewer Matt Lauer's invitation to defend the airline's conduct, Schmidt declared: "I'm here primarily to apologize to Ms. Cole. We overreacted." The victim, who had spent the first minute of the segment tearing into America West, was caught off guard. "I appreciate the apology," Cole responded. "I'm sympathetic to America West right now. I know they're going through a tough time."

Of course, it isn't always so easy. Kenneth L. Lay can't simply pull up a seat beside Oprah, offer up a confession, and make investors, regulators, and prosecutors suddenly forget about the Enron disaster. But in many situations, in which essentially law-abiding companies have made out-of-character blunders, apology has great underutilized potential to help win public forgiveness. At a time when Corporate America is desperate to regain investor trust, it could be a valuable tool.

One insight offered by the new academic research is that companies may be overestimating the costs of apologies and underestimating their benefits. For one thing, juries weigh the fact that a company has faced up to its problems when assessing punitive damages. More important, apologies can defuse victims' anger. Some evidence suggests that people may be just as interested in apologies as they are in money. In one 1994 study of British medical malpractice patients, 37% said they wouldn't have brought suit had the doctor provided them with an explanation and an apology.

And ever since 1987, the Veterans Affairs Medical Center in Lexington, Ky., has had a policy of apologizing to malpractice victims--regardless of the legal consequences. The medical profession hasn't rushed to follow this example. But a 1999 follow-up study found that the hospital was in the lowest quartile in claims payments among 36 comparable institutions.

These examples might not be enough to persuade a CEO with plaintiffs' lawyers on his tail to issue an apology. But one development that could make a difference is the new crop of laws making mea culpas inadmissible in court. Texas passed such legislation in 1999, California did so in 2000, and Florida followed suit last year. Similar bills are pending in eight states.

The details differ, but the laws generally prevent expressions of sympathy from being used as evidence of fault after an accident. They do not, however, apply to expressions of fault. So the statement "I'm sorry your son died in the car crash" would not be admissible to a jury, while "I'm sorry your son died because of our car's defective brakes," would be.

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One criticism of these laws is that they encourage wimpy apologies. While an expression of sympathy is nice, it means much more when it's accompanied by an acknowledgment of fault. In fact, a company that merely offers condolences without admitting that it has done anything wrong can come across as insincere. This problem already plagues many attempts at public contrition. Consider Merrill. On close examination, the company expressed only "regret that there were instances in which certain of our Internet-sector research analysts expressed views that at certain points may have appeared inconsistent with Merrill Lynch's published recommendations." In other words, Merrill apologized for its analysts' candid e-mail--not its own less-than-candid stock recommendations. The company declined to comment on its apology.

This trick may have helped reduce the firm's legal liability, but it did little to win over the public. Unlike America West's apology, Merrill's mea culpa won almost no goodwill. And that wasn't the only problem. The most important audience for apologies, in many cases, isn't just the outside world. It is also a company's own employees. There's no better way for CEOs to tell underlings they are serious about changing a company's culture than with a sincere apology--one indicating that top execs understand the rules they broke and that they intend to abide by them in the future. Merrill's mea culpa sent just the opposite message: that the company is talking one game but playing another. That's the wrong signal to be sending these days.

Read a Letter to the Editor about this story.

By Mike France

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