The Importance of Trust

According to the SARS article, successful crisis communication begins with “clear explicit objectives, such as providing information, establishing trust, encouraging appropriate actions, stimulating emergency response or involving stakeholders in dialogue, partnerships, and joint problem solving” (p. 5) Chinese authorities failed to do this during the early stages of the SARS crisis and the epidemic spiraled out of control. This lesson is also applicable to the Bank of American crisis.

Prior to the formal announcement of the Merrill Lynch merger on September 15, 2008, Bank of America’s CEO Kenneth Lewis was very optimistic about the deal. Merrill Lynch’s stability had been called into question previously, but Lewis received word from his financial advisor that the company’s balance sheet was becoming more stable. After the deal was announced, however, Lewis began receiving weekly reports about Merrill Lynch’s condition, and he quickly learned that the company was in trouble. By the end of November, its losses totaled $9 billion.

Bank of America officials began to doubt the merger and looked into breaking the deal. There was one clear cut way to do so, but the window for action was closing fast. The deciding factor in any merger is a shareholder vote. If the shareholders vote against a merger, it is dissolved with no legal obligations on either side. Bank of America’s shareholder vote was scheduled to take place on December 5, 2008. If company officials could prove to the shareholders that acquiring Merrill Lynch would result in tremendous losses for Bank of America and convince them to vote against the merger, the deal would be voided.

Bank of America opted not to disclose information about Merrill Lynch’s condition to shareholders, however, and the deal was approved. If the deal was terminated, it would have been an embarrassment for Lewis and a blow to Merrill Lynch. Lewis had publicly championed the deal from the beginning, and Merrill Lynch was dangerously close to bankruptcy and would not have been able to repay its debts without help.

The deal was officially closed on January 1, 2009. On January 16, 2009, Bank of America’s stock closed around $7 per share. Six weeks later, it was at $3.14 per share. This was a 90% decrease from the days before the Merrill Lynch merger. Shareholders were stunned. They felt deceived and took action. An SEC investigation and an investigation by Attorney General Andrew Cuomo commenced, and CEO Lewis announced his resignation for December 2009.

All of this negative press and internal crisis could have been avoided had Bank of America’s higher ups communicated effectively with shareholders from the beginning. The bank may recover financially, but the damage to shareholder trust and loyalty is irreparable.

Reference: http://www.theatlantic.com/magazine/archive/2009/09/the-final-days-of-merrill-lynch/7621/