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Gilded and Gelded

A wounded-but-wiser AT&T veteran recounts how one of the

world’s biggest and best-known companies became one of its

most battered—and explains how others can avoid that fate.

by Dick Martin

Dick Martin retired last year after a 32-year career in public relations at AT&T, the last five years as executive vice president of public

relations, brand management, and employee communications. A book about his experiences is scheduled to be published next year by

Amacom Books.

A golden statue of a winged youth, brandishing lightning bolts and draped in telephone cables, once perched on

the roof of the old AT&T headquarters at 195 Broadway in lower Manhattan. When AT&T decided to move

uptown in the early 1980s, it lowered the statue, popularly called “Golden Boy,” in order to place it in the lobby

of the company’s new headquarters on Madison Avenue.

No one was surprised that after being exposed to the elements for more than 50 years, Golden Boy needed to

be regilded. But AT&T’s chairman at the time, a courtly Southerner named John deButts, was shocked to

discover that the 24-foot-high figure was also anatomically correct—and of heroic proportions. Concerned that

the statue would scandalize genteel Madison Avenue shoppers, he decreed that it be not only gilded, but also

gelded.

Golden Boy thus became a metaphor for AT&T’s recent embattled history. Indeed, it serves as a cautionary

symbol for all companies operating in today’s brutal business environment, one in which, as most executives

quickly learn, perception can be as important as reality. While stock boosters, image consultants, and executives

themselves work to gild a company’s image, special interest groups, politicians, and the business media can end

up gelding a company with countless little cuts. Not surprisingly, CEOs, boards, and their advisers vacillate

between the impulse to jump up on a soapbox and the instinct to hunker down in the hope that they won’t be

noticed.

Over the past decade, AT&T has been buffeted by these opposing forces as few other companies have. A widely

admired icon of American business for over a century, it took a beating as its traditional business disintegrated

and new competitors emerged—at least one of which was able to slash prices and win customers in part because

it was freely fabricating its financial results. But the changing environment and a rival’s accounting fraud weren’t

the only reasons for AT&T’s troubles. The company made some strategic blunders. And it couldn’t seem to get

its management act together.

When I assumed responsibility for the company’s public relations in 1997, the CEO’s heir apparent had recently

jumped ship to join a start-up. The printing-company executive hired to replace him was such an unlikely choice

that he was dubbed by one newspaper the “heir unapparent”—and he was gone within nine months, $25 million

richer. An embarrassed board of directors then eased aside the CEO, Robert E. Allen, and started looking for a

successor. After a highly publicized three-month search, they settled on the man some thought should have

been next in line for the top job all along: C. Michael Armstrong.

Armstrong, who had been the CEO of Hughes Electronics, arrived with sterling credentials and high-wattage

energy—and no immediate plan beyond the most basic play in the turnaround playbook: slashing costs. It was

clear to many people inside and outside AT&T that finding and implementing a long-term fix for the company’s

broken business model would take time, possibly even longer than the five years in Armstrong’s contract.

As it turns out, we’ll never know if Armstrong’s strategy would have worked in the long run, because he didn’t

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Harvard Business Review Online | Gilded and Gelded

get a long enough run. Even before his five-year tenure was up, the company got hammered on several fronts.

This occurred, in part, because of our handling of a classic public-relations dilemma: We needed to convince

employees, customers, the media, and Wall Street that AT&T, famous for being slow to change, was indeed

changing—and fast. At the same time, to give the CEO a long enough runway to achieve strategic lift, the

company needed to maintain a low profile and avoid raising unrealistic short-term expectations.

We managed the first task fairly well; unfortunately, we did so at the expense of the second. And that was only

one of our mistakes. But if it’s true that experience comes from what one does and wisdom from what one does

badly, I can offer—with, I hope, a clear eye and a nose for sour grapes—some useful lessons that will help other

companies avoid the missteps we made.

Don’t Fall in Love with Your Own Story

The day Mike Armstrong succeeded Bob Allen as CEO in November 1997 was a blur of flashbulbs and

microphones. Exhausted after 13 hours of employee meetings, investor calls, and media interviews, Armstrong

slumped into the backseat of a company car to go home. The driver, wanting to impress his new boss, peeled

away from the curb—and promptly rear-ended a taxi.

At the time, we didn’t realize how portentous this incident would turn out to be. After a brief honeymoon, the

media would criticize Armstrong for moving too fast and acting too boldly—the very things for which they had

lauded him just months before. Ultimately, they would excoriate him for reversing direction, demonstrating that

business today is as much about managing perceptions and external relationships as managing employees,

finances, and assets. While few executives would say they try to artificially gild their company’s image, most

would admit the need to burnish it in order to highlight the company’s most attractive features. But it is

important to realize the risks that entails.

Let’s put this delicate task in context. In late 1997, AT&T was at a turning point. It had been 13 years since the

old AT&T was broken up by the courts, confining the newly formed regional “baby Bells” to local telephone

service and leaving AT&T with its long distance and telephone-equipment businesses. And it had been just over

a year since the company had spun off its equipment arm, which became known as Lucent Technologies, and its

troubled computer unit, NCR, which it had acquired in 1991. The breakup—commonly referred to as the

Trivestiture—was designed to allow AT&T to focus in on its promising communication-services business.

But with the passage of the Telecommunications Act of 1996, AT&T moved from being at the crossroads of

technological change, as represented by the Internet and new digital technologies, to being in the crosshairs of

powerful new competitors. These included not just competing long distance carriers, like MCI and Sprint, but the

regional Bell companies. The 1996 legislation had given these regional telephone monopolies a road map to get

into the long distance business, which accounted for 80% of AT&T’s revenue and 100% of its profits (and then

some, making up for losses in other areas). If the Bells were to offer long distance service, they would be able to

package it with their local services, re-creating that most natural of bundled products: “any distance” telephone

service.

AT&T faced plenty of obstacles in offering a competing service. The Bells owned the only wires carrying phone

calls into people’s homes, and they showed no inclination to share them. In fact, the Bells had brought suit in

federal court to strike down provisions of the 1996 law that required them to lease parts of their network at

steeply discounted prices. (It wasn’t until late 2001 that AT&T finally won the right to use Bell lines in one state,

New York, at economically viable rates.) With additional competition from burgeoning wireless-telephone

companies, AT&T had its hands full.

Clearly, there was a need to tell Wall Street where we were headed. Our recent organizational turmoil—two

apparent CEO succession plans going up in smoke—put an extra burden on us. Armstrong calculated that he had

90 days to outline his strategy, which gave him until the end of January 1998. Wisely, he avoided on-the-record

interviews during this period. He didn’t know what he was going to do yet and he didn’t need the media’s help in

narrowing his options. The only interview he gave was to BusinessWeek during his first days on the job, and it

resulted in a generally glowing profile.

Despite the holidays, Armstrong met his deadline, and on January 25, he staged an analyst conference at which

he announced an impressive set of cost reduction measures, including the elimination of 18,000 jobs. Unlike

previous head-count reductions, which had been public relations disasters, these were to be achieved largely

through an early-retirement offer that would prove to be tremendously popular among employees. The success

of Armstrong’s inaugural appearance before analysts and the media only whetted our appetite for more such

events.

It’s always tempting for an executive to say yes to an invitation from the mainstream business media for a one-

on-one interview. It’s the rare CEO who isn’t flattered by the attention of a publication he—and nearly everyone

he knows—regularly reads. And Armstrong liked the spotlight as much as anyone, arguably more. The camera

loved his broad shoulders, his blue eyes, and his wide grin, and young reporters were captivated by his charisma

and his reputation as a Harley-riding maverick.

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Indeed, Armstrong’s appealing presence made it easy for us to forget caution as we tried to get AT&T’s story out

to the media. He had won over many employees before he even formally arrived at AT&T: After driving himself

in his Porsche from his California home to a nearby sales office, he evaded the waiting AT&T dignitaries in the

lobby by talking his way past a guard at the employee entrance, then wandered through the building introducing

himself to startled clerks and salespeople. We figured someone like this would easily win over the media.

And he did—too well, maybe. His announcements and explanations of the company’s strategic plans raised

expectations that we ultimately weren’t able to meet. In retrospect, it could be argued that the CEO’s decision to

remove his self-imposed gag 90 days after his appointment came 1,736 days (the time remaining on his five-

year contract) too soon. Armstrong always wanted to give people “something to write about” when he made a

speech or met with reporters. There was a growing perception that AT&T was changing its culture and executing

a rapid makeover. A series of quick acquisitions made AT&T the largest owner of cable TV systems in the

country and solidified the company’s position as a major player in wireless telephony, a place it had first staked

out when it acquired McCaw Cellular in 1994. Our revenue growth rate doubled in both 1998 and 1999. The buzz

on the company was that the venerable long distance provider was building a platform that would offer one-stop

shopping for both wired and wireless voice and data communications, not to mention cable TV.

One example of overselling our story: In January 1999, we called a press conference to announce a tentative

agreement with Time Warner for the provision of local telephone service over Time Warner’s cable television

systems. Partly because of our promotion of the event—it would be presided over by Armstrong and Time

Warner’s then-CEO, Gerald Levin—the Wall Street Journal sent three reporters to cover it. When the deal later

fell through, not only did we have egg on our faces, but the reporters who had hyped the story to their editors

felt burned.

So when things began to go amiss for the company, we had a more difficult time controlling the damage than if

we had been more modest in laying out our plans. The company’s problems were numerous. Revenue from our

most profitable business, voice long distance, began to decline faster across the entire industry than anyone had

projected. That, along with some $32 billion in short-term debt incurred in our cable acquisitions, created a

liquidity crisis. A number of joint ventures fell through (such as the one with Time Warner) or fell apart (such as

one with British Telecom), and a number of acquisitions (including the purchase of Excite@Home) proved to be

ill-fated.

And we later learned that our major long distance competitor, WorldCom, in a desperate effort to maintain the

growth rates on which its stock price depended, apparently engaged in the biggest accounting fraud in U.S.

history—an $11 billion sleight of hand that allowed it to offer customers, over a three-and-a-half-year period,

prices below its real costs. AT&T was like a greyhound chasing a mechanical rabbit: We kept running faster and

faster—which did get us in better shape—but the race was fundamentally rigged.

Partly in response to these developments, Armstrong in October 2000 announced plans to restructure the

company once again, spinning off to shareowners its wireless and cable businesses in a move that would

ultimately leave AT&T with its operations in consumer long distance and business phone-and-data services. (The

wireless business remains a stand-alone company; the cable operations were sold to Comcast.) The divestitures

were designed to unlock hidden value for holders of AT&T shares, but they were widely viewed as a repudiation

of Armstrong’s ambitious plans for the company. Fortune, having rejoiced in an early 1998 headline that, in

Armstrong, “AT&T Finally Has an Operator,” was quick to write the company’s obituary in an article entitled “Say

Goodbye to AT&T.”

While stock boosters, image consultants, and

executives work to gild a company’s image,

special interest groups, politicians, and the

business media can geld a company with

countless little cuts.

Understand the Business Media’s Mind-Set

This portrayal of Armstrong as the embodiment of AT&T’s potential—and failings—should come as no surprise to

even the most casual reader of business news in the past decade or so. That’s because it reflects one of the

business media’s main preoccupations: the colorful personalities at the top of the corporate world.

As business has become more complicated, investors have turned their attention to the CEO, an aspect of the

corporation they think they ought to be able to understand. According to a 2001 study by public relations agency

Burson-Marsteller, some 90% of professional investors say they are more likely to recommend or buy a stock if

a CEO’s reputation is good. That’s up from 70% five years earlier. Whether the media help fuel this interest or

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only reflect it, the CEO has become central to business coverage.

Take the case of the hapless John Walter. In 1996, AT&T named Walter, then CEO of printing company RR

Donnelley, president and anointed him to succeed Bob Allen, who had been CEO since 1988. In an embarrassing

though arguably immaterial blunder at his first news conference, Walter was unable to answer a question about

which long distance provider he used. AT&T’s market capitalization went down by about $4 billion in a matter of

hours—not specifically because of Walter’s lapse but because it deepened investors’ unease about his

qualifications. Conversely, on the day the company announced the appointment of the well-regarded Armstrong,

the market added about $4 billion to AT&T’s market cap. (Aware of the power of symbols, Armstrong arrived at

his first press conference armed not only with the name of his long distance provider but also with an AT&T-

branded telephone calling card in his wallet—which he produced with a flourish when the inevitable question was

presented.)

But CEOs are not the only executives used by the media to personalize what might otherwise be dry business

stories. When AT&T announced the spin-off of its telephone equipment business in 1995, Fortune was looking for

an angle no one else had explored. The magazine decided to profile the executive who was seen as the likely bet

to succeed Bob Allen as CEO: Alex Mandl, who had joined the company just five years earlier as CFO and was

then running the long distance business. We told Fortune its angle was premature—Bob Allen wasn’t planning to

retire for four or five years—and declined the request to interview Mandl. Fortune’s editor, though, knew

someone who knew Mandl. “All they want to do is take your picture,” the friend told Mandl. “They’re going to run

the story whether you help or not.”

When you hear those words, take it as your cue to make top executives unavailable. I have never seen a story

change direction because its subject cooperated. The occasional modest improvement—usually a defensive

quote that is promptly rebutted in the story—seldom compensates for the greater credibility and prominence the

article will acquire by virtue of your cooperation. Instead of agreeing to an interview, have one of the CEO’s

trusted lieutenants or a PR person provide factual information and keep tabs on the reporter’s progress.

As might have been expected, Fortune did more than take a picture. While Mandl was under the lights, Fortune’s

editor engaged him in small talk about where he went to school, what it’s like for an outsider to work at AT&T,

and Wall Street gossip. Big chunks of their conversation ended up in the story. Worse, the article contrasted

Mandl’s “flamboyant” style with that of his low-key boss. The story made him look as though he were not only

running for CEO but also essentially running the company. AT&T headquarters reverberated to the sound of

noses going out of joint. The board never took formal action to name Mandl as Allen’s likely successor. That lack

of action contributed to Mandl’s decision less than a year later to leave the company to become CEO of Teligent,

a now-defunct start-up, setting the stage for the hiring of John Walter.

Another characteristic of today’s business media is the focus on winner-take-all conflicts, real or imagined,

among companies. And the assessments about who’s winning and who’s losing can change quickly. The CEO

prophet of today’s puff piece can quickly become the pariah of tomorrow’s hatchet job. The hallway outside my

AT&T office was hung with two sets of framed magazine covers and stories. Along one wall, representative

headlines read “Could AT&T Rule the World?” (Fortune) and “1-800-GUTS: AT&T’s Bob Allen has transformed his

company into a world-class risk taker” (BusinessWeek). Along the other wall: “Why Allen’s Latest Plan Won’t

Work” (Fortune) and “AT&T: When Will the Bad News End?” (BusinessWeek). Exhibits from both sides of the

gallery ran only several years apart.

Journalists who view the world as made up of winners and losers inevitably interpret most events as competitive

struggles. The managing editor of Forbes, Dennis Kneale, who once wrote and edited stories about AT&T for the

Wall Street Journal, told a gathering of public relations executives last year that he is always looking for

“conflict, drama, and setbacks” in stories—and especially appreciates “mean-spirited ideas about your rival.”

There is room for “a silver lining” in some stories, he said, but “if your client can be in Forbes and survive, then

you’ve done a great job.” In a recent follow-up interview for this article, he added: “It sometimes surprises me

why people talk to us at all, because it seems there’s no upside for them. But then I realize that, yes, there is an

upside: the opportunity for a company to grind its own ax. And because of that, I always operate under the

assumption that we’re being used.”

We figured someone like Mike Armstrong

would easily win over the media. And he

did—too well, maybe.

The perennial public relations problem of getting the company’s story told in a positive way without getting

burned played out in an interesting way as AT&T’s fortunes suffered. In the process, we got a window into

another preoccupation of business publications: how they’re doing in the competition against other media

outlets.

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When the controversy around AT&T’s strategy was at a fever pitch in 2001, we wanted to present our story as

effectively as we could. Having learned from our mistakes, we had become increasingly selective about the

interviews we advised Armstrong to grant. Of course, the business journalists covering us were clamoring for

greater access to the CEO. But it seemed to us that most reporters were simply fishing for quotes to support the

thesis of whatever story they were writing. To keep Armstrong from being held hostage to the reporting and

editing process, we settled on a radical approach: We let it be known that the CEO wouldn’t do exclusive

interviews without a promise that big chunks would run as verbatim questions and answers.

We weren’t asking for editorial control (although we did ask for an opportunity to review the Q&A to ensure that

the context wasn’t changed and that Armstrong’s off-the-cuff statistics were accurate). And we didn’t try to

specify how much space should be dedicated to the Q&A (although we asked that it be “substantial,” leaving the

publications to decide what that meant). But at first, the magazines bristled at our ground rule. As Fortune’s

then-editor, John Huey, said to me, “You need us more than we need you.” That may have been true, but when

I told him that my next call was to BusinessWeek, his candor surprised me: “You said the magic words. We’ll do

it.”

With that agreement in place, getting BusinessWeek to buy in was easy. The New York Times and the Wall

Street Journal followed. “We’re like any other business,” Huey, now an executive at AOL Time Warner, said in a

recent interview for this article. “If I think a competitor is going to get something, and I can get it first, I’ll go

after it even if I don’t want it.”

Competition between publications is nothing new. No one likes to get scooped, and even a newspaper of record

like the Wall Street Journal will often ignore or bury a good story if a competing publication has already reported

it. But this experience gave us some interesting insight into how the media plays its game.

Don’t Miss the Symbolism in the Facts

Perhaps one of the greatest public relations challenges is getting CEOs to look beyond rational arguments and

address stakeholders’ emotional concerns. We failed at this more than once. In fact, it’s how Bob Allen, one of

the most decent people I know, quickly became the poster boy for corporate greed—a “corporate killer,” in the

words of one infamous Newsweek cover.

In January 1996, AT&T announced that it would eliminate 40,000 jobs as part of its historic divestiture of Lucent

and NCR, with 17,000 of the cuts at AT&T itself and the remainder at Lucent. Unlike Armstrong’s later

elimination of 18,000 AT&T jobs, these cuts would largely be involuntary. The announcement was designed to

impress Wall Street, and it did: The company’s stock value increased by $6 billion in two days. But we didn’t pay

enough attention to the insecurity that people were feeling along Main Street. Despite a generally positive

economic climate, real income was declining, and Americans were worried about job security.

The initial news coverage was heavy but basically neutral. As we shut off our PCs that night in the PR

department, we felt we had dodged a bullet. As it turned out, we had focused too much on the newspapers

tucked into the seat pockets in our executives’ limousines. We should have paid more attention to the evening

news broadcasts, which were how most people across the country heard about our downsizing. For example,

NBC’s Tom Brokaw predicted that “if what happened today to 40,000 workers at AT&T is any kind of barometer

of what’s ahead, it will be another long, anxious year for the American middle class.” The television news

anchors tied AT&T’s downsizing to the fear that was rattling workers at all levels.

If we didn’t hear the rattle, Pat Buchanan, running for the Republican presidential nomination in the New

Hampshire primary, did. Tapping into working people’s very real fear and anger, he castigated AT&T for “laying

off 40,000 workers just like that, [when] the fellow that did it makes $5 million a year.” He added that “AT&T

stock soared as a consequence, [so Allen’s] stock went up $5 million.” Now the layoffs were more than an

emotionally charged symbol of the American workforce’s feeling of insecurity; they also symbolized corporate

greed, and the greed was personified by Bob Allen.

Media coverage of AT&T’s downsizing picked up and became increasingly negative. For example, Newsweek’s

Allan Sloan wrote that while the downsizing made business sense, AT&T’s executives should share in the pain. In

reporting the story, Sloan came to our New Jersey headquarters so he could look Allen in the eye when he asked

if he thought it was fair to draw a multimillion-dollar paycheck when workers were losing their jobs. Allen just

glared, saying it wasn’t his job to decide what was fair.

I knew that Allen genuinely worried about the people affected by his decisions. He replied to every letter he got

from the spouses—and sometime the kids—of people who were being laid off. He expressed his feelings to Sloan

and to others, but for some reason he couldn’t articulate his empathy for his workers. “I feel bad about it,” he

said, “but I don’t know what to do. I wouldn’t see any value of going on TV and crying and showing my sorrow

for the world to see.”

Sloan wrote that although Allen seemed like “a decent and moral man,” he apparently didn’t get it: “Symbolism

is terribly important, and so is a sense of shared sacrifice. If Allen had announced that AT&T’s top execs and

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members of its board of directors were donating some of their salaries and fees to a fund for the fired

employees, it wouldn’t make much financial difference. But it would make a huge symbolic difference.”

He was right; it would have made a difference. But because we didn’t do it, no rational argument—about how

today’s layoffs were likely to save tomorrow’s jobs, about how we were providing aggressive job placement and

other assistance to those laid off—could overcome the symbolic impact of the layoffs.

Whereas Allen was suspicious of anything that looked like grandstanding, Armstrong was a master of the

symbolic gesture. One of his first acts as CEO was to ban chauffeur-driven transportation to work for top

executives. The move was terrifically popular with rank-and-file employees and even made the business pages

as a sign of how serious he was about cutting costs and changing the culture. In fact, exactly one person was

being chauffeured to work at the time. She was an executive who was slated to retire soon, and she was driven

to and from the office until her last day.

Recalling the lambasting that Allen had taken, Armstrong froze executive salaries when he announced the

elimination of the 18,000 jobs in January 1998. Even more important, though, it was the last time we

aggregated downsizing information for the media. From then on, we did our downsizing by department,

providing the companywide numbers only to the very few executives who needed to ensure that we were

complying with SEC requirements on documenting accounting charges.

But Armstrong’s instincts weren’t unerring. For example, he was unable to understand the emotional

repercussions of AT&T’s spin-off of its wireless and cable businesses. From his point of view, the action didn’t

represent a fundamental strategic change, as the business media repeatedly contended. He was simply changing

the company’s structure with the primary aim of benefiting AT&T shareholders, who would now hold (more

valuable) shares in three companies rather than one. Despite our relentless efforts to convince people that

Armstrong had “not changed his strategy,” the media continued to report that he had switched course—which of

course he had.

What Armstrong didn’t understand was that most people—many small shareholders, as well as customers and

even the average person on the street—had an emotional attachment to this icon of corporate America. After all,

hadn’t Ma Bell, the caring parent, kept people in touch with one another for all those years? Armstrong had been

presented as the man who would return the icon to its former glory. After an investment of billions of dollars in

the effort, it now looked as if he were throwing in the towel. People were hurt, and there was no way to deal

with that on a rational level. The media’s coverage of these divestitures, in some sense, reflected that painful

sense of disappointment.

Perhaps one of the greatest public relations

challenges is getting CEOs to address

stakeholders’ emotional concerns. We failed at

this more than once.

On a somewhat more mundane level, Armstrong’s instincts also failed him when it came to the future of Golden

Boy. In 2001, as the company became more cost conscious, Dan Somers, AT&T’s CFO, recommended to

Armstrong that the company get rid of the statue because of its $50,000 annual maintenance cost (the figure

was apparently a rough estimate of the annualized cost of regilding the statue every five years). But Golden Boy

was more than a statue; it was part of the company’s heritage and a link to its days of greatness.

Fearing that the statue would ultimately show up on eBay, I convinced Somers to let AT&T donate it to the New

York City parks department, because many in New York had been miffed when AT&T moved its

headquarters—and Golden Boy—from Manhattan to Basking Ridge, New Jersey, in 1992. Unfortunately, the head

of the parks department wanted to relocate the statue in distant Queens, which wouldn’t have been exactly the

win-win we were hoping for. So we entered into lengthy negotiations on the placement of the statue. When that

discussion ended up in the press, as of course it inevitably did, there was an immediate outcry from AT&T

employees and retirees and even the family of sculptor Evelyn B. Longman. In fact, our home-state newspaper,

the Newark Star-Ledger, ran more column inches on the Golden Boy controversy than on the initial public

offering of our wireless subsidiary, the largest IPO to date, which took place while Golden Boy’s fate was being

determined.

Ultimately, Armstrong decided the negative press and employee complaints were not worth the uncertain

savings. If getting rid of Golden Boy had been intended as a symbol of our fiscal austerity, it had backfired. One

year later, when the company announced it was selling its Basking Ridge headquarters and moving down the

highway to another AT&T-owned campus, Armstrong was quick to add that “Golden Boy is moving with me.”

Pay More Than Lip Service to Your Stakeholders

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Public relations is not about polishing an image or creating buzz; it’s about building long-term relationships

between an institution and its stakeholders. This goes beyond the usual quid-pro-quo approach to public

relations, in which CEOs make regular deposits in a hypothetical “trust bank”—for example, by chairing charity

dinners—against the inevitable day when they will need to make a withdrawal.

Consider the firestorm of criticism AT&T suffered in 1993 over a small cartoon in a publication for employees

called Focus. A drawing intended to depict telephone calling around the world showed stereotypical figures

including a man in a beret in Europe—and a monkey on the phone in Africa.

The cartoon’s appearance resulted from bad luck, miscommunication, and insensitivity. It happened like this: An

article for the publication had been killed just before press time; an innocuous quiz on AT&T’s international

operations was quickly substituted; an outside design studio inserted cartoons into a hastily prepared layout; the

AT&T production manager (who happened to be a young black woman) received a blurry fax of the art and

signed off on the piece; and 250,000 copies were printed.

As soon as the first copies arrived in our offices, the editor knew we had a problem. Ashen-faced, she brought it

to her boss’s attention. The full run was already on its way to people’s homes, so we did what the textbooks say

you’re supposed to do: admit the mistake and accept responsibility before someone else makes a big deal of it.

We apologized in our daily electronic newsletter to employees within 24 hours, before the issue of Focus reached

most people’s mailboxes.

Of course, the apology practically guaranteed that employees would tear the magazine apart looking for the

offensive cartoon. Once they had seen it, there was such a strong reaction that the first apology was deemed

insufficient, so the CEO issued another. But a great many AT&T employees—African-American and not—were still

embarrassed or, in many cases, enraged. The cartoon became a lightning rod for every diversity grievance

employees were harboring. These grievances were shared with outsiders ranging from the NAACP to Jesse

Jackson.

In a final stroke of bad luck, all of this broke on the front page of the Washington Post just as the Congressional

Black Caucus’s annual Legislative Weekend was getting under way in the nation’s capital. Speaker after speaker

used the cartoon as an example of corporate America’s sorry diversity record. AT&T’s CEO was called to testify

before the Congressional Black Caucus, whose chairman dismissed all of his explanations and apologies with an

expletive.

In recent years, business leaders have focused on investors at the expense of other stakeholders. The reasons

are numerous: the rise of value management as a business philosophy; executives’ desire to boost the value of

their own stock options; the American consumer’s fixation on stock prices, thanks to an alphanumeric array of

tax-favored savings plans—IRAs, 401(k)s, 403(b)s, and the like. In the process, though, other stakeholders

have often been relegated to second-class status. One thing we learned at AT&T is that value creation has to

embrace all of a company’s stakeholders: investors, customers, employees (in their role as employees rather

than investors), and the communities in which all of these people live and work. And they can’t be embraced

sequentially—that is, you can’t wait to focus on communities, for instance, until after you get your share price

up to where you want it to be. You have to be able to serve these key stakeholders simultaneously.

In 1926, AT&T’s chairman—perhaps motivated by the still-fresh memory of a bomb exploding outside the offices

of J.P. Morgan a few blocks down the street—convinced Arthur W. Page to join the company as its first vice

president of public relations. Page, the editor of The World’s Work, the BusinessWeek of the day, had been a

forceful critic of laissez-faire capitalism. He relished the chance to put his theories into practice, helping the

company navigate the crosscurrents of public opinion in an era of doubt and skepticism toward big business. His

advice at the time rings true today. “All business lives by public approval and, roughly speaking, the more

approval you have, the better you live,” he said. Of course, he then added, “the fundamental way to get

approval is to deserve it.”

“Deserving it” clearly arises not from what you say but from what you do. And your actions have to be

meaningful, designed to do more than gild your company’s image. In one sense, this was our problem as we

tried to deal with the uproar over the cartoon. AT&T was (and still is) one of the most generous corporate donors

to African-American organizations, including the NAACP, the Rainbow/PUSH Coalition, and the National Urban

League. At one point, 25% of all African-Americans with PhDs in electrical engineering had received financial

support and mentoring from AT&T. The company was a pioneer in minority purchasing and spends more than $1

billion a year with firms owned by women or people of color. Furthermore, even during the extensive downsizing

of recent years, AT&T took pains to ensure that the company’s diversity profile wasn’t adversely affected. In

fact, the profile actually improved.

But despite the company’s good efforts, there were few black executives in top positions. Consequently, our pool

of goodwill with African-Americans was broad but not deep, and it evaporated in the heat of the controversy.

Leaders at the organizations we supported did little more than express surprise and sorrow at what had

happened. Among our own employees of color, the incident ignited fumes of discontent over the small numbers

of minority-group members who had moved into the higher ranks of management. The furor did not die down

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Harvard Business Review Online | Gilded and Gelded

until the company enacted a new diversity program with specific goals for promoting people of color—and

stopped publishing the employee magazine.

An interesting corollary to this incident showed that the controversy was about more than a thoughtless cartoon,

that it was the result of our failure to address the legitimate needs of one of our most critical groups of

stakeholders. At about the same time that the cartoon ran in our employee magazine, a similar drawing

appeared in the alumni magazine of Rutgers University, illustrating a story about graduates working around the

world. France was represented by a man in a beret, and Nigeria was shown with a pennant-waving monkey

(though there was a human in Africa too—Kenya was represented by a marathon runner). There was no public

outcry. Indeed, as far as I know, no one even complained.

Learning the Lessons

The public relations battles fought by AT&T may have been particularly memorable, but the issues they raised

weren’t unique. That’s why most senior executives would benefit from the lessons we learned: Don’t become

hypnotized by your own buzz; understand the way the business media think; be sensitive to the emotional

resonance of what seem to be straightforward facts; address, simultaneously and sincerely, the needs of all your

stakeholders.

In fact, Mike Armstrong’s successor as AT&T’s chairman and CEO, Dave Dorman, who took over in November

2002, appears to have taken a few of those lessons to heart himself. While not invisible, he has studiously

avoided the public limelight. One of his first acts after he was named CEO was to hold a rededication ceremony

for Golden Boy, which is now firmly planted outside AT&T’s headquarters in New Jersey.

But Dorman does not suffer from terminal nostalgia. He never misses an opportunity to warn people that the

communication-services industry is in nuclear winter and to worry out loud about whether AT&T has enough

parkas.

That was actually the theme of a get-acquainted breakfast he had with Jim Cramer, the hedge fund manager

turned media machine who had been a vocal critic of Dorman’s predecessor. Cramer had been on Armstrong’s

back ever since Cramer had been forced to unload his stake in “T” at a fat loss. As Dorman and Cramer shook

hands outside the hotel where they had met, a pigeon left the flagpole overhead—and relieved itself on Cramer’s

shoulder. Even the doorman caught the symbolism.

Reprint Number R0310B

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