Image at Stake : Smith-Irvine Co. Trial Bares Firm’s Internal Secrets
Rarely do prominent corporations call attention to their internal problems and protest publicly that their assets are worth far less than many outsiders assume.
But that is exactly what the Irvine Co. has been doing since Aug. 4 in a makeshift courtroom in Bloomfield Hills, a Detroit suburb.
The trial, scheduled to resume Monday after a week’s break, will determine how much money Irvine Co. heiress Joan Irvine Smith and her mother, Athalie Clarke, will receive for their 11% stake in the huge development company, which owns about a sixth of the land in Orange County.
Because of the huge numbers and colorful personalities involved, the trial is being followed as eagerly as “Dallas” and “Dynasty” by longtime Irvine Co. watchers, some of whom are placing bets on the amount of money Smith and her mother will ultimately pocket.
So far, courtroom testimony has cast a far different light on the Irvine Co.’s business affairs than the carefully crafted image projected by the company’s sophisticated public relations staff.
While the company has traditionally attributed much of its master planning philosophy to a sense of community spirit, courtroom testimony has tended to emphasize the overriding role of political expediency and financial necessity.
That emphasis may have been reinforced outside the courtroom by the effects of an ongoing corporate restructuring, which has resulted in a significant reduction of the company’s work force.
The company announced Friday that 285 employees will be laid off in the next eight months. In the last year, the company has laid off nearly 700 people.
As a result of the courtroom revelations and restructuring repercussions, some observers believe the company is no longer perceived to be as powerful as it once appeared.
During the first two weeks of courtroom testimony in Michigan, the company’s top officers maintained that much of the company’s 68,000 acres are not as valuable as might be assumed because of government regulations, including requirements for the company to pay for roads, set aside parks and preserve agriculture.
Irvine Co. officials also admitted that in 1983, the company adopted a business plan calling for a dramatic increase in the pace of development, ranging from homes to hotels, shopping centers and office buildings.
The faster timetable was adopted despite warnings from the company’s own community relations experts that it might generate the public’s anti-growth sentiment.
But in the end, they testified, difficulties in obtaining government approvals caused the plan to be sharply scaled back.
Although the company’s candor is uncharacteristic, its motives are clear.
As it presents its case in court, the company is trying to disprove the claim made by Smith and her mother that their stock is worth $500 million, including interest. That amount is $412 million more than the company’s major owner, Donald Bren, wants to pay for it.
Distraction for Executives
Not only is the trial a distraction for company executives, public relations experts said its chosen courtroom strategy presents a potential image problem for the privately held company, which usually keeps its decision-making process under wraps.
Lear Pearce, president of the Orange County Chapter of the Public Relations Society of America, said that the type of trial in which the company is embroiled can force companies to take positions that appear at cross-purposes with their public relations goals.
The result can be “a crisis communications situation,” Pearce said, in which “what you say in court isn’t necessarily what you would like to say in public.”
The ongoing trial in Michigan, where the company is incorporated, has already forced the company to enter into the public court record a number of documents stamped “confidential.”
As the case continues to unfold, it also promises to make the public privy to a power struggle within a board of directors that has included the likes of automobile baron Henry Ford II and shopping center magnate A. Alfred Taubman, as well as a Smith, a strong-willed and contentious heiress whose grandfather founded the company.
The company’s predicament intrigues some government officials, former employees and longtime Orange County residents who relish the prospect of gleaning inside information about the company’s business strategy.
Argument Over Value
Others are eagerly following the dispute between Bren, who argues that the company was worth $1 billion when Smith agreed to sell her shares in 1983, and Smith, who insists it was worth three times that amount, as an entertaining, real-life drama.
Assemblyman Gil Ferguson (R-Newport Beach), who was vice president of corporate communications at the Irvine Co. 15 years ago, said “anything about infighting on the board . . . will be devoured by people who absolutely love it.
“The Irvine Co. and Joan are Orange County’s Dallas,” Ferguson added.
Irvine City Councilwoman Sally Ann Miller said bets about how much money Smith and her mother ultimately will get for their stock is popular “dinner-fare” discussion at social gatherings in the city.
While the company contends that it has “nothing to hide” and that the testimony about the company’s value in 1983 has no relevance to today’s issues, some observers speculate that Smith could damage the company’s public image by bringing sensitive business matters to light.
“I’m sure every major corporation dreads the potential for full and complete exposure,” said Ken Agid, a real estate marketing consultant and former Irvine Co. employee.
Agid described Smith as “somebody with access and knowledge” who has nothing to lose by “baring all.”
Ferguson noted that Smith frequently has focused public attention on company matters through litigation and the press. “She keeps dragging everything out into the open like a cat dragging a dead bird around,” he said.
Martin Brower, the company’s director of public relations in 1973-85, said that although the company often has talked about problems associated with developing certain land parcels, it broke new ground when it testified that about 60% of its land is “unbuildable in the foreseeable future.”
Brower, who now writes a newsletter about Orange County business, said that when the company was adopting a new business plan in 1983, it would not have considered making public an in-house report warning that a proposed increase in the pace of development could generate public anti-growth sentiment. That report, however, was submitted by the company as evidence in the court trial.
The has company always stated publicly that its top priority is the public interest, Brower said. “You want to show you are taking it easy because it is the right thing to do, and not because it is the politic thing to do,” as the in-house report suggests, he said.
Observers with longstanding ties to the Irvine Co. also noted that it was uncharacteristic for the company to emphasize in court that it scrapped a former plan for developing its coastal property because that plan was would not make enough money.
Previously, the company had given the impression that the plan was revised in response to concerns raised by environmentalists.
White Hat Image
“The Irvine Co. did for years have an image of a white-hat developer that is community spirited, and the fact it was profitable wasn’t highly publicized,” Agid said.
Elected representatives of local governments with which the Irvine Co. negotiates the terms of its development programs may have the most to gain by closely monitoring the trial.
For example, Irvine Co. Vice Chairman Thomas Nielsen testified that since 1983, the company has seen a need to set aside more land for open space in its developments.
Irvine Mayor Larry Agran said Nielsen’s testimony will help the city in its negotiation of a new general plan amendment regarding open space. “We can say, you have already publicly conceded there will be much more open space,” Agran said.
On balance, though, several longtime company observers said they believe the company’s image will be enhanced by its repeated courtroom assertions that it has been forced to restrict its development plans--and profits--because of government mandates and restrictions.
“It demonstrates to everyone watching it that the company has been more sensitive to the community than many suspected,” said Bob Nelson of Nelson, Ralston Robb Communications, a public relations firm in Costa Mesa.
Agran said the court debate over the company’s value may make some city officials tougher as they negotiate land dedications for parks and other community purposes. “When you read that the company is worth billions and billions of dollars,” he said, “. . . you begin to wonder if you are leaving too much on the table.”
But Agran added that he sympathizes more with the Irvine Co. than with Smith. He said he believes that the additional value claimed by Smith is based on higher-intensity development than the company plans to pursue.
“If I had to choose what side I would be on, I would be rooting for the current Irvine Co. management,” Agran said.
He said the company seems to be arguing that “the opinion that you can go out and do what you want” with undeveloped land is wrong. Agran said he agreed with the company’s apparent position, noting that it is difficult for a developer to obtain the necessary government approval for high-intensity development.
“I’m interested in what comes out” of the trial, Agran said. “It is like seeing one of your adversaries having to open his books. But so far, I’m not surprised. In fact, I have been reassured.”
The company’s testimony about the increasing difficulty of proceeding with development in the face of government barriers, such as concerns about mounting traffic, may reinforce a potentially growing perception that the Irvine Co. has been losing its business clout.
Judy Rosener, assistant dean of the UC Irvine Graduate School of Management, said the company’s community image has been far more influenced by the recent reports of large layoffs and by its decision to halt its own residential construction business than by the trial.
While the company says the reorganization reflects a shrewd new business strategy, Rosener said many people believe that the company is in trouble. “People think they are not the power they once were,” Rosener said.
