It’s No Longer ‘Mum’s the Word’ on Cutbacks : Public relations: Troubled companies are hiring specialists to head off false rumors about their fiscal health.

Companies in trouble are dumping the notion that no news is good news, and that couldn’t be better news for public relations firms and business consultants.

From Los Angeles to the District of Columbia, PR firms are honing a new specialty--teaching clients hit hard by the economic downturn how best to disseminate information to their employees, suppliers, bankers and customers.

A number of these self-described “crisis management” companies are new, such as Sitrick & Co., formed nearly three years ago by people who had worked with corporate turnaround artist Sanford Sigoloff. Others are PR firms such as Kekst Inc. that once specialized in mergers and acquisitions but have since moved to what they consider a better opportunity for growth.

“Business is increasing,” said Jay M. Jaffe, president of the Washington-based PR firm Jaffe Associates Inc.

“Two years ago, local real estate firms were calling me to help them market their properties. Today, they are calling me to help them with bankruptcy filings. I’m getting at least one Chapter 11 call a week,” said Jaffe, referring to the title under which many businesses seek to reorganize their affairs in U.S. Bankruptcy Court.

Operating in teams of three to five people, trouble-shooting PR firms often arrive at the doorsteps of a beleaguered client on the eve of an appearance in bankruptcy court or as they are considering the possibility of seeking protection from creditors.

Many companies offering crisis management advice say that they would prefer to become involved with a troubled company as early as possible, say four to six months before the firm winds up in court.

“That’s the ideal,” said Stephen H. Case, a bankruptcy lawyer in the Washington office of Davis Polk & Wardwell who reports that he has increasingly seen his clients turn to PR firms in times of trouble. “The fact of life is that these things usually are handled at the last minute.”

Another fact is that five years ago most troubled companies, especially those faced with a bankruptcy court date, would not have bothered to call a public relations firm at all, Case said.

But the increasing complexity of business reorganizations, reflecting the complexity of the companies involved in them, has changed the “mum’s-the-word” approach to corporate fiscal crises. Instead, they are seeking what Jaffe likes to call “rumor control.”

Rumors often start when companies choose to squelch information, causing their employees, stockholders, suppliers and bankers to dig for their own answers to tough questions, said attorney Alan S. Gover, a bankruptcy lawyer in the Houston office of Weil, Gotschal and Manges.

Erroneous information can cause employees to panic and abandon ship, and it can cause suppliers to stop shipping, customers to stop shopping and creditors to start suing--all of which can hurt a company’s chances for survival, Gover said.

While their intentions may be good, the effectiveness and quality of these crisis management experts are difficult to measure, according to bankruptcy attorneys and others who have used their services.

Some financially ailing companies say privately that their public relations consultants actually hurt them by giving the “wrong” advice--telling them to forewarn employees of layoffs before the plans are firm, for example.

“There is no room for mistakes in business reorganizations,” said Michael Sitrick, who is chairman and chief executive of the 17-member public relations firm specializing in such work.

“You’re not just talking about a financial workout. You’re talking about people’s lives. The wrong word at the wrong time can ruin everything and put a company under. It’s a hell of a responsibility. Rather than fool around with a public relations firm that isn’t going to handle it right, a company would be better off leaving everything up to the lawyers.”

Sitrick and Co., apparently fearing nothing from competitors, is publishing its crisis management techniques in an upcoming book. Among other things, the company advises troubled companies to:

* Create a crisis management team to address communications issues.

* Make the lawyers part of that team.

* Restrict who can speak to the media.

* Make sure there are people specially trained to handle the calls of shareholders, bondholders and vendors.

* Decide what you want the story to be; stress, for example, “the difference between laying off 3,000 people in a 31,000-employee company and “ ‘saving’ 28,000 jobs by restructuring,” Sitrick said.