Golden PR lessons form the Bre-X mine fiasco.

Many people consider it a blot on the history of investing in equity, and a good example of how even the most sophisticated among business types and the general public can be deceived.

The 'it' was the first quarter of 1997, which was brimming with bright prospects for gold mining company stockholders around the world but turned out to be a weepy, angry one filled with riches-to-rags tales.

The dramatic change in fortunes took place as plans to develop mines in the steaming jungles of eastern Indonesia - for what was reputedly the world's grandest gold deposit since Sir Walter Raleigh's dreams of finding Eldorado centuries ago - came suddenly to a close.

The die was cast for the financial fiasco involving the proposed mines owned by Canadian-based Bre-X Minerals Ltd. as two reports, released in staccato step, dropped their bombshell:

March 26, 1997 - New Orleans-based Freeport-McMoRan Copper and Gold (Bre-X's recently announced partner with established ties to Indonesia), chillingly announces its results on drill cores made close to Bre-X's Busang mining sites in the island of Borneo. They reveal no more than 0.02 grams of gold per tonne, contrasting a millionfold with an average of three to four grams of gold per tonne that Bre-X claimed existed.

May 4, 1997 - an independent audit report on the Busang deposits by Canadian-based Strathcona Mineral Services Limited puts the final nail in the coffin, noting that there has been "falsification of assay values" in Bre-X's ore samples that allegedly came from the sites of future mines projected to contain 200 million ounces of gold worth Cdn. $70 billion at March 1997 prices.

Compared with the feverish activities of earlier months, the Busang jungles are calm again as mining workers, drilling machinery and geomorphological maps of the ore in that Far East country's East Kalimantan province have been transported out. The junior mining company that became Mr. Big in two short years with more than Cdn. $6 billion in capitalization - at one point - has since sought and received creditor protection and still operates quietly in the bustling city of Calgary, Alta. The president/chief executive officer of the company and the chief geologist (along with other company executives), who have become multi-millionaires since the company's stock went public, have both vehemently denied that they knew anything about the tampering of the drill cores.

If stockholders phone Bre-X at [phone], they will hear a cheery company receptionist's greeting, suggesting a calmness that easily hides the emotional cauldron in its executive suites. If there is a sense from the phone call that "things have now settled down in Bre-X since May," it's not the same outside.

The ire and disappointment of thousands around the world who had placed their money and faith in the company have not subsided. The financial pain to investors was brutal. In addition to some millionaires becoming penniless overnight (on March 27, 1997, Bre-X's shares lost $3 billion of their market value as the stock price tumbled to Cdn. $2.50 from $15.50), hundreds of small investors were forced into personal bankruptcy after brokerage houses asked for immediate repayment of the loans they were given to buy Bre-X stocks.

Public relations practitioners are no less bewildered than the public about what happened. In public relations, as in the investment business, lessons can be gleaned in 20/20 hindsight. First, what was the company saying to the world?

A Look at Bre-X Communication

Long before the disclosure of the fraud, Bre-X was never the media's darling. Company officials were generally close-mouthed about developments in the company and were virtually inaccessible to reporters. Its Internet site was the company's only ongoing official channel of communication. It had no full-time public relations manager, and except for a six-month period when it hired the New York public relations firm of Hill & Knowlton Inc., it had no one in charge professionally guiding its public relations.

Reporters found it frustrating, to say the least, doing the Bre-X beat. They found more barriers to obtaining information than they normally encountered. Wrote Don Saunders of The Globe and Mail, which promotes itself as Canada's National Newspaper: "... The Bre-X story was ... a reporter's nightmare. At its centre was a hugely popular company about which few solid and verifiable facts were available ... reporters were forced to rely on information provided by market analysts because the company was unusually averse to media scrutiny, because its mines were far away, because reporters have no way to test the samples themselves...."

This broadside by an editorial writer of The Financial Post in Toronto, after the fraud disclosure, also captured the essence of the disenchantment with the mining company's media relations: "Bre-X was not always accurate or forthright with its disclosures, and that alone should have rung alarm bells."

Lesson #1 for PR Managers and Non-PR Senior Executives about Communication

* Providing information to the public and the media, insofar as it is possible without harming an organization's competitive position, is an important principle. Going all out with what the PR profession calls the basic "public information" and "press agentry" models of, communication (that is, one-way communication moving outward from an organization), is not always the best course of action.

Because the mining company avoided the media consistently, it would appear that the organization might have had an inadequate PR strategy. But this could be a wrong conclusion. "[Bre-X might have been] poorly managed, poorly run or perhaps had devious or unethical plans to begin with," said Maria Russell, a professor of public relations at Syracuse University's S.I. Newhouse School of Public Communications, in Syracuse, N.Y. "A company that is not doing good does not seek recognition. It probably knew, oh, why would we want to ask reporters to come in, if there's a chance they can stumble on or ask about certain procedures, certain processes or practices that we don't want them to know about?

In the period prior to the two bombshells, information was provided to the media to the extent possible without harming Bre-X.

Also, communication has limits to what it can do. "How well can you sell a product that isn't very good? In the case of Bre-X, the whole product ... seemed to have been founded on a fraud. No amount of PR resources are going to change that fact," noted Ruth Edgett, principal of Wordbroker Communication Services, in Ancaster, Ont.

Lesson #2 for PR Agencies about Researching New Clients

* PR consulting firms have an obligation to protect both the public interest and the reputation of the public relations profession by doing proper background checks on new clients before signing them onto their roster. (The consultants' section of professional PR bodies and PR agencies' trade organizations should evaluate/introduce codes of conduct that deal with this aspect of practice.)

Hill & Knowlton, Inc., of New York City, was hired by Bre-X in December 1996 to provide communication services to the firm. But during early May 1997, soon after the Strathcona report came out, Richard Wool, senior managing director, who headed up the Bre-X account, arranged for what he described as a "mutual agreement" to resign the mining company's account.

One of the issues that has been raised following H&K's brief affiliation with Bre-X is whether PR agencies do enough research on potentially controversial clients before signing a contract. The price for not doing such research is paid for by society, not just by the PR agency that gets into controversy, according to Ralph Barney, a communication professor at Brigham Young University in Provo, Utah. "When somebody lies..., it not only victimizes [the public] ... it also reduces the trust level of society overall [toward business and the PR profession]."

In Canada, Bre-X's waywardness went beyond hurting the pocketbooks of thousands of Canadian mining investors, according to international trade specialist, Sigmund de Janos, Ph.D., principal of de Janos & Associates Consultants, an Ottawa, Ont.-based international development advisory services firm whose clientele includes mining companies in Africa. "The scandal has tarnished this country's business reputation abroad as a premier place for investment and technological innovation."

An absence among U.S. PR firms of the due diligence required in background checking of prospective PR clients is noted by Professor Barney, who explained that PR consultants in the U.S. tend to be much less rigorous in researching their clients than their Canadian counterparts. This is because the U.S. Constitution's First Amendment (on free speech) does not require the truth or the accuracy of what people say to be verified.

"The critical question is how much investigation or fact-finding was conducted by H&K prior to signing up that client? We don't know how much. But my guess is that H&K [did not dig up] ... as much as they should have," noted Cornelius Pratt, a public relations professor at Michigan State University who has published scholarly work on H&K's involvement in the early 1990s with controversial clients (for example, the pro-life campaign for the National Conference of Catholic Bishops).

Although Wool and his boss, President Thomas W. Hogg, declined to be interviewed for this article, reports on H&K's pre-contract investigation of Bre-X indicate that the New York-based public relations agency, which used its Canadian arm, Hill & Knowlton Canada, as its "eyes and ears" to keep tabs on the attitudes of Canadian stockbrokers and media, did not send any of its personnel to Bre-X's Indonesian exploration site. H&K accepted the mining company as a client, based on the word of both Bre-X president and, chief executive officer, David Walsh, and chief geologist John Felderhof, concerning the company's gold reserves.

However, Professor Pratt hailed the H&K decision to resign the Bre-X account. "In my judgment, that is a good signal regarding the seriousness with which H&K views the ethical transgression that may have occurred in the entire case. It's ... time for PR practitioners and agencies to take a firm stance against unethical and blatant abuse of the public trust."

Lesson #3 for PR Managers About Communicating Ethics Policy

* PR managers should better communicate ethics issues. Internal communication of such issues could build employee commitment to higher standards of business conduct as well as act as a preventive measure against fraudulent practices. External communication will broadcast to the world that an organization's products/services deserve recognition and will improve consumer reception for such products/services.

a commitment to consistent communication of an organization's ethics policy - if a formal one exists - is part of socially responsible communication. When employees are aware of, and develop, a commitment to its ethical standards of conduct, it may help prevent bad practices - and even fraud - in developing an organization's products and services.

The business community in Canada is generally aware of the need for the more formal adoption of ethical standards and the communication, internally and externally, of such standards - in the form of ethical codes of conduct. Such action will eventually help Canadian corporations perform better in world markets, according to George Khoury, director of the Ottawa, Ont.-based Canadian Centre for Business in the Community, part of The Conference Board of Canada, an independent, not-for-profit research organization.

He told Communication World that the Bre-X situation served as a reminder of the importance of the link between promoting good communication and developing corporate policies on ethics. "Internally, it [communication] is important [so] that employees are clear about what is acceptable and what is not, ethically ... Externally ... it impacts the image and reputation of a company and in the longer term, the competitiveness of the company...."

The overall long-term effect of consistent communication of mining companies' ethics policies could save them from the imposition by government of new additions to existing disclosure rules. However, because fraud might have been involved, the Bre-X situation may not call for "any more regulation than that which exists now," according to Neil Luebke, Regents Services professor of philosophy at Oklahoma State University in Norman, Okla., whose research interests focus on business and professional engineering ethics.

It would make sense for mining companies, through self-interest, to rally around one another to develop codes of conduct, noted Don MacNiven, director of the Centre for Practical Ethics at Toronto's York University, an independent facility that is reporting an increasing number of inquiries from business organizations about ethics training since it became established in 1994. Such self-regulatory measures could save corporations from further state encroachments into the market, he said.

RELATED ARTICLE: THE SAGA CONTINUES

Whether affected investors will get financial redress is a matter that has yet to be determined. There are more than nine class-action lawsuits that have been filed by U.S. and Canadian lawyers on behalf of shareholders in their respective jurisdictions. The Royal Canadian Mounted Police is still investigating the company. The Ontario Securities Commission (OSC), the Toronto Stock Exchange and the Alberta Securities Commission (ASC) are looking into charges of breaches of continuous disclosure requirements or insider trading provisions.

In July 1997, The Globe and Mail reported that Canadian private investigators interviewed an Indonesian tribesman who claimed to have sold 60 ounces of river gold to Bre-X geologist Michael de Guzman. This gold is believed to be the precious metal that was used to salt the drill cores.

On Sept. 17, 1997, some lawyers filing class-action lawsuits against the mining company asked a Calgary, Alta. court judge to put Bre-X into receivership to stop the drain on the company's remaining assets. (It is estimated that Cdn. $1 million is being spent every month - for legal and monitoring fees - since the court placed the company under its protection.) Justice Robert Cairns made a decision on the matter October 2, 1997. Other new developments: The U.S. Securities and Exchange Commission, the OSC and ASC are investigating an allegation that the company filed fraudulent papers to get listed on the Nasdaq.

RELATED ARTICLE: Excerpts from Ethical Guideline Codes in the Communication Profession

International Public Relations Association - Code of Conduct

C. Conduct towards the Public and the Media...

2. A member shall not engage in practice which tends to corrupt the integrity of channels of public communication.

3. A member shall not intentionally disseminate false or misleading information.

4. A member shall at all times seek to give a faithful representation of the organisation which he/she serves.

D. Conduct towards Colleagues...

3. A member shall co-operate with fellow members in upholding and enforcing this Code.

International Code of Ethics 

Each member

Shall Undertake

8. To act, in all circumstances, in such a manner as to take account of the respective interests of the parties involved, both the interests of the organisation which he/she serves and the interests of the publics concerned.

Shall Refrain From

11. Circulating information which is not based on established and ascertainable facts.

12. Taking part in any venture or undertaking which is unethical or dishonest or capable of impairing human dignity and integrity.

Hill & Knowlton Code of Professional Conduct

3. Employees shall practice the highest standards of honesty and accuracy and shall not disseminate false or misleading information. Staff shall not make insupportable claims or comparisons, or assume credit for ideas and words not their own. We will expect clients to provide information which is accurate and verifiable, and this is stipulated in our contracts.

5. Employees have the right to refuse to work on a project if it is in conflict with their own personal ethics or beliefs. Staff are entitled to their personal beliefs and the right to decline involvement in a specific project without compromising their current position or career opportunity at Hill & Knowlton.

IABC Code of Ethics for Professional Communicators

Articles

1. Professional communicators uphold the credibility and dignity of their profession by practicing honest, candid and timely communication and by fostering the free flow of essential information in accord with the public interest.

5. Professional communicators refrain from taking part in any undertaking which the communicator considers to be unethical.

12. Professional communicators are honest not only with others but also, and most importantly, with themselves as individuals; for a professional communicator seeks the truth and speaks that truth first to the self.

John Yuen is a senior communication officer with a government agency based in Toronto, Ont.