By Prof. Daniel Diermeier
it seems, has entered the age of crisis. Almost every day
another venerable company or institution finds itself in
the headlines, and usually not in a flattering context.
In recent weeks companies in trouble included CSFB, Deloitte
and Touche, Ernst and Young, HealthSouth, Martha Stewart
Living Omnimedia, Tyco, the New York Stock Exchange, ESPN
and the Catholic Church. Despite this change in business
climate, the nature of corporate crises is frequently misunderstood.
Such misconceptions can lead to severe management mistakes.
often crisis management is viewed as the sole responsibility
of the public relations or the legal department. This approach
makes it much less likely that crises are prevented before
they occur — the most effective form of crisis management.
Once PR specialists or corporate attorneys become involved,
the crisis is usually already in full swing — too
late for effective management. A much better approach is
to view crisis prevention as the management’s responsibility.
Why? A company has the most control over a situation in
the pre-crisis state. Also, many crises originate in routine
management decisions. This emphasizes the value of prevention
strategies applied to everyday business practice. The goal
of such strategies is to eliminate or significantly reduce
crisis risks. In the case of a manufacturer, these factors
include quality controls; in the case of an accounting
firm or financial services, a strong set of values is necessary.
Adopting such safeguards (and allocating resources to pay
for them) is the responsibility of managers.
are unprepared for typical scenarios. Not all risks can
be eliminated, not all crises prevented. Some scenarios
are predictable: a manufacturer must be prepared for a
product defect and potential recall, a theme park operator
for a terrorist attack, a financial service company for
a blackout. Others require strategic anticipation and scenario
planning, such as when a company is targeted by political
activists or faces changes in its regulatory environment.
do provide supreme learning opportunities. But, too often
the early warning signs are ignored or the wrong lessons
learned. After settling with the SEC in the Waste Management
accounting fraud case, Andersen changed its document retention
policy. It did not sufficiently investigate its culture,
value system or incentive structure. A company’s
values are its guide in a crisis. In turn, a crisis is
an excellent opportunity to see whether these values still
govern day-to-day decision making.
many firms, the crisis is misunderstood. Too often companies
immediately focus on who is at fault (usually somebody
else, such as a supplier) and who is liable (not the company,
of course). While the assessment of potential legal liabilities
is an important part of any crisis management strategy,
it is only a part. Other important issues that need to
be considered are a company’s reputation, supplier
relationships, customer loyalty, potential damage to employee
morale and relationship to regulators, to name just a few.
Managers need to balance those effects and integrate them
into their strategy choice. Delegation to functional specialists,
whether they are lawyers, PR specialists or security managers,
will not facilitate this task.
is by definition a threatening event. However, it frequently
also presents a hidden opportunity. Once a company is in
the media spotlight, crisis management can significantly
enhance a company’s reputation — as in Johnson
and Johnson’s famous decision to pull Tylenol from
retail shelves — or it can damage it, as in the case
of the Exxon Valdez oil spill. Whatever course management
takes, the action will define a company’s reputation
for the next generation of customers, employees and public