Crisis management essentials
By Prof. Daniel Diermeier

Business, 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.

Too 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.

Companies 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.

Crises 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.

For 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.

A crisis 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 stakeholders.