The New York Times reported that G.E.'s credibility has been called into question after CEO Jeffrey Immelt assured investors on a number of prior occasions that the company was on track to meet earnings goals and then announcing a shortfall. G.E.'s reputation also took a downtown in the results of Fortune's Most Admired Companies list, losing its long-held first place position.
Business crisis news was down slightly from last year, despite growing coverage of the subprime market crisis in the latter half of 2007, according to the Annual ICM Crisis Report. Of the 16 broad crisis categories that ICM has tracked since 1990, only three were up in 2007: defects and recalls, workplace violence and class-action lawsuits.
A Wharton accounting professor and doctoral student are developing a paper titled, "Executive Overconfidence and the Slippery Slope to Fraud" that examines the patterns in corporate fraud to determine if they evolve because executives are overly optimistic that they can turn their firms around before fraudulent behavior catches up with them. The researchers reviewed SEC accounting and enforcement releases from the 1990s and 2000s to examine patterns in companies engaged in fraud. According to accounting professor Catherine M. Schrand, overconfidence should not necessarily be considered a negative, since it is this trait that also helps firms succeed, "You should recognize that the overconfidence, which has its positive aspects, can also have its downsides." (Knowledge at Wharton, March 5, 2008).
A study conducted among financial advisors and high-net-worth investors by business and financial communications consultancy FD found that a company can lose in excess of 30 percent of its share value as a result of a highly publicized crisis. Additionally, respondents ascribe significantly more market value to reputation than they do to board quality...82 percent and 71 percent, respectively, of financial advisors and high-net-worth advisors believe reputation accounts for more than 20 percent of market value, compared to only 29 percent of financial advisors and 20 percent of high-net-worth investors who think boards account for more than 20 percent of market value. (October, 2007)
In response to a nationwide pet-food recall, Proctor & Gamble placed full-page ads in 59 daily newspapers with a letter from Iams and Eukanuba brands informing customers that the remaining food on the market is safe. Not only did the letter inform customers that they were "heartsick" that any of their products were involved, but also outlined their immediate response to the crisis and additional, ongoing efforts to ensure the safety of their products.
Reputation crisis can be lessened by “defensive branding,” according to an article in Advertising Age. Pete Blackshaw, chief marketing officer of Nielsen BuzzMetrics, believes the web can be used to ensure positive messages surface in the sea of negative messages. Examples of defensive branding include…
Advertising Age reported on the PR implications facing JetBlue in the wake of its mid-February crisis of delays and stranded passengers. According to the article, the event delivered a significant blow to the JetBlue brand which had been epitomized by its mission statement: “Our promise: to continue to bring humanity back to air travel.” However, all may not be lost thanks to reputational cache: Jonathan Bernstein, president of Bernstein Crisis Management, said “JetBlue has already built up a good enough reputation to survive the fallout…If they do any advertising at all about this, it should be in the form of an advertorial, a CEO letter in publications that are well-read by their consumer base.”
Robert Eccles, Scott Newquist and Roland Schatz, in the Harvard Business Review, outline three determinants of reputational risk:
Jack Welch, the former CEO of General Electric, outlined the five stages of crisis in the Wall Street Journal. Although Welch wrote these in the aftermath of Hurricane Katrina, the meaning for business is clear. The first stage is denial. In this phase, the prevailing thought is that the situation is not that bad due to a sense of invincibility (“bad things don’t happen here, to us”). The second stage is containment – the defining characteristic of this phase is the attempt to make the situation disappear by pushing the problem on someone else to fix. The third stage is shame-mongering, where all those constituencies with a claim in the situation alternate assigning blame to each other and claiming credit. The fourth stage is known as blood on the floor – when a highly visible player in the crisis loses his or her job. Finally, the fifth stage is when the crisis is resolved.
As Welch points out, all crises will go away eventually: “History shows us that crises almost always seem to give away to something better.” A crisis often reveals underlying problems and in a sense, forces companies to resolve them. Another key point is that while nearly all companies experience a crisis at some point, the ones they do experience are generally not repeats of past issues.
Ian Mitroff and Murat C. Alpaslan, in the Harvard Business Review, outline the differences between crisis-prepared and crisis-prone organizations and the ways in which crisis-prepared companies have bolstered their abilities to anticipate and respond to crises. First, crisis-prepared companies are able to manage a variety of situations beyond what they have experienced already. They are proactive. In contrast, crisis-prone companies (also known as reactive companies) can only respond to new crises if they are incarnations of previous problems. Based on their research of Fortune 500 companies over the past two decades, Mitroff and Alpaslan have identified important business advantages among those that are prepared for a crisis – they:
The authors also point out that there is not just one type of crisis. Crises can take the form of natural accidents like earthquakes or fires, “normal’ accidents that are caused by normal process or system failures such as industrial accidents and “abnormal” or intentional accidents resulting from unusual actions such as terrorism. Being prepared to handle crises takes careful consideration and planning - most of all, the ability to anticipate the unexpected.
Crisis management is no longer the exclusive purview of CEOs – more and more C-suite executives are now responsible for handling crisis communications according to the Economist Intelligence Unit. Why the change? Shareholders, analysts and regulators are all becoming more active and as a result, executives now must be more responsive than ever. According to Jean-François Cancel of Brodeur Worldwide, there are 6 C’s of crisis communication management:
While some reputational crises occur due to a specific event such as accidents or product recalls, there are also those situations that seemingly come out of nowhere and rapidly grow. As noted by John Murray Brown in the Financial Times, the key to crisis management and reputation control is anticipating problems before they happen. Even something as innocuous as a customer complaint gone unattended has the potential to balloon into a grass-roots pressure group. For example, the overheated Sony battery problem became a worldwide issue after starting as a minor complaint.
Though reputational crises are becoming more common, the responsiveness of business schools in providing reputation or crisis management training has barely materialized. As Wall Street Journal’s Ronald Alsop points out, schools that do offer these types of classes are more focused on public speaking rather than reputation management. Moreover, faculty members tend not to think of communications as an operational necessity in the same way they view marketing and accounting.
A new study by Lucian Bebchuk of Harvard Law School, Yaniv Grinstein of Cornell University and Urs Peyer of Isead has identified a connection between the process of backdating stock options and poor internal financial controls. The study analyzed options granted by 8,000 companies between 1995 and 2005. As the authors report “[t]hese findings are consistent with the view that grant date manipulation reflects governance problems rather than a compensation device used for valid business reasons.” The research found that backdating was even more common at companies whose boards had less than a majority of independent directors and whose CEOs had been in office for a longer period of time.
Harvard Business Review had an interesting article on Facing Ambiguous Threats in its November 2006 issue. The feature written by Anisya Thomas and Lynn Fritz on Disaster Relief, Inc. described how hospitals issue a "code blue" alert that calls a rapid-response team into action to aid patients undergoing cardiac arrest. Patients apparently exhibit early signs of distress such as respiratory rate changes and deviations in their appearance prior to the need for a full-fledged code blue alert. Hospitals are now codifying patient early warning signs for nurses and other staff members in order to help staff identify them before it is too late. Companies can learn from this codification to identify early warning signs that could affect their reputations.