Portions of the article below were featured in Risk Management Magazine both in print and online; those articles can be viewed here.This article was also republished in The National Law Review.

Crisis Management: A Critical Tool for Public Trust

by Bill Ide of McKenna Long & Aldridge LLP
and Terry Wade of Gibraltar Associates, LLC.

A single damning public allegation, whether true or false, has the potential to seriously undermine or even destroy a business. Ironically, frequently, it is not the merits of the allegation that count as much as how the allegations are managed with the company’s “publics.” Whether a company is significantly damaged by a corporate crisis or successfully navigates through the difficult time – regardless of the corporation’s culpability – can depend upon the existence and successful execution of crisis management skills and a crisis management plan.

Consider two of the most notable corporate “disasters” of the past few years, and how companies’ varied responses affected the outcome.

Before British Petroleum’s Deepwater Horizon offshore oil rig exploded and sank off the Louisiana coast in April 2010, BP was striving to build a reputation as progressive and environmentally responsible energy company. To support the effort, the company committed more than $200 million to its multi-year “Beyond Petroleum” advertising campaign. But a series of largely avoidable missteps in the wake of the blowout and massive three-month oil spill effectively sank the campaign, the BP brand and the company’s market cap. In the space of two months, the company lost more than $100 billion in enterprise value, as the stock plummeted from more than $60 a share to $27 a share. (It has since partially recovered and was hovering around $45 share in March).

What did BP do wrong? Some argue almost everything. First, BP engineers tried to minimize the environmental damage, initially insisting that no more than 1,000 barrels of oil were flowing daily from the broken wellhead into the Gulf of Mexico. It later turned out that the well actually was leaking, at its peak, an estimated 62,000 barrels per day. That ultimately created an insurmountable credibility problem for the company that has yet to disappear.

Worse, BP’s top executives appeared to be strangely out of touch with the depth and breadth of the disaster. CEO Tony Hayward (who ultimately lost his job over the incident) took time off from supervising the containment effort to attend a yacht race around the Isle of Wight, angering thousands. He earlier had lamented that that the spill was consuming his him. “I want my life back,” he said, apparently ignoring the obvious fact that so did tens of thousands of Louisiana residents. Even PR Chairman Carl-Henric Svanberg couldn’t get it right, at one point telling a press conference that “we care about the small people” of Louisiana.

Months after the damaged well was capped, BP’s reputation is in tatters. The expensive “Beyond Petroleum” campaign is in limbo. The company faces massive lawsuits and a slew of Congressional and criminal investigations. And for the first time in ten years, it was knocked off Interbrand’s annual list of top 100 global brands.

Contrast the outcome of BP’s handling of the Gulf spill to what happened to Mattell following disclosures in 2007 that hundreds of thousands of toys manufactured at its company-owned factories in China were finished with paint that had unacceptably high levels of lead.

In the summer of 2007, as stories about tainted Chinese products began to surface in the United States, a French retailer informed California-based Mattel that an independent testing company had found high levels of lead in some of its toys. According to the Harvard Business Review, the report prompted Mattel to undertake an internal investigation, which confirmed the French finding and traced the problem back to a supplier in China. It turned out that the supplier had run out of yellow pigment and arranged to buy 330 pounds of paint powder from an uncertified vendor.

Rather than wait for the Consumer Product Safety Commission to make a determination as to whether it was required to recall its toys, Mattel decided on a voluntary recall, which was announced on August 2. The recall covered 83 types of toys and 1.5 million units, nearly a million of which had been sold or shipped to retailers in the United States. Although the recall was broader than necessary, according to the Business Review, the company decided to err on the side of caution. Mattel also announced that it would review its procedures for ensuring product safety. The company then flew a delegation to China to meet personally with manufacturers and suppliers to require them to sign a new safety contract.

In its announcement of the recall, Mattel explained the source of the problem and named the supplier. Mattel CEO Robert A. Eckert told customers: “We realize that parents trust us with what is most precious to them….Our goal is to correct this problem, improve our systems and maintain the trust of families that have allowed us to be part of their lives by acting responsibly and quickly to address their concerns.”

Although the company suffered some consumer backlash (including the posting of satirical YouTube videos portraying a toy called “Tickle-Me Lead-Mo”), there were no lasting damage to Mattel’s reputation – or its enterprise value. Mattel’s stock price stayed on an even keel, moving between $23 and $21 a share, until the advent of the global financial crisis in the late summer of 2008. And the incident is cited as one of four examples of successful crisis management in Wikipedia’s extensive article on the subject.

In both instances, the companies suffered a level of initial reputational damage. However, BP’s responses further eroded the public trust, while Mattel’s responses laid the foundation for the public trust to be rebuilt. To be certain, there are crises that occur where the company has no culpability, but the potential impact of the mere perception of culpability makes it is essential that a company be prepared to handle any crisis situation quickly and responsibly.

What is Corporate Crisis?

Crisis is defined by Merriam-Webster as “an unstable or critical time or state of affairs in which a decisive change is pending.” A corporate crisis is often the result of a public accusation that the corporation has violated the social norms of corporate behavior, and the hallmark of a corporate crisis is the emergence of public hostility toward the corporation. Although the apparent retribution comes in the form of law suits, prosecutions and hearings before elected officials, the deeper and more dangerous peril is loss of public trust resulting in lost customers and business.

Historically, corporate crises have resulted from two broad categories: incompetent acts and intentional acts. With the rise of social media, however, corporate crisis has increasingly emanated from accusations that are demonstrably false or acts that are simply beyond the company’s control. The most notable recent example is the viral video posted on YouTube by disgruntled employees of Domino’s Pizza, which depicted them adding personal ingredients to pizzas that made the products entirely unappetizing.

As stated earlier, whether an allegation is true or false is not indicative of its impact on a corporation.

For example, the allegations that first surfaced against Toyota in late 2009 that its vehicles spontaneously accelerated because of an electronics problem have been proven false. But in the beginning of 2010, Toyota was fully embroiled in a public relations crisis as a result of the allegations. The Toyota crisis, like most recent crises, grew exponentially as a result of the changing delivery of news.

Until recent times, information was disseminated in a rigid fashion. Each day, there were two news cycles: morning and evening. Corporations responding to crisis had a window in which to act: no additional reputation-harming news would hit the press until a prescribed time. But now, as social media and Internet news coverage continues to evolve, information can be disseminated widely and instantaneously. The media is no longer the exclusive source for news: bloggers, activists and other stakeholders have taken to social media as a way to air legitimate concerns as well as other, sometimes frivolous, grievances. The media, anxious to maintain ratings, have altered their presentation of facts as well. In an age when the public is increasing skeptical of big business, corporate malfeasance is a head-lining grabbing story. In an attempt to be first to the press, reports by legitimate news media are often based on allegations that originated in social media.

The media locked in on Toyota’s problems and publicized every issue that arose. The fact that the stories crossed international borders compounded Toyota’s issues. Whereas before the information age stories were often isolated to a single country, news has become a global endeavor. The publicity in the United States crossed borders including, notably, to China, the top consumer of automobiles. Toyota was forced to issue global recalls for over 8 million vehicles to address the situation and its reputation was tarnished globally.

What To Do When Crisis Strikes? Using Crisis Management to Regain the Public Trust

Crises are defining moments for a company. Although no company wishes for such an event, a crisis provides a unique opportunity for a company to demonstrate its values and prove that it is worthy of the public’s trust. The textbook example of crisis management at its best remains Johnson & Johnson’s response to the Tylenol crisis in the fall of 1982, when seven people on Chicago’s West Side died after ingesting an Extra-Strength Tylenol capsule laced with cyanide. Although the incident occurred during a simpler time, the fundamentals of the company’s response are still applicable today.

Johnson & Johnson’s response was to put customer safety first, even though that appeared to put the health of the company a distant second. The seven-member response team assembled after the crisis looked to the company credo for guidance when responding to the crisis, first determining how the company could protect the public and then determining how the company would save the product. The result was a two-phase response: the crisis management portion and a brand rebuilding effort. Johnson & Johnson’s chairman, James E. Burke, was front and center (very unusual prior to this crisis) in demonstrating Johnson & Johnson’s concern about the incident. The company’s concern was also evidenced by its immediate plea to its customers nationwide not to consume any Tylenol product until the extent of the tampering could be determined. The company then ceased all advertising of Tylenol and stopped production. The company recalled Tylenol capsules from the Chicago area, then, after the discovery of additional tainted capsules, issued a nationwide recall, which encompassed an estimated 31 million bottles of Tylenol. To compensate those customers that had previously purchased Tylenol capsules, the company offered to exchange bottles of Tylenol capsules for Tylenol tablets. Although the actions of Johnson & Johnson were important, so too was its close engagement with the media. The media’s credibility in helping the company keep the public fully informed of its actions was also a key to the successful crisis management. Without honest, open communication, it is unlikely that the Tylenol product would have been able to survive the crisis.

When the dust settled, Johnson & Johnson started the second phase of its response: an organized plan to regain its market share. Although one advertising executive had quipped in the first days following the crisis, “I don’t think they can ever sell another product under that name,” the foundation laid by the effective crisis management provided the opportunity for the product to return to the market. By late December 1982, a New York Times article reported that Tylenol had reclaimed 67 percent of its pre-crisis pain reliever market share. Overall, by the end of December, Tylenol held a 24 percent market share for pain relievers, only 12 percent less than it held prior to the crisis.

Despite its textbook performance in 1982, Johnson & Johnson stumbled recently when quality problems at its manufacturing plants prompted a series of delayed recalls involving over-the-counter medicines, including children’s medicines. The company literally failed to follow its own playbook. The lesson: Corporations in crisis must be prepared to act decisively to ensure accurate and timely information is provided to the public. Every company must have a plan that works for it, but the following tenets can serve as a foundation for any plan.

1. Establish a crisis management team.

As a company responds to crisis, the company should ensure that the right leadership is in place and aligned. While the crisis management team should be small in order to be agile, at a minimum, the team should include a member of senior management and a representative from the legal department, the public relations team and the public affairs team. The crisis management team should have a clear leader, who heads the response team and ensures the tough decisions are made. Moreover, the crisis management team should be overseen by the CEO and the board, who should have final approval over the actions taken in response by the company.

2. Define the crisis by being out quickly with accurate, critical information.

Although reporters, bloggers or activists are often the first on the scene during a corporate crisis, the sooner that the company can take control of the story, the better it will be able to limit the damage. Indeed, Johnson & Johnson first heard about the tampering from a news reporter calling for a comment. Johnson & Johnson, however, quickly realized that the company needed to proactively communicate openly and honestly with the public and initially communicated to the public what was known about the incident, while asking the public not to use its products while the incident was being investigated. Although more difficult now due to the emergence of social media, a company in crisis must make every effort to be the primary source of information. While this may require reacting with imperfect knowledge, the company should not wait until all of the facts have been fully developed before making a statement. If necessary, the company can adjust as more facts become known.

3. Ensure that the actions or situation that caused the crisis have been mitigated.

Although defining the crisis is important, the company must also take steps to ensure that further harm does not occur. If the incident that predicated the crisis continues, the compounding effect can be devastating. For example, early in its crisis, Toyota was harmed by the frequent reports of sudden acceleration, while the company seemingly did nothing. With every story, the public’s perception of Toyota was further tarnished. In contrast, Johnson & Johnson immediately asked to public to stop using the product while the extent of the tampering was determined. If Toyota had immediately issued a comprehensive recall, instead of dragging its feet during the initial response, the news stories may have continued, but the slant could have been altered. Without the recall, the news media painted Toyota as uncaring.

4. The board must ensure that any failures or shortcomings in the company’s systems are addressed.

The board, typically, through the use of external independent counsel, should investigate the incident to ensure that any company failures or shortcomings that contributed to the incident have been identified and remediated internally. While this tenet is not necessarily for immediate public consumption, the board must ensure that similar failures are not occurring in other parts of the company. BP, for example, had an explosion at its Texas City refinery in 2005, which killed 15 workers. In response to the incident, BP’s board engaged an independent investigator, who found process safety deficiencies at the company’s refineries. Despite the finding, after 2005, regulators continued to find violations at Texas City and other facilities. Although the exact causes of the oil spill of 2010 remain undetermined, BP’s board will face hard questions regarding its oversight given their knowledge of process safety deficiencies at BP’s other facilities. It is not atypical for issues prevalent in one division of a company to be present in others. When a company has multiple crises, which can arguably stem from the same issue, the public relations issues are compounded.

5. Identify one spokesperson and make certain it is the right person for the job.

Many companies have been successful at leveraging senior management as spokespeople during crisis. Indeed, the public likes to see engagement by top management as it shows that the company is fully invested in addressing the issue. Both Johnson & Johnson and Mattel used company leadership to effectively deliver the respective company’s messages. Senior management, however, is not always the best choice. Witness BP. The public backlash that resulted from the CEO’s “I want my life back” statement cost the company much-needed public support and, eventually, Tony Hayward was asked to step down from his position as CEO. Without proper coaching, the spokesperson can do more harm than good.

6. Empathize with the public and any affected group.

Although empathizing can be accomplished on a larger scale through press conferences and declarations, actions taken on a smaller scale that show compassion can serve to ease the concerns of the affected group. In its response, Johnson & Johnson empathized with the public nationwide by honestly addressing their concerns and remaining committed to making the situation right by instituting recalls, replacing product and working with authorities to get to the bottom of the incident. Acknowledging and validating the public’s response can serve to temper the negative reaction. Recall that BP took the opposite approach, and by failing to acknowledge that there was a major problem, ignited the public’s wrath.

7. Take responsibility and explain your response.

When crises are quickly mitigated, the explanation of the response can simply be those steps taken by the company to address the situation. When crises are ongoing, however, the explanation of the company’s response often takes center stage. For example, environmental crises often require an extended response by the company: the physical damage of the crisis may not be rectified for several months and the lasting effects may linger much longer. The company must continually update the public on the actions it is taking to respond to the situation. If the company is not proactive in discussing its plan, the media will turn to outside “experts” to explain to the public what the company should be doing.

8. If the company is wrong, issue an apology.

Although apologies are often difficult for corporations given the potential impact in later litigation, a company in crisis must take those actions that allow it to survive the incident: the company must be willing to lose the battle in order to win the war. Companies should be mindful of potential litigation impacts in crafting its response; however, it should not allow its fears of litigation to dictate its response. If the company committed an intentional or incompetent act that led to the crisis, the company should apologize for the action. An apology is instrumental in diffusing a corporate crisis where the company is clearly at fault.

9. Communicate appropriately with all key stakeholders.

Above all else, a company in crisis must communicate with all key stakeholders, including, at a minimum, its employees, shareholders, customers, regulators, lawmakers and the affected group(s). Although other companies have done this well, Johnson & Johnson arguably did it best in the Tylenol crisis of 1982. In the days and weeks following the crisis, Johnson & Johnson was in constant contact with Chicago Police Department, the FBI and numerous media outlets, which were instrumental in keeping the public informed. The company also worked with its primary regulator, the FDA, and became the first company to be compliant with the FDA’s new anti-tampering regulations – a feat that won the company additional praise in the crisis aftermath.

Crisis Management starts with Crisis Prevention

Although the term “crisis management” is often used to refer to the actions of a company after an incident, in reality, crisis management starts with prevention. The most effective crisis management plan identifies and addresses a problem before it escalates out of control. It is difficult to identify an issue or event any given company has never faced before, but a good crisis plan researches crises or near-crises that have happened to similar companies. Many potential crises have been avoided as a result of good organizational culture and structural preparedness, including “mock crisis” drills created by a robust crisis management plan. While not all corporate crises can be prevented, many that should have been prevented are tied to classic causes: incompetent or intentional acts. These acts can be prevented by corporate culture and effective internal controls and compliance.

In our age of great scrutiny companies must set high expectations of safety and compliance for all employees. It is critical that those at the top of the organization proactively support this effort and “walk the talk.” Reports of potential issues cannot be ignored. One of Toyota’s biggest faults during its acceleration crisis came in the form of reports that the floor mat issue, which Toyota initially suggested could be causing the accelerator to get stuck, had surfaced internally months earlier. At the time, Toyota had done nothing to address the issue. When employees sense that reported issues are not addressed by management, the company creates a culture where potential crisis-causing issues go unreported.

An effective compliance program is critical for establishing and maintaining a vigilant corporate culture. The development of formalized compliance programs stems from the fundamental recognition that corporations, like people, are expected to operate within accepted bounds of behavior. A well-designed compliance program should enable a company to uncover intentional and incompetent acts before a crisis occurs. Robust internal controls and a regular audit of those controls are also a key component.

While the make-up of a compliance system varies by company, the existence of such system and the internal controls to assure its effectiveness cannot be optional. Without an effective compliance system, including a culture of accountability and strong controls, to curb the results of the inevitable human fallibility that every organization with one or more employees faces, a company will have a crisis – it is just a matter of time.

Crises Can Be Avoided and Managed To Minimize Loss of Public Trust

Many of the corporate reputation crises that have occurred could have been prevented and mitigated by an effective crisis management plan. By establishing a thorough and well-conceived crisis management plan before a crisis strikes, a company can better position itself to respond quickly and effectively. In the absence of such a plan, following these tenets and relying on the experts in the field to fill the gaps, companies can both minimize the lasting damage as a result of a crisis and lay the foundation for the recovery of critically important public trust.