How to manage business crisis

How to  deal with crisis created by frauds

Recently I faced a situation.when a candidate with tall claims about qualifications and experience in quality management was hired because the company was desperate for hiring one when the ISO certification preparations were over due .The new hire somehow within a week got access tot he CEO's Check book and credit card.When the CEO happened to away he struck and

withdrew huge sums from the account.The fraud almost shocked the company.When we  started to verify the candidate's credential with previous employer,  we learnt that he had done the same thing with them as well.

This incident reflects the need for checks and balances in any corporate transaction.

Despite many crises that had the global impact, there are very few organizations in the world, who can boast of equipping themselves with a robust defense strategy to deal with any crisis, though every one of these affected organizations is filled with brilliant talents , carefully selected and nurtured. 

Fraudsters are like internet hackers who are always one step ahead. Everyone knows that even a small crisis, however small, if ignored, has the potential to quickly snowball into a monstrous proportion and can spin out of control. Untackled crisis can cost the organization dearly and destroy everything that was built for years.

No one in America would have expected Sandusky’s child sex abuse episode at Penn State USA to come up years after the incidents to expose a monster child abuser and bring down everything that was built with his help. The crime came out of the blue many years later and there was no strategy in place with those institutions  to manage the crises and the entire leadership of those bodies involved was caught totally unaware. 

Blind faith led to the crime being buried and unchecked for a long time and led to disastrous consequences.  The impact on the university was not at  one level but at many levels, including the demolition of fair name and reputation, sanctions by the NCAA and the jobs of many executives and the President, Vice President, and Athletic Director. In October of 2013, Penn State agreed to pay nearly $60 million to 26 victims .It was another capitalistic approach to solving crime outcomes with money . Insurance companies may pay the damages but the loss of reputation as  massive as this one could be never compensated. 

While crises come in many forms,  it is invariably placing current leadership to face the world. 

If the leaders don’t answer the challenge, someone else has to and, when someone else tells the story, it won’t be to the liking of the affected parties. Without management response, the public draws its own conclusion, based on media created story.

How one delivers the message is as important as the message itself. The most defensive stance taken when faced with embarrassing questions is that of “no comment”.It  can only make a bad situation worse. 

It’s essential for every organization facing crisis to have a well-designed, strategic and action plan as crisis catches any leadership off-guard. It is not uncommon for a large company to have to deal with a social media crisis quite often these days and very few handle the media-created crisis effectively while foul-ups are common when  the leadership acts without any clue as to how to handle

 The social media and TV  channels are especially aggressive and sensationalize. The general public whether impacted or not get restless and get aggressive these days. In this digital world, news flows very fast with global  coverage within no time .

Twitter Facebook and all other channels make it easy for the news to go viral. An organization facing a crisis is left with no time to react to defend  the organization. There are many real incidents to prove this point.

Arguing in media especially with Social media users is always not a good option. These days even employees have many avenues through social media to speak about their employers and bosses. Be it Glassdoor, LinkedIn, Twitter, world can hear it loud and paying no attention to the message and try to be defensive is never a good strategy.

Applebee  tried an offensive public posturing when it took on social media for protesting against  a wrong termination of one of their employee .All that the  employee had done was to  take a picture of the bill  where a customer who was a pastor had jokingly written that  he would not give  the suggested 18% tip as he gave only 10% to god .That was not funny for the waitress and the management  and she posted it on Reddit. Applebee fired her for “violating consumer privacy”.

They had  posted a similar receipt that was  complimenting them just a few weeks prior to the incident. The standards adopted were not same. 

This attracted more comments from angry people and got re-posted in all other social media platforms. Applebee escalated this to Facebook and it attracted over 10,000 negative comments. Applebee reposted the same message many times hoping that their point would be heard but it only drew angrier remarks which criticized Applebee even more severely. In just matter of two days, the media had generated over 20,000 comments. Applebee tried  to hide the post which only caused angrier reactions. Applebee’s strategy to take offensive strategy  added fuel to the fire.

The moral is simple when it comes to mass public communication; one has to be very thoughtful. This is true when people ask very uncomfortable questions while change issues are being communicated. Someone said ,“settling a score or being right is far less important than being united”. This is truer in  change communication.

Normally the solution lies in apologizing when there is a huge public outcry.Apologies work when someone who is apologizing takes full responsibility for the actions or the impact of one’s action on others. Reacting quickly with apologies is what DKNY - a famous brand in apparel and clothing - did when faced with compensation claims for using someone else’s photos without permission  in their retail window display.

The actual owner of those photos resorted to  social media to mobilize his community support for his demand to donate $100,000 to a local YMCA. DKNY’s responded quickly with an apology. Unlike Applebee they explained the genuineness of the mistake and said that they had no intention to violate copyright and offered a donation of $25,000. The offer was duly accepted as it was an honest mistake. DKNY was quick and balanced in the approach which defused the situation before it snowballed and became media crisis.

These examples of communication strategies to handle crisis created by social media prove the point to the need to have defined communication strategies and the plans to face crisis.

In  April-May 2015  massive earthquake in Nepal  claimed 5000 lives and almost destroyed the business and economy of the Himalayan Nation and the 2011 Tahoka earthquake and tsunami  that devastated Japan with  total damages of  $300 billion dollars (about 25 trillion yen), according to the Japanese government which almost crippled the economy are natures disruptive  forces and  reminds every government and corporate management  that crisis management plans are extremely essential  to any business operations - and without that very  survival will be at stake .

Even a small crisis has the potential to spin to become   serious global proportion   and severely disrupt operations; damage relations with customers, suppliers. While most crisis situations start and appear to be random events and sudden, it's the failure to recognize potential problem situations and foresee the probability to become fatal, that puts companies of all sizes in jeopardy. Majority of crises are mere smoldering crises; the kind that starts out very small and could be sensed   and fixed before they assume larger proportion and run out of control. Satyam, Enron, Lehman etc. are examples of this disruption and need for methods to deal with them. Othertype of crises also can take a toll on the companies leaving the recovery to the individual managements. Industrial accidents, devastating oil rig fire, financial frauds, management scandal, government intervention, labor strife, and white-collar crime, physical accidents like Chernobyl explosions and chemical and oil spills, and workplace violence can have a  crippling effect on business.
If any business leader thinks that the company is immune from crisis situation is only living in fool’s paradise and putting the company at greater risk... According to ICM's 2010 Annual Crisis Management Survey, crisis due to external forces, only account for 20 percent of the total crisis potential, while the ineffective leadership and bad management account for more than fifty percent of crisis situations,

and employees contribute to the remaining 30 percent. This is amply demonstrated in the Satyam, Enron and Rcom examples cited elsewhere. Companies with proactive stance and forward-thinking crisis management planning as a tool to manage their business do lessen the impact that crisis.

There is no business organization which insulated from some form of crisis. Public anger leading to consumer litigations, product failures leading to recalls, government actions for non-compliance are some types of external actions that usher in crisis for a business. To manage a crisis one requires a solid plan of action which can be implemented quickly when an adverse situation happens with sudden negative impact which can disrupt the normal business operation.

The Institute for Crisis Management defines a business crisis as a problem that: 1) disrupts the way an organization conducts its business, and 2) it attracts media attention and/or public scrutiny.

Typically, many of the crises lead to negative financial consequences to the company, (an estimated penalty of 18 billion dollars for Volkswagen) unless tackled with prompt and effective corrective actions. In recent times crisis -some intentional and some unintentional - brought severe adverse reactions as in the case of Volkswagen accused of wholesale cheating by installing defeat software on cars that manipulated emission data and Nestles India getting into crisis for Maggi noodles in India, (though later disproved) facing government ban for noncompliance of food and drug control standard.

These are crisis examples that derailed normal business with huge financial repercussions.

Threats exist for every organization and can come and hit in any form such as natural disasters due to fires, flood, and earthquake and in this technology era due to data security breach. Other man-made crises include workplace violence, embezzlement, and fraud industrial accidents, and sabotage. Managing such crises need robust communication strategy and actions directed to all stakeholders viz investors, employees, consumers.

Managements need three levels of crisis management plans: operational, communication, and recovery to return to normalcy and establish continuity. Determining the risks and the probability of crisis through review and analysis of current operations is the starting point for setting up any decently workable crisis management. For example, identifying the risks associated with location, type of operation, and supplier and even governmental/political risks are triggers for depth analysis.

There was this case of a fast growing marketing company in India which had very successful national level marketing and sole selling and servicing business for Canon photocopiers in all the states of India. Establishing Photo Copier shops along with subscriber trunk dialing and international dialing phone services provided unique employment to many unemployed young entrepreneurs in India. This innovative retailing services business boomed with the help of bank finance, government subsidy and became a unique model for employment generation.

With low capital to millions of unemployed school dropouts. Capitalizing on this opportunity this company captured most of the rural India’s business in this segment by selling and servicing photocopying machines. Considerable revenue to the tune of over 100 million Indian rupees got generated in a matter of few years and majority of the revenue came from sale of consumables and maintenance service contracts. The business was running smoothly for over three years until one fine day the CEO hurriedly convened the meeting of the executive committee meeting and told the stunned group that a decision had been taken to close  down the business .No reason  was  assigned at that time though it, later on, turned out to be  a breach of trust.

The  CEO came to know from field sales that a retail outlet had been opened by the manufacturer in one of the prime selling locations and this was in clear violation the exclusive sole selling agreements that existed The snap decision led to lay off 300 full-time employees .The company had to pay large sums as retrenchment compensation .Terminating all legal agreements involved paying huge penalty. The company’s accumulated reserve and entire business which was nurtured for 3 years got wiped off overnight. This was a crisis created by one person’s whim. Was it avoidable? Yes, if there was any plan for crisis management in place.

Corporate Governance raises its head everywhere purely as a reaction to many large scale frauds that cause huge corporate collapses. Corporate scandals of various forms and magnitude have caused public and political uproar demanding the regulation through proper controls.  The Enron, Worldcom and other frauds caused U.S. federal government passing the Sarbanes-Oxley Act in 2002, to protect and restore public confidence in corporate accounting. Comparable failures in Australia (HIH, One.Tel) are associated with the eventual passage of the CLERP 9 reforms.

Similar corporate failures in other countries stimulated enhanced regulatory measures (e.g., Parmalat in Italy). These large scale frauds have set the tone for much robust corporate governance in many nations.

Corporate governance refers to the mechanisms, processes, and rules by which organizations that have public accountability have to manage control and direct their activities while behaving with responsibility. Governance requires conformance to laid down rules with identified distribution of rights and responsibilities among different groups /individuals who take decisions either individually or collectively while running the day to day affairs utilizing the money of investors. The board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders are part of the rules and procedures. Corporate governance includes the processes through which disciplined approach is set and pursued in the context of the social, regulatory and market environment. Steps definitely include reporting and monitoring actions, policies and decisions of corporations and their executives. Corporate governance practices are mainly aimed at protecting the interests of stakeholders especially investing public.

In India, various initiatives were taken the Ministry of corporate Affairs and Securities Exchange Board of India to ascertain that those entrusted with the responsibility of governing shareholder wealth are adequately regulated and are made accountable. Over the past fifteen years, there have been many reforms in the corporate governance framework – starting from constitution of the Kumar Mangalam  Committee (1999), introduction of Clause 49 in the listing agreement (2000), revision in Clause 49 on recommendations of the Narayana Murthy Committee (2006), issue of voluntary guidelines on corporate governance (2009), issue of guiding principles on corporate governance (2012) based on recommendation of the Adi Godrej Committee, enactment of the revised Companies Act (2013) and finally the new corporate

governance norms by SEBI (2014).Although, the Companies Act 2013 specifies the minimum requirements of governance applicable to all companies, a recent press release by SEBI indicates a move towards aligning the requirement for listed companies with that of the Companies Act and it simultaneously raises the bar on governance standards for listed companies.

The regulatory body has clearly indicated a move towards increased transparency on conducting Board Matters and articulated several changes in the roles and responsibilities of the board, board committees and independent directors. This move also indicates the intent of the regulators to align with the global standards on corporate governance adopted in mature economies (such as the UK Companies Act, US MBCA, US-DGCL, UK FRC Code, Stewardship Code and SOX). The revised listing agreement is likely to be publicly available.

A board of directors is a vital link between shareholders and management hence has a very critical role and responsibility in the overall governance framework. The Securities Exchange Board of India reconfirmed this aspect, after series of financial frauds where the responsibilities of the board, its committees, and independent directors were either ignored, not defined. or verified

Regulations -Discipline and Governance -Changes in the global conduct of business:

Successive waves of corporate scandals have reshaped the landscape of corporate governance around the world and changes continue to emerge in 2016. The latest Petrobras scandal in Brazil, Satyam and other recent stock market incidents in India, Toshiba accounting scandal in Japan, and Volkswagen’s emission fraud have a substantial impact on corporate governance measures not only in those countries but in those countries across the globe as legislators, regulators, and institutional shareholders demand more stringent measures to promote accountability and transparency from companies and their boards of directors.

Institutional investors are increasingly getting global and are becoming more demanding in outlook as their international investment holdings and cost of governance and hiring more staffs have increased, they naturally put pressure on lawmakers to see a core set of shareholder rights and responsibilities are applied across all the markets in which they invest.  The 2015 corporate governance reforms and changes in Japan were somewhat driven by US and other international asset managers who demanded higher levels of transparency and director independence. Investors are increasing their scrutiny of boards   and independent directors