Crisis management

The new year is fast coming up. I put together my thoughts on reputation trends to expect in 2012. It is on the HuffingtonPost site.  Take a look and let me know what you think. Happy pre-Xmas day.

Took me a few days but finally found a chance to read a fascinating review in the Financial Times of the impact of the insider trading scandal at management consultant McKinsey & Company and its impact on their reputation. Andrew Hill did a fine job providing a historical review of McKinsey's ups and downs over the many years of its storied existence and finding former partners and employees to offer their perspectives. As you already know from the trial of Raj Rajaratnam of Galleon Group, the hedge fund CEO is accused of insider trading using tips from former McKinsey partners' Anil Kumar and Rajat Gupta, global managing partner who left after several terms in 2003.  What intrigued me of course was how McKinsey was recovering from this reputation catastrophe and how it fit with the best practices in my book on reputation recovery. This is not just a bruise but a serious injury to McKinsey's reputation. Here is what they did so far:

• Communicated regularly with employees and former employees
• Initiated an independent inquiry with the help of a law firm
• Improved processes over protecting confidential client information
• Reviewed its ethics policies and standards
• Redefined what constitutes "material non-public informtion"
• Built a formal "stop-list" of client stocks that no McKinsey person can trade (not just those assigned to the account)
• Added new training procedures
• Strengthened governance

True to its highly analytical way of attacking corporate challenges (they work for 90 of the top 100 companies in the world, among others), they looked back at how they handled prior problems. Coincidentally, the article points out that they had been putting together a comprehensive internal history of the firm which luckily offered them insights on how they have historically dealt with challenges to their reputation and livelihood. The latter best practice is one I highly recommend to others. In my book, I talk about the importance of the Rewind period where companies study their mistakes to from the past to create a better future. Lord John Browne of BP did so after the refinery fire in Texas City and asked the question of how they did not see the pattern of errors that turned deadly sooner. Looking in the rearview mirror may take time that leaders do not think they have but critical warning signs are often present. Retromining is a critical piece of recovering reputation. As the new McKinsey global managing director, Dominic Barton, also did, he studied other thriving cultures that failed. As Barton said in the article, he had been “thinking what happened with the suppression of the Jesuits in the 1700s. This may seem strange, but [it was] an organisation that was thriving and doing well and all of a sudden was severely challenged.”

We recently released an interesting exploration on the relationship between top corporate communications officers and legal counsel when it comes to reputation management. I have already posted about this relationship where these two senior corporate officers seem to be working together more than ever. In light of the multiplying crises that companies and its leaders are facing on an hourly basis, the relationship between the two officers including outside counsel has to be strong and respectful.  As we say in the report, “general counsels (GCs) and chief communications officers (CCOs) are now finding themselves participating in the same reputation management strategy meetings, conference calls and contingency planning sessions. GCs, external legal advisors and CCOs now have no choice but to trust and understand each other.” There are several noteworthy insights and best practices in “Managing Legal and Reputation Risk” but two stand out for me in particular. The first is that you can’t prepare enough and expect surprises. ...”executives still find the nature or intensity of the situations they’ve managed to be unfamiliar or unanticipated on some level.” This is so true. There is always something overlooked or unexpected.  In fact, it seems to me that it is getting harder to find precedence for some of the crises that arise. For example, the Olympus crisis has few precedents.  For this very reason, being ready, practicing a few scenarios ahead of time and giving time to “near misses” are sensible readiness processes to have in place. Another finding that resonated with me was how general counsels appeared more willing today to balance the interests of the business with legal priorities. They said this, not just me. There are times when the short term hit (such as apologizing or admitting that the company could have done better and will do better in the future) outweighs the costs of winning or losing in a court of law down the road. The fact that many of the legal counsels we interviewed agreed that the “short-term pain for long-term gain” is often the right strategy demonstrated the transformation in communications-legal circles that we explored.

  Just returned from a multi-city tour of Europe where my colleagues and I talked about socializing your brand. This was based on our (Weber Shandwick) new recent research. We spoke to many clients and prospects about digital communications and the rewards and risks that come with this new territory.  Someone asked how you balance the reward-risk ratio when your senior management does not recognize that digital is so important to reputation today. In fact, our research found senior marketing/brand/comms executives saying that over half (52%) of a brand reputation today is attributed to how social it is. And this figure is expected to grow exponentially as time goes by. This gentleman said that being a social brand is akin to surfing with sharks. I loved the analogy because it explains how great it can feel to employ digital to communicate and give voice to a brand's story and yet how unexpected it can be when you feel that shark ripping into your reputation. The answer of course is being prepared. That's what the best of companies do. Crisis readiness gives you the head start you need today, in both a digital and non-digital world. Reputation is increasingly hard to manage while swimming with the unknown.

Reed Hastings, CEO of Netflix, in response to recovering their reputation after several recent missteps:

"The focus is on bringing back our reputation and brand strength, but it won't happen through grand gestures."

 

 This week we launched our excellent survey on what it takes to socialize a brand. It is among top marketing and communications executives in companies around the world. One of the drivers of world class social brands is being ever so careful about the assaults on a brand's reputation.  We learned in the survey conducted with Forbes Insights that executives of world class social brand companies are 35% more likely than the average global company to report that their brand experienced an online crisis in the past year that affected its reputation. These social champions who have dealt with a recent online crisis are no stranger to the risks of the hyper-connected world — two-thirds (66%) report that they deal with negative online commentary on a daily basis (vs. 51% of total global companies). The latter point was good news to me although perhaps not so for companies. The reason I say that is because I often get asked about how often companies experience reputation crises and I quickly respond "daily." Our research reveals that nearly two-thirds of socially aware companies are dealing with reputation threats and its just the tip of the iceberg. Just this week we saw Netflix and RIM in the news -- some self-inflicted and some not.  If you want to read more about the blackberry crisis and my comments, go here. These types of online crises will only increase as the world gets smaller, more people go online and more are eager to share their opinion about brands.  Being vigilant is the job of everyone. Lets not fool ourselves -- we all have to play cop.

Have Asia on my mind as I am soon airborn. A few facts and stories I just learned as I am preparing to go and talk about reputation trends. These are all China-based for now....

• In four years, more than 700 million people in China will be watching online video sites. Youku, similar to our YouTube, is one such leading site. (McKinsey Quarterly, 2011). Pretty dazzling if you ask me.
• Even during the global recession, sales of luxury goods in China rose by 16%. (McKinsey Quarterly, 2011).
• An interesting incident that caught my attention. Apparently the CEO of DangDang (China's Amazon) exploded at his bankers in a profanity-filled tirade blaming them for an IPO that undervalued his firm. The language was so profane that when reported there were alot of ****s. This all appeared on Sina Weibo, China's Twitter.  Apparently some employees of the bankers fired back on Weibo although now there are reports saying they were not employees. Whatever the story, what I found interesting is that we focus so much on social media guidelines for employees and perhaps its time to develop them for CEOs too! Not exactly a reputation-building story.

Whatever the merits on both sides, I wanted to point out here that what I thought was happening in the reputation warfare field is actually coming to pass.  Increasingly more companies are fighting back when they believe their reputations are at stake. Perhaps companies recognize that public opinion might be on their side as the general public loses trust in institutions. But without a doubt, companies are not necessarily turning the other cheek when they think their reputations have been unfairly damaged. In this blog, I have mentioned the increasing frequency of company documentaries that serve to tell their side of the story. Today's article about Del Monte's public spat with food regulators over restrictions on its cantalope imports underscores the trend.  To quote from the article,

"The company, which is one of the country’s largest produce marketers, says the restrictions could damage its reputation, and it has sued the Food and Drug Administration to lift them." "But advocates of safe food said that it was extremely rare for a major food company to take such a publicly aggressive stance, and that they suspected Del Monte Fresh Produce was trying to bully regulators into thinking twice before pursuing recalls in the future."

Expect to see more of this in the future.

  The trading scandal at UBS brings to mind the long journey that companies undertake to recover and restore reputations. UBS is now back at square one as they deal with the recently revealed $2.3 billion rogue trading. This reputation disaster brought me back to the days of the Societe Generale SA rogue-trading incident three years ago. If you recall, Jerome Kerviel managed to lose $7.2 billion on his derivatives scheme. The reputation drag on SocGen's reputation today and on UBS tomorrow is quite real. The SocGen scandal has not entirely faded in the past three years. In fact, everytime one reads about what happened last week at UBS, the SocGen scandal gets replayed. This is unfortunate for those who go down the path of reputation recovery like SocGen. SocGen's recovery program was quite extensive when you look at it from a three year vantage point -- they dismissed Kerviel's bosses, demanded that the bank move slower as new security systems were put into place and launched an internal controls program called "Fighting Back."  In addition, other measures were set forth such as spending on new IT security, starting a newly independent accounting group, beginning a SAFE (Security and Anti-Fraud Expertise) program to oversee financial operations and training 7,800 employees about fraud. Ultimately the CEO and chairman stepped down one year later.  All these remedies for recovering reputation came from an article in yesterday's WSJ and I was glad to be able to list these steps for other companies contemplating what to do when faced with sky rocket type scandals. Yesterday morning started off with an email to me from Netflix's CEO Reed Hastings. I immediately went to the Netflix's CEO apology on the blog.   What confused me however was the tone of the video. Although I am a loyal customer and fierce advocate of what Netflix has done for delivering movies to my home, I thought that the video apology was abit too cheery (outdoors in sunny California. albeit a parking lot) and efficient.  Maybe too rehearsed is the right word. I did not get the sense that this was a very repentent CEO who had seen his stock value decline 52% since the change in pricing occurred. But what really threw me was that he did not share the stage alone. In the video, CEO Reed Hastings had the new head of the DVD spinoff, Qwikster, Andy Rendich, joining him.  I always say that CEOs get all the credit when things go right but all the blame when things go wrong. Why did Hastings deflect some of that blame on this poor soul. I cannot remember the last time (if ever) I witnessed a CEO apology tied to the announcement of a new spinoff. I sincerely doubt that was a good launch plan for Qwikster. My sense is that there's more apologizing to come. This poor guy Andy looked like he too was somehow responsible for the communciations debacle. Despite these ramblings, the article on the Netflix problem in today's New York Times made me smile. The authors wrote, "But in the short term, the risk to corporate reputations is palpable."  It is not often that I even see the words "corporate reputation" in a top tier publication. Usually it is referred to as brand health or brand reputation or positioning.  It is fairly rare to see corporate reputation used as a commonly understood concept.  My two cents is that short term feels like long term these days when you are in the spotlight. As someone said to me, it's like a nuclear assault whether it is 6 days, 6 weeks or 6 months. Ultimately, Netflix will be forgiven but like the SocGen example above, reputation damage takes its toll and lingers longer than most CEOs care to imagine.

I recently had a discussion with someone about self-inflicted and non-self-inflicted reputational disasters. Most of the reputation crises I have worked on and written about were self-inflicted because the early warning signs were there in the first place and leadership had an opportunity to change course. Unfortunately, the early warning signs were ignored or deemed inconsequential. An article in strategy + business, the Booz & Company journal, discusses the concept of self-inflicted black swans (a surprise occurrence that causes a major impact) and provides excellent food for thought.  Essentially, the author points out that there are ways to detect if the culture is ripe for these kinds of disasters and ways to protect against their occurrence. And it all gets down to the organizational culture or DNA. There are some very good suggestions such as clarifying who is really in charge of identifying risk exposure, aligning incentives so that people are rewarded for anticipating and disclosing risk and third, creating unfiltered pathways so that those at the top hear the "ground truth" and not just what they want to hear. The bonus for me after reading the article was learning about some stats that the authors uncovered. Since I am always looking for good stats to illustrate the downside of reputational disasters, self-inflicted or not, I want to share here:

The unintended consequences associated with a self-inflicted black swan can be devastating. They include negative publicity; huge, sudden costs; lost revenues; lawsuits and criminal judgments; and regulatory penalties. Analysis of the stock prices of companies that suffered such events in 2009 and 2010 in the oil, automobile, aircraft manufacturing, and financial-services industries shows that within two months after a visible self-inflicted crisis, an average of 18 percent of shareholder value was lost, relative to the S&P 500. Moreover, stock price performance continued to diminish over time: On average, shareholder value came down 33 percent within a year.

A loss of shareholder value of 33 percent over a year's time is catastrophic in my book.  It is worth learning how to prevent these unexpected surprises from occurring and figuring out how to turn these black swans into white ones.