early warning signs

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.”

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.

  I always keep a pile next to my laptop to help me think of ideas for this blog. By mistake I threw out something two days ago that intrigued me enough to place in the pile. Now I can’t find it and I wish I could remember a key word to find it online. It was in one of the papers I regularly read and it had a chart about “bad reps.” My memory says that it was about how dissatisfied employees leave companies and contribute to their former employer’s bad reputation by their nay-saying. The research in the article said that this problem was only growing worse with the down economy, the anonymity of the Internet and employees’ feelings that they are overworked.  There was a chart that actually showed the growing dissatisfaction in the workforce with the words “bad reps” as the headline which is why I kept it (at least until I lost it).

Next in my pile was an article on boards and their conversations about sustainability which I wrote about at one point. But I had circled the words “horse whisperers.”  The consultant wrote about how the smartest executives were on the lookout today for “horse whisperers” who could send them signals about how things were being received at the company.  Those two words, however,  made me think about a good friend who called me a “reputation whisperer” a few years ago because I am often asked how companies are perceived reputationally and what ideas I had to help them recover by changing their behavior or communicating better.  There are many more reputation whisperers now than there were several years back but I enjoy thinking that traumatized crisis-ridden companies and leaders can be helped by getting on the right track to recovery by following several simple and clear-headed steps, taken incrementally. Gentling reputation takes some skill,  I like to think.

I am in a big believer in being prepared for reputational damage or crisis. My book on Corporate Reputation: 12 StepsTo Safeguarding and Recovering Reputation is all about learning from crisis and being ready for the next one.  As Weber Shandwick’s most admired stumble rate declares, every company should plan on some reputational mishap or misstep in the future. Nearly four in 10 companies have lost reputational status in the past year. I just read an article sent to me about the National Preparedness Leadership Initiative at Harvard. The initiative’s goal was to learn lessons from leaders who have faced crisis situations such as terrorist attackes (Israel, Madrid, London), natural disasters (Hurricane Katrina), health scares (pandemics), oil spills (Deepwater Horizon), etc. 

One of the first lessons they uncovered applies to companies and institutions and is:

“…that bad leadership – much like smoking – is a public health risk factor. Whether in the aftermath of a terror attack or a natural disaster, we have seen that when leaders don’t perform well lives are lost and people abandoned.”

And the second lesson is getting everyone on the same page so everyone can work quickly, effectively and efficiently on behalf of a common and shared goal. 

“Working together after a disaster requires forging bonds before a disaster.” 

Third, and a powerful lesson for companies, is to “expect every citizen to participate.”  Leaders have to listen no matter how soft or weak the signals are. And these early warning signs need to get to those who can act and whose job it is to protect reputation. Empowering employees is critical to averting reputational disaster. As the National Preparedness Leadership Initiative found, “citizen bystanders” can make all the difference as we saw with the shoe bomber and underwear bomber airline incidents of the past few years.

“We should regard these heroes as leaders in their own right.”

 I could not start this blog post without mentioning my deep sorrow for those lives lost in Japan due to the earthquake and tsunami.  The news is devastating and I am very sad for this amazing country. However, if there is a country with the ability to come together to move forward, Japan is the one with the finest reputation for preparedness and commitment to the community.

I wanted to share some research I read about in The Economist on the wisdom of debunking company myths and rumors online. If you are a regular reader of my work, you have heard me mention that I think it is a good idea to refute rumors about your company and its products if they become too prominent online and spiral out of control. However, researchers at Kellogg’s School of Management and Stanford Business School  found that it actually hurts to repeat rumors on a company web site.  They found that by highlighting the myths on company web sites (in order to explain why they are wrong), the rumors are actually propagated, not diminished. I think that there is always a risk to communicating about the negative but that companies need to join the conversation about hearsay that harms their company or their brands’ reputation. Being silent in some cases can cause even more damage because of the inaction and going on the record with the facts. Of course, the art to disclosure is knowing when to address myths and rumors and when enough is enough. That requires constant monitoring online to know when hearsay is spiraling out of control.

I do agree with the researchers, however, that when companies repeat myths and rumors that are circulating online, it increases the likelihood that search engines will pick them up and give the rumors greater  prominence in the search rankings. But as the article itself notes, the antidote to hearsay is making sure that there are good things also being said about your company to counter the negative ones. As the researchers say, the positive facts “nudges people to doubt nasty things they may hear about the company in question.” Therefore countering the rumors and complementing them with good information on what the company is doing or the brand is promising and delivering should work in your favor.

Ultimately, it is maintaining the right amount of the good stuff to counter the bad stuff. And knowing when it is the right time and right place to speak up and stop rumors in their tracks.

  Interesting leadership tactic surfaced when I was reading the New Yorker article on James Dyson of Dyson fame. Dyson forbids the writing of memos at his administrative headquarters so that people have to talk to each other. Since it is an open office, sounds alot easier than the usual dispersed office infrastructure. But I thought that he might just have a good idea. Years ago I recall reading how IBM’s former CEO Lou Gerstner forbade internal memos when he found out early on how much time people spent on them instead of dealing with customers. He wisely regarded this as an early warning sign.  It was just a small part of the things he changed early on in the giant’s turnaround. This practice resonated with me because earlier in my career I worked for a company where the internal memos and internal toasts made or broke careers. It was an art form unto itself and I learned to take it very seriously. When I went to another company, I was surprised how little it mattered as long as the message was clear and the writing grammatical. This also brings to mind a company where they took out all the elevators and made people walk the stairs so they would run into each other and interact. Not the best idea for skyscrapers but a good idea nevertheless. The fundamentals are always the bottom line in leadership.

  I have been mighty busy of late. I think about posting all the time but the days seem to leave little time for reflection. Several items of interest have been collecting in my reputation-obsessed brain so here are a few for an early Sunday morning.

It seems that many people are learning about “leadership” these days. Because people know about my keen interest in the reputations of leaders, I get asked when I am among friends what I think of Obama’s leadership. The discussion usually gets heated because everyone is now an expert on the topic as we read and hear about how President Obama is dealing with the oil spill in the Gulf of Mexico. For me, President Obama is exhibiting “no drama” leadership. I do not need him to be overly angry, emotional and making a human spectacle over the man-made disaster now at his doorstep. The majority of the American public that elected him did so exactly because he was reasoned, calm, rational and thoughtful. We got what we voted for. 

Yesterday’s WSJ had an interesting article about the importance of “near misses” or close calls in the science of disaster. This type of study is really the science of risk assessment, something that many industries do regularly to calculate the chances that something will go wrong.  Nuclear power companies are big fans as are industries such as aviation, NASA and more. For example, NASA puts the chance of any shuttle mission ending in disaster at 1 in 89. Sounds like risk-y business to me.  The concept of assessing a company’s “near misses” is appealing to the reputation protection business. If a company could regularly tabulate and review  its near misses, it might be able to prepare for improbable events and develop strategies that come in handy when a crisis arises. I recall reading about a hospital that meets monthly to review its near misses where things could have gone much worse for patients and other members of the facility.  The regular discussion among hospital staff sensitized them to how human error could raise the risks they face every day and make them more alert for problems that might surface. I think it would be a good idea for companies to regularly practice “near misses” meetings to review how they would react quickly, who would do what, what else could go wrong and what would protect their reputation from  full-blown disaster. We might have fewer reputation scars if we practiced better.

The third item I thought I should mention this morning was that Booz & Co. released their comprehensive CEO succession annual research. Many years ago, I started a database on CEO turnover when I realized that CEOs were losing their jobs by the boatload. It may have been in 2001 when Enron exploded but it became a major source for the media on who was in and who was out. It was a great deal of fun compiling all the stats on why CEOs departed, the average tenure of departing CEOs, regional variations and all the many reasons for the rising turnover rate.  I have to say that I miss being in the quarterly departure rate business. We stopped doing it because it was so time intensive. But I was one of the first to report on CEO turnover and for that reason, I totally enjoy the Booz report every June.  A few details are worth noting because CEO turnover is explicitly tied to company reputation recovery. One way to get a company’s reputation back on track is to bring in a new CEO over a CEO who did not do the job. It is one way of providing a clean slate and giving the company a grace period to correct failings and start anew.

• The number of forced CEO turnovers declined indicating that boards are getting better at picking the right candidates and supporting them.
• There has been a “harmonization” of CEO turnover rates regionally with 10 year averages between 12 and 14%. The US used to be known for its rising CEO turnover rate but it seems to have evened out worldwide.
• The trend towards a separate Chairman and CEO is real and growing. North American companies are now splitting the role more often which is quite a change from years ago. Comined roles (where one person holds the CEO and Chairmen job)  in 2009 fell to 16.5% in the US and 7.1% in Europe. Years ago, the figure in the US was about 50%. Interestingly, Booz reports that no one governance role (separating the roles or combining them) outperforms the other.
• More companies are having their outgoing CEOs become chairmen and annoint the incoming CEO as an “apprentice” CEO. The chairman oversees the growth of the CEO this way.
• Insider CEOs continue to be the norm, perform better and last longer.

There are many more interesting details in the research which I hope to cover in another post. This one is getting too long for casual reading. Enjoy your Sunday.

  Author and columnist Thomas Friedman wrote today: “In this kind of world, leadership at every level of government and business matters more than ever. We have no margin of error anymore, no time for politics as usual or suboptimal legislation.”  Leadership matters is one of the cornerstones of great company reputations. There is no getting around it. The destiny of the CEO is inextricably linked to the company’s reputation. If you have ever worked with a CEO who was not the right fit for the company and who worried about themselves more than the company, you know the damage that the wrong CEO can do. It is almost better to work for a so-so or good, not great, CEO than the wrong one.

Also in today’s New York Times’ business section is some advice from the CEO of The Calvert Group, Barbara Krumsiek . She was asked for her best advice to executives starting out.  She said to ask each executive on your leadership team the following question,  “Tell me about your job, but now tell me about what you think you do here that is not in that job description that you think is really critical.”  Good starting out question but I actually like the second question better, “Tell me one thing that’s going on at Calvert that you think I don’t know that you think I should know.”

The best advice for CEO newcomers is that there is no such thing as a stupid question. One CEO told me that. You get about 3 or 4 months to ask those “stupid” questions.

Getting back to the importance of leadership, we don’t need Thomas Friedman or even me to relay this important news about what drives the global economy and business today — good leaders. Every day we get examples of the impact of good and bad leadership. Unfortunately there are so many examples of bad leadership decisions that we forget to notice the daily good deeds of many company CEOs.  Is too bad. The margin of error might actually be wider than we think.

  Harvard Business School’s recent Working Knowledge newsletter has a terrific Q&A with HBS history of business professor Richard Tedlow. It is about the big D word…Denial. The focus of the interview is how CEOs deal with reality and what happens when they do not see the writing on the wall. HOw did they miss shifts in their industry? Did someone forewarn them? How could they have missed the tell-tale signs of impending disaster if the company had been so successful? Rightfully so, Tedlow says that the problem with denial today is that the costs are so much higher. And that they are. Reputation stumbles and performance blow outs set your best people running for the exits, customers to jump ship and investors to flee.

There were two quotes that I particularly enjoyed reading in the interview. When asked how companies like A&P and Webvan could have fallen on such hard times, Tedlow paraphrased Tolstoy saying “every company in denial denies in its own way.”  That is certainly true and rings loud when you think about Lehman Bros. and its CEO Richard Fuld.  Then  second quote came when Tedlow was asked how leaders can not see the early warning signs that provide hints that something is not right. Tedlow responds: “It is often middle managers who are best acquainted with new realities. As Andy Grove has noted, these are the people who are out on the front lines while top management is ensconced at the home office, cushioned from the daily reality of the rough-and-tumble of the marketplace. ‘Snow,” he [Grove] wrote in Only the Paranoid Survive, ‘melts first at the periphery.’ Problems, in other words, appear initially at the borders.”  I have got to remember that the next time I get asked why it is important to monitor reputation online.

Tedlow has a new book coming out which proves to be very good. It is titled Denial: Why Business Leaders Fail to Look Facts in the Face–And What to Do About It.  The book cover has a pair of rose-colored glasses. What else!

Very cool research study I just learned about in a WSJ blog. FIT researchers’ Ronaldo Menezes and Ben Collingsworth tracked emails between employees during Enron’s shakedown. They examined  nearly 517,000 emails sent by 150 senior managers during the last year and a half of Enron. They found that there was a spike in email exchange one month prior to the Fortune 500 company’s collapse. They learned that “the number of  active email ‘cliques’ — defined as a group in which every member has direct email contact with each other — surged to 800 from about 100.” Due to privacy laws, they could not dig deeper but this research demonstrates that companies may have a built-in early warning system that might be worth noting. The research is covered in New Scientist.

Early warning systems are very important to detecting clear and present danger that can impact reputations. It would be interesting to determine whether customer service teams have spikes in their emails before a problem unfolds publicly or whether some other company functions (compliance, safety) are chatting more than usual.

Reputations are so vulnerable today that any chance of capturing a problem is worth investigating and testing further. I imagine that Enron top managers had alot to talk about prior to its demise. As we all know, it is often too late by then.