Crisis Management, Post Toyota

In August of 2009, off-duty Highway Patrol officer Mark Saylor was on a family outing to a college soccer game when he lost control of his Lexus ES, on loan from a Toyota dealer. A passenger in the car called a 911 emergency center and reported the brakes had failed. The resulting crash killed Saylor and three others.

There was little in the Toyota press release issued two-and-a-half weeks later to indicate the tragedy was more than a sad but isolated incident, perhaps attributable to a dealer installing the wrong size floor mat in the Lexus. The company urged its dealers and “all other automakers, dealers, vehicle owners and the independent service and car wash industries to assure that any floor mat… is correct for the vehicle.” Media interviews were delegated to US-based managers while Toyota’s Japanese executives stayed in the background.

Five months later, Toyota’s ceo Akio Toyoda was forced to appear before a US Congressional committee over widespread vehicle failures. In emotional testimony, he apologized for the company’s mistakes. It was a stark reminder of how a single, seemingly insignificant incident can escalate into a full-blown corporate crisis.

The Japanese car group’s woes have fueled a sense of impending calamity for corporate managers already thrown off guard by the global banking crisis and a string of natural disasters such as the earthquakes in Haiti and Chile.

There is a sense that crises are becoming more common. The data are sketchy on this point, but one thing is certain: A corporation’s missteps are more likely than ever, in today’s highly wired society, to become public. And the bad publicity surrounding those mistakes can itself have disastrous consequences. “It’s hard to keep a secret these days,” says Ian Mitroff, president and founder of the California-based consulting group Mitroff Crisis Management. “It’s best not to try.”

Globalization raises financial stakes and can make it more challenging to cope. When senior management is geographically removed from the epicenter of a corporate shock, it may be difficult to fully comprehend its implications. And if the problem is not tackled early on and in force, even a minor problem can easily spin out of control. The UK-based research firm Oxford Metrica estimates that executives have an 82 percent chance, these days, of facing a corporate disaster over any given five year period. That’s up from a 20 percent chance two decades ago.

How should corporations prepare? One line of thought says there’s little any business can do to get ready for a crisis ahead of time, because the very nature of a crisis lies in its unpredictability. “The only way to prepare is to make sure you have a leader who can deal with it,” says Eric Dezenhall, a crisis management expert said to have advised domesticity guru Martha Stewart, entertainer Michael Jackson, and Enron’s Jeff Skilling.

Dov Frohman, who was general manager of Intel’s Israeli plant during the First Gulf War, warns that too much planning and training can be counterproductive. Threats, in themselves, are often foreseeable. In the lead-up to Iraq’s invasion of Kuwait and the ensuing US attack, for example, it was clear that something was going to happen. Yet the precise way a disaster plays out can easily throw people off guard.

“Everyone assumed that when war broke out, the men would go to the front and the women would stay home with the kids,” says Frohman. Companies focused on obtaining replacement workers. The scenario didn’t play out that way. Instead, with Israeli officials unsure where missiles would fall, everyone in the high-risk zone was told to stay in their own houses. Companies like Intel were ordered to shut operations. Frohman refused to comply, and instead invited workers to bring their entire families to Intel’s plant. He turned the company’s bomb shelters into day-care centers so that employees would feel they were actually protecting their families by showing up for work.

The danger is that if you have a script, you’ll be tempted to stick to it, even if it’s not applicable to your specific situation,” Frohman explains. “There’s no replacement for a leader.

But many crisis management advisors see great value in training. Crisis training runs the gamut from a simple discussion around a meeting room table to full-blown simulations. Some consulting firms even hire actors to convincingly play the roles of kidnappers or terrorists. Christine Pearson, a professor at the Thunderbird School of Management, believes simulations can be instructive, and described one of her own client’s experiences.

Pearson worked with an oil refinery, whose executives decided to pretend there had been an explosion at the plant. This was a full-scale simulation, with everyone acting out the part they would play in a real-life disaster. Even outside constituents such as the city’s mayor and its fire department were involved. Important lessons were learned. For one thing, it turned out the mayor, the fire chief, and the head of the refinery each thought he would be in charge. That realization triggered essential discussions about the division of responsibility in the aftermath of a real-life explosion. The simulation also yielded some practical information: the hoses brought by the fire department to the pretend scene of the disaster did not fit the nozzles at the plant.

“Not everyone can have these kinds of full blown simulations,” says Pearson. “It takes a lot of money and time, and it’s not always practical. But every company should at least engage in the discussion-around-the-conference-table form of crisis management preparation.”

Studying the way other companies have dealt with crisis can be helpful. But executives need to be careful. When calamity strikes, much of the ensuing action happens behind closed doors. The lack of transparency has led to misperceptions about the way crises often sometimes play out. Here, advisors attempt to dispel some of the most common myths about crisis management.

MYTH 1 The interests of individual managers are the same as those of the corporation.

In February of 2007, the airline Jet Blue faced its first big public relations disaster. Weather-induced flight delays had stranded thousands of US passengers and left one plane-full of travelers sitting on the tarmac for a harrowing eight hours without sufficient drinks or food. In the days that followed, founder and ceo David Neeleman seemed to model the best post-crisis approach.

A charismatic leader who had promised to “bring the humanity back to airplane travel”, Neeleman immediately and publicly apologized. He had workers contact affected passengers personally, by email and telephone, collecting information about their bad experiences to formulate a response. He ponied up with $30 million in compensation, issuing a passenger “Bill of Rights”, retroactively effective, promising a free round trip ticket if any Jet Blue flight is delayed more than six hours.

Three months later, Neeleman, who had become personally linked to the crisis in many people’s minds, resigned. “No one advances a career by becoming associated with a debacle,” says Dezenhall. According to an Oxford Metrica study, any ceo facing a corporate crisis big enough to rock the share price, stands a better than even chance of being out of job six months later.

Dezenhall describes the tensions that commonly grip conference rooms after catastrophe hits: “You’re in a meeting and a senior manager says ‘Joe, I think it would be a good idea for you to go on television and make a statement about this.’ And Joe says “Actually, Bob, I think it would be great for you to go out and make a statement.’ It may not seem admirable, but it’s about self-preservation.”

Because individual executives’ interests are not always synonymous with those of the company, a corporation might improve its chances of survival by taking the weaknesses of human nature into account ahead of time. A number of corporations have pre-designated “crisis teams” whose job is to deal with calamity. “This could be a good idea,” says Sarah Kovoor, a professor specializing in crisis management at the University of Colorado, Denver’s business school, “ as long as those teams have the understanding and authority to really deal with any crisis that may come up.” If the team is merely a vehicle to scapegoat certain people, however, it could be counterproductive.

Pearson points out that managers shift blame onto others at their own risk. If word gets around about their refusal to take responsibility, workers reporting to them may not put in their best effort, and are more likely to leave their jobs. But many managers instinctively believe they will personally benefit from avoiding the crisis spotlight. In the end, companies tend to underestimate the extent executives will go to in order to avoid taking responsibility in a crisis. “I’ve never seen anyone do a simulation of the blame game, and they should,” says Mitroff. “But senior management should always step up to the plate, because of the corporation sinks, they’ll be blamed anyway.”

Oxford Metrica divided companies in one study into two groups – those whose share price dipped two to three months after the debacle, then recovered, and those whose stock price remained low or falling six months after the catastrophe. Not surprisingly, ceos in the first group had a better chance of remaining in their job.

MYTH 2: The best advice in a crisis comes from the legal department.

In 1996, fast-growing juice maker Odwalla faced a terrible situation. Officials in Washington state linked the company’s apple juice to an outbreak of e.coli bacteria that had killed a small child and sickened many others. The group’s sales plummeted 90 percent.

Ceo Stephen Williamson brushed aside legal concerns about liability, taking care during every media interview to apologize for the disaster. Odwalla also adopted a new method of “flash pasteurization”, which eliminated bacteria while retaining most of the juice’s flavor. As a result, the company’s share price quickly recovered. Williamson later said that he had no preparation in crisis-management, but just went with his gut, following tenets of the company’s core values.

Corporate executives can be tempted to rely heavily on their legal department to steer them through a disastrous situation. This is often a mistake. Public apologies strike fear in the hearts of lawyers, because they seem to imply legal culpability. Yet sincere apologies are golden in the eyes of the public – particularly the American public, which is often a company’s biggest consumer market.

When in doubt, and certainly if lives have been lost, say corporate reputation experts, it’s important for the head of the corporation to immediately express regret. If a crisis is big enough, it is usually just a matter of time anyway before executives yield to pressure to say “I’m sorry”. And if a corporation waits too long – like Toyota – the apology, when it does come, risks sounding insincere.

“The value that lawyers destroy by trying to be clever more than outweighs the small change they bring in scoring legal points,” says Rory Knight, ceo of Oxford Metrica. And crisis management gurus say the legal risks of public apologies are largely overstated. “I can’t think of a single company forced to make liability payments just because its ceo apologized,” says Koover.

Pearson recommends bringing legal teams into pre-crisis planning sessions so that they know what’s at stake. “They need to be educated out of the hunkering down mentality that they sometimes have,” she says. “Then, they’ll be better positioned to give good advice when crisis strikes.” 

MYTH 3: Don’t panic!

When an Estonian ferry capsized in mid-sea during a tragic night in 1994, few passengers survived. Those who did recalled the final hour of the disaster not as one of chaos, but of eerie calm. Survivor Kent Harstedt, interviewed by author Amanda Ripley for the book The Unthinkable: Who survives When Disaster Strikes, recalled that most of the victims didn’t try to save themselves, but seemed to fall into a stupor. One man stood calmly on deck, smoking a cigarette. Passengers appeared to be waiting for someone to tell them what to do.

Psychologists say that most people, in the face of extreme danger, do not panic; they freeze. This impulse can be reinforced by the inaction of social peers, and helps explain why many executives sink into a collective well of denial when faced with a serious crisis. When calamity strikes, managers don’t want to fight for survival; they feel like hiding under the boardroom table. “Usually there’s not enough panic in the midst of a corporate crisis,” says Knight. “People don’t realize what the stakes are half the time.”

There are two camps of thought on the best way to break people out of their stupor. Some say training can mitigate a natural impulse to inaction because it provides a set plan for everyone to follow. And people in a crisis do better, psychologists say, if they don’t have to think too hard.

When planes hit the World Trade Center on 9/11, for instance, the employees at Morgan Stanley, Dean Witter, already knew how to proceed. Their corporate head of security, Rick Rescorla, nervous after the parking garage bombings years earlier, had already taken the staff through hours of evacuation drills. When an announcement came over the speaker asking people to stay at their desks, workers at the firm ignored the advice. Instead, they did what they had been trained to do, moving as quickly as they could down the stairs. Morgan Stanley’s survivors that day numbered 2,687. Thirteen – including Rescorla – were killed.

For some, the Morgan Stanley story shows the importance of crisis training. For others, it’s an example of the necessity of leadership. People moved down the stairs, not just because they had been trained to do so, but because Rescorla was there to lead them. “People in a crisis want to be told what to do, and that’s what leaders are for, to bring them out of their stupor,” says Frohman.

MYTH 4: Stick to the script

Because crises are not created equal, it sometimes pays to break the rules. Crisis 101, for instance, dictates that a corporation quickly take responsibility and action for any problem that comes up. But when a woman in 2005 claimed she found a human finger in her bowl of Wendy’s chili, executives at the fast food chain knew something was fishy. They decided to wait for the results of the police investigation, and they were right. They claim turned out to be a hoax. The company had been right take a more cautious approach.

Another maxim for crisis management is to tell the public everything you know right away. Releasing information piecemeal can place the corporation on the unenviable news cycle of new revelations on a weekly or daily basis. And that can irrevocably damage a corporation’s brand. “It’s hard to see the value in a news drip approach, like Toyota’s,” says Paul Argenti, a corporate communications professor at Dartmouth’s Tuck School of Management and vocal critic of Toyota’s handling of its recall.

But before rushing out a press release, executives need to get their story straight. When North Carolina state inspectors discovered abnormally high amounts of benzene in bottles of Perrier in 1990, the company seemed at first to make the right moves. It immediately ordered a recall of 70 million bottles from North American grocery shelves. The company also released a feasible explanation: that an employee in the US had mistakenly used benzene to clean bottles.

After high benzene levels were also found in Europe, however, the group changed its story. Benzene, said Perrier, was naturally present in the carbon dioxide the company used to make the water fizzy. Normally, it was filtered out before the water was bottled, but a group of workers had failed to change filters. Perrier suffered for its mistake. Throughout the 1990s, when bottled water demand grew ten percent annually in the US, Perrier’s yearly growth was limited to just five percent .

“One approach may be to tell news outlets and the public that they can expect an announcement at a specific time in the future,” says Argenti. “That will give managers the necessary time to gather information and formulate a response, without giving the impression that they’re trying to hide stuff.”

Another widely held truth of crisis management is that corporate disasters are bound to blow up to global proportions. Yet this is not always the case.

When the Netherlands-based financial group, ING, however, accepted a $13 billion Dutch federal loan, executives did not go on an offensive to shore up the company’s reputation with US consumers. Despite ING’s sizable presence in the US, they judged that the bailout would remain a local issue, and stay off the radar screen of the American public.

It turns out they were right. The ING bailout attracted little attention outside of Holland. Had management taken a more aggressive approach in explaining itself, the strategy would likely have backfired. “You don’t necessarily want to trot out your ceo at the first sign of a problem,” says Argenti. “Some local issues actually do stay local.”

When companies are assessing the seriousness of an issue, they may do well to take their cues not from their own internal evaluation of the problem, but from who is asking the questions. If calls are coming in from local press, the disruption may indeed prove to be small. But if calls are being received from big international media outlets, it’s time to sit up and pay attention, no matter how trivial managers judge the problem to be.

MYTH 5: Crisis is always bad

In 1982, seven people in the Chicago area died after ingesting Tylenol painkiller capsules that had been inexplicably laced with cyanide by a malevolent criminal. Before the incident, Johnson & Johnson had held a 33 percent market share in analgesic sales in the US. Almost overnight, its market share fell to just seven percent. But ceo James Burke’s reaction remains the gold standard for crisis management. Although the company was not legally responsible for the killings, Burke took full responsibility. The group ordered a Tylenol recall. Burke became a fixture on television news shows.

A similar cyanide killing four years later induced Burke to take even more decisive action. To ensure such an incident would not happen again, the company introduced new tamper-proof packaging that is now standard in the industry. The company quickly recovered its market share, and managers often look to Burke’s example.

Companies need not fall victim to the inevitable crises they will face. Important lessons can be learned in the face of calamity, and by showing concern and leadership in the midst of a debacle, corporations can actually elevate their standing with the public. In fact, an Oxford University study authored by Rory Knight and Deborah Pretty, now both at Oxford Metrica, found that most companies facing a catastrophic situation saw their share price exceed pre-crisis levels within six months.

Crisis management advisors say that a long period of success, unmarred by crisis, can even set corporations – and individuals – up for a hard fall. “People can get a sense of invulnerability, a belief that bad things happen to others but not them,” says Mitroff. “Just look at Toyota and Tiger Woods. In a way, they were victims of their own success. 

The reason some executives are unable to turn crisis into an opportunity, says Frohman, is because they are too focused on the short term. When Scud missiles started falling near the Intel plant during the First Gulf War, Frohman knew it was a golden chance to show US executives the viability of an operation in Israel. “Everyone would understand in the short-run if we all just stayed home,” he says. “That wasn’t the question. The question was whether they would see Israel in the long-term as a good place to put a factory. That was the opportunity of the crisis, and we took it."

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Victoria Griffith is a long-time correspondent for The Financial Times and covers business from Boston.

Authors

  • Victoria Griffith

    Contributor, Korn Ferry Institute