Renowned cases of crisis management from the IR perspective
In a small village in Belgium, a young boy is eating lunch with his classmates. He has a bottle of Coca-Cola, as do a few other smiling children. It is a perfect picture, an impromptu commercial touting the world's most popular soft drink. But then the boy and some of his friends fall ill and are rushed to hospital. Similar outbreaks soon surface in France. While Coca-Cola traces the problems to what it says are isolated incidents at bottling plants in France and Belgium, reports surface of a contamination in a plant in southwest Poland. Amid product recalls, an avalanche of negative news, and a chorus of cries from politicians, the perfect picture is shattered and the company finds itself facing an uphill fight for its reputation.
The after-shocks of Coca-Cola's well publicized mishaps in Europe still reverberate through the media. It's an unenviable position to say the least. But while some IROs may wish to believe those dramatic events are isolated, many others know a simple truth: no company is immune to crisis. And no IRO can safely assume their tenure will pass without incident.
Some crises are indeed tragedies: Tylenol laced with cyanide; the deadly gas leak at Union Carbide's Bhopal, India facility; the downing of TWA's flight 800. But a crisis need not be the result of a dramatic accident. Take the issue of liability, such as the legal entanglements roiling the tobacco industry, or the recent multi-billion dollar judgement against GM regarding a fuel tank explosion.
From bad to worse
The truth is, there simply is no 'safe' business. And when things go wrong, they tend to go very wrong. But while the stars may not be aligned in a company's favor, executives can compound problems by mishandling a situation. From an investor relations perspective, shareholders are looking for immediate answers, but they're also looking for leadership and a sense of control.
'You've got to keep your feet on the ground, because your reaction can magnify events,' says Colin Coulson-Thomas, a UK-based counselor on corporate direction who helps boards of directors improve performance. 'By making too much of something, you can add momentum. Of course, if you don't act, things can get worse. How you respond needs to be proportional to the crisis.'
Coulson-Thomas, who has served as a chairman as well as a manager of corporate affairs for several companies that have been embroiled in crises, says investors tend to look at a company as separate pieces. To handle crises, therefore, investor relations officers need to take a directorial perspective, understanding the business as a whole so that they can gauge the extent to which the crisis is going to impact the company, and then respond appropriately.
'I've found that some analysts and investors are almost happier with a severe crisis that they feel is being properly managed from the top, than they are with a less severe one, where they think that the organization is panicking and not in control,' says Coulson-Thomas. He believes that what worries investors more than anything is the concern that the company may blow a crisis.
Big bug
One company that was accused of mishandling a crisis is Intel. In 1994, the company launched a new Pentium chip, and quickly faced rumors of a so-called Pentium flaw. Intel was criticized for not taking the situation seriously, and paying scant attention to consumers. Shelley Floyd, a former vice president of investor relations and the current technical assistant to the CFO, remembers the event vividly: 'That was a defining moment in the company's history, and it's still something that people talk about. It showed us how to respond to future crises, and it has motivated people to be responsive.'
Floyd says that investors weren't specifically nervous about the reported flaw, which did not affect consumer applications, but they were upset that the company wasn't responding to consumer concerns. 'We were not aware of the extent to which we had become a consumer company,' says Floyd. 'Non-computer specialists looked to us for confidence and trust, and for them to see us seeming to be callous was terrible. That's what upset the Street. We didn't understand that there was a much larger audience watching our reaction.'
Intel learned quickly from its mistakes, however, and the company now reacts immediately to reports of flaws in its products, no matter how small the actual implication for users. As soon as a problem is reported, Intel forms a task force that works round the clock to resolve the issue. In addition, Intel staff contact potentially affected customers by phone to apprise them of the latest developments. 'We understood that these are people whose concerns must be taken seriously. We cannot appear to be arrogant or insensitive. The pain you incur when you turn your back during such issues is substantial,' warns Floyd.
Controlling culture
While Intel changed the way it views itself internally, other companies have had to take more drastic steps to correct a corporate culture ill-suited to dealing with problems. Such was the case with British Biotech. The company first ran into problems when its head of research disclosed to a major shareholder doubts over the company's prospects for passing a crucial testing hurdle for one of its development drugs. British Biotech executives, who had been making bullish comments to investors about the drug's prospects, were outraged and immediately sacked the employee. Unfortunately, the drug did ultimately fail the tests, the former head of research sued, the London Stock Exchange began an investigation into the company's actions, and British Biotech was reduced to a penny stock.
That episode began in March 1998 and dragged on until June, when the London Stock Exchange published a censure of the company. In the meantime, the entire management team was replaced, and the company began the painful process of restoring confidence, which included settling with the former head of research.
Tony Weir, financial director at British Biotech, has since assumed responsibility for investor relations. As he explains, the company has changed its culture – the first step in ensuring it does not fall into a similar situation in the future. 'We try to be as open and honest and objective as possible. Everything we now say is based on precise data, rather than on hopes and aspirations, which was the prior case.'
Internally, Weir says British Biotech now encourages employees to stand up and voice their views. The company has also established an operating committee of the most senior managers, and they review all major decisions, rather than having one or two people making important calls in a vacuum. More importantly, British Biotech has communicated these steps to shareholders.
'We just had a round of meetings with our major shareholders in the first week of July, which went well. They see that we're handling ourselves differently. For example, we have data on a new drug, and some of the news is conflicting. But we've been up-front with analysts and shareholders, giving them all the possible scenarios, good and bad.'
Restoring confidence
Thankfully, most companies find they're able to persevere amid negative events without replacing the entire management structure. But how a company handles a situation can be more important than the situation itself. Often, success can depend on a few specific concepts which sound simple, but often are drowned out by panic.
Mel Stephens, director of corporate communications and investor relations for Ford Motor Co, says he deals with a crisis just as he would a positive business event. 'We provide open, honest, credible and timely communication. You want to be up-front, you want to say what the crisis is, and you want to say what you're doing about it. With most crises, time is a major factor, so you have to deal quickly.'
Dealing with investors is a finesse job, and some situations simply don't warrant communicating with major shareholders. The effort can backfire and fan the flames unnecessarily. However, companies walk a fine line, risking being perceived as holding back information. 'We may do conference calls, and provide regular updates to shareholders, but again it depends on the situation,' explains Stephens. 'Often, we'll post updates on specific events on our web site, allowing interested parties immediate answers without a serious drain on resources.'
To Colin Coulson-Thomas, the most important point comes back to confidence: 'If you're at sea, and you have confidence in your captain and crew, you're not going to run for the lifeboats at the first sign of a storm. But these are hard lessons learned.'