Research by Templeton College, Oxford, published in 1996, into the aftermath of 14 corporate disasters for publicly-owned companies identifies a number of common factors.

It is clear that:

  • shareholder value drops rapidly in the immediate aftermath of a crisis;

  • recovery of shareholder value appears to be related directly to the perceived ability of the management team in dealing with the crisis;

  • companies that prepare for crisis handle it better than those who do not;

  • insurance will not protect shareholder value;

  • recoverers find that shareholder value rises after a short period of time after the event. Non-recoverers' shareholder value continues to decline for many months.

    The difference in performance between recovers and non-recoverers is shown in Figure 1. Shareholder value has been very carefully adjusted to take into account the background stock market and industry sector indices and thereby reveal the direct effect of the crisis. This shows us that:

  • companies that prepare well for crisis can mitigate share loss;

  • companies that prepare well can even enhance share price.

    Why crisis management is different

    An increasing number of major companies have come to realise that their day-to-day management culture, routinely consultative and taking time to obtain management consensus, is far from appropriate during a crisis. What then are the most important drivers in a crisis situation? What is required to make the culture-shift that is necessary for the company to have a chance of being a recoverer?

    A crisis usually is an event that is unexpected and difficult to diagnose quickly. It is difficult (sometimes impossible) to predict where it is going, and it is partly or wholly outside previous experience.

    Every crisis is unique, but it is very likely that some of the following will figure:

  • late identification/recognition;

  • insufficient or faulty warning systems;

  • unfortunate reflex actions;

  • slow and flawed management systems;

  • line pressure and stress;

  • individuals pushed to the brink;

  • danger of “group think”.

    Crisis preparation must gear the organisation and its people to cope in this difficult and disorienting environment.

    Henry Kissinger in 1979 said: “In a crisis only the strongest strive for responsibility; the rest are intimidated by the knowledge that failure will demand a scapegoat. Many hide behind a consensus that they will be reluctant to share; others concentrate on registering objections that will provide alibis after the event ...”

    The best plan for crisis is avoidance

    The London Stock Exchange (LSE) guidance on internal control, as interpreted by the Turnbull report, has far-reaching consequences for publicly-quoted companies. Principally this centres on the listing rule disclosure requirements of the LSE. Non-compliance with the Turnbull guidance must be disclosed in the annual report, threatening potentially embarrassing exposure.

    The challenge is to ensure that effort directed at Turnbull compliance actually (and literally) pays dividends. Turnbull requires a risk-based management strategy and its implementation, with due management controls, throughout the organisation. Control of risk must become a routine element of board business and internal management processes, not a bolt-on extra and not another bureaucratic layer.

    The stages of crisis planning are:

  • corporate risk assessment;

  • issue exposure;

  • management control and internal reporting systems;

  • early warning signals;

  • crisis response organisation;

  • corporate leadership.

    Some companies have already assessed the risks to their business along these lines, and put in place measures designed to give them at least a fair chance of being a recoverer post-crisis. These companies or groups first establish their opportunity/risk profile. A simple five point matrix is appropriate for risk assessment, assessing the impact of the hazard and its likelihood against certain criteria. Crisis scenarios are likely to have a range of impacts, both financial and reputational. It is not wise at too early a stage to reduce everything to the bottom line, or critical interactions between reputational issues and business success can be lost. (See Figure 2.)

    Issue exposure

    Part of any corporate risk assessment must be consideration of the issues that would arise in response to one of the identified crisis scenarios. The ongoing public affairs profile of any large company will require identification and tracking of a number of reputation issues. This homework forms the crucial backdrop against which general reputation and stakeholder issues deriving from a specific crisis must then be managed.

    Management control and internal reporting

    Internal controls are the bread and butter of corporate risk management. Spanning all areas of management and starting obviously with financial management and accounting systems, they also include production, quality, safety, health and environment, people management, hostile takeover, security breach, legal action, board conflict, market conditions and many more. If the whole system of internal control is to work and not become a bureaucratic burden, then it must become an integral feature of management and board activity, and not a bolt-on extra. This in turn has implications for traditional management reporting methods. Management reports must answer the key questions of how well risks are being managed, at the right level of detail to avoid obscuring the issue by too much or too little reporting.

    Early warning signals

    Deriving from the crisis scenarios and corresponding internal controls are the early warning signals that might presage a corporate crisis. Unlike most internal controls, these are often cross-departmental and frequently more difficult to interpret. Ongoing attention is vital since not all crises arise from one sudden disaster. Many crises can be termed creeping or progressive crises. The objective is to identify their potential from a number of warning signals and to take in good time steps to remove or mitigate the consequences.

    Crisis response organisation

    It is important to cater for the possibility of crisis arising from origins outside this footprint (equivalent to what major hazard operators call “beyond design accidents”). Business continuity planning, which is an element of crisis management contingency work, arises directly from this framework.

    Companies need to design and put in place an in-house organisation. There are various principles to be observed, but its precise architecture will quite properly be very much a reflection of group/company culture(s). There are a number of important features here.

  • The crisis management organisation needs to be carefully thought through and substantial. It is a common fallacy that crisis is so variable in form when it breaks that only the loosest of structures is needed. This is, of course, wrong. As we have seen, crisis variants have many common characteristics.

  • It is necessary to be able to put this organisation, in its fullest provision, in place very quickly if needs be. It can then be trimmed and adjusted to the precise circumstances as they unfold.

  • The crisis management organisation must be line-management driven. It is not satisfactory to put it in the hands of one department. Experts (ie. departmentalists) will be crucial contributors in crisis situations, but they are by nature single-issue creatures. Crisis at its worst (for which one must prepare) will affect the fortunes of the group/company as a whole - possibly its very continuance in its present form. This is not an expert or departmental matter. Excessive dependence on experts in a crisis is a sign of weak line management and can lead to flawed strategic direction in the event.

  • The hallmark of a weak crisis management organisation is one in which the public relations (PR) department is in charge and board members or senior managers immediately available are gathered to take charge of the situation, no on-call support organisation of any substance apart from PR having been designated lead. This is not to under-value the role of PR in a crisis – it is crucial, and reputation protection (or, better, enhancement) is likely to be vital to success. Its role, however, is to represent policy, not to create and drive it. There are likely also to be major stakeholder issues that are certainly not best left exclusively or even mainly in the hands of the PR department.

  • There are various components of the organisation which are perennial, even though they will be shaped as a function of group/company culture. One is information management, a core capability that is little understood and almost invariably under-provisioned to a potentially fatal degree. There must be facility to harness particular departments/skills quickly and effectively.

  • Once the organisation is set up, it needs to be tested element by element, then section by section, and then as a whole. All this needs to be refreshed periodically.

  • It is very important that senior management, up to the highest level, gives its full and active support to this process, including participating in exercises. If top management investment is lacking, the organisation will be handicapped.

    Corporate leadership

    It is vital that boards (group and company) sign up whole-heartedly to the derived crisis management policy, and also its implications in terms of the personal involvement of designated top people. This is a matter both of giving the correct signals and of direct leadership. Top managers, supposedly only too well accustomed to pressure, need active practice if they are not to stumble conspicuously in the event, to the detriment of both success in adversity and their personal reputation. Management effectiveness is likely to be directly proportional to the reality of this commitment.

    In summary, the corporate crisis management team must be able to function with the utmost efficiency from a standing start. It will be a relatively unaccustomed element of the organisation, and only effective preparation and practice will give it a chance of achieving this objective – and maybe of turning adversity into opportunity.

    Preparing an organisation for crisis

    The actions necessary to design an organisation that can move along the spectrum of corporate cultures from consensus (the norm), to directive (crisis mode) are not complicated. They include:

  • designing the crisis organisation, building on existing cultural and organisational strengths but ensuring speed and flexibility of action;

  • a short training programme for senior and middle managers in crisis management techniques. If required, this can be accompanied by a process of identifying those who are suited to a high-profile role in crisis;

  • crisis exercising at a suitable but not onerous frequency to ensure that decisions are made by those best able to make them and to rehearse the information conduits to the person in charge of the crisis.

    Managers who attend crisis management development programmes report an interesting and very positive side effect, in that their day-to-day management skills, decisions, objectivity and completion of tasks to programme are enhanced. It may be that this focused view will go some way towards helping recognise a crisis developing or even avert the disaster to which their senses are newly attuned.

    Source research: ‘The Impact of Catastrophes on Shareholder Value,'

    Dr Rory Knight and Dr Deborah Pretty, Templeton College, Oxford.

    Jeremy Larken is managing director of Octo Ltd and Charles A Wilson is manager, Octo Scottish Office. Octo specialises in senior level crisis and emergency preparedness and practical management. E-mail: Octo_uk@compuserve.com

  • Topics