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:
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:
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:
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:
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.)
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.
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:
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