No more ‘Sergeant Schultz’ for top executives in a crisis

How long can top executives credibly claim ignorance of malpractice happening on their watch? The bumbling Sergeant Schultz on Hogans’ Heroes became famous for his catchphrase “I see nothing, Nothing-g-g”. The joke of course was that he DID see what was happening and pretended not to.

In the same way, two major reputation crises in the last few weeks raise the very obvious question – How could senior managers NOT know what was taking place?

The first case saw Princess Cruise Lines agree to a record $US40 million penalty after pleading guilty to Princess Caribbean discharging oily waste into the ocean. Moreover court documents showed illegal practices were found on four other Princess ships, including use of ocean water to fool on-board sensors that would otherwise detect dumping of contaminated bilge-water. Authorities said cost saving was the motive and that the ship’s officers and crew conspired to cover up what was going on.

The company’s official response was to blame “the inexcusable actions of our employees, who violated our policies” and went on to say that although they had policies and procedures in place, “it became apparent that they were not fully effective.” No mention of the fact that the illegal practices came to light after an engineer on the ship told investigators looking into a big discharge off the coast of England in 2013.

The second reputation crisis was reported just days later when BMW Australia’s finance arm agreed to pay back $72 million to car buyers who were misled into thinking they could afford a luxury German car and were provided loans on false documents. BMW will write off $50 million in loans the company should never have made, will pay $14.6 million to people who were misled, and grant $7.5 million in interest rate reductions on current loan contracts.

The Sydney Morning Herald reported “there was evidence that the company’s management was aware of the failures and lack of controls in its business.” The paper said an earlier review blamed “a strong sales culture” in which people with “known compliance failings” were paid unprecedented bonuses, while risk and compliance teams were undermanned, under-trained and not taken seriously. Again it raises the question, where were top management in all of this?

Such cases are eerily reminiscent of the VW emissions scandal, which was initially blamed on a handful of low level employees, unbeknownst to the CEO, whereas later reports make it clear that the problem was known in the executive suite much earlier. Or take the recent scandal involving systematic underpayment of employees at 7-Eleven Australia, which was initially blamed on unscrupulous franchisees acting without the knowledge of Head Office. The company later admitted a culture of underpayment and false records had become “normalised” in its network

Let’s not be naïve here. In some such cases the CEO steps down, but in the background there are usually highly-paid lawyers warning executives not to admit responsibility, and trying to avoid their clients being forced to undergo cross-examination in open court.

However, it would be a welcome change – albeit unlikely – for a top executive to step forward and candidly say: “Yes, I knew about it, and I’m really sorry.”  Just don’t hold your breath waiting for that day.

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How WikiLeaks revealed a ‘secret’ issue management plan

It’s not often the world gets to see inside a confidential issue management plan. But when that happens, it sometimes exposes a strategy which probably sounded great at the Board table, but maybe didn’t look so great on the front page of the newspaper.

The latest major plan to leak was the scheme hatched by US activist PR man David Fenton to fight the influence of Rupert Murdoch over climate change denial, and to go after two of his major news outlets – the Wall Street Journal and Fox TV.

The proposal was to use guerrilla tactics, civil disobedience and targeted advertising to put Murdoch “on the defence” on climate change, and to make it possible for conservative politicians to be able to support positive action on reducing global warming. It was launched in the US to influence the Republican convention, and also proposed similar activities in Australia and the UK.

The $US2 million plan to directly challenge climate change reporting in the Murdoch media was exposed in the massive flood of emails hacked from the account of Clinton campaign Chairman John Podesta and published by WikiLeaks. In the heat of the election campaign and the furore over hacking, this divulged issue management strategy was overshadowed by much bigger revelations. But the plan itself makes interesting reading.

The document sent to Podesta (reproduced in full here) detailed elements including:
• A series of climate science advertisements in the Wall Street Journal
• Television and social media advertising
• Hidden funding for Greenpeace and other activists to target Murdoch and his businesses
• Soliciting and promoting supportive statements by opinion leaders around the world
• Targeting Fox and WSJ advertisers to persuade them to withdraw ads
• A campaign to embarrass News Corp and Fox board members and top executives.

Fenton PR subsequently proudly promoted the science print-ads which were run, and their television advertisements. But it appears they did not formally proceed with the plan to “Replicate these and other relevant tactics in Australia and the UK.”

This isn’t the first time an issue management plan has leaked, and certainly won’t be the last. Look no further than the secret strategy to combat Government efforts to limit gambling on poker machine which Clubs Australia accidentally posted on their own website. Anti-gambling campaigner Senator Nick Xenophon called the document a “smoking gun” which showed they had misled the Government and the public.

Sometimes it takes years for such secret plans to surface. Consider the revelation just last year of a strategy by the sugar industry in the 1960s to combat US Federal research on tooth decay. It came to light only with discovery of a treasure trove of documents from a former advisor to the industry, which showed they knew sugar played a major role in dental cavities as early as 1950.

And who could ignore the decades-long issue management strategies implemented by the tobacco industry, confirmed in the late 1990s by the release of over six million previously undisclosed documents, extending to about 35 million pages of evidence.

Such cases are a vivid reminder of one of the most basic rules of issue management: Don’t write plans you wouldn’t want to see on the front page of the newspaper or going viral on social media. Because nothing remains secret for ever.



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Should you blame a crisis on a rogue employee or the system?

Blaming a rogue employee or system failure is a pretty popular crisis strategy. But one of the most notorious cases of blaming a rogue employee for a crisis has just been turned on its head, with a court deciding the management system rather than the perpetrator was mainly at fault.

French derivatives trader Jerome Kervial famously went to prison after making €50 billion worth of unauthorized trades and committing forgery and fraud to cover them up.

Société Générale lost €4.9 billion unwinding his trades but, in a case which has come to exemplify failure to recognise and act on warning signs, a subsequent investigation found the French bank had ignored 75 red flags over the previous 24 months.

Kervial consistently argued that managers had turned a blind eye to his profitable transgressions, and earlier this year a French labour tribunal seemingly agreed when it ruled he should not have been fired from the bank he had defrauded. The tribunal concluded that his illegal actions presented “no real and serious cause” for his dismissal and ordered Société Générale to pay Kervial about €450,000 in compensation.

Now the bank has been handed another setback. Although a lower court originally ordered Kervial to repay Société Générale the full €4.9 billion it lost, a few weeks ago the Versailles Court of Appeals reduced his obligation to one million euros, declaring that the bank’s “multiple faults” meant it “had a major and decisive role” in allowing the incident.

While blaming a rogue employee or the system in the face of a crisis is not uncommon, it can carry enormous risk. Take the tragic nightclub shooting in Orlando, Florida, where one challenging question was how the Islamic extremist shooter got to be employed as a gun-carrying security guard? Global security giant G4S quickly adopted the rogue employee strategy, emphasising that gunman Omar Mateen was off-duty at the time of the massacre and the system had failed to alert them to any concern. But that didn’t prevent the news causing an eight percent drop in the company’s share price on the London exchange, which slashed about £200 million off its market value.

After just about every crisis, someone steps forward to say they saw the warning signs, and sure enough, in the Orlando case, a former co-worker, Daniel Gilroy, told reporters Mateen was racist, sexist, homophobic and frighteningly aggressive. “This guy was unhinged and unstable. He talked of killing people. Everything he said was toxic, and the company wouldn’t do anything.” G4S, which is one of the world’s largest employers with over 600,000 staff, said it had no record of any such complaint.

But no matter how large or small the organisation, the lessons are the same:

  • recognise that a single employee can bring high-profile crisis risk
  • have robust processes in place to weed out rogue individuals, and
  • have strong systems which can withstand individual failure.

No amount of blaming rogue employees or the system can detract from the inarguable reality that ultimate responsibility lies at the top. When hackers stole $81 million from Bangladesh’s central bank in February, Governor Atiur Rahman resigned, but blamed flaws in the global money transfer system, and declared: “As a Governor, I’m not supposed to look at each and every small thing.”

Sorry Mr Rahman, but that’s exactly what executive-level crisis proofing is all about.

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Why crisis preparedness is a great investment

Any time someone questions how to justify the expense of crisis preparedness and executive training, just remember the dire financial impact of a real crisis.

Last month’s accident at Dreamworld was a terrible tragedy for the families of the four people killed. And the outpouring of anger and sorrow was entirely justified. At the same time it’s impossible to ignore the impact on the business itself. Shares in parent company Ardent Leisure fell by up to 22% next day – slashing about $200 million from corporate market value – and, despite a brief recovery, continue to stall as analysts speculate about the long term viability of the enterprise.

Facing months of investigation and litigation, the financial cost of the accident – to the company and its investors – may not be known for some considerable time. But it is a gloomy reminder that nothing destroys reputation faster than a crisis, and that the business impact goes straight to the bottom line.

Of course share price might not be everything when it comes to assessing reputation – yet for many organisations there is nothing but daylight back to whatever comes second. Take the case of BHP when the Brazilian Government announced a mega-lawsuit earlier this year arising from the collapse of the Samarco Dam. Shares in BHP fell more than 8% in a single day, wiping out over $8 billion of investor value.

Or consider the market response when Crown employees in China were arrested in October over alleged breaches of law relating to gambling. Crown Resorts’ shares fell $1.3 billion in a day, with about $630 million carved off the value of billionaire James Packer’s stake in the casino company.

And who could go past the fire-prone Galaxy Note 7 phone debacle. The crisis cut $14 billion off the market value of Samsung, and the company says the recall will cost it at least $5.3 billion.

Not every crisis produces such spectacular numbers, but the lesson is the same for every organisation – Crisis preparedness reduces losses and accelerates recovery. Anyone who doubts the importance of being properly prepared need only look at a famous study at Oxford University which related preparedness to the impact on market value. This well-respected study showed that companies with effective crisis plans in place suffered on average an initial 5% fall in share value, but after 12 months their share value on average had recovered to 7% above the pre-crisis level.

By contrast, companies with no effective crisis plan in place saw their shares initially fall by an average of 10%, and after 12 months their shares were 15% below the pre-crisis level. In other words, for companies without effective planning in place, the share price initially fell twice as far and recovered much slower. A year later their value was 22% behind the well-prepared companies.

A 22% penalty on long-term market value is surely powerful evidence that crisis preparedness is a great investment.

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How to explain illegally bulldozing an historic building

PR is sometimes cynically described as trying to put the best possible complexion on a given set of facts. Of course it’s much, much more than that. But occasionally that’s the priority when you are caught out doing something really dumb. Like, for instance, illegally destroying a heritage-protected hotel.

That was the challenge facing two property developers in central Melbourne after they demolished the 159-year-old Corkman Irish Pub in Carlton, just a week after it was damaged by a suspicious fire (now under investigation by the police arson squad).

While Council officials found no signs the two-storey historic building would need to be demolished as a result of the fire, on Saturday 14 October a demolition crew linked to the developers started to knock it down. Melbourne Lord Mayor Robert Doyle said that despite a stop work order issued that night, they returned on Sunday to finish the job. He said: “This is the most brazen and wanton act of destructive vandalism that I’ve seen in my time as Lord Mayor.” The public outcry was as swift as it was predictable, increased further when it was revealed the rubble contained asbestos, and the country’s biggest building union placed a construction ban on the site.

You’d think the developers would have been super careful at this stage, but no. Asbestos-contaminated waste from the old hotel was discovered dumped on another development site they own in outer suburban residential Cairnlea.

You’d also think that with five separate agencies investigating potential breaches, developers Raman Shaqiri and Stefce Kutlesovski – who have other building projects in the city – would have something to say. But for almost two weeks the news media were not able to get any response.

Then, 13 days after the demolition began and facing a firestorm of criticism, they sent a letter to the Planning Minister. Released by their PR consultants, the letter was certainly blunt. “We apologise for having undertaken this demolition without the appropriate permits in place” and concluded “We will reconstruct the hotel as it was, forthwith.” The letter also contained a convoluted explanation built on misunderstandings, prior advice and arguing that the demolition was done to protect community safety. However it unambiguously conceded: “Undoubtedly, this was the wrong course of action.” (full text here)

While a parade of officials, tribunals and costly lawyers will doubtless determine the fate of the developers and the site over coming months, there are some pretty clear lessons in terms of issue and crisis management. First and foremost is failing to offer any comment or explanation for almost two weeks.

Their letter said: “The lack of public commentary by us on this matter might serve to underline our naivety. We wish we had made a statement earlier, but we simply hoped to deal with this through formal processes.”

Naïve possibly, but a classic error in the face of a crisis. Saying nothing creates a news vacuum where every critic and commentator fills the gap. It allows speculation and allegations to multiply and increases the temperature of the public discourse. While the illegal demolition in Melbourne inevitably triggered a legal and reputational crisis, some sharp PR advice – albeit too late – showed there was another way forward.

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Superannuation and dog racing: Policy back-flip or ‘responding to stakeholders’?

One of the challenges for policy makers and managers everywhere is how best to communicate a major change of mind. Will it be negatively perceived as a back-flip by a weak leader, or recognised as a positive outcome resulting from flexible consultation with stakeholders?

This issue management conundrum was highlighted by two recent high-profile developments in Australia.

In the first case, Federal Treasurer Scott Morrison had to explain why the Government had backed down from some unpopular changes to the national superannuation system. His communication strategy was clear and unapologetic. The Minister told reporters he had listened and then made the right decision – and the story pretty quickly went away.

Contrast this with the issue management debacle surrounding greyhound racing. Reacting to a television exposé of cruel practices in the sport, New South Wales Premier Mike Baird announced a total ban on greyhound racing in the state. Predictably, animal welfare groups praised it as trend-setting and courageous, while the greyhound industry, along with their allies in politics and the media, were outraged and angry.

Aside from the arguments for and against the ban, what is of interest is how the NSW Premier managed the growing controversy. After three months of damaging headlines, and repeatedly denying reports he was about to change his mind, to the apparent surprise of no-one, the hapless Premier announced last week he had dropped the proposal.

Mr Baird certainly tried to emphasise that new rules would be introduced to clean up the sport. But what appeared on news bulletins across the country was of a sombre-faced Premier declaiming: “I was wrong. The Cabinet was wrong. The Government was wrong.” The perception was a humiliating defeat.

The question is: Did it have to be that way? There is no doubting the Premier’s sincerity, but the first important precept of issue management is to fully understand your stakeholders. Mr Baird very evidently over-estimated the extent and persistence of public attention to animal welfare, and under-estimated support for the greyhound industry and its economic reach.

Second, keep your allies and potential allies inside the tent. NSW was not able to rely on supporters from leaders in other states and increasingly looked out of step with the rest of the nation.

Third, leave yourself room to manoeuvre. While a total ban was a bridge too far, the Premier could have demonstrated leadership and secured political credit by a more measured response to a legitimate matter of public concern. Issue management is a two-way process and he needed to do more listening and consulting before jumping in at the deep end.

Finally, in the words of Kenny Rogers, know when to hold, know when to fold. The Premier’s repeated denials left him no dignified way out and he waited far too long. There is an important difference between being firmly resolute and stubbornly blind to reality.

So it’s worth considering the two strategies for managing a policy reversal. The Treasurer framed his superannuation change of mind as a virtue, responding maturely to feedback. Naturally his critics labelled that as spin to cover up a back-down, but he seemingly suffered little lasting political damage. By contrast Premier Baird went from being one of the nation’s most popular politicians to being perceived as misguided, inflexible and plain wrong. There has to be a lesson somewhere there.

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When big business intervenes in social issues

When Australian Federal Treasurer Scott Morrison chastised superannuation funds for selecting investments for “political reasons” rather than financial return he was flying in the face of a growing trend in issue management.

The Minister attacked the funds for not investing in coal, but perhaps he had overlooked the fact that just months earlier the world’s  biggest Sovereign Wealth Fund – the $860 billion Norwegian fund – announced it will drop investment in 52 companies linked to coal.

Using investment muscle in support of a social issue is nothing new. As long ago as the 1990s, withdrawal of business investment in South Africa was a major factor in speeding the collapse of Apartheid.

Similarly, Corporate Social Responsibility and Ethical Investment have been around for decades, helping big business play a role in the community to help protect their operations and maintain their social licence to operate.

But now corporations and CEOs seem to be showing a renewed willingness to play a role in high-profile social issues with little or no apparent direct relevance to their core business. Some people are describing this as Corporate Social Advocacy, or Corporate Activism.

Look no further than the 81 American multinationals which pledged to support President Obama on climate change. Or the Who’s Who of Australian corporates who lent their names and brands to a newspaper advertisement in support of same-sex marriage. Or the more than 200 CEOs and business leaders who signed an open letter to Governor of North Carolina to protest against new legislation which overturns protections for the LGBTI community.

In that case some companies did a lot more than just sign an open letter.  For example PayPal cancelled plans to open a global operations center in Charlotte, North Carolina, that would have created 400 jobs, and the Washington Post reported that Deutsche Bank cancelled expansion plans into the state.

Corporate philanthropy is another concept which has been around for a very long time, but now some high profile philanthropists are no longer simply supporting existing good projects and good causes. A good example is West Australian mining magnate Andrew “Twiggy” Forrest who began by championing the issue of indigenous disadvantage, then masterminded the international Walk Free Foundation which aims to shame governments into action on modern slavery and to persuade global corporations to ”slavery-proof” their supply chains. The Walk Free campaign was later rolled into a US charity, but it highlights how CEOs can use their money and status to promote issues onto the global agenda.

Although various forms of corporate intervention are well known, what’s new is the growing pace and profile of such intervention. Sometimes, however, the line between corporate social activism and longer term self-interest is somewhat blurred. Like the decision of the worlds ten biggest PR agencies not to represent climate-change deniers. Or the Male Champions of Change group which brings together some of Australia’s most influential and diverse male CEOs and Chairpersons to use their individual and collective influence and commitment to drive the issue of women’s representation in leadership.

But in some ways it’s less important whether the rising tide of intervention is labelled as CSR or corporate activism or ethical investment or corporate social advocacy or philanthropy or the bandwagon effect. The real trend here is that business and its leaders are increasingly willing to play a role in high-profile social issues, and issue managers everywhere need to pay attention.

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