Can Reputation Management Render Crisis Management Redundant? (1992)
Charting the future of public relations
Holmes Report
CEO

Can Reputation Management Render Crisis Management Redundant? (1992)

Few CEOs involve public rela­tions professionals in decisions involving issues such as compensation, pricing strate­gy, recruitment policy, even plant location and closure. Yet these are areas with tremendous potential for negatively impacting corporate r

Paul Holmes

 

Early in June, California's Consumer Affairs Department accused Sears Roebuck & Company of systematically overcharging cus­tomers of its car repair centers. The company's first response was to deny the accusations, and suggest that its accusers were politically motivated. Using lawyers as spokespeople, it held to that position, until a week later New Jersey's Department of Consumer Affairs reported that it too had visited six Sears auto centers, and all six of them had recommended unnec­essary repairs.

Eventually, with public relations experts in almost unanimous agreement that Sears had bobbled the ball, the company took out full-page advertisements in major newspapers, in the form of a letter from chairman Edward Brennan. The ad adopted a more contrite note, although it failed to acknowledge that Sears management might share in the blame for the fraud.

"With over two million automotive customers serviced last year in California alone, mistakes may have occurred," said Brennan. "However, Sears wants you to know that we would never intentionally violate the trust customers have shown in our company over 105 years."

It was some time later before Brennan announced that the company would change its compensation policies, which paid employees who advise customers on the need for repairs solely on the amount of repairs customers authorized. The company also discontinued its policy of requiring service advis­ers to meet sales quotas. Sears officials had denied that such policies even exist­ed, while critics charged they were part of a deliberate scheme to recommend unnecessary repairs.

Brennan eventually admitted the compensa­tion policies "created an environment where mistakes did occur." 

While most criticism of Sears' PR efforts has focused on their handling of the crisis after it broke, many public relations professionals agree with the assessment of Alan Towers, president of Alan Towers Associates and a pioneer in reputation management: "Good public relations advice, had they taken it, could have saved them, not by helping them handle the crisis better but by avoiding the crisis in the first place.

"Sears seems to be treating each instance of malpractice as an aberration, rather than considering that their compensation policy should have been considered for its impact on the behavior of their employees. I can almost guarantee PR people were not consulted when that compensa­tion package was being drawn up, just as they were probably never consulted at Salomon Brothers and E.F. Hutton. Had they been consulted, PR people would have advised that these policies have tremendous poten­tial for negatively impacting the corporate reputation."

Someone at the company had clearly lost sight of the prin­ciple espoused by then Sears Roebuck CEO General Robert E. Wood in the 1930s: "Business must account for its stewardship not only on the balance sheet, but also in matters of social responsibility."

"This incident has destroyed or severely damaged one of Sears' most valuable assets: trust," says Alan Towers. "The damage from that will extend way beyond its auto repair centers. It's a perfect example of how public relations is a real bottom line item."

The Sears story is by no means unique. In 1978, Fortune magazine reported that employees of Olin Corporation had falsified records to cover up illegal mercury discharges into the Niagara River. The discovery came after Olin chairman James Towey launched a campaign for improved financial perfor­mance and company executives threatened to close plants if regulations imposed unrea­sonably high costs.

The article noted: "It never occurred to [Olin executives] that their atti­tude of grudging compliance might encourage outright evasion of the law by their sub­ordinates."

The fact is that even in today's envi­ronment, with corporations being held accountable to ever higher standards by the media, the public and the courts, and with scrutiny of business by consumer groups, press and regulators more intense than it has ever been, few CEOs involve public rela­tions professionals in decisions involving issues such as compensation, pricing strate­gy, recruitment policy, even plant location and closure.

Yet these are areas with tremendous potential for negatively impacting corporate reputation. The oil industry was penalized by the windfall profits tax for not consider­ing the public relations impact of pricing decisions, while the entire health care estab­lishment—including pharmaceutical manu­facturers and insurance companies—cur­rently faces stricter government control because of similar historic neglect.

"Communications professionals are given the responsibility for guarding the corporate reputation," Alan Towers con­tends. "But there are many things that impact reputation—corporate policy, the quality of products and services, recruit­ment practices and employee attitudes—over which communications people have no authority, and may not have any input. Public relations has to evolve into a disci­pline that understands these issues and their impact on reputation, and that can play a part in the decision-making process."

What this means is that crisis planning must take place in a much wider context than has traditionally been the case, focus­ing not on the technical aspects of how an organization will react if crisis hits, but on organi­zational, operational and cultur­al norms, looking at how they impact the behavior of the orga­nization and the people who work for it, and assessing how cultural factors might contribute to crises.

"Crisis management must take place in concert with and be a product of a clearly defined and articulated sense of corporate first principles," says John Scanlon, executive vp at New York public policy firm Sawyer Miller. "A company that is clear about its core val­ues, and that is driven by those values, with generally tend to produce positive energies that will permeate the corporate organism."

Scanlon is one of the pre­mier promulgators of the increasingly widely accepted notion that crisis preparedness has more to do with on-going corporate behavior, culture and values than with the develop­ment of a crisis manual that details appropriate behavior.

That's a view shared by Richard Hyde, head of the crisis management function at Hill & Knowlton. Says Hyde: "I firmly believe that a corpora­tion that knows itself, and what it stands for, and articulates that for those who work for the corporation and the outside world, is prepared for any event that comes along." A solid foundation of corporate values provides managers at all levels with a frame­work for decision making that will help them take the appropriate action in day-to­-day decisions and under crisis circum­stances. And if the action taken is appropri­ate, the communications process is simple and straightforward.

Hyde suggests that these values should be encapsulated in a corporate credo. "One of the reasons Johnson & Johnson was so successful in handling the Tylenol crises was that the corporation had a strong corporate credo that was established in the minds of management and that laid out the company's guiding principles," Hyde says. "The company was guided in its reaction by the credo."

Such preparedness can help predict and prevent crises by focusing on internal systems and the problems they can produce. However, most crisis preparedness planning today continues to focus on exter­nal crises, single incidents that cannot be eliminated entirely and that thrust an orga­nization into the public spotlight, rather than on on-going issues or cultural prob­lems. That's because it is easier to look at externalities than to focus on systemic flaws within an organization.

Yet systems-based crises are precisely those that will evoke the greatest public outcry.

"People understand that accidents can happen," says Mary Woodell, director of the environmental, health and safety prac­tice at management consulting firm Arthur D. Little. "They don't understand systems that permit or encourage fraud. Those situ­ations that involve systemic, cultural prob­lems, whether they lead to fraud or envi­ronmental damage or workplace hazards are going to create the greatest outrage.

"But it's easier for companies to look at outside mechanisms than it is for them to conduct a thorough self-analysis, to look at their own systems and norms of behavior. Yet many of the crises of the past few years are things the companies involved should have seen coming: Beech-Nut selling sugar and water as apple juice, compensation sys­tems that incite fraud. Some of them are in a legal gray area, but in public relations terms they are black and white."

Says Jim Lukaszewski, president of The Lukaszewski Group: "The worst possible bad news that can befall us and our organizations is almost never caused by enemies, competitors or foreign factors. It is almost always caused by ourselves, our organization, or a well-meaning friend."

Because it requires such a commitment to self-examination, reputation manage­ment has to be the responsibility of the CEO, according to Alan Towers, because the CEO is the only individual with the moral and practical authority to ensure that reputation issues are at the top of the corporate agen­da. In this model, the public relations department exists to counsel the CEO on the likely reputation impact of his or her decisions, and to ensure that the impor­tance of reputation is effectively communicated within the corporation and to external audiences.

"The CEO is the chief reputation officer whether he likes it or not," says Towers. "You could say that reputation management is the CEO's only com­munications challenge. It's the only thing a CEO needs to know about communication."

While many CEOs, particularly in larg­er, more sophisticated companies, now clearly recognize the value of a good reputation, the majority clearly does not. The PR profession as a whole has failed to show the relevance of an organization's values to the bottom line, and most experts agree that until they can do so, PR will continue to be regarded as a secondary concern.

"I believe there is a role within a cor­poration for a conscience," says Dick Hyde. "That role can properly be filled by PR people. But you will never convince the CEO if you discuss your role in those terms. You have to make the CEO understand that the corporation's reputation is an asset, and that it needs managing like any other asset. You need solid, pragmatic evidence to show that the corporate reputation is linked to the bottom line."

Hyde agrees that there are few economic models available to prove this connection – although the work of Harvard's John Kotter, explained in his recent book Corporate Culture and Performance provide more sub­stantial evidence than has previously been available—but points to a wealth of anecdo­tal evidence, and companies brought down by failures of relationships with various publics: Eastern Airlines, A.H. Robins, Johns Manville.

"There are those who will invest only in companies that conduct business by a set of ethical standards," Hyde says. "There are college graduates who will choose which company they want to work for based on the company's reputation. And there are some consumers who make purchasing decisions based on what they know about a company's record on the environment and other key issues."

Reputation, Hyde agrees, is more important today than ever. Not only is the public more demanding than ever before, but long-established legal prin­ciples are changing to reflect the public's concern, holding both managers and direc­tors personally responsible for the actions of a corporation to a far greater extent than in the past.

Mary Woodell warns that executives and directors are being held accountable for the actions of hundreds of people under their supervision but from whom they are far removed. This "failure to supervise" argument for guilt has gained increasing acceptance, she contends. It holds that even if an executive did not know of wrong­doing or corner cutting, he or she should have known.

"It effectively voids ignorance as a defense," Woodell says, "placing responsi­bility on managers for subordinates' actions. Similarly, subordinates can now defend themselves by claiming that a manager's lack of response is an implicit endorsement. Managers should never take on a question­able enterprise unless they are satisfied on the front end."

If legal standards on accountability are changing, they continue to lag public expectations. Woodell attributes the heightened expectations of the public—or, more precisely, the refusal of many people to take business at its word—to demographic changes. Considerable power today resides in the hands of individuals who came of age in the Watergate era, she points out, and many of them are skeptical of institutions in general, from government to industry to media.

"People don't care about legal angels dancing on the heads of pins when they make decisions about who they trust and who they don't trust. Sometimes, I think it's more a case of legal pinheads dancing on angels. A defense based on the letter of the law is not going to be very beneficial in the court of public opinion."

Public health and safety concerns have become dominant market forces.

Shareholders are more and more vocal, demanding accountability for environmen­tal policy. Plant communities and labor unions no longer hesitate to take action against a perceived offender, and customers are under pressure to do business with more responsible companies.

A recent study by The Roper Organization found that most Americans felt environmental and safety were more important that corporate profits, and that the public's reluctance to

put economic interests before safety and environ­mental concerns had grown more intense over the past decade, despite a deeply troubled economy. For example, the share of adults opposed to postpon­ing stricter emissions standards on cars grew from 51 % to 70% between 1981 and 1991.

David D'Alessandro, a former public relations man turned president of the cor­porate sector of John Hancock Financial Services, warns that in the 1960s, 55% of consumers had great confidence in business executives, but that by the `80s that figure was 18%. He blames business, arguing that few of them understand how to build and develop a reputation. He cites the following common fallacies:

  • You can make and sustain an image overnight through one benevolent act. Many Exxon executives, for example, were shocked to find that when the Valdez oil spill occurred, groups to which they had made corporate grants were critical of the corporation;
  • Only public relations and advertising are responsible for reputa­tion. "Everyone is respon­sible for image building," D'Alessandro says. "From the mail room to the CEO to customer service.";
  • You don't need to make any investment in your image as long as you can handle a crisis;
  • You can control the media through money and influence;
  • You have to change your image con­stantly to keep up with trends or competi­tors. Classic Coke was one example of this problem; Merrill Lynch's abandonment of its "bullish on America" theme another. Both companies came to realize their mis­takes and quickly got back to basics.

Good reputation management also demands that PR pros do a better job than ever before of understanding and communicating to management the external environ­ment. Public relations people need to spend more time listening to employees, cus­tomers, the media, community organiza­tions, to provide an early warning system about issues that might impact the corpo­rate reputation in the future.

Sam Ostrow, head of the worldwide public affairs practice at The Rowland Company, points to McDonald's to illus­trate the point.

"McDonald's is a company that for the first 25 or 30 years of its history enjoyed almost uninterrupted success," he says.

"They were ahead of the curve in terms of understanding how to manage their reputa­tion, pushing service, quality, cleanliness. They became the dominant company in their business. But they slipped behind in two important areas—nutrition and the environment—because they failed to antici­pate them, and they took a hammering from activists and from the media. They recovered, and now they are again commit­ted to being ahead of the curve."

0 ne of the reasons for McDonald's success over the years, Ostrow con­tends, is that the company places enormous emphasis on even senior manage­ment being close to the consumer. Everyone at the corporation, from CEO Michael Quinlan on down, has spent some time working in a McDonald's restaurant. Most large corporations, Ostrow says, are run by people who started their career at headquarters and have never spent any time in the real world, far removed from the company's key publics. PR people have to be able to bring them the real world per­spective.

Unfortunately, many corporations continue to require crisis to hit before the value of crisis preparedness, in any form, becomes apparent.

"Crisis management planning in the absence of crisis seems to elicit two kinds of response from management," says Jim Lukaszewski. "It's either a minimal-to-zero desire to conduct preparation and analysis beyond operational solutions, or an almost adolescent arrogance that managers and their people can handle themselves whatev­er happens."

Lukaszewski explains this by pointing out that that corporate executives must be pragmatists first and foremost: that they must deal with today's problems today while assuming that the organization will continue to operate under similar or at least predictably dissimilar conditions tomorrow.

One of the problems managers face is that many organizations do not encourage line executives to identify problems. Lou Capozzi, senior vp at Manning Selvage & Lee, believes most corporate cultures encourage man­agers to ignore crises or signs of impending crisis, and to avoid any discussion of controversial issues, par­ticularly in the media. "Managers who come up through traditional routes believe that in the short term the best thing that can hap­pen to them is that their names not appear in the local newspaper in connection with a particular crisis," Capozzi says. "They are discouraged from reporting problems or potential crises to their superiors, and so people ignore problems in the hope that they will go away, or someone else will discover them and they will become someone else’s problem.

Capozzi recalls working with a major corporation that faced a health scare in one of its build­ings. There was a possibility that as many as 7,500 employees could be affected, yet the problem went unreport­ed for several weeks because the engineer who discovered it felt he would be repri­manded for bringing it to the attention of management, and once management was made aware of the situation, the manager in charge did not wish to close the building because of the negative publicity it would attract. This despite the fact that 7,500 peo­ple were at risk and negative publicity would clearly be much greater if they were hospitalized and if the media discovered that management had been aware of the problem.

"In fact," Capozzi recalls, "it was only after workers were overcome and had to go to hospital that the problem was brought to attention of the corporate affairs depart ment. That's the way many companies operate, even today, and it's the way prob­lems escalate into crises."

Arthur D. Little chairman John Magee agrees: "Managers often are indoctrinated not to report bad news—unless they can also report a happy resolution."

There are other factors inhibiting cor­porations dealing with crises, most signifi­cantly the conflict between legal concerns and public relations interests. Traditionally, PR people have lost more of these argu­ments than they have won, since legal coun­sel is perceived within many organizations as being better qualified and more in touch with bottom line con­cerns.

However, there are indi­cations that the balance of power is shifting, and that many more sophisticated corporate attorneys understand the communi­cations demands of a cri­sis situation better today than was the case in the past.

"A crisis poses serious financial risks, including significant declines in earnings, share values, and overall credit rating or borrowing power," says Arthur D. Little's John Magee. "It also poses significant ques­tions of liability. A key question is whether it is more important to limit a company's legal exposure or to respond to the public interest. We believe responding to the public interest best servces a company in both the short and the long term.”

Nevertheless, Magee concedes that many com­panies approach crisis as though limiting liability was the first—even the only—priority. Financial liability can be huge and, he says, legal counselors often articulate legal concerns persuasively while counter-arguments by a public affairs or personnel office can sound weak or vague. This legalistic approach may be the riskiest, Magee believes.

"One problem is that a company may delay steps to contain damage. Lawyers may warn that aiding victims can be interpreted as an admission of guilt. In one case, a dis­charge from a chemical plant spread a toxic contaminant to a residential neighborhood. The firm's public affairs officer proposed sending in clean-up teams and making immediate cash grants to help residents temporarily relocate. Legal counsel, howev­er, argued that assistance should be contin­gent upon a release from further further lia­bility. Faced with the forms, many neigh­bors turned to aggressive plaintiffs' lawyers for advice. The irony is that the company's counsel admitted that assistance would not have significantly changed the firm's total loss exposure."

Magee says his company recom­mends drawing on legal advice hen it is available, but not delaying action on its account.

Virgil Scudder, president of his own crisis training company, Virgil Scudder Associates, agrees that legal concerns are probably the greatest single factor that leads companies to mishandle crises. Often, he says, fears about liability create an atmo­sphere in which the obviously decent, ethi­cal thing to do is made to look like a high risk strategy, and so executives who are used to playing it safe will often choose to do nothing.

"Even today, attorneys will often advise the company not to say anything," Scudder says. "While the public relations person is urging the company to say every­thing it can. Someone has to find a compromise. But that compromise should be on the side of public relations, because the public relations person's case is being won or lost right now, while the legal case will not be fought for several months, perhaps even years."

And there is a mounting body of evidence that the way a corporation and its actions in the wake of a crisis are perceived can have an impact on the conduct of later legal action. Exxon, for example, saw its ini­tial settlement agreement with the authori­ties over the Valdez oil spill thrown out, with the judge citing overwhelming public sentiment that the fines were not high enough. Other companies, such as Ashland Oil have seen legal settlements reduced because of their swift and sympathetic response.

"In crisis it comes down to the question of whether you are the victim or the perpetrator," says Virgil Scudder. "Are you good guys who had an accident, or are you bad guys who carelessly despoiled the environ­ment? That's a question that is often decid­ed within the first couple of hours of crisis and the answer will depend on how much preventive action you have taken and how well-prepared you are to deal with the crisis in question."

One suggestion Scudder has for com­panies in high-risk industries is that they should make sure that before any crisis hits, the public understands what it is they do. He cites the petrochemical industry as an example. While modern life would be incalculably less comfortable and convenient without petrochemical products, because few petrochemical companies deal directly with the public, the public has a very limited understanding of the contribu­tion they make to society, and few compa­nies have done anything to address this bal­ance.

"If a company only comes to the pub­lic's attention when there is a crisis, when it does something wrong, the public is going to have a very negative impression of that company," says Scudder. "Companies need to communicate more in times of calm about the value they bring to society, not just in terms of the economy but in terms of things that people come into contact with use in the daily lives."

Another example, Scudder says, is the railroad industry that transports the majority of America's toxic chemical waste and many other unpleasant items. The Association of American Railroads, he says, needs to communicate that it provides the safest means of transportation for such material, that its accident rate is extremely low compared to that of road transport, and it needs to communicate these facts in advance of any crisis, to media in every community that might be affected by an accident.

Dick Hyde carried out just such a pro­gram for a number of utilities in the mid­west in the '80s. These organizations were preparing to ship spent nuclear fuel by rail, and along with Hill & Knowlton they went into every community along the route, explaining why the material was being shipped by rail, why it was being shipped along a particular route, and what safety precau­tions were in place.

"We knew going in that there would be opposition whatever we said," Hyde says. "But we also felt that the-more knowledgeable people were about what we were doing the more comfortable they would be."

Such communication may not elimi­nate the negative impact of crisis, but it can insulate a company.

"There will always be those people who would rather practice good preventa­tive medicine that first aid," says Alan Towers. "Merck, Disney, J.P. Morgan, these are companies that understand the value of a good reputation, who understand that the right reputation can be an asset in the marketplace, and who are managed in a way that maximizes the value of that reputa­tion."

Towers admits that even companies with great reputations experience crises on occasion, although he suggests that it is likely to happen less often, because the rep­utation management heads off potential trouble. Moreover, when crisis does strike, as it did when a crazed gunman shot up a McDonald's franchise several years ago, the corporation is more apt to respond well and to have a reservoir of goodwill to draw upon. This reservoir of goodwill is not, in itself, enough, however. Corporations that manage their reputations effective­ly on a day-to-day basis need to apply the same principles to their actions in crisis. However, for these companies, cri­sis management is not qualitatively different from on-going reputation management, although it will provide quantitative chal­lenges. It is these challenges of scale that the traditional crisis manual can help a cor­poration meet.

It is also important to understand the range of responses an organization can make, and what the impact of those responses is likely to be on the audience and on the reputation of the organization. Michael Klepper, media relations expert and president of Michael Klepper Associates, divides crisis management strategies into three basic approaches: disas­sociation, misassociation and association. 

Dissociation, Klepper says, is a technique by which the organiza­tion distances itself from events. He cites Johnson &Johnson's reaction to the Tylenol tragedy as an example: the company was able to portray itself as the victim rather than the perpetrator of the crisis and thus maintain public confidence. "This strategy can prove difficult if you are the wrongdoers," Klepper says, "but it can still be invoked in the sense of sharing responsibility. Place the unfortunate cir­cumstance in which your organization finds itself within the context of all the positive contributions you've made over the years." Klepper describes misassociation as a "hardball" strategy, calling for an organiza­tion under siege to question the motives and the credibility of its opponents, casting doubt upon their causes, tactics or people. Most examples of this technique, he says, have been in the political arena, but there are instances where it has been used suc­cessfully in the business world, most notably when Consumer Reports alleged that the Suzuki Samurai was unsafe.

In that case, Suzuki and its PR agency, Rogers & Associates, took an unusually aggressive stand. Rather than recalling the product, or making the traditional expres­sions of concern, Suzuki insisted that its product was as safe as any in its category and accused Consumer Reports of scare mongering in an attempt to increase subscrip­tions and raise funds. The vehicle was eventually vin­dicated.

"But the best of all strategies in a crisis remains the proactive association," says Klepper. "Here, the organization immediately makes itself available to the media and takes full responsibility for its misdeeds, speaking openly and forthrightly. It admits the wrongdoing and uses that moment to reassure the public that it has a responsible program in place to lessen the impact of the crisis on others.

"Since it has been said that people make up their minds about you in the first 30 seconds of your response, your words immediately following a crisis are criti­cal to restoring public confidence. Also, it's best

to get all the bad news out at once, instead of having it leak out in fragments that only prolong the negative story."

That's a lesson recent crisis-prone companies such as Dow Corning and Salamon Brothers learned the hard way, allowing negative information to reach the public in dribs and drabs (presumably at the insistence of lawyers) and thus prolonging their crises and the belief that they were obfuscating. Ashland Oil, on the other hand, took full responsibility for its Monongahela River oil spill and benefited not only in terms of reputation but also in terms of the eventual legal settlement, which took into account the company's vol­untary clean-up efforts.

James Lukaszewski, and others insist that organizations can even profit from bad news, if they handle the crisis well. Lukaszewski cites Ashland, Chrysler and Johnson &Johnson as examples of compa­nies that have done

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