Lessons From the Top 10 Crises of 2006: Part One
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Lessons From the Top 10 Crises of 2006: Part One

If there’s a unifying theme among the largest crises of 2006, it’s the fact that most of them simmered for several years before coming to a boil. If there’s a second common element among these crises, it’s that bad things can happen to good, or even (once) great companies.

Paul Holmes

If there’s a unifying theme among the largest crises of 2006, it’s the fact that most of them simmered for several years before coming to a boil. Among those listed in this week’s issue (the story will be concluded next week), HP’s board of directors has been dysfunctional for at least five years before self-immolating through its investigation of a leak so innocuous it barely registered outside the boardroom walls; BP’s management problems, involving cost-cutting and corrupt practices in its U.S. operations, date back a similar number of years; and the difficulties of the Coca-Cola and Pepsi brands in India have their roots in a water shortage four years ago and allegations about pesticide levels that were first raised in 2003. In all these cases, the company appears to have continued to conduct business as usual even as a slow fuse burned down to an inevitable explosion. If there’s a second common element among these crises, it’s that bad things can happen to good, or even (once) great companies. HP was for many years among the most respected companies in America, indeed the world. Its founders, Bill Hewlett and David Packard, are revered for creating a company that successfully balanced growth and profitability with a culture that served all stakeholders, but especially employees. BP, meanwhile, has been hailed by business writers and activists in recent years for its willingness to consider alternative energy sources and its outspoken—by oil industry standards—position on global warming. Its problems over the past 12 months have led critics to question whether its efforts over the past few years—into which it has poured significant resources—amount to anything more than “greenwashing.” In other words, our list of the biggest crises of 2006 is—as it seems to be every year—a salutary reminder to all companies, no matter how strong or successful or well-regarded, that a reputation that has taken a lifestyle to earn can unravel in a matter of months or even days. And it’s a reminder that the most damaging crises are rarely caused by sudden, unexpected events, but are rather the result of internal failures, the inability—or reluctance—to grapple with troublesome issues before they find their way on to the front pages of national newspapers and turn into full-fledged crises. 1. Hewlett Packard Spy Scandal The Hewlett Packard boardroom has been a hot bed of conflict and intrigue for the past five years, since the company—then led by controversial chief executive Carly Fiorina—announced its plan to acquire rival Compaq. That triggered a rancorous eight-month battle in which dissident shareholders led by former board member Walter Hewlett opposed the deal and dragged the company into a Delaware courtroom before the merger was narrowly approved. In early 2006, HP directors were apparently still feuding. In January, CNET News.com reported on a board meeting at the upscale Esmerelda Resort & Spa in Indian Wells, Cal., to discuss future strategy. The report was fairly innocuous and included no details, but it apparently infuriated HP chairwoman Patricia Dunn, who authorized an investigation that quickly spiraled out of control, with investigators employed by the company obtaining the phone records of board members and reporters, and allegedly using an ethically troubling technique known as pretexting—pretending to be someone with a legitimate interest in the records. The probe identified the source of the leak, but it also infuriated innocent board members, most notably Tom Perkins (founding partner of venture capital powerhouse Kleiner Perkins Caufield & Byers, who had advised Dunn to simply ask directors whether they were the source of the story—an option she apparently rejected as far too sensible and not nearly complicated enough. It was Perkins who brought HP’s egregious invasion of privacy to the public attention in September, triggering an avalanche of media coverage and a government investigation that would ultimately result in Dunn’s ignominious departure. At a time when the technology industry as a whole is dealing with customer concerns about data protection, a crisis involving deliberate invasion of privacy was clearly a disaster. “Let’s assume that HP’s board of directors was right to want to find out who among them was secretly talking to the press,” says Steven Silvers, principal of Denver public affairs firm GBSM and a prominent public relations blogger. “In hiring investigators that used identity theft to obtain private phone records, HP used a hydrogen bomb to kill a skunk. The company’s actions and subsequent rationalizations vaporized leadership’s credibility. The fallout on the company’s reputation will last for years.” Silvers also marvels at the fact that HP appears to have allowed legal advice—its strategy was apparently guided by high-powered Silicon Valley attorney Larry Sonsini—to trump any public relations considerations, despite the entirely predictable way the story played out in the media. “Even some of the most talented in-house and outside attorneys make bad PR advisors,” Silvers says. “They see the world through precedents and precise subtleties…. They don’t grasp the crazy, market-driven dynamics by which corporate scandal creates news and news creates corporate scandal. They underestimate the transparency, agendas and speed of the information economy.” The fact that the company’s actions ultimately came to light is further evidence that we are all living in an age of transparency, that it makes sense to conduct corporate policy on the assumption that every decision will one day find its way on to the front page of the national news media. “This is a lesson to corporate America to be mindful if you feel uneasy about a particular action than it probably is not worth taking the risk and negative exposure that could result,” says Matthew Harrington, who heads Edelman’s New York office. “In this age of greater transparency and a legal and governance universe poised to punish it simply behooves companies to strive to greater standards of behavior. I would like to believe if a senior communications person had been at the table when some of this process was being considered that person would have shut it down.” The decisions made by Dunn and her colleagues looked even less judicious given HP’s proud heritage. Once one of the world’s most respected companies, HP vaunted commitment to ethical values has been permanently tarnished by this scandal—something chief executive Mark Hurd acknowledged during a press conference and later in testimony before Congressional testimony. “What happened at HP was more than poor judgment,” says Richard Torrenzano, chief executive of New York public relations firm Torrenzano & Company. “It defied common sense, and was blatantly wrong. But what is perhaps most troubling is that each of these actions flew in the face of HP’s proclaimed corporate culture and ethos The result is that it unwound any possible goodwill that Mark Hurd built post-Carly Fiorina. HP will now always be a poster-child for corporate espionage, illegal tactics at the board level, and self immolation.” Quite apart from the public relations implications, the use of questionable investigative techniques made no sense on a purely pragmatic level. As a prominent Los Angeles-based private investigator told MSN, there was a simple, legal way for H-P to handle the matter: The chairman could have asked directors to sign a form that released their personal phone records. It could have told directors that the company could not force them to comply, but failure to release the data would have signaled that they were unwilling to cooperate with a reasonable request by management. The chairman and CEO could have signed the release themselves to demonstrate their commitment to learning the truth. “The HP mole-hunt also highlights how leaky executives with their own agenda will increasingly be an issue,” says Joanne Milroy, a partner at London-based public relations firm Eloqui. “Many business leaders are as media savvy as celebrities these days and some, if they feel their reputations are being threatened, will increasingly be tempted to play this type of dangerous media management game.” Still, most observers believe HP can eventually recover its reputation. “As far as the art of crisis management goes, there are no winners here,” says Al Tortorella, who heads the crisis communications practice at Ogilvy Public Relations Worldwide. “Virtually everyone involved—the board of directors, the management, the consultants, the lawyers, the media—should hang their collective heads in shame for bringing this iconic company low. The only fix here is time. Hopefully, the respect for the founders will eventually return the HP name to its rightful place in corporate history.” 2. BP: Beyond Prudhoe For the past seven years, BP has presented itself as a socially responsible oil company, with an advertising and public relations campaign that has boasted of the company’s efforts to move “beyond petroleum,” acknowledging the dangers of global warming and investing in solar and other alternative energy sources. In the process, BP’s longtime chief executive Lord John Browne has emerged as one of the most respected business leaders in the world, a statesmanlike figure. But a series of problems in the company’s U.S. operations, dating back six years—pleading guilty in 2000 to knowingly failing to report the release of a hazardous substance in Alaska, safety violations at service stations in California, a 2005 explosion at a Texas City refinery that killed 15 workers, hurricane damage to a facility in the Gulf of Mexico, its trading arm was accused of price-fixing—culminated in the spill of several thousands of crude oil from its Prudhoe Bay facility in Alaska in March of 2006. Those incidents threaten to undermine the company’s reputation (a gleeful editorial in The Wall Street Journal this week unfavorably compared BP’s recent safety record to that of its villainous competitor ExxonMobil) and tarnish Browne’s legacy as he prepares to stand down earlier than expected this year. There is little question that the incidents represented more than just a series of unfortunate events. The Texas City blast, for example, was caused in part by a 25 percent reduction in the budget for the plant back in 1999, which investigators concluded led to a progressive deterioration in safety. Employees, meanwhile, told of a culture that discouraged the reporting of accidents or work-related injuries. One worker told investigators, “When you get hurt, you drag yourself out of the gate, if you’re able, and say it happened at home.” A report by former U.S. Secretary of State James Baker, commissioned by BP management, found that “BP has not always ensured that it identified and provided the resources required for strong process safety performance at its U.S. refineries…. BP tended to have a short-term focus in its U.S. refining operations, and its decentralized management system and entrepreneurial culture delegated substantial discretion to U.S. refinery plant managers without clearly defining safety expectations, responsibilities or accountabilities.” The problems began to build on each other, says Chris Nelson, senior vice president and director of issues and crisis management at Ketchum in New York. “The litigation resulting from the Texas City explosion served as an unfortunate backdrop for BP’s Prudhoe Bay pipeline problems, forcing BP to fend off allegations it cut corners in its operations.” And the whole crisis was exacerbated by BP’s very public leadership on environmental issues. “Some news stories about these events contrasted BP’s operational troubles with the environmental promises it made through its ad campaign,” Nelson points out. Mark Harris, who heads the crisis communications practice at U.K. public relations firm College Hill, agrees. “The issues that BP faced during 2006 are evidence that corporations are still aspiring to standards of responsible behavior and publicizing this behavior, while internally either failing to live up to these standards, or at worse acting in a manner that hampers or intimidates responsible behavior. “It is imperative that companies ensure that a culture or behavior is totally understood internally and that all employees, from executives down to those on the rigs or shop floors, know their role and accept their responsibility prior to informing external stakeholders and through the media the wider public. Failure to do so will result in embarrassing revelations or incidents and disasters. These in turn will be followed by investigations and punishment which will damage reputations, both corporate and individual, sap morale, and may threaten future commercial success.” While the company’s lack of oversight clearly helped to create the crisis, by the end of the year there were multiple indications—including the commissioning of the Baker report—that it was addressing the roots of the problem. In October, the new head of BP’s operations, Bob Malone, launched his own internal blog, Dialogue, as part of an effort to improve employee communications. The company also established a 24-hour complaints hotline, created a new ombudsman position and launched an employee communications campaign to encourage employees to use both. “I didn’t even know what a blog was until just a month ago,” he told employees in an e-mail. “But evidently in this cyber-world we live in, a blog enables two-way communications.” He also acknowledged “some serious mistakes over the last 18 months. We have apologized and accepted responsibility for these mistakes. We are taking action. We are learning from the past and we are working hard to make BP America a stronger company. We will not change what we value. Our commitment to operational integrity, safety, the environment, diversity—all the things we stand for—has never been stronger.” The company also brought in Stanley Sporkin, a retired U.S. federal judge, to receive and investigate employee complaints, although many employees expressed skepticism about the changes and said they would continue to leak complaints to activist Chuck Hamel, who has lobbied Congress and regulators to force improvements at BP operated facilities. “I don’t think they have been effective at addressing problems previously,” one employee told the Financial Times, “so why would this be any different?” Says Nelson: “Crises are moments when companies get to demonstrate publicly whether their slogans and taglines are ways of life or just tools to seduce customers. Over time, BP should find moments in time to demonstrate to stakeholders that it’s walking the walk.” 3. Coke and Pepsi in India When a drought struck the southwestern state of Kerala, India, in 2002, political activists staged protests against soft drinks giants Coca-Cola and PepsiCo, blaming the beverage companies for withdrawing too much water from local aquifers. Pepsi quickly showed that its plant drew water from a separate deep-well aquifer, one that had no connection to the city’s water source, but also took action to improve the community well. Protests against Coca-Cola continued, with activists further emboldened by a 2003 report from the New Delhi Center for Science and Environment, alleging dangerously high pesticide levels in the companies’ products. In 2004, the Coca-Cola plant in Kerala was shut down by the local government, and activists again turned their attention to Pepsi—until local residents, grateful for its commitment to the community—came to its defense. But controversy surrounding the two companies has stubbornly refused to go away, and surged again this year with another report from the CSE, which claimed that pesticide residues found in Coca-Cola and PepsiCo brands were 24 times higher than new safety standards on soft drinks—prompted by the group’s 2003 report but not yet in effect—developed by the Bureau of Indian Standards. The study sampled 57 finished drink products at 25 different Indian Coca-Cola and PepsiCo plants, and revealed pesticide levels that are “clearly unacceptable as we know that pesticides are tiny toxins and impact our bodies over time,” said CSE director Sunita Narain. Both Coke and Pepsi have attacked the CSE claims in advertorials published in local newspapers, and Coca-Cola used its website to provide background information on its testing and quality procedures and has offered to take Indian customers on guided tours of its processing plants to see for themselves how seriously it takes its commitment to quality. Pepsi, meanwhile, pointed out in ads that pesticide levels in Indian teas and milk are far higher. The companies formed committees in India and the United States, working in parallel on legal and public relations issues. They commissioned their own laboratories to conduct tests, and waited until the results came through before commenting in detail. “This approach quickly backfired,” the International Herald Tribune reported in August. “Their reticence merely fanned consumer suspicion. They became bogged down in the technicalities of the allegations, instead of focusing on winning back the emotional support of their customers.” Executives from both companies agreed with that diagnosis. “We have some way to go to restore consumer confidence in our brands,” said Coca-Cola communications director Kari Bjorhus. Added Rajeev Bakshi, who heads Pepsi in India: “Has our side of the story got across to the consumer yet? Not really. I am concerned about that.” There’s no doubt that the crisis was exacerbated by the fact that Coke and Pepsi are giant multinational corporations at a time when the developing world is disquieted at the prospect of increasing globalization, and powerful symbols of America at a time when the reputation of the U.S.—and its corporate culture—is in decline. “As multinationals, the scrutiny is going to be a little higher, and the public is going to make a judgment,” Madan Bahal, managing director of Mumbai-based corporate and financial specialist AdFactors Public Relations told BusinessWeek last year. “And if the judgment is that there is something fishy going on, it will harm you.” “Coke and Pepsi’s troubles illustrate the problem of doing business in an argumentative grassroots democracy, where controversy can spell trouble for big brands and where multinational corporations are victimized by easily slighted nationalism,” says Richard Levick, chief executive of Washington, D.C., crisis communications firm Levick Strategic Communications. “NGOs may have credibility in the United States, but here—in a nation that counts a socialist like Nehru among its revered founders, and where governments like Kerala’s are strongly entrenched—they enjoy a particularly emphatic legitimacy.” CSE is a particularly well-respected NGO, having achieved national recognition. Last year it was awarded a $150,000 Stockholm Water Prize presented by King Carl XVI Gustaf of Sweden for its research and advocacy in rainwater harvesting. The companies’ slow response also added to their problems. “The thing that makes this issue really, really bad is that this isn’t the first time it’s come up,” marketing guru Al Ries told the International Herald Tribune earlier this year. “I think the companies are going to take a big hit in sales over the next couple of years.” Indeed, soda sales in India declined by 16 percent last year, while consumption in China was up 14 percent, according to Beverage Digest. “Coke and Pepsi are to be commended for their willingness to confront the issue directly,” says Levick. “However, Coke and Pepsi made an unfortunate timing error. CSE’s accusations had already fired the public imagination and the crisis swept the nation. Subsequent attacks, far from quelled, were unrelenting and ferocious, in some cases led by publicly hostile local bureaucrats. “The earlier one meets a crisis head-on, the better.” While Coca-Cola attempted to use third parties—including supportive bloggers—as proxies, “there must be a central controlling voice. The beverage companies—or any companies under attack—need to provide that initial voice. The blogs and third parties will then provide the reverberations that form public opinion. They cannot be left on their own to do it or you will lose control. Unfortunately, in the early days of this crisis, the cola companies, while highly active, were fairly quiet publicly.” In August, the dispute reached a new stage when Kerala, home to about 30 million people, banned the Indian subsidiaries of both companies from making or selling their beverages in the state. Several other regions, including the Western coastal state of Gujarat and Madhya Pradesh in central India enacted partial bans on the sale of Coke and Pepsi at schools and government offices. And the Hindu nationalist Bharatiya Janata Party called for a national ban, while the Indian Supreme Court ordered Coca-Cola to divulge its formula—secret for more than a century—so government investigators can have more accurate readings of pesticide levels in its products. The implications of the protests in the subcontinent are serious enough—India is a $2 billion market and Coca-Cola and PepsiCo enjoy 80 percent share—but the crisis has taken on an international dimension, with several colleges and universities in the United States and Europe discontinuing their business with one or both of the companies. Ram Baliga, professor of management in the Babcock Graduate School of Management at Wake Forest University, and Rick Amme, president of Amme & Associates in Winston-Salem, cite Sun Tsu’s The Art of War, which recommends that strategists should “know thine enemy as thyself.” The aphorism for global corporations, they say, should be to “know the cultures, histories and politics of your foreign partners as thine own.” “American managers often don’t,” says Baliga and Amme. “They prefer living in ‘golden ghettos,’ enclaves isolated and insulated from the host country. Therefore they fail to see cultural, historical and political potholes. True cultural immersion can help managers better deal with a crisis and perhaps forestall one and, significantly, grow business.” 4. The Danish Cartoon Crisis In September of 2005, the conservative Danish newspaper Jyllands-Posten decided to confront the issue of self-censorship by European media reluctant to offend Muslim sensibilities by publishing a series of cartoons featuring the prophet Mohammed. Any image of the prophet is considered a grave offence by many Muslims, and the mocking tone of the cartoons simply exacerbated the problem. Controversy simmered for months, finally exploding into full-blown crisis in early 2006, when a group of Danish imams, angered by the Danish government’s refusal to act against the newspaper, embarked on a tour of the Middle East. Those offended by the cartoons targeted not Jyllands-Posten or even its advertisers, but the Danish government—which had offered a tepid defense of free-speech that was nonetheless sufficient to add insult to injury—and to all Danish companies. At one stage, dairy giant Arla Foods, which makes Lurpak butter, estimated that it was losing £1 million a day because of a boycott of Danish products, and toy company Lego and specialty pharmaceutical company Novo Nordisk were also targeted. This was not the first time activists had threatened to boycott companies based on their nationality. After the invasion of Iraq, some European groups had called for consumers to avoid American products, while in the U.S., neo-conservative pundits and Republican members of Congress had called for a boycott of French products (and called for French fries to be renamed freedom fries) in retaliation for the refusal of the Chirac government’s refusal to support American aggression. Just as Jyllands-Posten had a right to run these cartoons, angry Muslims surely had a right to protest and to express their anger. They had a right to boycott the publication, and its advertisers. But the extension of that boycott to cover the entire country of Denmark and Danish products raised other issues. It changed the Muslim reaction from protest from about a specific example of offensive speech into a protest about the very concept of free speech itself and suggested the protestors would not be satisfied until the west abandoned the single most important defining characteristic of a free society. “In many European countries there is a sense of secular values being under fire from conservative Islamic traditions among immigrant communities,” says Rune Wergeland, who heads the European crisis practice for Burson-Marsteller. “Many commentators see the cartoons as a response to this. There are also issues of integration: how much should the host society compromise to accommodate immigrant populations, and how much should immigrants integrate into the society they are making home. “Some commentators have defended the cartoons, saying they address fault lines in changing European societies that need to be discussed more openly. However, Arab and Muslim commentators say the issue and furious reaction must be understood in the context of Islamophobia, the perceived oppression of Muslims in the Middle East conflict and the US-led ‘war on terror.’” In that context, the challenge faced by the Danish government, and the companies threatened by boycott, was exacerbated by comments from politicians who seemed to abandon their belief in free speech in the face of an angry reaction from Islamic leaders. French president Jacques Chirac (“Anything that can hurt the convictions of another, particularly religious convictions, must be avoided”) and a Bush administration spokesman (“Anti-Muslim images are as unacceptable as anti-Semitic images, as anti-Christian images, or any other religious belief”) were both equally unhelpful. Companies caught up in the crisis could legitimately distance themselves from the cartoons and repudiate those publications that chose to reproduce them. They could—and perhaps should—withdraw their advertising from those publications. But the protests against Danish products were more violent than anything that had come before and it was clear that the most virulent critics of the Danish position would not be satisfied with statements of regret or expressions of sympathy with the offended party; they wanted the Danes to repudiate the very notion of free speech. Mary Rayner, of the U.K.’s Ethical Consumer organization, pointed out the difficulty facing the targeted companies. “Normally, the purpose of a boycott is to force companies to change their actions, but this is different. Arla has no real links to this newspaper so, in a sense, boycotting it is not logical. It is very difficult for Arla to respond because there is no link between it and this situation.” From some experts, the advice was simply to maintain a low profile. “If it is possible, laying low is the best thing you can do,” said Al Geduldig, a senior consultant with Fleishman-Hillard. “Sometimes the best thing to say is nothing.” And Michel Ogrizek, then vice chairman of Edelman, suggested that the companies involved “must adopt a low corporate and marketing profile—not to become the target of choice versus their Danish peers in their market and industry sector.” A more proactive approach was recommended by former Ambassador Elizabeth Jones of APCO Worldwide, an advocate of what she calls “business diplomacy.” Among her suggestions: reach out to business colleagues in Muslim countries for advice on ways to address the problem in the local context; to engage moderate Muslim clerics and politicians; to address local media outlets, such as al-Jazeera; and to persuade the Danish government to add an element on the study of Islam to the Danish public school system and to underwrite educational programs. Says Jones: “The principles of business diplomacy involve engaging with any sector of a society that might influence the outcome in a way that allows Danish business to overcome the Muslim world boycott and restore the good name of Danish companies and of Denmark itself. There is no limit to the sectors of society with which to engage. Successful business diplomacy requires an integrated, proactive approach to get ahead of problems as much as possible—and when that is not possible, to launch damage control and repair strategies quickly and efficiently.” Wergeland, meanwhile, points out the companies with strong roots in Muslim countries were somewhat better insulated against the crisis. “Norwegian mobile operator Telenor experienced hard attacks in Pakistan, while the paint producer Jotun didn’t notice anything, because it acts local in any market it operates. That’s something to think about at a time of globalization.” Next week: The options backdating scandal, a film about conflict diamonds, food poisoning linked to chocolates and salads, a clinical trial gone horribly wrong, and more.
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