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

In June, venerable confectionary company Cadbury Schweppes took seven of its most popular chocolate brands off the shelves in the United Kingdom and admitted that half a million bars contaminated with salmonella could have found their way into consumers’ hands.

Paul Holmes

6. Cadbury’s “Poisoned” Chocolate

In June, venerable confectionary company Cadbury Schweppes took seven of its most popular chocolate brands off the shelves in the United Kingdom and admitted that half a million bars contaminated with salmonella could have found their way into consumers’ hands—causing food poisoning among more than 40 people.

The Food Standards Authority accused the company of failing to alert the agency after a leaking waste water pipe at one of Cadbury’s factories contaminated the “milk chocolate crumb” that is blended with fillings in several products. The company had discovered the contamination in January and corrected the problem in March—but did not notify the FSA, or consumers, until June, when the Health Protection Agency launched an inquiry into the salmonella outbreak.

The company had argued that the risk was so low that it was not necessary to alert regulators, arguing that a level of 0.1 cell per 100 grammes is considered safe and that levels found in the chocolate were 40 times below that. “We found the cause of the problem, fixed it, and subsequent tests proved we were completely clear…. The scientific evidence was that the level found was way below what could have caused illness.”

But the FSA disagreed. “This is not like eggs or meat, where you cook it,” an agency spokesman explained. “The salmonella doesn’t distribute itself evenly throughout the chocolate bars. There’s a risk of salmonella infection, especially for vulnerable young people or the elderly.”

“The Cadbury salmonella contamination highlights once again three of the golden rules of crisis communication,” says Jonathan Hemus, U.K.-based leader of the crisis and issues practice at international public relations firm Porter Novelli.

The result was a torrent of negative publicity for Cadbury, one of Britain’s most beloved brands.

One lesson is that “it is very important to have cooperation between the food supplier and the government,” says Rune Wergeland, who heads the European crisis communications practice for Burson-Marsteller.

“Many have already made the point that Cadbury’s did not involve U.K. governmental agencies such as the Food Standards Agency quickly enough,” adds Joanne Milroy, a partner with U.K.-based corporate communications consultancy Eloqu. “Therefore, the company not only incurred the wrath of consumers, but also faced criticism from organizations that could have been useful allies and supporters.

“It reminded me of Shell and the Brent Spar issue. Cadbury’s just looked at the science in isolation, and made a decision based on this, rather than considering all the wider reputational issues.”

 “First, take control. Cadbury seemed to be forced into a product recall by the UK’s Food Standards Agency, many months after they first became aware of a potential problem. This meant that it was seen to be reacting to events rather than managing them, and gave the impression of being a company that wanted to hide the problem, rather than address it. This came as a major shock to the U.K. public: Cadbury is perceived as a caring, wholesome and well managed company. So, its approach to this situation jarred and raised questions as to how deeply held the company’s professed values really were. This is a major concern for the organization as it calls into question the very values which underpin the brand.

“Second, perception is all. Cadbury judged that the contamination posed no threat to human health. National newspaper coverage in the U.K. today seems to confirm this. As a result, the organization may have felt justified in not pro-actively communicating or instigating a recall. Bad move. As communicators know, all that matters is the public perception and the public mood. The subject of food safety is a burning issue in the U.K. right now, and Cadbury should have factored this into its decision-making. A better strategy might have been to take decisive action that would have created the perception of Cadbury as a well managed, well organized company and, crucially, one that put the health and safety of its customers above all other considerations.

“And finally, communicate pro-actively. Not communicating meant that the information vacuum was filled by third parties, potentially people and organizations that did not have Cadbury’s best interests at heart. If Cadbury had communicated pro-actively and early it could have set the agenda, the messages and the timing for this issue.”

Some compared the company’s response to that of the supermarket Waitrose, which voluntarily took thousands of chicken products off its shelves in October of the previous year because of concerns over possible salmonella contamination.

And things continued to get worse for the company through the rest of the year.

“You make your own luck,” says Milroy. “And Cadbury has not made any this year. As well as the salmonella recall, there has been the constant swirl of stories on child obesity and junk food,  a financial restatement because of issues in the Nigeria business, and criticism from shareholders for abandoning annual profit targets. It is a good example of a reputational crisis going from bad to worse—when each of these news stories broke, media referred back to the product recall creating an impression of bad news heaping up on bad news.”

The cumulative impact was clearly significant.

“We know that this has done real damage to the organization, both in terms of the cost of the recall [$36 million] and longer term impact on the brand,” says Hemus. “Senior management has acknowledged the financial cost; even more worrying is the damage to the brand.” He cites work by Brand Index, which monitors the reputations of hundreds of companies, which reported: “The loss of confidence in Cadbury is the greatest we have seen since we started Brand Index.”

“Now that’s a real cause for concern, and should be the wake up call for any other organizations considering a half hearted approach to crisis communication.”

7. Sago Mine Disaster

Any accident in which a dozen miners lose their lives is bound to create a crisis for the company involved, but the Sago mining disaster of January 2006 was compounded by an egregious miscommunication that left both International Coal Group—which operated the West Virginia mine—and the media scrambling to repair their damaged reputations.

At 11:45 pm on January 3, the mine rescue center received a report that the 12 miners trapped in the disaster, were alive. At 12:18 am, the rescue center received a report that the rescue workers and the survivors were leaving the area where they had been found. Company officials at the mine did not release any statements at this time, according to CEO Bennett Hatfield. “However, we were aware that numerous cell phone calls from a number of mine rescue workers and jubilant employees were made to family members and others upon receipt of this uplifting report.”

At 12:30 am, when the rescue teams came to a place where they could breathe fresh air, the mine command center was informed that there appeared to be only a single survivor and that the others were dead. In the command center, the feeling was that the report of only one survivor might be erroneous, and additional rescue teams were dispatched.

At approximately 2 am, Mr. Hatfield said, state police officers were notified and in turn were asked to notify clergy that the initial reports “may have been too optimistic.” By 2:30 am, the company decided to announce the “devastating news,” and “in keeping with our commitment, we went first to the church to tell the families, and then from there to the media center.”

The result was that for two hours the families of the victims were given false hope. But the media, without waiting for any official word, blurted the “news” of the miraculous survival of the 12 missing men all over their front pages.

Jay Rosen, who authors the PressThink blog was appalled, especially when a CNN announcement described the network’s erroneous reporting as “unavoidable,” and suggested an alternative approach for the media involved: “We screwed this up, although we came out looking okay because the Governor was wrong, and we had a wrong Congress person too. Their sources were as bad as our sources.

“We’re CNN; we’re supposed to be more reliable than anyone. Our slogan isn’t ‘Wrong when the Governor’s wrong.’ Statesmen are supposed to watch us to find out what’s going on in their world.”

The disaster “demonstrates how devastating it can be when inaccurate information is distributed,” says Chris Nelson, senior vice president and director of issues and crisis management at Ketchum. “Beyond the suffering they caused for victims’ families, the erroneous reports generated a deluge of outrage toward everyone involved, from the mining company to government rescue officials to mining regulators. In a crisis, there can be no weak links when it comes to gathering and verifying information. Even in the face of elation, crisis managers have to be professionally skeptical and ensure information is accurate.”

International Coal’s early response—it got better once it sought professional public relations advice—was hindered by the company’s low profile. A visit to its website two days later found no mention of the disaster, no statement of corporate sympathy, no information about the company’s social responsibility activities. (Even finding the site was a challenge: entering the company name into Google and you had to scroll quite a way down the page to find the company site.)

That kind of lack of communication was unacceptable in an industry where the accidents are a fact of life and can lead to tragedy.

“As it should be, the sad drama of the Sago mine disaster was focused on the human aspect of lost lives and the miscues by the rescue officials and executives of the mining company,” says Al Tortorella, who heads the crisis communications practice for Ogilvy Public Relations Worldwide. “What the industry should be concentrating on is a set of standards on how to disseminate information while the crisis is occurring so that false hopes and high expectations are labeled for what they really are.

“Mines are dangerous places and the outcomes of accidents are rarely good news for the families and friends involved. The industry long ago should have figured out a message of hope tempered with reality and used it in press relations at all mine disasters everywhere in the world.”

The corporate response was “a textbook lesson in how not to handle a crisis,” says Michael Kempner, chief executive of MWW Group. “From the beginning, it was clear that neither the officials of the Sago Mine nor its parent, International Coal Group, were prepared for a crisis of this magnitude. In a field where tragic events such as this are a known quantity, it is unfathomable that they were not more prepared to handle both the rescue and the communications with the public, and most importantly, the families.

“Appearing inept from the first report of the disaster, the company compounded the suffering of the families by allowing for ‘miscommunication’ and then not immediately correcting the false impression that their loved ones were still alive...not only was this a display of horrific judgment, but their actions were, in fact, cruel.”

Steve Cody, a principal at New York’s Peppercom, took the view that there was plenty of blame to go around: “Although the press jumped the gun, the WV state officials are even more at fault… Regardless of who made the incorrect decision on the miscommunication, today’s incident is a painful example of the need for all organizations to prepare for different types of crises by doing advance simulations and to be sure the correct policies and procedures are in place before ‘the next big one’ hits.”

Steven Silvers, principal of GBSM in Denver, agrees: “There is no question that International Coal Group violated every standard of crises management. The company’s lack of preparedness and incompetence in managing communications both within and outside the unfolding tragedy will unfortunately be studied by PR and management executives for decades to come.

“But much of that lesson will focus on the increasingly understood possibility that competing news interests will run with miraculous but unconfirmed headlines like a raging herd of snorting, blind buffalo.”

8. Options Backdating

“Like the mint wafer that caused Monty Python’s bloated, gluttonous Mr. Creosote to explode spectacularly,” the Economist suggested this summer, “the backdating of share options may prove to be a small, lethal ‘just one’ last treat for the fat cats of corporate America.”

Resentment over soaring compensation has been escalating for some time, accelerated by the growing suspicion that the amounts paid out are completely unrelated to performance, and exacerbated by the fact that the real earnings of ordinary workers are either stagnating or in decline, while their jobs are routinely sacrificed on the altar of profit maximization.

So when academic research—first reported in The Wall Street Journal in March—found suspicious patterns in executive stock option grants, an improbable number of which were awarded just before the company share price increased, the Securities & Exchange Commission launched a massive investigation and observers began to wonder whether what had been merely egregious greed might now have crossed the line into criminal behavior.

“Executive compensation is handled badly by far too many companies,” says Harvey Pitt, former chairman of the SEC and now chief executive of consulting firm Kalorama Partners. “Contrary to some views, it is not the amount of compensation that is the problem. Rather, it is the methodology by which companies award compensation and then monitor whether they have received performance, or merely a pulse, for the pay they provide.”

The practice of options backdating occurs when executive manages to move the date of a stock option back in time to when the share price was lower, increasing the value of the options. Some companies forward-dated in the event of good news, held open a grant to see where the stock would go and picked out specific dates that represented a low point in the stock, all in an attempt to reward their senior executives more lavishly. In some cases, that manipulation violated tax laws, the Sarbanes-Oxley act, and the Foreign Corrupt Practices Act, and may also have resulted in fraudulent corporate proxy statements.

“This only fosters the perception of a chronic and systemic corporate mental illness,” says Rich Torrenzano, CEO of corporate and financial communications specialist Torrenzano & Company. “You must ask the question what was learned the last three years—post Enron, WorldCom and Arthur Andersen? Is anyone at the C-suite level paying attention? The unfortunate fallout is that the vast majority of public companies, and the upstanding executives who successfully balance the conflicting agendas of their stakeholders, collectively can’t counterbalance these individual misdeeds in terms of public perception.”

At last count more than 120 companies have allegedly participated in backdating, and hundreds more have launched internal investigations to figure out whether their option-granting practices bent or broke the law. Among the prominent companies caught up in the scandal were Microsoft and Home Depot, but much of the media attention has focused on Apple, where chief executive Steve Jobs apparently benefited from backdating.

An internal Apple investigation concluded in late December, and “found no misconduct by current management,” while acknowledging “serious concerns regarding the actions of two former officers.” But the misdating of options at Apple began in December of 1997, three months after Jobs was named interim CEO, and two grants to Jobs—10 million shares in 2000, when the stock hit its quarterly low, and 7.5 million in 2001, which the Apple board has acknowledged was misdated—are among the largest in history.

Several CEOs have now lost their jobs over the scandal, and while Apple’s decision to stand by Jobs—understandable given his performance—is likely to give other companies the confidence to ride out the controversy, there is still a good chance that some senior executives will go to jail.

“Corporate profits provide enough to satisfy most shareholders’ needs, but not every man’s greed,” says Allan Hilburg, who heads the PN Consulting unit at Porter Novelli. “Options backdating is devastating on corporate and executives’ reputations because it fuels and confirms public opinion of American business. From a communications standpoint, a quick mea culpa is essential. Call it what it is: bad judgment. Immediately put in place a higher standard of corporate governance... and live up to it.  Immediately have the board compensation committee acknowledge that maybe we need to examine our corporate compensation strategies.”

At a time when Treasury Secretary Henry Paulson is talking about relaxing Sarbanes-Oxley because of its burdensome demands and alleged impact on America’s competitiveness “backdating fuels the arguments against that view. In the absence of innovative solutions for self-correcting and self-regulating, the government will fill the void at the lowest common denominator. Now is the time for leadership. Executive compensation begs to be reformed. It will be reformed. Just how depends on whether the executives, board members, lawyers and  communications professionals get busy now and play an active role in shaping what the future looks like.”

9. American Ports in Dubai’s Hands

Recent years have provided plenty of evidence that civil regulation—the restrictions on corporate behavior imposed by unofficial regulators like environmental groups and other activists—can have as much impact on a company’s ability to do business as actual regulation.

That was a lesson that DP World, the Dubia-based company that acquired Peninsula & Oriental Steam Navigation Co. of the U.K., and thus responsibility for the management of operations at six U.S. ports, learned in 2006. That deal triggered a firestorm of criticism that united xenophobic Republicans with opportunistic Democrats and culminated with news that DP World would sell its operations in the U.S. to a local entity.

The company outlined its plans—which averted a huge political embarrassment for President Bush—in a press release: “Because of the strong relationship between the United Arab Emirates and the United States, and to preserve that relationship, DP World has decided to transfer fully the US operation of P&O Operations North America to a United States entity.”

But prior to that announcement, public relations experts were generally unimpressed with the company’s handling of the issue. It was “a classic case of contributing to one’s own crisis,” says Carreen Winters, who heads the crisis management practice at MWW Group. “The  failure to anticipate the public’s reaction—and the subsequent  failure to educate the public, establish benchmarks and shape the debate about the priorities, options and parameters of port security prior to this proposal being made—is the real reason that the administration is dealing with a crisis at this level.

“That’s not to say that the involvement of a company with an ownership structure like DP World would be an easy sell under any circumstances: emotions run high when it comes to security, terrorism and the Middle East in general. But universal understanding of the selection criteria, the pool of potential qualified candidates for the assignment and the proposed oversight procedures could have gone a long way to creating an environment where the proposal could be discussed on its merits and within the context of possible alternatives.”

The company should have been more proactive in countering efforts to “portray it as some type of shadowy Arab port security group,” says Ed Cafasso, a senior vice president at Manning Selvage & Lee “instead of a relatively well-run and well-managed public business that has a proven track record of delivering a cargo handling service that is important to the global supply chain and the global economy.”

The company should also have been more aggressive about telling its story, according to Cafasso, “being open about what it does and its expertise at doing it, and invite the media and policymakers to tour its operations and meet its executives. Except among a handful of international business reporters, DP World was a blank canvas that has been caught in what amounts to a political paintball contest whose sole purpose is to undermine the Bush administration national security credentials in a mid-term congressional election year.”

Others were critical of the company’s decision to rely on the Bush administration to tell its story, “a critical mistake for all parties and placed the deal in jeopardy,” says Sam Singer, chief executive of Singer Associates, a San Francisco public affairs firm. “This is not a criticism of the Bush Administration, but a reflection of the fact that deals such as this have to be made with full knowledge of the public so as not to seem as if information is being hidden from the legislative arm of the government as well as the media and American citizens.

“Right now there is a solid reaction in the news media to bring balance to the initial criticisms of the deal. The media is researching and writing with great detail and balance about this story.  I would advise both the Arab Emirates and Dubai DP to provide as much background information as possible to the media right now.”

At the same time, a communication strategy needed to address the broader issues raised by the reaction to the deal.

“I think there is a strong benefit in reminding the American public about the international nature of the world today and pointing out how many other Arab countries already have strong economic stakes and investments in the United States,” says Singer. “This information would shed light on the fact that there is an already substantial and positive economic tie between the U.S. and Arab countries that benefits all—and no more security risk than dealing with other countries.”

Rich Tauberman, senior vice president at MWW adds: “I think what has been missing in the debate is a true sense of what Dubai is all about. It is the most western, most progressive and most business oriented place in the mid-east. Dubai has consistently has championed putting economics before ideology. 
It has become the corporate, media, financial and aerospace center of the region not to mention a shopping and tourist Mecca for westerners. I would look to tell the story of Dubai’s commercial success, long relationships with top U.S. firms and enlist some global brands to go to bat for the emirate and what it stands for.”

Richard Levick, president of Washington-based Levick Strategic Communications, which works with numerous Arab countries and companies, “the Arab world now recognizes that it needs to create more Tom Friedmans,” a reference to The New York Times columnist who has traveled extensively in the Middle East and written of the progress being made in countries such as the UAE. “There are precious few American writes who really understand the Gulf region, and the American people tend to lump the whole region together, without distinguishing those countries like the UAE that are staunch allies of the United States.”

10. Blood Diamond

In recent years, documentary makers have achieved considerable commercial and critical success with unflattering portrayals of big business, from Michael Moore’s guerrilla attack on General Motors in Roger & Me to Morgan Spurlock’s anti-McDonald’s agitprop Super Size Me. More recently, dramatic movies have enjoyed similar success tapping into public cynicism about the actions of multinational corporations. The Constant Gardener featured pharmaceutical company executives exploiting Africa’s poor; rapacious oil companies were the villains of George Clooney’s Syriana, and toward the end of 2006, the diamond industry was roiled by pre-publicity for the Leonardo DiCaprio vehicle Blood Diamond.

The film is set in the late 90s, when rebel militias seized control of Sierra Leone’s diamond mines and sold the gems it acquired to buy weapons that were used to slaughter and mutilate many thousands of innocent people. The unfortunate reality is that many of the world’s diamonds are mined in regions where conflict is a harsh reality, and that the profits from the diamond industry have frequently been used to fuel those conflicts.

The movie was the culmination of a campaign against conflict diamonds that dates back several years. Beginning in 2000, World Vision and more than 150 organizations urged the diamond industry to develop a system to ensure that all diamonds in the global market were no longer funding conflict and human rights abuses. That effort included a 2001 television spot airing during the season finale of “The West Wing,” with actor Martin Sheen urging consumers to ask jewelers about “conflict-free” diamonds. Negotiations with the diamond industry lobbyists culminated in the establishment of the international Kimberley Process Certification Scheme and the U.S. Clean Diamonds Trade Act, which requires all diamonds entering the United States to bear Kimberley Process certification.

Non-profit groups launched their own publicity efforts to coincide with the movie’s release. Amnesty International and Global Witness, with the support of director Ed Zwick and cast members Jennifer Connelly, launched blooddiamondaction.org, a website that sough to educate consumers about the role of diamonds in funding conflict. “Despite the tragedies that blood diamonds have caused, neither governments nor the diamond industry is doing enough to stop them,” said Global Witness director Charmian Gooch. “Consumers have the power to effect industry-wide changes simply by demanding that their diamonds are clean.”

The industry was clearly concerned that the public might use that power. Michael Rappaport, who has been providing insider reports on market and price information in the diamond industry, was one of the first to speak out. “If you buy sneakers that were made labor, you can still play a pretty good game of basketball with them. But diamonds have no functional utility, they are a symbol of love and commitment that cannot be tainted, or their value as the ultimate feel-good objects will be destroyed.” In addition, “The film makes its debut during the heaviest-selling season for the $60 billion-a-year worldwide diamond industry, and the U.S. accounts for nearly half of diamond-jewelry purchases,” wrote marketing journalist T.L. Stanley.

Sensitive to the threat, the diamond industry was unusually proactive in its efforts to head off any crisis. The World Diamond Council created a website, DiamondFacts.org, making the case that the industry’s monitoring has all but eliminated blood diamonds, and hired Los Angeles crisis specialist Sitrick & Company to create an education campaign to neutralize the movie’s potential impact. Meanwhile, Michael Rae, a former WWF activist, was named chief executive of the Council for Responsible Jewellery Practices, a group with members such as mining giant DeBeers and retailer Tiffany & Co., seeking to establish ethical standards at every level of the supply chain.

Any damage the film might have caused was undoubtedly lessened by the fact that it was both a critical and commercial dud. But the diamond industry successfully did what so many of the others on our list of the top 10 crises of 2006 so conspicuously failed to do: identified an issue that had the potential to become a full-fledged crisis and decided to act before it was forced to.

 

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