The Biggest Corporate Crises of 2005: Part I
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The Biggest Corporate Crises of 2005: Part I

If we learned anything about crisis management in 2005, it is surely that corporations—no matter how ill-prepared they might be for crisis—are still infinitely better prepared than the United States government.

Paul Holmes

If we learned anything about crisis management in 2005, it is surely that corporations—no matter how ill-prepared they might be for crisis—are still infinitely better prepared than the United States government.

The biggest crisis of last year, without question, involved the federal government’s staggeringly inept response to Hurricane Katrina. President George W. Bush’s contrarian view (“Brownie, you’re doing a heck of a job”) notwithstanding, the Federal Emergency Management Agency bunged its first major catastrophe since terrorist attacks of 9-11 in a spectacular fashion.

The government response was made to look even worse by the response of the private sector. While FEMA was still trying to shift the blame for the response on to local and state governments, major American companies were rushing aid—products, services, and financial assistance—to those in need.

“Careful preparation and execution by companies like Home Depot, Pfizer, FedEx, Southern Company and others enabled them to mitigate the economic damage of Katrina and Wilma, respond to employees and communities hit hardest by the disasters, and likely save lives,” says Larry Kamer, president of North American operations at Manning Selvage & Lee.

Wal-Mart, which had been suffering under a barrage of negative publicity, found itself earning accolades after it was able to relocate 34,000 workers and quickly dispatch 1,500 trucks and 100,000 meals to Mississippi and Louisiana.

“All across the affected area, as soon as businesses had trucks restocking inventory and employees returning to work, they became hubs of activity, with residents lining up to shop for everything they needed to get their lives back together,” adds Rich Blewitt, president of Rowan Blewitt, the crisis communications firm that is a part of Weber Shandwick.

“In addition to having construction materials on hand, Home Depot and Lowes brought employees from stores all around the country so that when frazzled hurricane survivors showed up with shopping lists in hand they could be greeted by platoons of helpful sales people in company smocks standing next to piles of plywood, plastic sheeting, and chain saws that had been moved conveniently to the front of the store. And even before the rain stopped, the big chain restaurants brought in construction teams to strip out water- soaked fixtures and restore water and power. It didn’t matter how the place looked, as long as it was clean and dry.”

The lesson, he says, is that “disasters like last year’s hurricanes offer smart businesses, especially those with the resources to take full advantage of the opportunity, a chance to build brand loyalty and burnish corporate reputation.”

At a hearing in November, Maine’s Senator Susan Collins told a panel of corporate executives:  “I’m struck by the meticulous planning and the escalating series of actions that you took in advance of Katrina making landfall. It contrasts so sharply with the lack of planning and slow response of FEMA.”

But while companies were being applauded for their response to the disaster, there are still lessons corporate communications managers can learn from studying Katrina. “Not the flood,” says Helio Fred Garcia, president of Logos Consulting Group and professor of management at New York University’s Stern business school, “but the ineffective, pathetic, and jumbled response to the crisis.   

“Even though the players were not companies, companies can learn significant lessons from studying Katrina response.”

Because Katrina was not primarily a corporate crisis (and because we covered it so extensively in this newsletter at the time), it falls outside the scope of this article. But even so, there were still plenty of crises to consider, and there were some trends evident in the crises of 2005.

For one thing, activist shareholders replaced Elliot Spitzer as the people most likely to spark a major corporate crisis. The ultimately successful campaign by dissident shareholders to oust Philip Purcell and Morgan Stanley and Carl Icahn’s attack on management at AOL/Time Warner—both covered in our review of the year—were just two high-profile cases among many. And the current woes of General Motors, which faces withering criticism from Kirk Kerkorian, make it clear that this trend will continue into and possible accelerate in 2006.

For another thing, most of the major crises of 2005 were not acute crises—one-off events like airplane crashes or plant explosions. Such events, if managed effectively, rarely threaten the long-term viability of an organization, unless it can be shown that they were cause of ongoing, systemic negligence by the senior leadership of the company.

Most of the year’s big crises were about values, not events: the ongoing troubles of retail giant Wal-Mart; the decision-making process that led Guidant Corporation to delay recalling its faulty defibrillators; the events that embroiled companies such as Microsoft and Ford in the middle of the culture wars. More and more, it’s a failure to live up to a company’s own values (and the expectations of its stakeholders’) that lead to a crisis of confidence.

Crises also continued to cost CEOs their jobs: Purcell and Boeing’s Harry Stonecipher (also covered in our review) were two high-profile departures, but according to outplacement company Challenger Gray & Christmas more than 1,320 CEOs lost their jobs in 2005 (up from 663 in 2004), with Hewlett-Packard’s Carly Fiorina—who appeared to have weathered one of last year’s most painful crises—among them.

Clearly, crisis management is a discipline in which companies and their leaders need to invest even more time and money and resources.

10. Hermes Turns Away Oprah Winfrey

The old adage “Never pick a fight with someone who buys his ink by the barrel” is most commonly attributed to Mark Twain. If Twain had lived long enough, he doubtless would have extended his advice to include brawling with talk-show hosts.

Luxury goods retailer Hermes learned that lesson the hard way after it refused to allow American television personality and media mogul Oprah Winfrey entry to its flagship store on the Rue du Faubourg Saint-Honore in Paris last June.

News of the “snub” first surfaced on Page Six of the New York Daily News, which claimed an Hermes employee had told Oprah she could not come in because the store had been “having a problem with North Africans lately.” Later, Entertainment Tonight interviewed a friend who described the incident as “one of the most humiliating moments of her life.” Later, a spokeswoman for Winfrey’s production company described the clash with the Hermes store clerk as the star’s “Crash,” moment, a reference to the 2005 movie Crash in which a wealthy African-American woman character is sexually assaulted by a white police officer.

“Oprah Caught Shopping While Black” was the headline at, while other Internet posts made it clear that substantial numbers felt Oprah had experienced the kind of treatment familiar to African-American shoppers rich and poor.

It took Hermes almost a week to issue an apology, explaining that Oprah had arrived at 6.45pm, 15 minutes after the store had closed for the night, and that because a private public relations event was being prepared, no one was allowed into the store. “Hermes regrets not having been able to welcome Oprah Winfrey and the people accompanying her to give them all the attention and service that Hermes is committed to giving each of its clients in the world,” said the company in a statement. “Hermes expresses its sincere regrets for any misunderstanding that these circumstances could have caused.”

The company said there had been no discussion of problems with North Africans, and that the clerk had offered Winfrey her business card with an invitation to return the next day.

Winfrey was reportedly unimpressed by the apology. Oprah’s friend Gayle King claimed that “People were in the store and they were shopping. Oprah was at the door and she was not allowed into the store.” Others agreed: “Considering a charge of racism was coming directly from the camp of one of the world’s most recognizable black women,” said T.J. DeGroat of Diversity, Inc., the company apology “amounts to a kiss off.”

Regardless of the facts of the case, Hermes was painfully slow to respond.

“A week today is like six months 10 years ago,” public relations consultant B.L. Ochman wrote at the time in her What’s Next blog. “You cannot wait a week to react to a PR crisis. The only way to respond to such negative press from traditional media and bloggers is with an immediate and honest response.”

In fact, because Winfrey’s show was on summer hiatus, the controversy continued to simmer until September, when in the first show of her new season Oprah addressed the issue directly. “I just want to say shame on anybody for thinking that I was upset for not being able to get into a clothes store and buy a purse,” she told her audience. “Everybody who’s ever been snubbed because you were not chic enough or the right class or the right color or whatever…. you know that that is very humiliating and that is exactly what happened to me.”

Fortunately, Robert Chavez, the chief executive officer of Hermes USA, was invited to appear as a guest and was able to issue an apology, conceding that Winfrey had met up with a sales person who was “rigid and rude.” At which point, Winfrey complimented Hermes on its handling of the incident (including sensitivity training for employees), and urged her viewers to buy Hermes products.

9. The Culture Wars Hit Corporate America

In 2004, Microsoft was one of dozens of corporations in the Pacific Northwest—along with Boeing, Nike, Qwest, Washington Mutual, even Coors Brewing—that had endorsed Washington state legislation that would protect gays and lesbians from discrimination in employment, housing, banking, and insurance, extending a law that already bars discrimination on the basis of race, religion, gender, or marital status.

Microsoft, which has a strong record on employee rights, had issued a letter of support for the legislation. But after officials from the company met with pastor Ken Hutcherson, who presides over a “mega-church” close to the company’s Redmond headquarters, it withdrew that support, announcing that it was now “neutral” on the legislation.

According to newspaper reports, Microsoft’s general counsel told gay staffers at the company that Hutcherson had threatened a boycott of the company. But Microsoft’s official position is that withdrawal of support for the measure was unconnected to that threat. The measure was subsequently defeated by 25 votes to 24.

But Microsoft’s problems were only just beginning. Progressive blogs launched a campaign accusing the company of endorsing bigotry, and Microsoft employees expressed their own disgust at the company’s withdrawal of support. And so Microsoft reversed itself, with chief executive Steve Ballmer announcing that “diversity in the workplace is such an important issue for our business that it should be included in our legislative agenda.”

Microsoft’s apparent indecisiveness contrasted unfavorably with the firm and clear position adopted by Kraft when it was targeted by anti-gay groups for its support of the Gay Olympics. Kraft executive vice president and corporate counsel Marc Firestone responded to a letter-writing campaign by the American Family Association with a memo to the company’s employees that explains the company’s position, how it relates to the company’s values, and why it will be sticking to its guns.

“While Kraft certainly doesn’t go looking for controversy, we have long been dedicated to support the concept and the reality of diversity,” said Firestone. “It’s the right thing to do and it’s good for our business and our work environment. Diversity makes us a stronger company and connects us with the diversity that exists among the consumers who buy our products.

“At Kraft we truly respect all kinds of differences. And diversity is not a selective concept. By definition, it’s nothing if not inclusive. We respect diversity of ethnicity, gender, experience, background, personal style and yes, sexual orientation and gender identity. Recognizing, respecting and valuing these differences helps us be a more successful business and a workplace where all employees can realize their full potential.”

Automotive giant Ford apparently failed to learn the lesson from these two cases, because at the end of the year the company announced that it would pull ads for its Jaguar and Land Rover brands from gay and lesbian publications and that it would no longer sponsor any gay-themed events. Almost all the ensuing reports linked that decision to a boycott launched in May of this year by the Reverend Donald Wildmon’s American Family Association.

Ford spokesman Mike Moran told Washington, D.C.’s Metro Weekly: “Some months ago we began a constructive dialogue with them, just as we do with other customers and interest groups. While we don’t agree on all issues, we expect the dialogue to continue so that we understand each other better.” Moran said that “ceasing advertising is an outgrowth of those meetings.”

A few days later, however, Ford was telling reporters from the mainstream media that the decision to discontinue advertising was based on cost-cutting considerations. That didn’t prevent a backlash from human rights groups, and with days Ford announced it would resume ads featuring Land Rover and Jaguar and also begin ads for its other brands in gay-themed publications as well. The company also promised to support nonprofit groups and events in the gay and transgender communities.

Companies facing criticism from groups promoting bigotry simply cannot afford to engage with them the way they would engage with other groups, any more than they would engage with a racist group if it demanded that they cease advertising in African-American publications. And faced with dueling boycotts, companies need to be guided by their core values rather than by prevaricating over which group can inflict the most commercial damage at any given moment.

Says Kraft’s Firestone, “It can be difficult when we are criticized. It’s easy to say you support a concept or a principle when nobody objects. The real test of commitment is how one reacts when there are those who disagree.”

8. Wendy’s Gets the Finger

When the news broke in March that a California woman had found a human finger in a bowl of Wendy’s chili, it must have been obvious to anyone with any experience in either journalism or public relations that the story was bogus. Certainly it was obvious to Wendy’s chief executive Jack Schuessler, who told USA Today of his reaction when he first heard the news: “My first response was ‘I cannot believe it.’ And I said, ‘This is a hoax. And we have to get to the bottom of it.’ It’s just that we go through so much care in our food supply with tracking systems at the manufacturer level. Within a day, we could track back and know that there were no accidents in any of the plants; and that, if there were, the whole plant would have to be shut down.”

The fact that the story was so obviously an attempt to extort money from the company did not prevent the mainstream media from reporting it as if it was the truth, or bloggers from piling on, or stand-up comics from incorporating it into their acts. The story made national headlines (“Woman Bites Off More Than She Can Chew”), became a punch line on late night television (“Instead of a spoon, they serve it with nail clippers”), and cost Wendy’s a fortune in sales.

In the immediate aftermath of the discovery, Wendy’s cooperated fully with the police. The day after the grizzly discovery, employees submitted to polygraph tests and visual inspections to ensure they were not the source of the contamination. But allowing the police to take the lead in the case was the source of the company’s problems, according to at least one crisis expert.

“Wendy’s relinquished control of the crisis to law enforcement.,” wrote Steven Fink, president of west coast crisis communications specialist Lexicon Communications at the time. “This was a big mistake. Cops are only interested in catching bad guys; it’s not their job to manage a business crisis. Catching the culprit is unquestionably important, but Wendy’s acted as though this was the single most important thing to do and nothing else could be done until this law enforcement mission was completed.

“While Wendy’s kept upping the reward for information about the finger, no one was addressing the real crisis: the perceived lack of consumer safety causing the real lack of customers.”

A timeline makes it clear how quickly a story can take on a life of its own. The finger was discovered on March 22, and a photograph was released to the media by the Santa Clara health department on March 23, before Wendy’s had concluded its internal investigation, the results of which were reported the next day. That night, Jay Leno made the first of many jokes about the incident: “I didn’t know Wendy’s sold finger food,” Mr. Leno quipped. “I guess we know what Wendy’s did with their founder, Dave Thomas.”

Three days later, on Sunday, Wendy’s senior public relations executive, Denny Lynch was told that the alleged victim would appear on the next day’s Good Morning America. The company prepared a statement, but its words were no match for the story told by Anna Ayala: “Suddenly I chew something that’s kind of hard, crunchy. I spit it out.”

At the time, some critics suggested the company should have settled with the woman quickly to make the problem go away. “We could have capitulated and paid this person off,” says Schuessler. “But we really thought the facts pointed in our favor, and we believe that our reputation is the most important thing we have, and you have to earn it every day, and to pay this person off to make it go away was never even discussed.”

Others suggested the company should have shown more “empathy” for the “victim.”

Says Peter Fleischer, a senior partner at Wendy’s PR agency Ketchum: “In years of doing this, I see time after time that critics and arm-chair quarterbacks, who are so quick to judge, often demonstrate that they rarely grasp the complexity of crisis situations—particularly the law enforcement and legal considerations.”

Ultimately, however, most experts were supportive of the company’s efforts. “I think Wendy’s has been assertive, they’ve been cooperative with the media for the most part,” Eric Dezenhall of Dezenhall Resources told CNN.

Still, it wasn’t until mid-April, when police with a warrant searched the supposed victim’s home that newspapers reported her history of filing dubious lawsuits. But by that time, Schuessler says, the incident had cost the company about 2.5 percent of sales, or about $15 million, from March 23 until the end of April. Even now, sales of chili in the area where the incident occurred have not fully recovered.

7. Harry Stonecipher Steps Down at Boeing

When Harry Stonecipher was named chief executive of Boeing after the ignominious departure of Philip Condit, instilling an ethical culture at the aerospace manufacturer was a top priority. Condit stepped down shortly after the company fired its chief financial officer, Mike Sears, for unethical conduct. Sears had negotiated a deal to hire an Air Force missile defense expert while she was still working for the Pentagon and was in a position to influence Boeing contracts.

So it was no surprise that Stonecipher emphasized the importance of ethics from day one. He promptly instituted a revised Code of Conduct, a single-page document that includes the following sentence: “Employees will not engage in conduct or activity that may raise questions as to the company’s honesty, impartiality, reputation, or otherwise cause embarrassment to the company.”

What is surprising is that an executive of Stonecipher’s experience and integrity would be one of the first victims of strict enforcement of that code.

In February of 2005, Boeing chairman Lewis Platt received information from an anonymous source that Stonecipher—who was married—was engaged in an affair with a female employee. Eleven days later, the CEO was out. “As we explored the circumstances surrounding the relationship, we just found some things that we thought reflected poorly on Harry’s judgment and would impair his ability to lead the company going forward,” Platt said.

Helio Fred Garcia, president of Logos Consulting Group, is also a professor of management at New York University’s Stern business school and says he teaches the Stonecipher story as an example of successful crisis management.

“What Stonecipher did was stupid,” says Garcia. “What Boeing’s board did showed that it took ethics seriously, and that the board learned the crisis management lessons of letting bad news linger and stagnate. Stonecipher was seen as the redeemer of Boeing’s honor, and he invested his personal reputation in the new ethics code. His violation of the code, especially so soon after arriving, was dumb.

“It would have been quite easy for Boeing’s board to rationalize, dissemble and delay. But instead it held him to the standards he would hold others to, and didn’t let any time pass between its finding and his dismissal.”

Chris Atkins, who heads the corporate practice at Ketchum, agrees, describing the Stonecipher issue as “an ugly incident, appropriately handled. Boeing had no choice but to fire him.  What’s surprising is how fast they came to that conclusion and acted. An ugly incident, appropriately handled.”

And Al Geduldig, a senior counselor at Fleishman-Hillard, extends the praise to Stonecipher himself: “Harry handled the matter in typical Stonecipher fashion–decisively. He accepted responsibility, and stepped down.”

The post-crisis coverage included an important lesson for executives. University of Washington business professor Jonathan Karpoff told the Seattle Post-Intelligencer: “Everyone’s on pins and needles when it comes to manipulating the numbers, but now [the focus on ethics is] spreading out to all aspects of a firm’s leadership.”

John Dienhart, a professor at Seattle University Business School, said the incident showed how codes of ethics should work. “A corrupt company, or a company worried about exposure, could very easily have crushed the investigation,” he said, but Boeing sent a signal  that no one is immune from the rules. “A lot of research inside organizations shows that unless senior executives are held to the same standards as everyone else, those standards won’t be respected.”

That was a point underscored by Platt, who told reporters: “He let everyone know that even minor violations would not be tolerated, and when one does that, you have to look at that standard.”

6. The New York Times and Judith Miller

The oil industry, the insurance industry, and the pharmaceutical industry all have their public relations problems, but no industry is as consistently bad at handling PR challenges as the media, and among the media, no institution has suffered quite as many crises in recent years as The New York Times—without apparently learning anything about how to handle them.

The Times took a major blow to its reputation when reporter Judith Miller, who four years earlier had been a willing conduit for some of the misinformation that helped the administration sell the Iraq war, refused to identify the source (for a story never written) of a smear against former ambassador Joseph Wilson that illegally exposed his wife, an undercover operative for the Central Intelligence Agency. Her refusal to testify led to her being jailed for contempt of court. The Times, meanwhile, was steadfast in defending her right to maintain confidentiality.

But by protecting their source—who turned out to be Scooter Libby, a senior aide to White House chief of staff Karl Rove—Miller and the Times were defending the right of vast and powerful institutions, in this case the Bush administration, to intimidate those who would use the media to blow the whistle on corruption, dishonesty, and abuse of power.

Nevertheless, the principle upon which they based that decision initially earned them a measure of support from the rest of the media.

“When this was framed as ‘we protect our source’ it was a positive for the NYT,” says Helio Fred Garcia. “But they fundamentally mishandled the aftermath, and probably the year before the jailing.”

Rich Blewitt of Weber Shandwick’s Rowan & Blewitt unit, agrees. “At first, the Judith Miller affair looked like a matter of high journalistic principle, pitting one of the nation’s biggest newspapers against an overzealous federal prosecutor in battle over the sanctity of confidential sources. But looking back, it now appears that the Times made all the wrong moves for all the right reasons.”

As the facts of the case began to emerge, however, the Times’ position began to look increasingly untenable.

“Times management impulsively rushed out to the end of a very long limb without taking into account all the available and relevant facts,” says Blewitt. “Then suddenly Miller was freed to testify, mysteriously released her from her pledge of confidentiality. Miller’s source, the hapless Scooter Libby, was promptly indicted. The Times suddenly turned on Miller, accusing her of not being forthcoming with her editors and publisher about her sources and methods, even as they were vigorously defending her reporting.”

There was plenty of criticism of both Times editor Bill Keller and publisher Arthur Sulzberger, Jr., much of it from within the company. A Maureen Dowd column that was highly critical of Miller’s Iraq reporting and her apparent immunity from normal editorial oversight was particularly damaging. Times management began to distance itself from its reporter, who was left twisting in the wind.

Says Chris Atkins of Ogilvy Public Relations Worldwide: “The Times followed the Jason Blair playbook flawlessly, first defending Miller then excoriating her, followed by self-flagellation. It’s growing tiresome.”

The crisis “had echoes of the Jayson Blair scandal,” Garcia agrees. “In both cases you had someone who was perceived as a favorite of the big man, and treated different from others. This is the second of three strikes against Arthur Sulzberger Jr. The first was Blair, which was handled almost as poorly as one could imagine And strike three is the Times’ sitting on the domestic spying story for a year.”

One lesson? “Get the facts straight before framing the message,” says Blewitt. “Listen to those in your own organization who tell you that the emperor you are about to put your reputation on the line to defend isn’t wearing any clothes. When it comes to matters of high principle, be very careful to pick your fights strategically. The Times should have thought twice before defending what they should have known to be indefensible.”

Perhaps even more troubling, “Sulzberger and Keller’s refusal to even discuss their decision with the Times’ own public editor has them behaving just like the politicians they otherwise excoriate,” says Garcia. “The Times knows that light is a disinfectant, but it seems unable to behave intelligently when it is the story.”

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