The Top 12 Crises Of 2015: Part 1
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The Top 12 Crises Of 2015: Part 1

Our annual crisis PR review kicks off with Volkswagen, FIFA, Chipotle, HSBC, data breaches and Petrobras.

Holmes Report

The Top 12 Crises Of 2015: Part 1

Part two of our annual crisis PR review, featuring Starbucks, Theranos, Sports Direct, Nestle India and the Tianjin explosion is here.

1. Volkswagen

The Milton Friedman test sets the bar for corporate responsibility about as low as it can be: the Nobel-winning economist believed that the only social responsibility of a company is to increase its profits "so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." When the
Financial Times editorializes that your company failed to meet even that standard—and tarnished the reputation of big business everywhere—you know you’ve messed up.

In what was probably the biggest corporate crisis of 2015, Volkswagen—one of the world’s largest automakers—was found to have installed a software "defeat device" that helped cars pass emission tests. The resulting recall affected 8.5 million vehicles in Europe and 500,000 in the US, and the company quickly announced that it would set aside €6.5 billion to deal with fines and lawsuits (a number most observers expect to rise). Car
sales declined by 5 percent in the month after the scandal broke.

Crisis experts appear united in their assessment of the company’s pre-crisis behavior. Ulrich Gartner of crisis specialist Gartner Communications points out that suppliers had spotted the problem at least six years ago and that VW was aware of an investigation at least a year before the crisis broke. "The company could have developed a proactive communications strategy, yet it only went public in September 2015, reactively."

Cultural issues may have played a role here. VW is the largest employer in the city of Wolfsburg, and the company is overseen by a board that includes union officials and politicians from Lower Saxony—people who might have served as outside checks on corporate malfeasance in a less insular, collegial culture. "Volkswagen had no crisis-detection system to discover that someone was gaming the system," says Jim Haggerty, founder and CEO of CrisisResponsePro in New York.

Similarly, there are questions about the early days of the company’s response, with then-CEO Martin Winterkorn issuing what Gartner calls a "lukewarm apology.... His primary concern was to assert he had no knowledge of the illegal manipulation." Over the next few days and even weeks, information continued to dribble out.

"Volkswagen struggled to demonstrate any level of control," says Tim Luckett, global lead, issues and crisis, at Hill+Knowlton Strategies. "Its initial response did not contain any expression of regret when it was clear almost immediately that it had acted improperly…. VW’s failure to reassure customers quickly enough—compounded by inconsistent use of its social media channels in the immediate aftermath of the crisis—will also make regaining people’s trust more difficult."

Having said that, when the company did act, it did so decisively, firing Winterkorn and several other key executives who were in a position to know about the fraud. And while there were some raised eyebrows when the company selected an insider—Matthias Mueller from Porsche—to take the reins, one of his first actions was an internal communication that made it clear the company needed to change, to address its hierarchical and tribal culture and encourage greater collaboration—and the freedom to challenge bad decisions.

One final lesson from this crisis is that the litigation environment remains a key difference between Europe and the US. There has been some criticism of the way crisis PR has been handled in the US, but insiders in Germany say that the influence of legal advisors on the western side of the Atlantic remains considerably stronger—for reasons that are understandable if not necessarily right—in the US than in Europe. — Paul Holmes (PH)
 

2. FIFA

Where do we start with FIFA, which has now become a perennial fixture in this feature? After questions were raised in 2014 over the bidding process for the 2020 Qatar World Cup, the issue exploded into public view in 2015 when a reputation crisis became an existential one — sparked by the dramatic intervention of US law authorities.

Seven top FIFA officials were arrested last May on charges of widespread corruption throughout football’s governing body over the past 20 years. Swiss prosecutors soon opened criminal proceedings related to the awarding of the 2018 and 2022 World Cups and, before the year had ended, the scandal had led to bans for numerous Fifa officials, including Sepp Blatter and Michel Platini, amid  demands for reform from FIFA's billion-dollar sponsors.

Those changes are likely to prove beneficial for FIFA in the long run, says Sermelo managing partner Jonathan Jordan. "During the latter half of the year, FIFA started the delicate process of rebuilding its reputation, which began with a long overdue change at the top," he says.

The organisation also hired Teneo to provide reputation counsel. "Given [Teneo’s] clients are understood to include The Coca-Cola Company, there is little doubt the sponsor’s voice is being heard loud and clear, as well as those who feel angered by the result of the 2018 and 2022 bids," adds Jordan.

While FIFA has hardly responded rapidly, Jordan believes this is understandable given the "complex and meticulous process" required to unpick FIFA’s opaque structures and relationships.

"The myriad of external stakeholders have probably heard and read enough; what they’ll want to see now is action," explains Jordan. "Getting this right is critical and, moving forward, the key challenge FIFA will face is engineering a complete change in personnel and culture to restore the integrity of football, while maintaining its massive commercial opportunities."

Much will depend on whether FIFA can create the necessary safeguards to prevent conflicts of interest and build a far more robust governance structure, one that can, as Jordan puts it, "rebuild credibility and trust." — Arun Sudhaman (AS)
 
3. Chipotle
 
One of the more breathtaking crises of 2015 was the food contamination that Chipotle faced — with ongoing consequences. Until last fall, the chain was upheld as the fast-food model of the future: "food with integrity" is its brand promise. That all changed when the restaurant was linked to a massive E. coli outbreak spanning many states. This was the just beginning. The company’s problems mounted amid criticism it was too slow to respond, rapidly falling sales and it now faces a criminal investigation. The chain recently announced it would close all of its restaurants on February 8 to deal with food safety issues.  

"Chipotle’s troubles can be traced back to the choices made during the overall branding process," says Padilla CRT EVP Brian Ellis. "When the company chose to go down the locally sourced path, a risk analysis would have recommended that Chipotle review its food safety protocols." The chain may now have to back down from its promise of locally-sourced food, gutting the most powerful component of its "food with integrity" pitch.

Eric Herman, managing director at Kivvit, echoes the inherent risk in Chipotle’s "fresh ingredients" branding. "Who cares that you banned GMO and that you have ‘integrity’ if your burritos make people sick?" he says. "This crisis has been more damaging to Chipotle precisely because the company put itself on a fresh-ingredients pedestal."

He also says the company’s cheery disposition around the outbreak was unnerving. "At one point, they said the outbreak was a good opportunity for the company to revamp its food systems, calling it a ‘a very, very exciting time for us,’" Herman says. "That seems very out-of-touch. And for quite a while, the company avoided expressing guilt."

How can the restaurant rebound? Sam Singer, president of Singer Associates, worked with Jack in the Box following its E. coli crisis. He advocates the chain take a similar approach to Jack in Box and take "their greatest weakness, food safety, and make it their greatest strength. They need to be the leader in food safety." Singer suggests, for instance, offering regular customer updates on its food safety progress and pledging not to open any more new stores until the issue is resolved. — Aarti Shah (AaS)
 
4. Data breaches

The data breaches of 2015 were far-reaching: BlueCross BlueShield, Hyatt, Hilton, Experian (that impacted T-Mobile) and Anthem, among others. But there were two that stood out for media coverage and overall public outrage. Ashley Madison was among the most memorable, mostly because of the inherent scandal. The breach revealed some 32 millions users of the site for married people looking for extramarital affairs. The breach included exposing some Internet celebrities and the breach was also, sadly, linked to some suicides

But the data breach that triggered the most outrage was the largest known hack targeting kids, in which toymaker VTech exposed the data of 6.4 million children. Adding to this, VTech took some of its toys offline resulting in a Christmas Day fiasco.

Louise Harris, Ruder Finn’s chief global strategist, points out that VTech was slow to respond and acknowledge the extent of the problem. VTech customers in the US faced long waits from the the company’s Hong Kong headquarters.

"Think in advance about how to ramp up customer service response quickly, especially if you are dealing with different time zones," Harris says. "Consider temporarily adding additional call centers to deal with the increased volume of inquiries."

"VTech was dealing with worried and angry parents, so its response should have gone above and beyond the practical aspects of the data breach and recognize the emotional impact and implications," Harris says. "It’s important to show empathy; the choice of spokesperson is extremely important, so in a case like VTech, where children are involved, the best company spokesperson is going to be a parent."

Meanwhile while the theft of children’s data is especially alarming, the reality is that no one’s information is safe, says Tim Fiala, SVP at Text100. "In the retail sector, in particular, which has seen such a preponderance of thefts, it would almost seem data breaches have become just one more ‘cost of doing business,’ akin to ‘shrinkage’ from shoplifting and employee theft."

Fiala advises companies to have "clearly defined roles and responsibilities, tracking executive spokesperson availability, updated contact lists, statement templates, ready to blast media email lists and call down logs, and direct access to website, social and employee channels" — before a breach hits.
 
"It’s essential that you map the volume of your response to the arc of the story and pull back when you detect that interest is fading," Fiala says. "Expressing contrition only gets you so far.  Communicating the right tone is key to creating audience empathy; this tone could be aggrieved, apologetic, disdainful, or forgiving depending on the scenario." — AaS
 
5. HSBC
 
Unlike most corporate crises, which erupt suddenly and catch organisations by surprise, HSBC’s problems with its Swiss private banking operation were a long time in the making. Thousands of confidential files were handed over to French tax authorities in 2008, but it was not until February 2015 that the issue hit the headlines, when the Guardian revealed how the bank had helped clients avoid millions in taxes.

At the Holmes Report’s Global PR Summit later in the year, HSBC HR and communications head Pierre Goad admitted that the bank should have handled the crisis much better.  "I wish we had come out much harder, much faster, and the distributed information had been much more transparent," said Goad, conceding the bank didn’t "know how to manage a crisis in this new environment."

And while HSBC may have been surprised by the severity of the ensuing crisis, Lansons CEO Tony Langham believes they should not have been. "HSBC’s problems didn’t really tell us anything we didn’t already know about banks and crises," says Langham. "Reputation is, ultimately, about behaviour first and communication second – and banks have behaved in ways that fall short of what Governments, regulators and society find acceptable."

While increasing compliance costs have made reputation management a priority across the banking sector, Langham notes that HSBC’s response was "leaden footed, at least in part because of fear of possible legal action (in France and elsewhere) and trying to limit any regulatory fines."

"The bank always appeared to be reacting to events too slowly," says Langham, who also criticises the bank’s high-profile newspaper ad campaign. "Its attempt to use controlled communication, in the form of national newspaper advertisements saying sorry, was expensive and probably pointless."

Neither did HSBC’s appearance in front of the Treasury Select Committee help, with chairman Douglas Flint and CEO Stuart Gulliver both stopping short of taking personal responsibility. "The inevitable conclusion is that HSBC did not consider its reputation management seriously enough until last year, despite the problems that hit its rivals earlier - as it’s hard to explain why it seemed unprepared to respond to its ‘Swiss problem’," says Langham.

Regardless, HSBC does not appear to have suffered lasting damage from the affair. Q3 2015 profits jumped 32% to nearly £4bn and that bank’s public pondering of a potential HQ move out of the UK appears to have successfully applied pressure on the UK Government and regulator.

"Martin Wheatley, head regulator of the FCA (and often described as ‘banker basher in chief’) was removed by George Osborne in July 2015," explains Langham. "On New Year’s Eve the FCA quietly announced that it was dropping its ‘thematic review’ into UK banking culture. In January 2016, it emerged that there would be no formal FCA review of HSBC’s conduct relating to its Swiss operation."

6. Petrobras

Such an integral part of the Brazilian political and economic establishment is the state-run oil company Petrobras that its former chair, Dilma Rousseff, is now the country’s president. That may explain why the Petrobras corruption scandal—investigations suggest company executives accepted bribes from a cartel of 20 companies, enriching themselves and channeling funds to politicians—has become the most high-profile crisis in Latin America over the past year.

"Most crises involve institutions—private, public or non-profit—whose intentions were legitimate but suffer a crisis due to either chance, systematic neglect or individual negligence, greed or criminality<’ says Ramiro Prudencio, who leads Burson-Marsteller’s operations in Latin America. By contrast, the Petrobras crisis appears to involve "pervasive and systematic illicit contracting practices" and "a failure of governance at every level."

This is not, therefore a crisis of perception; it is a crisis of governance, and as such "PR’s role will be to communicate effectively the measures Petrobras is taking to actually change its practices." That’s a task made more challenging because the company’s new CEO and board are still uncovering details about the depth and breadth of the problem.

Ciro Dias Reis, CEO of Brazilian firm Imagem Corporativa, sees this is the major challenge of this particular crisis: "The global corporate ecosystem requires from PR pros much more than communication skills," he says. "It demands perfect understanding of the best practices in the governance field and ethical values, in order to be able to help companies to interconnect all those topics in a consistent agenda towards reputation and competitiveness."

One lesson from the crisis is that PR people need to help companies predict and prepare for systemic problems like this one. Going forward, Reus says, "there is always something new PR pros can do in terms of mapping and monitoring risks and vulnerabilities, advising the organization on improvements related to internal procedures and external positioning."

But perhaps the biggest takeaway from this crisis is the fact that Brazil is now governed by the same standards as other major markets.

"In Brazil, and arguably much of Latin America, a succession of corruption scandals have shown that civil society’s tolerance for corruption has been reduced significantly," says Prudencio. "It is likely a combination of a larger, more civic-minded middle class, unprecedented access to information and the ability to share it via digital and social channels, and more recently, lackluster economic performance that has left the public angry. The trend today is that corruption has consequences, and this is very good news for the region."

Prudencio points out that while the crisis has tarnished the image of Brazilian business and politics, the fact that the civil institutions such as the courts have been responding effectively and transparently is a positive. That’s a point
echoed by Wlilliam Burke-White, professor at University of Pennsylvania Law School: "Brazil has built a strong democracy with good institutions, good court systems, good investigative ability, and paralleling that, a strong civil society with freedom of the press, freedom of expression and transparency."—PH

Part two of our annual crisis PR review, featuring Starbucks, Theranos, Sports Direct, Nestle India and the Tianjin explosion is here.

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