John Bussey’s Wall Street Journal article today examines the missteps in News Corp’s still unfolding hacking crisis. In parallel, a recent Cass Business School research report – The Roads to Ruin - examines 18 high profile corporate crises. Together they provide solid cause and effect examples that underpin corporate crises.
No company ever wants a crisis to get to this point, writes Bussey: the chief executive and his lieutenant grilled by skeptical legislators, with errors condemned, reputations impugned and the drama broadcast around the world.
For News Corp. CEO Rupert Murdoch and his son James, the hearings in London on Tuesday on the company's phone-hacking scandal were the climax of a bad couple of weeks. For the company and its shareholders, it may have been confirmation of something more troubling: for years News Corp. insisted its phone-hacking scandal was largely an isolated affair: one reporter and his investigator gone rogue, a small number of voice mails hacked.
Cass investigated 18 high profile corporate crises of the last decade. Companies involved in these crises include AIG, Arthur Andersen, BP, Cadbury Schweppes, Coca-Cola, EADS Airbus, Enron, Firestone, Maclaren, Northern Rock, Shell and Société Générale. Their aggregate precrisis value was over $6 trillion.
In seven cases a company involved faced bankruptcy, of which three were ‘rescued’ by Government. In 11 cases the Chairman and/or CEO lost their jobs, and in others senior executives and non-executive directors (NEDs) lost their positions. In 16 cases the companies and/or executives personally suffered financial penalties or fines, and in four cases executives received prison sentences.
Most companies - and their shareholders – suffered severe, uninsurable losses and most reputations suffered severe damage. None of the companies emerged without obvious immediate harm.
Top managers at News Corp. responsible for managing its crisis may have believed the problem was an isolated incident, and may also have believed they had properly investigated and addressed the problem. But it turns out more rogues were involved, and many more lines were hacked—possibly thousands. Authorities in Britain are also investigating whether News Corp. employees bribed police.
Bussey quotes Andrew Brimmer, a partner at Joele Frank, a crisis-management firm: "Management should have responded more thoroughly to the issues raised by the original hacking. What happens to a crisis deferred? It typically explodes into the open at some point."
The penalty for missteps in the early phase of a corporate crisis—expense, lost reputation, distraction—can be brutally high.
Ask BP, which initially played down last year's oil spill in the Gulf of Mexico. Or Toyota, which at first dithered over public concerns about alleged sudden acceleration in its cars. Or Jack Welch, the former General Electric CEO, who was slow to see how his robust retirement package might become a public embarrassment for GE.
Cass’ study identified the key lessons associated with the failure to prevent each crisis and thereafter manage the consequences. The failures that gave rise to each crisis were analysed and seven key issues emerged, described in this report as the underlying risks that caused the crises:
- Board Skill and NED Control: Risks arising from limitations on board skills and competence and on the ability of NEDs effectively to monitor and, as necessary, control the executive arm of the company
- Board Risk Blindness: Risks from board failure to recognize and engage with risks inherent in the business, including risks to business model, reputation and ‘license to operate’, to the same degree as they engage with reward and opportunity
- Inadequate Leadership on Ethos and Culture: Risks from a failure of board leadership and implementation on ethos and culture
- Defective Internal Communication: Risks from the defective flow of important information within the organization, including up to board level
- Risks from Organizational Complexity and Change: This includes risks following acquisitions
- Risks from Incentives: This includes the effects on behavior that results from both explicit and implicit incentives
- Risk ‘Glass Ceiling’: Risks arising from the inability of risk management and internal audit teams to report on and discuss, with both executive and nonexecutive directors, risks emanating from higher levels of their company hierarchy, including risks from ethos, behavior, strategy and perceptions.
In News Corp's case, the rising casualty count includes: Two senior executives forced out; a newspaper closed down; a key corporate acquisition lost (for now); law-enforcement investigations in Britain and the U.S.; the energies of top managers consumed by the problem; and shareholders increasingly restive.
Experts who deal with blow-ups like this say News Corp.'s big mistake was not understanding—or ignoring—the dimensions of the problem from the outset. The time for crisis management, they say, was in the years between 2006 and 2011, when evidence of wrongdoing kept emerging, when inadequate investigations were conducted by the police and the company, and when victims kept complaining and reaching settlements with News Corp.
The advice from other experts is straight forward: This time, get to the bottom of what occurred, find out if there was a coverup, and determine if the rot was unique to the down-market News of the World or if it extends elsewhere into the News Corp. culture. Then make everything public, make amends with victims and the authorities, and demonstrate how the company will assure it never happens again.
How the company manages the next stage of the crisis will determine one of two things: Will News Corp. be able to start rebuilding its reputation? Or will the crisis worsen into a more serious attack on the leadership of the company?
Read the full article from John Bussey in the Wall Street Journal.
Read the Cass Business School Report: Roads to Ruin - A Study of Major Risk Events, their Origins, Impact and Implications
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