Crisis management

From Economist.com

The Institute for Crisis Management (ICM), an American consulting firm that specialises in developing communications strategies for crisis-struck businesses, defines a crisis as “a significant business disruption which stimulates extensive news media coverage. The resulting public scrutiny will affect the organisation’s normal operations and also could have a political, legal, financial and governmental impact on its business”.

The idea that businesses face moments of crisis that require special skills not called upon in the normal course of commercial events is widely accepted. Allied to this is the idea that there are people who are especially good at handling crises, and that there are crisis-management skills that can be learned. Special training courses on the subject can be found in many countries.

Crises are commonplace. The ICM puts their causes into four categories, with over 60% of them falling into the last category (management decisions):

• Acts of God (storms, earthquakes, etc).

• Mechanical problems (metal fatigue, etc).

• Human errors (the wrong valve opened, miscommunication, etc).

• Management decisions/indecision (underestimating a problem, assuming nobody will find out).

In recent years, certain industries have been more prone to crises than others. Airlines, software designers and pharmaceuticals firms headed the ICM’s list for 2006. But tobacco companies have been in an almost permanent state of crisis as the medical evidence against them has unfolded over the years. Oil companies, too, have a crisis on their hands every time a tanker leaves a slick on a beautiful beach.

One of the worst environmental accidents so far, at the Union Carbide factory in India where thousands of people were killed by a leak of poisonous gas in 1984, made companies everywhere think again about how to manage crises on such a scale. Then the Exxon Valdez oil spill of 1989, generally regarded as one of the worst-managed crises of all time, showed how it should not be done. It took two weeks for Lawrence Rawl, Exxon’s chief executive at the time, to visit the scene and make any kind of substantive statement about the tragedy.

There are several elements to good crisis management:

• Be well prepared in advance. Potential members of a crisis management “team” should rehearse how they would manage the impact of an incident. It is a bit like learning the safety instructions on a plane before take-off: you hope you will never need them, but you know it would be unwise to miss the lesson. The team should include the chief executive and a representative of the press office. Thereafter, all external enquiries relating to a crisis should be answered by the team.

• Move fast. It is the first few hours that count, the period when news of the crisis first breaks. One of the most difficult things is handling the ambiguity in those first hours and days. There are sure to be gaps and inconsistencies in the information available.

• Get outside help and advice. Because a crisis is often brought on by employees of the firm, it can be difficult for insiders to view the issue objectively.

• Be honest. Accurate and correct information is crucial. Misinformation invariably backfires. But if a company has a naturally secretive culture this is a difficult policy to pursue.

• Look to the long term. Do not seek just to contain short-term losses. A contaminated product may require the withdrawal of massive stocks to reassure customers over the longer term that the product is safe for consumption.

Further reading

Dezenhall, E. and Weber, J., “Damage Control: Why Everything You Know About Crisis Management is Wrong”, Portfolio Hardcover, 2007

Regester, M. and Larkin, J., “Risk Issues and Crisis Management: A Casebook of Best Practice”, Kogan Page, 2002

Sikich, G.W., “Emergency Management Planning Handbook”, 4th edn, McGraw-Hill, London and New York, 1996

More management ideas

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Banking madness

A bottle in front of me? Or a frontal lobotomy?

IF THE definition of insanity is doing the same thing over and over again and expecting a different outcome, bank shareholders are certifiably mad. Time and again since the start of the credit crunch, shares in one bank or another have rallied after the announcement of another slug of write-downs on mortgage-related assets and other nasties. With each round of bad news, investors dare to hope that a bottom has been reached and that the bank in question can start to think about a return to health. Invariably their hopes have been dashed.

The pattern has repeated itself this month with Merrill Lynch. In mid-July, the investment bank announced a $4.6 billion loss for the second quarter, after a write-down of $9.4 billion. To help plug the hole in its finances, John Thain, Merrill’s newish chief executive, offloaded a long-prized 20% stake in Bloomberg, a financial-information provider. “We believe that we are in a very comfortable spot in terms of our capital,'” he told analysts. Could the worst finally be over, wondered investors?

On Monday July 28th, Mr Thain had a swift answer: no. Merrill announced more write-downs, this time to the tune of $5.7 billion, and further steps to bolster its capital through an $8.5-billion share offering (a figure that may rise to $9.8 billion). Temasek, a Singaporean fund that became Merrill’s largest shareholder when it raised capital in December, will buy $3.4 billion of the new stock, but will also be reimbursed for the losses it has suffered on its initial investment.

The speed of the about-turn does little for Mr Thain’s credibility, but this time it is not lunacy to wonder whether a turning-point has been reached. The new write-downs reflect a deal to sell collateralised-debt obligations (CDOs) with a nominal value of $30.6 billion at an eye-watering discount to a distressed-debt investor called Lone Star Funds. The CDOs are being sold for just $6.7 billion, valuing them at a mere 22 cents on the dollar. To make the deal even sweeter for Lone Star, Merrill is lending it money to complete the deal, using the very same toxic assets it is trying to get rid of as collateral. Merrill is also slashing the value of hedges it had bought from various bond insurers.

The pain is not over for Merrill but the risk of further big write-downs has been considerably reduced. The deal with Lone Star brings Merrill’s exposure to CDOs down to around $10 billion, much of that in the form of mortgage-backed securities from 2005 and earlier, when lending standards in America’s housing market were not as slipshod as they were in 2006 and 2007. The raising of new capital leaves some headroom for further markdowns. Whether Mr Thain can restore Merrill’s fortunes over the longer term is a bigger question. Some argue that a purged balance sheet, coupled with a battered share price, makes it a much more attractive takeover target. But the bank may finally be able to raise its head to the horizon.

The news for other banks is less good. Merrill was an outlier in terms of the size of its exposure to mortgage-backed assets, because of its leading role as a distributor of CDOs. But the Lone Star deal sets a new, and very low, benchmark for the price of these instruments. There is enough wiggle room in the accounting rules for banks not to be bound by this price level but the news from Merrill signals the likelihood of more fair-value losses to come. Shares in European banks tumbled on Tuesday morning as a result, with Barclays, a British bank with fewer write-downs and a lower capital cushion than many of its peers, taking the worst punishment. For most bank shareholders, the madness continues.