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Archive for December, 2013

Top Ten Crises of 2013

Before the end of the year, the 2013 edition of this year’s top ten reputational crises. No clear theme this year, but a wide variety of reputational challenges for companies big and small (and some governments as well).

[Bloomberg.com published a similar list for which I provided commentary to co-authors Suzanne Woolley and Ben Steverman].

1. The U.S. Government

The U.S. government is back on the list after its entry in our 2011 edition. In addition to the government shut-down and another debt ceiling scare, we had the revelations about the NSA (more on this in #2) and, finally, the disastrous launch of healthcare.gov. Things have started to lighten up a little towards the end of the year with the budget compromise, but ongoing worries persist.

The various problems faced by the U.S. government make a fascinating comparative case study with other democracies, especially those of the parliamentary type such as the UK, Sweden, and Germany. While the U.S. conflicts are largely a consequence of the bargaining and brinksmanship built into the American governmental system, parliamentary democracies face no such problems. In parliamentary democracies, the cabinet and the ruling coalition share the common interest to stay in power which leads to swift cooperation. However, there is a flip-side to the efficiency. Dramatic policy shifts can be passed with only slim majorities and without any need to search for broad support. Sometimes such policy changes are wise, often they are not.

For expansion upon this idea, read my October 4 interview with the Washington Post amidst the government shutdown article.

2. Big Data, Little Privacy

This year saw the first clear example of the dark side of big data. The wide-spread NSA surveillance program, leaked by Edward Snowden, continues to capture the world’s attention and has created a marathon crisis for the NSA and the U.S. Government.govt-listen[1]

A particularly interesting aspect of the crisis is the negative spill-over to companies such as Google, Yahoo!, and Apple. For a long time, privacy and data security concerns have topped the list of reputational challenges for high-tech companies. The NSA program not only creates tremendous attention for the issue, but also raises concerns over how much privacy policies can be trusted when the NSA knocks at the door (or finds a side-door to enter unbeknownst).

To escape this uncomfortable situation, leading tech CEOs formed an industry-wide coalition and urged President Obama to “move aggressively” to reform the way the U.S. government conducts surveillance. The approach may work, but, even if it doesn’t, it allows tech companies to distance themselves (at least partially) from the reputational spill-over of the NSA surveillance debacle.

3. The Rana Plaza factory, Bangladesh

It often takes a human tragedy to put an issue on the agenda. On April 24, the Rana Plaza factory complex collapsed in Dhaka, Bangladesh, killing 1,127 people, mostly women. The Rana Plaza factory was a supplier to many international retailers and brands including Walmart, Disney, The Gap, and H&M. Global media coverage quickly pointed to lax building construction and safety standards and poor working conditions. After considerable media outrage and activist pressure, companies either withdrew from Bangladesh or agreed to improved safety standards.07_Rana-Plaza-Collapse_Savar_2404131[1]

The case illustrates a broader, important phenomenon: the rise of private regulation of global commerce fueled by activists, (social) media, and public outrage. Many multi-national companies now require their suppliers to comply with global standards ranging from safety to labor conditions and minimum wage levels. Such requirements are not required by local law. Indeed, they usually dramatically exceed local practice. Supplier standards are usually mandated by private contracts, industry-wide agreements are sometimes legally binding, sometimes not. These rules and regulation have the same practical impact as traditional governmental regulation. A manufacturer that does not comply with Walmart’s environmental standards may effectively be shut out from the U.S. market. Industry-wide agreements have even more far reaching consequences. But governments play little to no role in creating and enforcing such agreements. They are negotiated and enforced by private parties: companies and NGOs.

For more details on this, see my article in the Chicago Tribune and NU Law faculty Caroline Kaeb’s blog post on the different legal environments for U.S. and European firms . The Kellogg School of Management, organized jointly with the Aspen Institute, will host a conference in February 2014 to further explore this topic of private governance.

4. Paula Deen

The collapse of Paula Deen’s Southern style comfort cooking empire could be just another example of the swift rise and fall of celebrities, but it also offers some broader lessons for businesses that are tightly connected with a particular person.

Credit: Supplied by WENN.com

Credit: Supplied by WENN.com

Other examples include Martha Stewart’s Omnimedia, Lance Armstrong’s Livestrong Foundation, as well as Tiger Woods’ corporate sponsors. In these cases, we have more than a simple association with a celebrity, as when a former quarterback endorses a car dealership. Rather, the connection goes far deeper, as the salient personal attributes of the celebrity are intended to rub off on the associated entity. Livestrong, for example, was built on the values associated with Armstrong: toughness, defiance, and a never-say-die attitude. The risk associated with highly personal brands is that the personal life of the endorser/founder/owner is closely tied to the success of the business entity (see my blog on this for more details). In case of a personal scandal, the positive spillover from an admired celebrity can quickly turn to a severe crisis, especially if the scandal undermines the very values on which the personal brand was built.

5. Barilla Pasta

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Posted at a restaurant in Chicago.

Yet another company found itself unnecessarily drawn into a controversial social issue. Like Chick-fil-a in 2012, the issue was again gay rights; the company was now the family-owned Italian pasta maker Barilla. During a September radio interview, Chairman Guido Barilla stated, “I would not do a commercial with a homosexual family, not for a lack of respect for homosexuals … but because I don’t agree with them and I think we want to talk to traditional families.

”Barilla went on to support gay marriage while condemning adoption by gay families.The story clearly illustrates the challenges of operating in a truly global media environment turbo-charged by social media. The story started in Italy, but its biggest impact was in the United States, where the issue of gay rights is on top of the political and social agenda. Gay rights activists quickly called for a boycott of Barilla products. Guido Barilla apologized, but the damage was done. To add insult to injury, rival pasta maker Bertolli created and distributed advertisements through social media, under the motto “Pasta and love for all!”For more on boycotts, see this blog entry.

6. Nasdaq – OMX Group

On August 22, the Nasdaq market shut down for three hours due to technological failures in a data feed. A different data feed failure occurred on October 29th . These problems followed on the heels of the problems associated with the Facebook IPO.Nasdaq

Quality concerns are among the most common sources of reputational crises. They go to the very core of what a company stands for and undermine trust in the company and its management. What made this crisis noteworthy was the fact that it hit an exchange. On the one hand, exchanges are somewhat isolated from immediate competitive threats due to the network externalities created by a large inter-connected customer base. On the other hand, the connectedness also can quickly lead to calls for regulatory action due to the systemic nature of the business, which brings us to banking and entry #7.

7. JPMorgan Chase

International banking topped the list last year. While most JPMorgan Chase’s problems go back to 2012 or earlier, this was a particularly tough year for the bank and its CEO, Jamie Dimon. Reputational damage, ongoing investigations, record legal fines JP-Morgan-Chase-300x225[1]and settlements constituted a never-ending string of bad news. Add to that hearings in the U.S. Senate, and this has been a tough year by any standards. Even Dimon’s Christmas card was savagely criticized.

8. SAC Capital Advisors

Exterior of Headquarters of SAC Capital Advisors, L.P. in StamfordWhen Steven A. Cohen’s SAC Capital Advisors pleaded guilty to criminal charges of insider trading, and agreeing to pay $1.2 billion in fines, it not only ended the money managing career of one of the most storied traders in the hedge fund world, but also cast a glaring light on an industry that usually prefers to operate out of the public’s eye. Following the conviction of Galleon founder Raj Rajaratnam for insider trading, it not only further heightened public scrutiny, but also created additional incentives for regulators and public attorneys to look even closer at suspicious business practices.

9. American International Group

This year’s gift that kept on giving was AIG. In a September interview with the Wall Street Journal, CEO Robert Benmosche compared the public outrage in March 2009 over $165 million in bonus payments to employees at AIG’s Financial Products Division, one of the epicenters of the 2008 financial crisis, to a lynching in the American south. Specifically, Benmosche stated that the criticism “was intended to stir public anger, to get everybody out there with their pitch forks and their hangman nooses, and all that — sort of like what we did in the Deep South [decades ago]. And I think it was just as bad and just as wrong.” For full article, click here.130709175442-aig-oversight-620xa[1]

Predictably the comment was met with outrage and calls for resignation. Within a few days, Benmosche issued an apology where he said “It was a poor choice of words. I never meant to offend anyone by it.” The question is: what was the point of bringing this story up in the first place?

10. Tesla Motors

And to conclude, something unusual: a successful rebuttal. On February 8, The New York Times article by John Broder severely criticized Tesla Motors’ Model S sedan’s battery life in cold weather as well as the effectiveness of its battery charging station. On the day after the publication of Broder’s article, Tesla’s CEO Elon Musk struck back. Using personal Tweets, TV appearances and an extensive blog, Musk attacked the article directly and asked the New York Times to conduct a full investigation. In particular, he pointed out that, unbeknownst to Broder, Tesla had begun installing monitoring software in its cars in 2008. The data, according to Musk, showed that Broder had actually set cruise control at a higher level than claimed, had turned up the car’s heater while on low battery and charged the car less and less with each stop. Musk also claimed that Broder had driven the car in circles with near depleted battery “for over half a mile, in a tiny 100-spot parking lot” instead of charging it. Following the post, Musk was defended by loyal Tesla owners using social media posts and letters to the Editor of the NY Times.

A day after Musk’s post, Broder posted his own rebuttal in The New York Times entitled “That Tesla Data: What It Says and What It Doesn’t.” New York Times Public Editor Margaret Sullivan subsequently entered the debate and stated that while Broder, in her view, “took on the test drive in good faith, and told the story as he experienced it,” he did not show good judgment in his fuel management. (For all of Margaret Sullivan’s comments, click here.)

When faced with negative media coverage, business leader dream of such a slam-dunk rebuttal, accompanied by passionate expressions of support by loyal customers, but such opportunities are rare. Companies rarely will have instantaneous exonerating data at their disposal based on meticulous preparation. Indeed, subsequent concerns over battery fires were not as easily put to rest.

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