Top Ten Reputational Crises – The 2012 Edition

Welcome to our second annual list of the top ten crises of the year. This was another banner year for corporate crises and scandals.

1. Global Banking

2012 was a particularly harsh year for global banking. Bank of America, Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan Chase, Morgan Stanley, Standard Charter, and UBS all would have been strong candidates to make the 2012 list on their own. Issues included the Libor scandal, rogue traders, fraud, money laundering, and a botched IPO (Facebook), among others. In addition, prominent hedge fund managers were convicted (Galleon) or investigated (SAC Capital) over insider trading, as U.S. authorities significantly stepped up their investigative and enforcement efforts.

All this contributed to a new low in public trust for an industry already held in low public esteem. But how much does this matter? Cynics may argue that while the entire industry is mistrusted, it still fulfills an irreplaceable function in global commerce. Moreover, the size and interconnectedness of global banks may make them (in the words of Andrew Bailey, chief executive designate of the UK’s Prudential Regulation Authority) “too big to prosecute.” Finally, if the entire industry is mistrusted, no one bank can be singled out. But this view is short-sighted; it overlooks the increasing willingness by politicians and regulators to take action. Public officials may act due to genuine outrage or policy concern, or in response to public pressure. The result is that financial institutions increasingly need to play defense; they fight merely to continue existing business practices – not an encouraging prospect.

2. Costa Concordia

Image courtesy of CyrOz via a Flickr Creative Commons license.

According to Karl Marx (a quote recently revived in the movie Argo) history repeats as tragedy and ends as farce. But as the Costa Concordia crisis showed, sometimes the move from tragedy to farce requires no repetition.  As a reminder, the cruise ship Costa Concordia, operated by Costa Crociere S.p.A. and owned by Carnival Corp., partially sank on the night of Jan. 13, 2012, after hitting a reef off of the Italian coast and running aground at Isola del Giglio.  More than 4,000 people on board had to be evacuated (more than thirty were confirmed dead), and the images of the half-sunken cruise liner made evening news across the world (it still warranted a 60 Minutes story as late as last weekend). Things took a turn to the bizarre when it became known that Captain Francesco Schettino had deviated from the ship’s computer-programmed route to treat people on Isola del Giglio to the spectacle of a close sail-past or “near-shore salute.” Captain Schettino was later charged (among other things) with abandoning incapacitated passengers. To refute the allegations, Captain Schettino had claimed that he had fallen into a lifeboat by accident. In addition to these operatic details, the crisis raised serious issues over safety practices at the ship’s operating company, a forceful reminder that, once a company finds itself in the spotlight, all its previous actions will be scrutinized as well.

3. Apple and Foxconn

Image courtesy of plasticpeople via a Flickr Creative Commons license.

A soaring stock price, passionate customers, and an iconic status are no guarantees against reputational crises. This is one of the lessons from the controversy over labor conditions at Apple supplier Foxconn. Following months of controversy over illegal overtime, inadequate safety conditions and poor workers’ housing, and highlighted by a string of reported suicides by distraught workers, Apple and its main manufacturing contractor, Foxconn, agreed to significantly improve labor conditions at Chinese factories. Foxconn’s decision to make improvements followed an investigation by the Fair Labor Association (FLA) which found multiple violations of labor law, including extreme hours and unpaid overtime. Apple’s initial response was slow and somewhat evasive, but eventually Apple’s new CEO Tim Cook decided to take a leadership position on the issue of global labor standards.

This case illustrates an increasingly important phenomenon: the rise of private regulation of global commerce via reputational crises. The strategy works as follows: advocacy groups target a particularly well-known company that is likely to generate broad media coverage. If successful, the reputational damage forces the company to change its business practices, setting a benchmark for the industry. This “regulatory” activity is entirely driven by private entities, while public entities play little to no role. Even though Foxconn’s compliance with new standards is not mandated by a new law, the practical effect is the same.  This is the force of regulation through reputation.

4. Walmart

It was an annus horribilis for Walmart. What started as an isolated corruption case in Mexico has now engulfed the company as a whole involving senior management and the board. A December 18 article in the New York Times states this as follows: “Rather Walmart de Mexico was an aggressive and creative corrupter offering large payoffs to get what the law otherwise prohibited. ” Moreover, according to the same article, Walmart’s leadership was informed about the allegations, but decided to shut them down. This (still ongoing) issue follows on the heels of  the recent fire at the Tazreen Fashions factory in Bangladesh, a maker of clothing items for Walmart and other retailers. Bangladesh is the world’s second largest apparel manufacturer after China, and the fire, caused by gross negligence, has refocused attention on the country’s unsafe working conditions.

These crises have re-energized the anti-Walmart coalition in the U.S., which had lost some of its steam after Walmart embraced sustainable supply chain practices, universal health care, and even moderated its anti-union stance, at least in some instances.  The case also points to the exposure for globally operating companies due to supply-chain risk: reputational risk cannot be outsourced.

5. Lance Armstrong and Livestrong

Image courtesy of Angus Kingston via a Flickr Creative Commons license.

When Lance Armstrong was stripped of his record seven Tour de France titles following the damning report by the U.S. Anti-Doping Agency (USADA), and lost major sponsors Nike and Anheuser-Busch, the crisis quickly spilled over to his cancer foundation Livestrong. Although Armstrong stepped down as chairman, the foundation has faced the difficult challenge of creating a successful separate existence after being so closely associated with its founder.

This is not the first case where a personal scandal has created severe difficulties for associated entities. Examples include Martha Stewart’s Omnimedia, as well as Tiger Woods’ corporate sponsors. 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. In case of a personal scandal, the positive spillover from an admired celebrity can quickly turn to a reputational crisis for the associated entity, now caused by a negative spillover, especially if the scandal undermines the very values on which the personal brand was built. Things seem to go reasonably well, so far. Livestrong’s donations actually increased immediately after Armstrong’s resignation, though some donors asked for their money back.

6. Susan G. Komen Foundation

Image courtesy of Joel Kramer via a Flickr Creative Commons license.

Nonprofits feature prominently this year on this year’s list. This may be a coincidence, or a reflection of a broader trend that managing reputational risk is as important for nonprofits as for companies. After all, what are the assets of successful non-profits other than their people and their reputation?

Nonprofits may believe that they have a reservoir of goodwill, a trust bank account that can be drawn upon when times get tough. This view is largely misguided. Trust does not work like a bank account; it resembles a currency. The same message coming from a trusted source will have more credibility. But if trust is not maintained, this multiplier effect can vanish quickly.  When Susan G. Komen for the Cure, the nation’s largest breast cancer advocacy organization, considered cutting off most of its financial support to Planned Parenthood in late January 2012, it was quickly engulfed in a firestorm of protest, initially stirred by social media advocacy before it reached traditional media channels. Now caught on the battle lines between pro-life and pro-choice advocacy groups, the leadership quickly stumbled. Unconvincing, overly bureaucratic, justifications gave way to a quick reversal of its decision to cut funding for Planned Parenthood. Subsequently, CEO Nancy Brinker and President Elizabeth Thompson announced plans to step down from their posts. But recovery has been difficult. Participation at its signature Race for the Cure is down by 19 percent, according to a recent New York Times article. Once the Komen foundation had been associated with the vitriolic abortion debate, any decision was criticized by somebody, a common feature of highly polarized issues. During last October’s National Breast Cancer Awareness month, the foundation ran a new ad campaign focusing on the individual women whose lives have been saved by the foundation’s work. While this particular attempt to refocus public attention on the mission was well-executed, it remains to be seen whether the Komen foundation can ever fully recover its past status.

7. Chick-fil-A

Another controversial issue, another company. This time the controversy was over gay rights and the company was the family-owned fast food chain Chick-fil-A. The uproar began in late July when President and COO Dan T. Cathy stated that Chick-fil-A supported “the biblical definition of the family unit.” While the deeply religious roots of Chick-fil-A’s founder and family owners were well known, the new comments quickly led to boycott threats by gay rights groups, statements by public officials in cities such as Boston or Chicago that the company was not welcome there, and the decision by the Jim Henson Company, creator of the Muppets, to no longer supply the company with toys.

What made this case particularly interesting was the support of Chick-fil-A by conservative advocacy groups and politicians, including then candidate for the Republican presidential nomination Rick Santorum and former presidential candidate Mike Huckabee. Conservatives asked supporters to increase their visits, effectively organizing a “buy-cott.” The sales impact on Chick-fil-A seems to have been limited, raising the intriguing and somewhat worrisome specter of consumer preferences being significantly correlated with political ideologies. Picture the Whole Foods shopper compared to the Cracker Barrel customer, Starbucks versus Dunkin Donuts. But before embracing another new marketing fad companies should be careful with (unintentionally?) defining themselves as a “Republican” or “Democractic” brand. Otherwise, they will be in for some interesting times.

For more details on the impact of boycotts, see my Harvard Business Review blog post.

8. The BBC

This fall the BBC faced the biggest crisis since its existence. The first blow was revelations that TV personality Jimmy Savile had sexually abused children while he worked for the BBC. Moreover, prior to the revelations by a rival news program, an investigation conducted by a BBC’s news program had uncovered credible evidence that Savile was a pedophile. Yet the BBC canceled the investigation in December 2011, the same month the network ran a glowing tribute to Savile. A recent report on the incident pointed to chaos and confusion rather than a cover-up.

Image courtesy of Elliott Brown via a Flickr Creative Commons license.

But that was not all. In the aftermath of the Jimmy Savile scandal, BBC flagship program Newsnight investigated a North Wales child abuse scandal. A former resident of the Bryn Estyn children’s home was reported on Newsnight claiming that a prominent but unnamed former Conservative politician had sexually abused him during the 1970s. Rumors on Twitter and other social media named the politician. After The Guardian reported a possible case of mistaken identity, the politician stated that the allegations were wholly false and seriously defamatory. The accuser unreservedly apologized, stating that as soon as he saw a photograph of the individual, he realized that he had been mistaken. The BBC subsequently apologized.

The decision to broadcast the Newsnight report without contacting the person first lead to further criticism of the BBC, and the resignation of its Director-General George Entwistle. Following Entwistle’s resignation, Lord Patten, Chairman of the BBC Trust, called for a “thorough, radical, structural overhaul” of the organization. Tony Hall, a former BBC journalist and subsequent successful director of the Royal Opera House, was appointed the head of the BBC. While this appointment inspired confidence, the BBC has a tough road ahead.

9. Japanese companies in China

We can now add “country of origin” to the ever increasing list of headaches for today’s multinational companies. The most recent example is Japanese companies operating in China following the controversy over a cluster of uninhabited islands northeast of Taiwan.  This conflict has had severe consequences for Japanese companies doing business in China. Compared to last year, Toyota has seen its sales drop by 49 percent, Honda by 40 percent, and Nissan by 35 percent.

Other examples of this phenomenon  include the 2005 boycotts of Danish products in the Muslin world after the Danish newspaper Jyllands-Posten published satirical cartoons which depicted the prophet Mohammed, as well as the oil company CITGO, which is owned by Venezuela’s state-owned national oil company. Venezuela’s leader Hugo Chávez gave a highly inflammatory speech in 2006 where he called then President George W. Bush the “devil” and “sick man.” As a result, CITGO faced immediate calls for boycotts in the U.S.

These intense reactions are usually triggered by moral outrage, either because of violated national pride or firmly held religious beliefs. In the ensuing angry protests, companies may find themselves the target of popular rage. The strategic options for companies to respond are limited. They usually are well-advised to stay out of the political debate, in part because allying themselves with one government will alienate the other. A more promising strategy is to highlight local roots. The problem with such strategies is that they run counter to a brand-based strategy that has downplayed local independence up to this point. Having it both ways is difficult for companies: you live by the brand, you die by the brand. This insight holds even if the brand damage is beyond the company’s control.

10. The NFL

The NFL is by far the most successful sports league in the United States.  TV viewership is up and fan passion runs as high as ever. Moreover, compared to other leagues (the NHL comes to mind) bargaining issues were resolved successfully leading to a landmark 10 year agreement. So, why did the NFL make the list? No, it’s not the issue of replacement referees, highlighted by the missed call in the Packers-Seahawks game. The issue is player safety, especially the issue of head trauma and concussions that are being linked to dementia and player suicides. In June 2012, more than 2,000 former NFL players filed a lawsuit against the NFL, the biggest sports-related lawsuit ever, accusing the league of concealing information linking football-related injuries to long-term brain damage. The suit alleges that the “NFL exacerbated the health risk by promoting the game’s violence” and “deliberately and fraudulently” mislead players about the link between concussions and long-term brain injuries.

What we have here is an example of slow-burning crisis that remains unresolved and leads to repeated flare-ups, especially whenever another player tragedy hits the headlines. The NFL has responded decisively, donating $30 million to the National Institutes of Health for brain-related research, changing concussion policies, and engaging in ongoing rule changes. That said, at this point there is no solution to the problem. Moreover, some of the policies intended to better protect players are resented by some players, e.g. the controversy over penalties for Steelers linebacker James Harrison. The recent decision by former commissioner Paul Tagliabue to vacate player suspensions over the Saints bounty scandal was a further setback in this direction. Maintaining the popularity of the game while making it safer will be a challenge for years to come.

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Apple, Foxconn, and the Private Regulation of Global Commerce

Last Thursday, Apple and its main manufacturing contractor, Foxconn, agreed to significantly improve labor conditions at Chinese factories. This decision followed months of controversy over allegedly illegal overtime, inadequate safety conditions and poor workers’ housing, as well as a string of reported suicides. The controversy was further fueled by a performance of actor and author Mike Daisey that was broadcast on National Public Radio but later turned out to be partially fabricated. Foxconn’s decision to make improvements followed an investigation by the Fair Labor Association (FLA) which found multiple violations of labor law, including extreme hours and unpaid overtime. For more details see this Reuters article on the subject.

Much of the existing media coverage on the story has focused on the crisis management aspect of the story. My own views can be found here and here. I had argued that Apple will have to take a leadership position on this issue due to their brand exposure and global impact, a position similar to Walmart’s embrace of sustainable supply chains a few years ago.

But this case illustrates a broader, more important phenomenon: the rise of private regulation of global commerce. Everywhere in the world, business activity is both enabled and constrained by formal and informal norms and regulations that structure market competition. These “rules of the game” vary significantly across countries and are subject to change, but significantly impact competitive positioning as well as firm and industry profitability.

Public institutions such as legislatures, agencies, and courts have traditionally been viewed as the dominant creator and enforcer of such structures, but increasingly companies and observers realize that new organization forms (NGOs and advocacy groups, non-profits, public-private partnerships etc.) have started to play an important role. Examples include global health, sustainability, human rights, labor conditions, fair trade and supply chain safety. The outrage over the labor conditions at Apple supplier Foxconn is simply the most recent example of this trend.

Not that this regulatory activity is entirely driven by private entities, but public entities play little to no role. Even though Foxxconn’s compliance to new standards is not mandated by a new law but rather by its main customer’s desire to contain reputational damage, the practical effect is the same as if a new law had been passed.

As I have argued in other writings, (Strategic Activism and NonMarket Strategy, Private Politics- A Research Agenda, Private Politics: Public Activism as an Alternative Regulatory Mechanism?, and Chapter 3 in Reputation Rules) the rise of private regulation is due to three mutually reinforcing factors:

1. The dramatic rise in media coverage (both traditional and social).
   Companies now live in an ever-faster-moving news cycle, driven by intense competition between 24-hour news channels, wire services, and online news providers. Concerns over business practices in distant areas of the world are spread in minutes.
2. The globalization of value and supply chains has limited the regulatory reach of individual companies.
   Yet, the globalization of business has been matched by the globalization of activists that look at companies as the main engine of social and political change.
3. A change in values and expectations.
   Customers and the public (especially the younger segments) expect more and more from companies. Complying with local law and maximizing shareholder value is not enough. Companies are now expected to have a positive social impact from animal welfare to sustainable business practices.

These trends suggest that the factors that led to the Apple-Foxconn story will grow in importance. They also raise normative questions of legitimacy and social impact. Stay tuned…

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An interview with The Wall Street Journal on the anniversary of the Fukushima nuclear plant disaster

I recently spoke with The Wall Street Journal Japan’s Misako Hida about the future of Japan’s Tokyo Electric Power Company (TEPCO), which was previously at the center of Japan’s nuclear crisis during last year’s earthquake and tsunami. Marking the first anniversary of the Fukushima nuclear plant disaster, we discussed what went wrong with TEPCO’s crisis management strategies, and if the company could possibly recover from such severe damage to its corporate reputation. We also discussed other recent events in Japan such as the Toyota sudden acceleration crisis and the scandal at Olympus. The interview coincided with the Japanese edition of my book, “Reputation Rules: Strategies for Building Your Company’s Most Valuable Asset.”

The original interview (published in Japanese) has been condensed, edited and translated from its original Japanese form by Trevor Devlin.

“It has been more than one year since the Great East Japan earthquake and disaster. With recovery demand just gathering momentum, we have seen considerable fallout from the efforts by TEPCO to impose increases in electricity charges for major contracts as well as households, sharp division of opinion on whether there should be ‘de facto nationalization’ of the company, plans for a major shakeup in management, and a host of other pressing problems surrounding the company. TEPCO’s manner of responding to the nuclear power plant crisis, lack of crisis management consciousness and other issues elicited an avalanche of criticism from foreign media, and now it is also being bluntly criticized by Japan’s domestic media and political and business circles.

If we look back at TEPCO’s track record over the past year, what was its biggest problem? Can it possibly restore the reputation and trust it previously enjoyed in Japanese society as a top-notch infrastructure enterprise? We posed those questions to Daniel Diermeier, author of “Reputation Rules: Strategies for Building Your Company’s Most Valuable Asset” and professor at the Kellogg School of Management at Northwestern University, who is an expert on crisis management, corporate social responsibility and reputation management.

Misako Hida: What critical error has TEPCO made over the past year in response to the nuclear power station crisis?

Professor Diermeier:  It would probably be its failure at reputation management. Crisis management concerning things like natural disasters involves all kinds of issues, including operational problems, safety and financial issues. And although there is a tendency to give it short shrift, there is a need for enterprise reputation management. If a crisis occurs, public attention is going to be focused on that company. Since a merciless spotlight will shine on the firm, recollections of whether or not it got a good handle on the situation may well remain among the public decades later. In other words, competency in reputation management is a vital factor in the creation of a company’s long-term image. For that reason, such things as the Exxon-Valdez oil spill accident involving the international oil major Exxon-Mobil remain in the collective public memory more than 20 years later.

That being so, companies simply have to grapple with these difficult questions related to the management of operational crises and reputation crises. Reputation crisis management involves striving for the capability to keep the “trust” of the public, customers and regulating authorities.

Misako Hida: What is required to maintain or increase trust?

Professor Diermeier:  There are four critical elements involved, and all are interrelated. First, there is transparency. Here the question is whether a company can make the public and other concerned parties feel that it is not hiding anything. Second, it has to back things up with adequate “expertise.”  Third, leadership should be evidenced in a decisive ‘commitment’ (proactive involvement). Finally, there is ’empathy.’ In other words, the company should show concern for and attentiveness to the needs of the victims.

In the case of TEPCO, all of these elements were lacking. First, there were grave concerns regarding its transparency, sharing of information and clarity. Because of the hospitalization of TEPCO’s president, Masataka Shimizu, there was an impression that the company’s management lacked leadership. There is no denying that top management left the impression that they had passed the ball to subordinates as far as empathizing and providing heartfelt consolation or relief to the victims and others affected by the disaster is concerned. All I can say is that it was shocking that they failed in every single respect. On top of the damage to the environment, this is the reason why TEPCO is under such strong criticism now.

As another example, roughly two years ago there was the case of the massive recall by Toyota Motor in which things unexpectedly snowballed. Here I don’t believe it was a case of a lack of expertise. The company had a clear understanding of the point at issue in the dispute, and carried out a very careful assessment of the situation. Later a report conducted jointly by the National Highway Traffic Safety Administration (NHTSA) of the U.S. Department of Transportation (in February 2011) and NASA showed that Toyota’s position had been correct and that the acceleration problem was not due to a failure of its electronic steering system but rather entrapment of the gas pedal by the floor mat. In the case of Toyota, the only real problem was that it excessively focused on the expert knowledge and forgot about transparency, commitment and empathy with its customers.

Misako Hida: In the case of TEPCO, which of these four qualities was most lacking?

Professor Diermeier: It was transparency. They did not provide the necessary information in timely fashion. When a natural disaster hits, people want to know the “truth.”  If the nation’s people are aware that there are things that are unknown (even to the company or the government), they will accept that fact. Clearly telling the public what is known and what is not known enhance transparency.

Furthermore, and this is also commonly true for other companies, TEPCO excessively used difficult technical language. The public is basically looking for simple, clear explanations. So if too much difficult-to-comprehend technical language is used, they suspect that something is being hidden, or that there is an attempt to dodge the issues.

When directly faced with an actual natural disaster, establishing transparency requires courage by leaders. In the case of TEPCO, the executives may have panicked, and were consumed with anxieties, worried about the long-term effects (of the nuclear accident crisis) on the company and their own careers, and they therefore tried with all their might to create a feeling that they were in control.

Misako Hida: Are such crisis management responses a product of Japan’s business culture?

Professor Diermeier: Not in all cases, but some other companies have the same kinds of issues. In a broader political or organizational sense, traditionally as far as violations related to issues of regulation and safety are concerned, as compared to Great Britain or the United States, ties between regulatory authorities and companies in Japan have been too close, and the former do not maintain sufficient independence. For that reason, when a crisis arises, the government also rushes to defend itself, and politicians are preoccupied with their own survival, so they do things like press for harsh responses towards the companies involved, which also embroils the regulatory authorities in the crisis.

Moreover, because of the desire for perfection found in Japanese society, you have a situation in which it is difficult to get companies to own up to mistakes.

Misako Hida: Can TEPCO regain trust?

Professor Diermeier: That would amount to open-heart surgery for the company, in other words it is comparable to a substantial transformation. They would have to reconsider all kinds of different aspects of their governing mechanisms and processes, as well as their corporate culture, to ferret out whether they are any deficiencies and which areas need to be improved.  There has to be top-to-bottom reconsideration of what needs to be improved. However, under the present management that would be nearly impossible. At the same time as undertaking wholesale revamping of their governing mechanisms, they also need to change their relationship with the authorities.

Misako Hida: Can other companies learn anything from TEPCO’s failures?

Professor Diermeier: Well, first of all, we are now in the age of global media, so the most important lesson to be learned from the example of TEPCO is the recognition that as soon as some incident takes place, the world’s media will come running en masse to report on it.

The next thing that can be learned is that as things now stand it is not enough for companies to be superior from the standpoint of operations and business. They also have to fulfill various other requirements related to things like labor standards and environmental standards. People have come to expect a lot more from corporations than in the past. Companies operating on a global scale are expected to be ‘good citizens.’

For that reason in particular, reputation is very important. If establishing itself as a global brand is an important consideration for a company, along with management competency concerning things like product quality and safety, it needs to establish management competency concerning reputation. Just as with product management and safety management, success demands the strategic mindset, processes and corporate culture essential for a proper reputation.”

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Crisis Management Essentials: A Primer

Business, it seems, has entered the age of crisis. Almost every day, another venerable company or institution finds itself in the headlines, and usually not in a flattering context. In addition to a long list of global corporations, public sector institutions and non-profits are increasing forced to deal with serious crises. Yet, despite this significant change in business climate, the nature of corporate crises is frequently misunderstood. Such misconceptions can lead to severe management mistakes in a crisis situation.

1. First, all too often crisis management is viewed as the sole responsibility of the public relations or the legal department. This approach overlooks the fact that crises need to be viewed as business issues closely connected to a company’s identity and position in the market-place. Managing these challenges frequently requires a trade-off between different risks such as legal and reputational risks. By delegating these decisions to any functional unit managers effectively abdicate their responsibility.Delegation to functional experts also makes it much less likely that crises are prevented before they occur – the most effective form of crisis management. The reason is that once PR specialists or the corporate attorneys become involved the crisis is usually already in full swing – too late for effective crisis management.A much more effective approach is to view the prevention of crises as the responsibility of management. On the one hand, a company has most control over the situation in the pre-crisis state. On the other hand, many crises originate in routine management decisions. This emphasizes the value of prevention and preparation strategies applied to everyday business practice.

   The goal of prevention strategies is to eliminate or significantly reduce crisis risks. In the case of manufacturer this includes quality controls, in the case of an accounting firm or financial services a strong set of values. Adopting such safeguards (and allocating resources to pay for them) is the responsibility of managers.

2. Second, the crisis is misunderstood. Companies frequently focus on who is at fault (usually somebody else, e.g. a supplier) and who is liable (ideally not the company, of course). While the assessment of potential legal liabilities is an important part of any crisis management strategy, it is only a part. Other important issues that need to be considered are damage to a company’s reputation, its supplier relationships, its effect on customer loyalty, its potential damage on employee morale, and its relationship to regulators, to name just a few. Managers need to balance those effects and integrate them into their strategy choice.The most important task during a crisis is to reassure all stake-holders. Brands are promises, and these promises needs to be reaffirmed to a crisis. To preserve and rebuild trust companies need to focus on four dimensions: transparency, expertise, commitment, and empathy. Unfortunately, many companies focus on expertise alone, in part because their expertise is their comfort zone, giving them an illusion of control. Leaders need to actively resist this temptation and emphasize all four dimensions.
3. Third, crises are not only threats. They can also present a (hidden) opportunity. Once a company is in the media spotlight it is effectively on stage, and customers, employees, business partners and external stakeholders are paying attention. Once we pay attention, we remember. So, whatever course of action management takes, it will define its reputation for a long time. Effective crisis management can significantly enhance a company’s reputation, as in Johnson and Johnson’s famous decision to pull Tylenol from retail shelves, or it can damage it as in the case of the Exxon Valdez. These crises happened over two decades ago. Yet, they define the companies’ perceptions to this day.
4. Finally, crises provide supreme learning opportunities. But too often early warning signs are ignored or the wrong lessons are learned. After settling with the SEC in the Waste Management accounting fraud case, Arthur Andersen changed its document retention policy. It did not sufficiently investigate its culture, value system, or incentive structure.

A company’s values are its guide in a crisis. In turn, a crisis is a great opportunity to see whether these values still govern day-to-day decision making.

This post originally appeared on TanveerNaseer.com.

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Total Football, Crisis Management, and the Strategic Value of Space

 Instinct may lead us to focus on  finding a quick solution to the crisis. Total Football suggests otherwise.

While still in the afterglow of Saturday’s glorious Champions League final, here are some observations on the similarity of soccer and crisis management.

In the 1970s the Dutch soccer coach Rinus Michels—first with Ajax Amsterdam and then the Netherlands national team—developed a new approach to soccer strategy. Known as Total Football (“Total Soccer” for Americans) it reached its pinnacle with the 1974 FIFA World Cup team and its embodiment with striker Johan Cruyff.

Total Football is usually understood as the idea that players rotate into different situations which requires highly technically skilled players at all position, a task made possible by Ajax’s famed youth system. While the 1974 team never reached its zenith (it lost to host Germany 1:2 after a legendary second half of non-stop attacks on the German goal), its approach to soccer has found modern heirs in CF Barcelona and Arsenal London. Cruyff is the connecting link in this lineage, first as player and then as coach of Barcelona, which also established a famed youth academy, La Masía. In the 2010 the three finalists for the FIFA Ballon d’Or (formerly known as the World Player of the Year award) were Andres Iniesta, Xavi (Hernandez), and the eventual winner, Argentinean superstar Lionel Messi. All three were La Masía graduates.

Neither Arsenal nor Barça play total football. Barcelona’s style, also known as Tiki-Taka, is characterized by ball possession, extensive (short) passing, and constant movement, but lacking the extensive player rotation typical of the Dutch approach. But Total Football has another characteristic. Players do not intend to score directly, but rather to increase the overall chances of scoring. A sense of space and movement is critical for this approach. Both Cruyff and Barcelona’s midfield master strategist Xavi have repeatedly emphasized the importance of space and movement. This leads to extensive passing even close to the goal rather than excessive dribbling and low probability long-range attempts. Some observers are critical of this approach complaining that the teams try to “carry the ball into the goal”, but that’s the idea: rather than go for the goal, maximize the opportunity space, the room to maneuver.

So, what does this have to do with crisis management? It becomes a useful analogy when dealing with a reputational crisis, especially during the all-important first 24 hours. As I have argued in Chapter 1 of Reputation Rules, during a reputational crisis a company is “on stage”. Customers, employees, business partners, and other stakeholders are all paying particular attention to the company’s actions. But in most cases the company is on stage only for a very short time—often no more than 24 hours, a consequence of a much accelerated media news cycle. Companies may wish to be out of this spotlight as quickly as possible. But this is a misconception. Getting out of the headlines is desirable only if the last impression by customers, stakeholders, and the public is positive rather than negative. Otherwise, a negative impression will tend to stick in the mind of observers with few opportunities to correct it. After all, public attention has now moved on to a different topic.

But this creates a conundrum. During the first 24 hours it is virtually impossible to establish even the most rudimentary facts about an incident. Yet, without a response or a “no comment” statement observers will draw negative inference (lack of transparency, commitment, empathy and so forth). The solution is to take a lesson from Total Football. Our instinct (the direct path to the “goal”) may lead us to focus on trying to find a quick solution to the crisis. But a more promising approach is to put this desire aside and instead attempt to create a trusted process to get to a solution, e.g. by setting up a task force, bringing in trusted third parties, commit to a schedule with updates and so forth. The point is to create much needed room to maneuver, not a quick shot on goal. Another advantage is that it is much easier to prepare for setting up processes than for anticipating solutions.

This approach, however, is counter-intuitive for many managers as (in their day-to-day existence) they are used to solving problems quickly and competently. Resisting this impulse requires discipline and teamwork. Watching Barcelona play is a pleasurable reminder of this insight.

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