Bonus Feature: Brief Updates on the Top Ten Reputational Crises of 2011

Some of the entries in last year’s top ten list would have made this year’s list as well. Here is how they fared during the last 12 months.

News Corp. (2011: #1)

The News Corp. phone hacking scandal continued unabated. Former tabloid editors Rebekah Brooks and Andy Coulson were accused by British prosecutors of conspiring to pay public officials in exchange for information. Later in the year, the final report of the Leveson Inquiry criticized News Corp. as follows: “Most responsible corporate entities would be appalled that employees were or could be involved in the commission of crime in order to further their business. Not so at the News of the World.” The report also proposed a new arbitration scheme conducted by a new regulator. In December, News Corp. chair and CEO Rupert Murdoch announced a proposed split of the company into a publishing and a bigger media company. The publishing company will retain the name News Corporation and will consist of newspapers, including The Wall Street Journal, The New York Post, and Harper Collins. Mr. Murdoch will serve as chairman. The bigger company will be called Fox Group and will include Fox Broadcasting, 20th Century Fox and cable channels like Fox News and FX. It will be led by Chase Carey, currently News Corporation’s president and chief operating officer.

TEPCO and the Japanese Government (2011: #2)

A series of reports by the Japanese government as well as independent panels harshly criticized Tokyo Electric Power Co. (TEPCO), the operator of the Fukushima nuclear power plant, as well as Japanese regulators for insufficient preparedness and inadequate crisis response measures. Both TEPCO and the Japanese government were also criticized for lack of transparency and timely release of information. Anti-nuclear power sentiment in Japan has grown strongly over the last year. Only two of the country’s reactors are online and Japan’s new nuclear regulatory body is in the process of issuing new regulations. That said, the recent parliamentary elections awarded the traditionally pro-nuclear LDP a majority of seats. How this will affect Japan’s new regulatory landscape and its nuclear policy remains to be seen.

Penn State (2011: #3)

Another horrific year for Penn State. Jerry Sandusky was found guilty on 45 of 48 counts of sexual abuse and sentenced to 30-60 years in prison. The scandal had far-reaching outcomes for the university. The July 2012 report of an independent investigation led by former FBI director Louis Freeh stated that former Penn State University President Graham Spanier and legendary Penn State football coach, the late Joe Paterno, along with Athletic Director Timothy Curley and school vice president Gary Schultz, had known about allegations of child abuse on Sandusky’s part as early as 1998, and were complicit in failing to disclose them.  In doing so, Freeh stated that the most senior leaders at Penn State showed a “total disregard for the safety and welfare of Sandusky’s child victims” for 14 years and “empowered” Jerry Sandusky to continue his abuse.

Following the report, the NCAA imposed sweeping penalties on Penn State — among the most severe ever imposed on an NCAA member school — including a fine of $60 million, a four-year postseason ban, scholarship reductions and vacating of all victories from 1998–2011. In doing so, NCAA President Mark Emmert stated that the sanctions were levied “not to be just punitive, but to make sure the university establishes an athletic culture and daily mindset in which football will never again be placed ahead of education, nurturing and protecting young people.” The Big Ten Conference subsequently imposed an additional $13 million fine. Former Penn State officials Spanier, Curley and Schultz have since been brought up on criminal charges for their role in the abuse scandal.

German Politicians (#4)

More problems for German politicians. In addition to further claims of plagiarism against various politicians (including the current minister of education and research), German Federal President Christian Wulff had to step down after being investigated for corruption. While the actual amounts (by international standards) seemed small (paid vacations, a favorable mortgage, etc.), they raised major questions of character and judgment. Moreover, the former President’s efforts to diffuse the issue landed him in more hot water. At the end, it was all too much.

ERGO (2011: #5)

Having survived the embarrassing revelations regarding a 2007 “incentive trip” for its top salesmen which involved the hiring of prostitutes in Hungary as well as various other allegations, German newspaper Handelsblatt reported that Ergo had paid for employees to visit a swingers club in Jamaica and a brothel on the Spanish island of Majorca. The company had previously stated that the 2007 event had been a singular incident. Confronted with the new revelations the company first argued that the cases are not comparable and engaged in a brief battle with the newspaper, but later promised improved transparency, among other things providing a website with details on any “inappropriate behavior.”

Netflix (2011: #6)

After the Qwikster disaster, Netflix stock somewhat recovered to about $94, better than last year’s $67 per share, but still far from its height at $300 reached before last year’s crisis. However, a July Facebook posting by CEO Reid Hastings boasting of exceeding 1 billion hours of video streaming in a month for the first time led to a statement by the SEC that it may sue the company. This led to an interesting debate about what disclosure means in the digital age.

HP (2011: #7)

HP certainly would have made the 2012 list. This time over its Autonomy acquisition, now discussed as a candidate for “worst corporate deal ever,” possibly edging out the previous leader: the Time Warner-AOL merger.  HP is suing former Autonomy executives and auditors over alleged misrepresentations, while investors are suing HP.

Fifa (2011: #8)

The Fifa corruption scandal is continuing, though at a lower level of intensity.  The person in charge of investigating corruption at Fifa reported “resistance,” especially by some older members. The investigative panel also asked European lawmakers to get involved.

The U.S. Government (2011: #9)

Having narrowly avoided disaster over the debt ceiling, the U.S. government now tries to avoid the “fiscal cliff,” a legacy problem created by the negotiated solution of the debt ceiling crisis. We’ll keep our fingers crossed.

The Republican Candidates (2011: #10)

47%!

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The British Watergate

Photo Courtesy of Reuters

We are now witnessing the British version of Watergate. What started out as a sordid story about hacking into voice mail accounts and other personal information has now grown to engulf not only the Murdoch media empire, but also the British government (certainly the current one under David Cameron and, possibly, past ones), and Scotland Yard. Every day we see new resignations and arrests. Pundits, politicians, and journalists alike now deplore the decade-long stranglehold of Murdoch’s papers. Charges not only include hacking, but the bribery of police officers to derail ongoing investigations into the practices at News of the World and other tabloids. The resignation and subsequent arrest of former editor Rebekah Brooks and the resignation of Dow Jones CEO Les Hinton have cut deep into News Corp’s inner circle.

Already the British media is full of speculation of a possible arrest of Rupert Murdoch’s son James. And the public is awaiting the testimony of father and son on Tuesday.  Across the Atlantic, U.S. politicians have asked for criminal investigations for violations of the Foreign Corrupt Practices Act and the FBI has been reported to investigate potential hacking into accounts of 9/11 victims.

It is clear that the Murdoch and News Corp. is facing the biggest crises in their history. The BSkyB acquisition has been abandoned and shares have plummeted. But now the very existence of the Murdoch empire is at stake; what’s more, the crisis has now reached deep into the venerable institutions of government, leading to resignations of John Yates, Metropolitan Police’s top counterterrorism officer and Paul Stephenson, commissioner of the Metropolitan Police. Pressure is mounting on Prime Minister David Cameron regarding his cozy relationship with Brooks and Murdoch and his appointment of News of the World‘s former editor Andy Coulson as communications director.

The most upsetting case pertains to Milly Dowler, a 13-year-old girl who was kidnapped and subsequently killed in 2002. News of the World is accused of not only listening to Dowler’s voice mail messages, but deleting messages in order to make room for new ones, which potentially interfered with the missing person investigation and provided Dowler’s family with false hope that the young teenager was still alive.

Nobody knows where the crisis will end. But while breath-taking in its speed and drama, the scandal followed a familiar script.

First, newspapers and media companies are especially bad at managing reputational crises. This is not only illustrated by the News Corp. crises but other cases such as the Jayson Blair scandal at the New York Times or “Memogate” at CBS’ 60 Minutes. Operating in an intensely politicized atmosphere in their daily lives, news organizations typically interpret any criticism immediately as another politically motivated act and miss the underlying business issue—a crisis that threatens the pillars of news organizations: competence and integrity. The response is defensiveness, which further erodes trust. What was required was a sense of transparency, empathy and commitment to set things right. After almost two weeks, News Corp. finally changed course and took some of the steps that should have been taken much earlier: an apology to the victims of the hacking scandal, the resignation of Rebekah Brooks, and a commitment to reform. But after weeks of fighting back and dismissing the concerns, these steps now look calculated and reactive.

Second, good governance structures pay off in a crisis. According to the New York Times, News Corp. stock routinely trades cheaper than comparable media companies’, commonly known as the “Murdoch discount.” In the aftermath, this “discount” has since hit 30%. Ineffective boards or ill-placed personal loyalties are a problem in good times, and in bad times they are a disaster.

Third, dormant issues can very quickly become life-threatening crises if the roles of the key actors change. One of the striking aspects of the News Corp. scandal is that the allegations of hacking into voice mail messages, private accounts, and bribery of police officers were known for years. But the dynamics dramatically changed when the reports related to Milly Dowler (and other similar cases such as murder victims or soldiers killed in action) surfaced in early July. Previous tabloid targets were celebrities and politicians, parties that could count on little sympathy from a jaded public. But the horrific case of Milly Dowler and her family immediately triggered reactions of sympathy for the victims and disgust and outrage for the new villains: News of the World, News Corp. and Murdoch.

Fourth, moral outrage and fear quickly turn public opinion. Once a company loses public opinion, politicians will adjust, turning from friends to enemies in a heart-beat. At that stage politicians and public officials need to save their own skin amidst allegations of inaction or complicity.  Another illustration of the eternal law of politics: Nulli Permanentes Amici Nulli Permanentes Inimici. No permanent friends, no permanent enemies.

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