Corporate governance and crisis management.

• Author: Bremer, L. Paul
• Position: Crisis Management

Developing an effective crisis management strategy is not an optional activity for a corporation -- it is at the heart of good corporate governance. From the boardroom to the factory floor, here are the principles of a comprehensive crisis plan.

THE TERRORIST ATTACKS of September 11 were a wake-up call for the American people and the American government. They also showed American businesses that effective crisis management is vital for all corporations. Four hundred companies were directly affected by the attacks on the World Trade Center. Many will never recover because they were unprepared to manage a crisis.

Unfortunately, crises are an inevitable part of the corporate landscape. Large corporations can expect to face a crisis on average every four to five years. For example, Marsh and McLennan, the company I work for, experienced four crises in the past 17 years, the latest being the loss of nearly 300 colleagues in the World Trade Center attack.

Every CEO will probably have to manage at least one crisis during his or her tenure. A director may face two or three crises during a normal tour of service on a board.

Over the last 30 years, 80% of all terrorist attacks on American targets have been on American businesses. But terrorism is not the only threat a CEO has to worry about. Many events can provoke a crisis -- an industrial accident, product tampering, financial improprieties, sexual harassment allegations, or a hostile takeover. Any event that suddenly threatens a company's financial performance, reputation, employee retention, customer or community relations has the potential to become a crisis.

A corporation's response to a crisis will have a major effect on the company's short- and long-term performance.

First, effective crisis management can make a significant immediate difference in shareholder value. A study conducted at Oxford University assessed the financial impact of 15 major corporate crises, ranging from product recalls to industrial accidents and terrorism, occurring between 1980 and 1995. The study found that the stock prices of companies that managed their crises well rose 7% on average in the year following the crisis. By contrast, the stock price of companies with less effective crisis management dropped 15% (see Figure 1 on page 18).

Damage to companies and boards

But poor crisis management can also do lasting damage. For example, Perrier reacted slowly and ineffectively to the presence of benzene in its bottled water in 1990. This crisis cost Perrier an immediate 1 billion FF in lost sales. Over the following three years, the company lost 40% of its market. Even now, a decade later, the company has not fully recovered its position. Last year, Firestone took a $3 billion write-off to cover the immediate costs of a massive product recall -- and it lost its century-long relationship with Ford Motor Co.

Corporate crises also threaten brands -- the reputation of the company and that of the CEO. The immediate cost to Coca-Cola Co. of the 1999 product contamination in a Belgian Coke bottling company was not great. But the company's handling of the crisis was a serious jolt to one of the world's great brands. Ultimately, the CEO lost his job.

A pre-September 11 business survey found that:

-- 85% of CEOs said they expected to face a crisis;

-- 50% said they had a crisis management plan in place; but

-- 97% of all CEOs expressed confidence that with or without a crisis management plan they would handle a crisis successfully.

Are they right? Or are they overconfident? How do they define "success"? If they have a plan, is it more than just a communications plan? Is the plan comprehensive, adequately integrating the operations of various corporate departments? Does the company have steps for business recovery in place? When did top management last participate in a full exercise of the plan? What...