WHAT TO DO WHEN THE PHONE RINGS — CRISIS MANAGEMENT
| Jurisdiction | United States |
(Apr 1999)
WHAT TO DO WHEN THE PHONE RINGS — CRISIS MANAGEMENT
Rio Algom Limited
Toronto, Ontario, Canada
Vice-President, General Counsel and Secretary
ABSTRACT
Modern standards of corporate governance and principles of sustainable development oblige directors and officers to evaluate and manage corporate risk. Today a crisis management plan is seen as an integral element in a corporation's comprehensive risk management strategy. It enables a corporation to better deal with failures of risk mitigation measures or unexpected developments and events that can seriously threaten a corporation's well being.
An effective crisis management plan provides an orderly, systematic response that permits the corporation, to the greatest extent possible under the circumstances, to continue with its daily business while effectively dealing with the crisis. In addition to minimizing injuries, loss of life and damage to property and corporate assets, a crisis management plan can assist management in preserving the corporation's reputation and maintaining shareholder value during a crisis.
For a corporation whose corporate culture encourages the early identification of potential problems, the preparation of a crisis management plan constitutes an extension and codification of principles that are inherent in the corporation's daily activities.
The crisis management plan should be developed by and receive contributions from a team of individuals from various areas of the corporation. This team should conduct a corporation-wide inventory of strengths, weaknesses and vulnerabilities to identify areas of potential risk. To the extent possible, specific situations should be considered and a detailed framework of a response plan prepared to deal with each of them.
A properly considered and drafted crisis management plan should maximise the crisis team's ability to function under the informational and timing constraints of a crisis as well as provide a systematic procedure for collecting, analyzing, verifying and disseminating information about the crisis. To the extent that it serves these functions, the crisis management plan will be an indispensable tool in the management of legal and informational issues.
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I. INTRODUCTION
A. Modern Crisis Management
Corporate crises are not new. The names, places and other facets of a crisis may vary but the underlying situation is substantially similar — a major problem surfaces suddenly and unexpectedly which requires a prompt management response.
Crises can arise from internal or external causes and with or without corporate involvement, culpability or negligence. While most recent crises in the resource industry have involved large-scale environmental incidents, corporate crises are by no means restricted to environmental situations. Examples of situations which can lead to crises include:
Internal:
• Disruption to operations
• Incidents resulting in injuries, death, damage to property
• Uncontrolled releases to the environment
• Loss of officer(s), director(s)
• Bad news story — focus on toxic or hazardous elements of operations
External:
• Natural disasters — earthquakes, floods, fires
• Political upheaval — sabotage, war, insurrection
• Kidnappings
• Government investigations or charges, anti-trust, corrupt practices, criminal activity
• Loss of a major customer
• Default under a major contract
• Takeover
The events underlying crises may be foreseen or unlikely to the extreme — it matters not. The corporation is expected to, and must, respond in an effective manner to build confidence in its ability to manage the situation. Failure to do so can quickly render a bad situation worse and destroy hard-earned goodwill between the corporation and its diverse stakeholders, including employees, customers, creditors, suppliers, governments, local communities, the general public and public interest groups.
As corporate and political crises in the last decade have shown, modern communications technology permits almost instantaneous gathering and dissemination of information. Indeed, with the increasing popularity of all-news television networks and the Internet, the first indication of a corporate crisis may come from external sources. Immediately upon identification of the crisis situation, and probably well in advance of the corporation being able to determine the full nature and extent of the problem, the corporation will be inundated with requests for information from a variety of stakeholders and third parties. Local employees and residents may be anxious to know what effects the event will have on their health, homes and livelihoods. Customers may want to know whether or not the corporation will continue to provide products. Shareholders may be concerned about the value
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of their investment. Lenders may look to the value of their security. Local governments may be investigating to see whether or not any action will be required on their part and whether or not any law has been broken. The news media may want to know the cause of the event and what steps are being taken to remedy the situation in order that they may disseminate information, analysis and various opinions. The corporation's critics may be clamouring that the incident is but another failure on the part of the corporation specifically, and the industry generally, to fulfil legal, ethical, economic, social and environmental obligations.
In connection with the crisis event, the group of individuals chosen by the corporation to constitute the crisis management team will be immediately required to decide how to manage the situation, how to remedy it and ascertain what its effects will be. In addition, they will be required to decide what the media should be told, who should be notified, what local residents may be told about compensation, whether corporate insurers should be notified and claims settlement procedures implemented, what the corporation's legal obligations are and how the legal issues should be handled. The corporation's initial response may fundamentally affect its ability to abate the crisis event, repair the corporation's reputation and minimize the damage to the corporation and to its shareholders. Furthermore, if the corporation is not successful in satisfying the informational demands of its stakeholders and of third parties, and convincing them that the crisis and its effects are being appropriately managed, then its crisis management efforts may be perceived as a failure, regardless of whether or not the facts indicate otherwise.
B. Importance of Having a Crisis Management Plan in Place Prior to a Crisis Event
Given the informational and time constraints and stress inherent in all crises as well as the potentially complex nature and harmful effects of crisis causing events, corporations which prepare crisis management plans and conduct simulation exercises in advance of an actual crisis event are more likely to fare better in crisis situations than those who do not. There are four main reasons for having a crisis management plan in place prior to the occurrence of a crisis event.
First, a crisis management plan should enable the corporation to more quickly assess the situation, formulate a response and indicate to its shareholders the magnitude of the event and if applicable, that its business activities will continue. If it is successful in providing this reassurance, the corporation will build shareholder confidence in management and hopefully mitigate an erosion in shareholder value as a result of the crisis.
A crisis management plan will enable a corporation to respond early, in an organized manner, and exert some control over the crisis situation rather than be at the mercy of unfolding events. While some crises may ultimately prove to be uncontrollable, the mere fact that a corporation is seen to be taking charge may enable it to influence the outcome and effects of a crisis even if it cannot fully control them.
A quick and orderly response to a crisis also sends a signal to affected parties, environmental groups, local communities and governments, shareholders and business partners that the corporation is prepared to deal with situations in a responsible, determined and effective manner. This will go a long way to salvaging the corporation's reputation, which generally suffers after a crisis. As two employees noted after the tailings spill from the Marcopper Mine, "Not only has the spill become
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a convenient stick for the company's critics and competitors to wield whenever they choose, it has damaged the company's relationships with the community and the government."1
In some cases, the most significant harm in dollar terms is not the direct damage caused by the event but rather the loss suffered directly by the corporation's shareholders as the market price of the corporation's shares plummet in reaction to the unknown implications of the event. For example, when another major mining corporation's tailings dam failed recently, the drop in the corporation's share price during the month following the announcement of the crisis was approximately 30% or approximately $428 million. That value may never be totally recovered.
Second, a crisis management plan pre-determines a management structure which provides direction to various corporate departments and their respective employees as to their role during a crisis. This enables corporate personnel who are not part of the crisis management process, to the greatest extent possible, to continue with their normal business activities. After all, the corporation may handle a crisis in an exemplary manner but if it cannot operate its business and maintain its bottom line during the crisis period, it may not survive.
Third, the processes and procedures contained in a crisis management plan should help to ensure the...
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