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Crisis Management in the 21st Century

Written by: Peter Macrae Dillon

Article Overview: Crises may come in many forms: fires, floods, plant disasters, class action lawsuits--and these days, terrorist threats or attacks. A properly-managed enterprise must plan for such contingencies, lest the onset of such a crisis end up in the extinction of the business. Remember--it may not be the crisis itself that results in your extinction--it may be your slowness to respond, or the inappropriateness of your response. This paper looks at the type of planning and resources you need to dedicate to manage crises to best ensure the survival of your business.

Crisis Management in the 21st Century

What is a “crisis”?

For purposes of this paper, a crisis is an episode or series of events — usually unexpected — that creates a very real potential for adverse or even catastrophic consequences. Crises usually result in adverse consequences and, in the heavily regulated and highly litigious business environment today, that usually means it will have significant legal consequences. Regardless of the legal merits of any crisis situation, perceptions generated from onset through resolution of the crisis can dramatically impact the reputation and financial standing of the company.

Basic Assumptions

Any company in business for more than a short period of time will encounter a crisis. The only question is: will it be a minor or a major crisis? The survival of the company will depend upon its level of preparation, the calibre of the crisis management team, the effectiveness of its execution of the crisis management plan, and its follow-up after the event (even the worst crisis will pass). A crisis can usually be minimized by timely, decisive and effective action.

Potential Crises

The list of potential crises that might affect a business is virtually limitless. Here’s a sample: product defect and recalls; consumer boycotts; hazardous substance release; natural disaster; political instability (within Canada, this has its greatest application to the “political instability” of the Province of Quebec. For companies operating outside of Canada, the issue will vary from country to country1; employee theft/fraud; Anthrax2 transportation disasters; strikes and labour unrest; industrial accidents; government investigations; criminal charges against the company, management or even an employee; executive succession; shareholder disputes; media attacks by competitors, special interest groups, and others; sexual harassment lawsuits; hostile takeover attempts; and anthrax-type events. For companies who operate in the area of franchising and distribution, one of the greatest ongoing crisis risks is that of a “revolt” by their distributors or franchisees. This risk and some discussion of its management is built with below.

Some Recent Examples

Here is a sampling of the some recent business crises that were particularly well handled, enabling the business and to emerge from the crisis arguably stronger than before:

Pepsico A consumer claimed to have found an hypodermic syringe in a can of Diet Pepsi and this was quickly followed by similar reports. Pepsico immediately produced and disseminated information showing that it was impossible for a foreign substance to make its way into the canning process. The president and other top managers made themselves available to the media where they explained the company’s safety measures in the canning process. Public fears were dealt with and the crisis diffused.

Mercedes Benz When the Mercedes A Class was introduced in Europe, car magazines reported that it suffered from rollover during cornering. Mercedes seized the initiative, and through an on-going series of open communications between their engineering department and the media, not only managed the crisis, but garnered a considerable amount of respect (this high class bread box will soon be available to buyers in North America).

Cantor Fitzgerald Over 700 employees of this world-leading bond trading company died in the September 11 attack on the World Trade Centre. The company demonstrated its considerable disaster recovery planning by recommencing operations within 47 hours of the attack. They also demonstrated an outstanding level of responsibility through their ongoing communications in the media and directly with the victims families by way of immediate crisis counseling, toll-free telephone numbers, website postings, the availability of the CEO, and through financial assistance to the victims families.

There are lots of examples of poorly handled crises that have resulted in significant – sometimes catastrophic – financial consequences to the affected company:

Perrier in the company’s initial avoidance and denial of responsibility for car sanctions of found in their bottled water cost them a considerable amount of goodwill in the market and resulted in lost sales.

A. H. Robins--the “Dalkon Sheild” The company’s IUD had its sales suspended after a study linked the device to pelvic inflammatory diseases resulting in spontaneous abortions. Over 4000 individual lawsuits were pending against the company at the time of its bankruptcy. It’s crisis management strategy was: “Deny everything at all costs.”

Dow Corning This silicone breast implant case received enormous media coverage (for obvious reasons?). The company went into denial and paper-shredding mode, claiming that: “the message agenda had been led for far too long by journalists, special interest groups, and medical commentators often lacking solid scientific evidence”. Dow Corning filed for bankruptcy.

Jack-in-the-Box Four young children died and a number of others became ill after eating undercooked meat at this US QSR franchise. Initially, the company did not accept blame and by the time they accepted their role in the situation, the public had lost confidence in the fast food franchise.

Sometimes, a company may emerge unscathed from a crisis, through sheer good luck:

McDonalds The story of “the old lady who spilt coffee on herself in Albuquerque and got millions” is now firmly ensconced in urban legend. The fact is, the coffee was unusually hot and that the car was not moving at the time of the spill. Perhaps more importantly, McDonald’s failed to manage what started out as a consumer complaint, and grew into a cause celebre. In the end, public perception was that McDonald’s had been victimized by a deranged jury. This only underscores the importance of managing perceptions during crises.

Different responsibilities

Every company has a variety of sometimes conflicting responsibilities in the management of a crisis. These include:

Public responsibility--to prevent consumer suffering injury, death or damage, and to comply with all laws and regulations;

Responsibility to shareholders--to protect the assets and earnings of the company; to manage risk; to insure business continuation and recovery; and

The marketing imperative--to protect the brand; to retain and recover market share; and to protect/recover corporate reputation.

Recent trends

Contingency Fees One major source of crises for businesses are personal injury claims. The growth of personal injury litigation is largely the results of a move toward contingency fees in US jurisdictions, and in Canadian jurisdictions outside of Ontario (Ontario is the only jurisdiction in both Canada and the United States where contingency fees are not allowed (except in class-action suits). Although personal injury claims are a nuisance, they are an insurable risk and usually have a small impact on the brand. Of course, in the franchise and distribution setting, personal injury claims and where liabilities affixed against the franchisor are troublesome – but are excellent examples where proper planning and implementation can reduce or eliminate a risk. Leading Canadian cases in this area include: Leahy v. McDonald’s Restaurants of Canada Ltd., (unreported) July 19, 1993 (Ont. Gen. Div.), Fraser v. U-Need-a-Cab (1983), 1 D.L.R. (4th) 268, 43 O.R. (2d) 389, 26 C.C.L.T. 309, 24 M.V.R. 18 (Ont. H.C.); aff’d (1985), 50 O.R. (2d) 281, 17 D.L.R. (4th) 574, 7 O.A.C. 375 and H&R Block (Beuker v. H&R Block Canada Inc. (Sask. Q.B.) 2000 S.J. No. 811).

Class Actions The introduction of class proceedings legislation in Ontario, Quebec and British Columbia has introduced the possibility of mass tort litigation. This creates considerable exposure to claims such as product liability, where the individual claimant would never pursue the action because of the small amount involved. In the United States, class proceedings commenced by disgruntled franchisees on behalf of all franchisees within the system have become so widespread that legislation was recently introduced into the U.S. House of Representatives to curb such actions3. Ontario is the only jurisdiction that permits certification of a national class (i.e. an action in which franchisees in other provinces can become members of the class).

Building the disaster recovery or crisis management plan

Why Have a Plan? The most basic reason for crisis planning is ethical: to protect human life and avoid injury. Perhaps the next most important reason is material: to minimize physical damage to property and loss of other assets. Next, a social reason: to cooperate with law enforcement authorities and other concerned governmental agencies. Although the point has been made before, for the most part, these three reasons represent insurable risks (a serious exception would be the possibility of criminal charges against the company or individuals involved in management of the company). The fourth reason for planning — to maintain the company’s reputation and brand – is not insurable, arguably as the greatest value, and is largely based upon public perception of the company’s handling of the crisis. This is the realm par excellence of media communications.

Assessing Risk The first part of the planning process is to identify, with as much accuracy as possible, the types of risks to which the business is exposed. This is usually accomplished through management brainstorming. The nature and extent of the risk will of course vary depending upon the type of industry. The sorts of questions used in assessing risk include:”what could happen? What could hurt us? What’s the worst-case scenario?”

Dependency and impact analysis The second part of risk identification is to consider upon whom and what does the ongoing functioning of your business/organization depend? What are your vital resources/services? What is the time criticality for each of them? Once those questions are answered, you pose the question of how to plan for the unavailability of one or more of them. A related question is to consider what the actual consequences of any given disaster on your different operations and business functions would be.

SWOT analysis In this part of the plan, you consider the various strengths, weaknesses, opportunities and threats that are specific to your company. For instance, your company may have a particular expertise in engineering, which will allow you to deal competently, quickly and efficiently with product defect and recall issues. You might have a particular weakness, such as a location next to a school. You may be subject to a specific threat, such as a recognized special-interest group, for instance.

Stakeholders Different people, groups or institutions may have varying or even conflicting interests in the existence, management and outcome of a crisis. Some of the stakeholders include: franchisees; customers; suppliers; employees; shareholders; lenders; media; government/politicians; directors; competitors; the general public; and special interest groups. Identifying stakeholders helps prioritize concerns and interests and may suggest steps to be taken in resolving a crisis.

Key components of the plan

Topics to include The plan itself should be as simple and flexible as possible. Remember: it’s going to be implemented during a period of considerable stress and intense media scrutiny (which is why crisis management training is so important to achieving maximum results). A typical plan will include the following headings: location of the emergency operations center (and alternate locations); who needs to be notified in the event of a crisis; reliable means of reaching those people (i.e. cell phone numbers, cottage numbers etc.); procedures for initiating and maintaining external communications; identifying the basic types of crises that the company is most likely to confront; an outline for managing each of the identified types of crisis; for each type of crisis, a proposed crisis management team should be identified; internal and external resources should be identified and their capabilities and areas of responsibility explained; separate phases for testing in simulated conditions; and, last but not least, instructions for keeping the plan up-to-date.

The Crisis Management Team Different crises may call for different teams and/or leadership. Typical members of a team might include any or all of the following: operations; human resources; health and safety; marketing/sales; public relations (inside and/or outside); legal (inside and/or outside); and specialists in the area, such as: information systems; engineering; and/or finance. It is usually a bad idea for senior management, who are not involved in the crisis team, to second-guess and delay the ongoing work of the team. A consistent, unified response is necessary. The mixed responses from various parts of the Perrier organization in the 1994 carcinogen discovery, or the failure of Intel to handle a minor problem with one of its chips in 1994 perhaps caused greater damage to the brands than might otherwise have occurred. Conversely, the hands-on, speedy response of Johnson & Johnson to the pal poisonings demonstrate the very best in leadership and teamwork. Membership and leadership on the crisis management team should be addressed early in the planning stage. Leadership of the team will depend on the size of the crisis relative to the size of the overall enterprise. It may be that the CEO should lead the team. Alternatively, the individual whose substantive responsibilities are most directly related to the crisis should lead the team. For instance, if the crisis is primarily a legal one, the crisis manager might be the general counsel. If the company faces a public relations crisis, the chief public relations officer is the most obvious choice.

Dealing with the crisis

The facts Nothing can be done to change the facts. The goal during the crisis is to make certain that all helpful evidence is collected and communicated in the most positive way. Before any irrevocable decisions are taken during or in the immediate aftermath of a crisis, those decisions need to be taken with the benefit of the very best possible intelligence as to precisely what happened and where the responsibilities and potential legal liabilities may lie.

Legal privilege If lawyers are involved in and control the investigation process, the results of their labours will attract what is known as legal professional privilege and can be protected from becoming public knowledge. Statements that the lawyers obtain and the opinions that they give and the analysis they provide with the assistance of the client’s own staff — and possibly outside technical experts as well — will be confidential and protected from disclosure to third parties, including potential claimants, government inquiries and the police. If lawyers are not involved in the investigation process, there two risks: 1. that the work of the internal investigation, whether damaging or not, may become available to the public at large; and 2. those conducting the investigation, while they may be very well qualified in their own particular areas, may have insufficient knowledge of the legal framework within which they are operating and they run the risk of making things worse.

Police and criminal proceedings In any case involving significant loss of life or personal injury, a police investigation will likely occur. There may also be other investigations by official bodies, including coroners, the Labour Board etc. There now appears to be an immediate media driven desire to find fault and to pin blame on individuals and urge criminal proceedings almost indiscriminately. Directors and senior management likely should be less concerned about individual claims for damages by injured parties, which are fully insured; the far greater concern centers around potential criminal charges, how a criminal investigation should be handled, and the potential financial impact on the company’s business and brands. Someone needs to decide who is going to coordinate the defence. The person probably best equipped to do this is a lawyer. The last thing that a defendant company needs in the midst of the crisis is their own senior employees running off to their own lawyers in an uncontrolled way. This raises the issue of who will pay the legal and related expenses. Not all insurance provides coverage for this sort of expense. Furthermore, this may not be enough. Counsel appointed by the insurance company, because their primary obligation to the insurance company, might seek simply to minimize the amount of civil claims. They may do little or nothing to restore the credibility of the brand or about restoring confidence in the mind of the consumer. As part of a proper contingency plan, these issues need to be raised and addressed, including discussions with your insurance company.

Documentation Tight control needs to be exercised over internal inquiry documents. There’s nothing worse than a “leak” of documents which can be extremely damaging when taken out of context. Conversely, proper timing of disclosure of these documents in a proactive way, can emphasize the positive.

Employees/witnesses In the aftermath of any disaster, there will be huge media pressure for interviews with eyewitnesses. Our advice typically is to counsel against allowing eyewitnesses to be exposed to the media. These employees have not likely been trained on how to deal with media questions, nor may they necessarily appreciate the significance of what they are saying. Far better to seize the initiative and put forward a senior company spokesperson, who has received proper training and adequate briefing, to be put explain what happened and what has or is being done to address the situation. Certainly, legal advice should be obtained prior to initiating any disciplinary proceedings against your own staff. Such proceedings and their conclusions may severely prejudice the company’s own position.

The claims The potential for claims against the company of course exists. Usually these are insured and will “work themselves out”. However, what is often overlooked is the action necessary to protect the interests of the company — its brands, its reputation and so on. If these are not taken, devastating consequences may ensue for which no insurance is available.

Conclusion

The fateful events of September 11, 2001 have made many people realize that even the best managed companies can encounter a major crisis. Crisis management theory makes the simple assumption that risk analysis and proper planning can, in some cases, go so far as to eliminate or at least drastically reduce the occurrence or impact of certain crises. For those crises which by their nature cannot be specifically foreseen, a crisis management plan can provide a platform for response that will substantially increase the likelihood of enterprise survival and brand protection – the latter being a matter which is frequently overlooked by management. Numerous publications, software programs and consultants exist to assist businesses with the preparation of disaster recovery, crisis management and media relations plans. Further information is set out below.

Crisis Web Resources

Trauma and Post-Incident Management
www.posttrauma.com
www.crisisdoctors.com
Workplace Violence
www.workplaceviolence.ca/home.html
www.queensu.ca/security/news/violence.html
www.hc-sc.gc.ca/futureorg/english/programs/career/newsletter9-1_e.html
www.opm.gov/workplac/handbook/p2-intro.htm
members.aol.com/tbfeld/wpvdata.html
www.opm.gov/workplac/handbook/p3-s6.htm
www.tamucc.edu/`whatley/PADM5302/group/work4.htm
www.protectmgmt.com/library/wpv.html
www.ojp.usdoj.gov/ovc/ncvrw/2001/stat_over_17.htm

Crisis Management and Crisis Communications
www.meca.ca
www.osba.org/hotopics/crismgmt/crisres.htm
www.rothstein.com/
www.hcsc.gc.ca/hpbdgps/theraeut/htmleng/crisis.html

Business Recovery
www.fema.gov/ofm/brecov1.htm
www.fema.gov/ofm/brecov3.htm
www.fema.gov/ofm/brecov4.htm
bluehen.ags.udel.edu/betsy/disaster.htm

Crisis Communication
www.niu.edu/newsplace/crisis.html
www.sru.edu/depts/finance/safety/emergency.htm

Disaster Response
www.ibhs.net/ibhsdocments/pdf/recovery.pdf
www.ccep.ca/
www.drie.org/

If you suspect mail is contaminated with anthrax:
1. Do not handle, shake or smell the suspicious article.
2. Notify your supervisor, who will immediately advise local authorities of the situation at hand. Do not return the item to Canada Post.
3. Make sure that damaged or suspicious packages are isolated and evacuate the immediate vicinity.
4. Ensure that all persons who have touched the mail piece wash their hands with soap and water.
5. List all persons who have touched the suspicious article. Include contact information. Provide this list to the local authorities.
6. Place all items worn when in contact with the suspected mail article in plastic bags and have them available for law enforcement agents.
7. As soon as practical, shower with soap and water.
8. If prescribed medication by medical personnel, take it until otherwise instructed or it runs out.
What to look for:
o No return address
o Restrictive markings (i.e., “Personal”)
o Mailed from a foreign country
o Excessive postage
o Misspelled words
o Addressed to title (i.e., “President”) only, or incorrect title
o Badly typed or written
o Protruding wires
o Lopsided or uneven
o Rigid or bulky
o Strange odour
o Wrong title with name
o Oily stains, discolourations or crystallization on wrapper
o Excessive tape or string

Note: To date, Health Canada reports that there are no cases of Canadians being infected with anthrax. Postal officials remain vigilant and will report suspicious articles to local authorities. The best advice: exercise common sense.

A Brief Summary of Product Liability

European, American and Australian governments have introduced strict liability regimes where anyone injured by defective goods can sue the manufacturer or the importer without having to prove negligence, breach of contract or warranty.

This is not the case in Canada.

In Canada, the basis for liability is in contract and/or tort. That is, liability may arise out of breach of an express or implied term of contract of sale, breach of a collateral contract or warranty or operation of the law of negligence. It is possible to be liable concurrently in contract and tort.

A manufacturer’s liability may arise out of express or implied terms of sale. The Sale of Goods Act implies certain terms in a contract for the sale of goods. For example, it implies terms relating to sale by description and/or sample and sale for a particular purpose.

The ultimate outcome of most of the cases in the area of manufacturer’s liability depends very much upon the specific facts of the case.

The problem with the buyer suing the manufacturer in contract (including using the Sale of Goods Act) is normally a lack of contractual privity. For example, the sales chain may look something like this:

manufacturer ÿ distributor ÿ retail store ÿ ultimate buyer

Contractual privity means that you can only sue the person you contracted with, so in this example, the distributor can sue the manufacturer, the retail store can sue the distributor and the buyer can sue the retail store. So, in most cases, there is no contractual privity of any kind between the manufacturer and the buyer, thus, no basis for suing in contract. This lack of contractual privity often applies even if there was a collateral contract of warranty.

Where there is no privity of contract a manufacturer may nevertheless be liable in tort to the ultimate consumer of goods. The courts have held that manufacturers have a “duty of reasonable care.” It is important to note that the supplier must do more than just supply a defect product to be liable, he/she must have done so negligently.

More information.

For more information on franchising in Canada, the United States and internationally, please contact Peter Macrae Dillon, head of Siskinds Franchise Law Group. Peter is recognized expert in franchising. He is the author of the annotated Ontario Franchise Disclosure Act and the annotated Alberta Franchises Act and over 40 other publications on the subjects of franchising, licensing and distribution. He is licensed in Ontario and New York. Peter can be contacted at 800-816-9596 ext. 389 or by email at peter.dillon@siskinds.com. The information contained in this note is for general reference only, and should not be relied upon as constituting legal advice.

Disclaimer.

This article does not constitute legal advice. If you require assistance with the issues raised in this article, either to determine whether your business constitutes a franchise, to establish a franchise, or to avoid a finding that your business constitutes a franchise, you must obtain competent legal advice. Siskinds would be pleased to assist you in this regard.

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