Former Securities and Exchange Commission chief Harvey Pitt closed out the Compliance Week 2007 conference with his Top 10 list of suggestions for corporate crisis management—or, as he put it, “when bad things happen to good companies.”
Pitt’s list stretched a bit past 10 points, something Pitt admitted a weakness for. It boiled down to preparation and, when the inevitable crisis hits, rapid action.
Not preparing is inexcusable, he said, because “it's a corporate fact of life that a crisis will arise at some point. It’s not `if' it will arise, but `when' it will arise.”
When a problem does arise, he said, the race goes to the swift and those who have well-crafted crisis-management plans. “Organizations have little to no lead time to prepare an on-the-spot, intelligent response to their shareholders and to the regulators and the media that, like vultures, are circulating,” Pitt said.
Pitt
A crisis response plan should be clear about who will be responsible for what, to avoid what Pitt called the “Al Haig problem,” referring to the former presidential adviser’s claim of being “in charge” following the assassination attempt on President Ronald Reagan in 1981.
Plans should specify the roles of finance, technical, public relations, marketing, investor relations, and employee relations departments, Pitt said. “They're all critical, and all personnel have to be assigned roles and be able to respond immediately and effectively,” he said.
Companies should also have money in place to secure sufficient outside resources to handle independent inquiries, since companies should avoid tapping their usual outside advisers when an investigation is necessary. Further, he said, those conducting independent inquiries should be given the flexibility to explore unexpected avenues; if not, you may end up with another inquiry, “which is a horrific proposition for any organization.
Pitt’s recommendations for companies facing a crisis:
(1) You must believe that others can and will sniff out your problems.For many companies and firms, there isn’t ever a problem unless someone tells them there is, Pitt said. He said problems must be addressed before they “rear up and bite you in a part of your anatomy in which you do not want to be bitten.”
(2) Since problems are an inevitable part of corporate life, finding them is critical. Proactively rooting out problems gives companies the time to consider issues, giving a company an enormous leg up, Pitt said.
(3) Waiting to interface with regulators until you really need them is the road to disaster. The time to meet with regulators is before you need them, Pitt said; when no pressing issues are on the table, much more pleasant and constructive relationships can be forged.
4) Every company needs to assume that it will be the subject of some sort of crisis. The “what” is difficult but not impossible to predict. Companies that regularly think about potential crises can anticipate them, Pitt said.
(5) Avoid becoming a victim of your own success. One of the worst mistakes corporate managers make is to become complacent and content, because danger of some sort is just around the corner, Pitt said. Also, he said, the more successful a company becomes, the more attention it will attract.
(6) It’s critical to play nice with other people, especially your outside directors. With outside directors bearing increasing responsibility and obligations, CEOs will inevitably create self-fulfilling prophecies by treating them poorly, Pitt said. A board caught by surprise will turn on a CEO “in a second.”
(7) No surprises. If problems could be significant, tell the board sooner than later.
(8) There’s no such thing as an instant fix. Still, problems can be handled methodologically, Pitt said. Every crisis requires adherence to simple corporate methodology answering the questions: How did it happen? Why did it happen? How did the company learn about what happened? What steps were taken to remediate any damage?
(9) You can pay me now or you can pay me later. The old FRAM ads comparing the cost of an oil filter to that of a new engine holds true for corporations, Pitt said. “Many companies balk at resources they must commit to solve or ward off current problems, but it’s demonstrable that spending money in advance saves you down the road,” he said.
(10) Ignoring warning signals can prove fatal. When an employee complains, whether or not the employee is disgruntled is irrelevant, Pitt said.
(11) There’s virtue in simplicity. In today’s environment, effective compliance policies and procedures are essential, but they’re often far too hard to follow for those who must understand them, Pitt said.
(12) Being smart is good; being too smart isn’t. When considering novel or unique way of circumventing a difficult obstacle, before coming up with clever structure or artful disclosure or creative accounting, ask why the obstacle exists and why circumventing it is appropriate, Pitt said. “Being too cute is never a good thing,” he said.
(13) If you’re smart enough to obtain good external, independent advice, be smart enough to follow it. What you view as a problem with the advice may be a problem with your expectations, Pitt said. “You have to be able to figure out the difference.”
(14) Obey Isaac Newton’s third law of motion. Every action will have an equal and opposite reaction. If regulators and prosecutors are leaving you be, it’s best to leave them be, too, Pitt said. “Companies that attack those charged with performing the public’s work, even inadvertently, should realize they’ll come to regret their conduct and pay more to overcome it,” he said.
(15) Stay away from litigators when you’re in the middle of a crisis. Litigators want to win the case, Pitt said; when you’re confronted with a crisis, you want to salvage the company. “Those are diametrically different objectives,” he said.
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