Fueled by a weak economy, a strong regulatory regime, and a litigious-hungry culture, lead directors today must wear more hats than ever before. But never are their skills so put to the test as they are during a crisis management situation.

“It’s a challenging, economic environment right now, and that’s put a lot of stress on a lot of companies,” says Bill Baxley, a partner at law firm King & Spalding. As a result, lead directors are expected to be much more actively involved with the board and senior management than in years prior in making sure companies are well prepared for a crisis, he says.

Baxley

Because many lead directors have former experience as CEOs, too, “These are experienced people, who have been around the block, who have seen these issues before,” notes Baxley. They can really add some needed judgment—some helpful judgment to be able to deal with these situations.”

To be effective in a crisis situation, lead directors must possess several important characteristics, including the following:

Practice SWOT analysis. One strategic method companies should employ when weighing in on the inner workings of the organization is the SWOT analysis—looking at your strengths, weaknesses, opportunities, and threats. This is something, says Ken Haseley of The Ammerman Experience, a Houston-based crisis management and communications consulting firm, that every company should constantly be looking at. Adds Baxely, “Companies need to understand well in advance of any crisis the business and strategy of the company,” so they can understand how crises will affect the business and how to most effectively respond.

Bonnie Hill, lead director at The Home Depot, who has served on its board for ten years, agrees. She says if there are boards that aren’t looking inwardly, “that has a lot to do with their own corporate governance issues and how they are managing themselves as a board.”

Be open with management and the board. This means having the ability to not only communicate with the board and senior management, says Baxely, but also making sure they are communicating well together.

“In external situations, usually it’s the lead director helping support the CEO, providing additional resources, providing additional judgment, and really working as the CEO’s teammate to move forward and deal with a crisis,” says Baxley.

Baxely says that cohesion will show its true value when there is a management clash, as often happens in the corporate world. He says some internal crises may mean confrontation with the CEO, and it is times like these when having an open and trusted environment is essential, because a crisis situation “will test that trust and test that confidence in each other.” This is particularly true in the case of the departure or the ousting of a CEO. In situations like this, says Baxley, it’s helpful that the lead director “caringly confront” the CEO, focusing on the issue at hand in a diplomatic, supportive way.

Hill

Communicate with shareholders. “More and more, directors are being asked to meet with shareholders, and shareholders are asked to meet with directors,” says Hill, noting that her company has even made it a priority in some of its own job descriptions: “The lead director shall also be available for consultation and direct communications with shareholders upon request, and shareholders can contact the lead director in writing or through e-mails.”

While management working hand in hand is obviously beneficial to crisis response, notes Hill, there are still concerns. “Directors need to know what they can and cannot say; they need to be aware of Regulation FD and that there is a line you don’t cross; and it should really be done in coordination and cooperation with the company and investor relations and certainly the chairman and CEO,” she says.

Damage Control

Communication both inside and outside the organization is essential to a sound damage control policy. “At a time when communication is needed the most, a lot of organizations communicate the least,” which is a huge mistake, says Haseley.

CRISIS COUNT

Crisis Categories Compared 1990 – 2007

(Percent of total crises each year)

Category

1990

2006

2007

Catastrophes

5.5

9.0

7.0

Casualty Accidents

4.8

7.0

7.0

Environmental

7.8

2.0

2.0

Class-Action Lawsuits

2.2

7.0

9.0

Consumer Activism

2.8

4.0

5.0

Defects & Recalls

5.4

4.0

5.0

Discrimination

3.3

4.0

3.0

Executive Dismissal

1,3

2.0

1.0

Financial Damages

4.2

4.0

4.0

Hostile Takeover

2.6

1.0

0.0

Labor Disputes

10.3

10.0

9.0

Mismanagement

24.1

14.0

11.0

Sexual Harrassment

.4

2.0

1.0

Whistleblowers

1.1

1.0

1.0

White-Collar Crime

20.4

21.0

19.0

Workplace Violence

3.8

9.0

15.0

Source

Institute for Crisis Management (2007).

The most telling example of this occurred in March 1989 with the Exxon Valdez oil spill, when a tanker owned by Exxon ran aground in the Prince William Sound in Alaska, spilling millions of gallons of crude oil into the waters off Valdez. Despite its catastrophic effects, CEO Lawrence Rawl shunned public involvement. “This was such a significant crisis that the world, the public, needed to see that chairman, but it took him quite a while to even decide, or realize, that ‘I have responsibilities from a communication standpoint, as well,’” says Haseley.

Neither did the company have a communication plan nor a communication team in place to handle the event. In fact, the company did not appoint a public relations manager to its management team until 1993—four years after the incident.

In these situations, Haseley says, lead directors need to be a “cheerleader” and say, “‘Let’s be visible, let’s talk, let’s not crawl into our shell, or wait until we have every ‘T’ crossed and every ‘I’ dotted,’” but a lot of companies make the huge mistake of hiding out because they don’t have all the answers when a crisis occurs, he says.

On the flip side of the coin, one company that did handle itself well during a crisis situation was Johnson & Johnson back in the 1980s, when cyanide-laced Tylenol capsules were unknowingly placed on store shelves, causing several fatalities. Haseley says what CEO James Burke did right in that situation was to not only immediately pull the product off the shelves, but also assemble a crisis management team and appear on public talk shows informing consumers of the company’s actions.

The company also introduced tamper-resistant packaging, immediately and indefinitely canceled all television commercials for Tylenol, established a toll-free telephone hot-line for consumers, and offered refunds or exchanges to those who had purchased the product.

More recently, toy maker Mattel reacted in a similar way when it was plagued with more than 28 product recalls in the summer of 2007. Following the federal announcement of the recalls, Mattel CEO Robert Eckert did 14 television interviews in one day and took dozens of individual reporters’ phone calls. By week’s end, according to The LA Times, Mattel had responded to more than 300 media inquiries in the United States alone.

Proactive Steps

The good news in all of this is that many of the crises companies face are avoidable, says Haseley. He cited a study by the Institute for Crisis Management, which found that of all crises faced by public companies, 85 percent are “smoldering.” In other words, they are below the surface but can easily be spotted and fixed before getting out of control.

One of the most far-reaching smoldering issues in 2007 was the loss or theft of personal data such as credit card and Social Security numbers. Other smoldering issues include workplace violence, sexual harassment, and racial discrimination allegations, he says.

So how can a company avoid becoming a victim? Haseley recommends that companies assess the following questions:

Do we have a culture that encourages employees to report problems?

Do we have a crisis management team in place and a structure in place?

Do we have somebody in charge of crisis planning? And who does this person report to?

Do we have adequate training and drills?

Are we asking ourselves what could happen, what could go wrong?

Do we have established guidelines to deal with a crisis?

Hill also recommends that companies have a succession plan in place that ensures someone will be ready to step in and run the company—whether that individual be a successor or an outside party—if something unexpected happens and the CEO is unable to continue his or her responsibilities. Home Depot experienced this first-hand when its CEO Bob Nardelli abruptly resigned in January 2007 after six years at the helm. Frank Blake, the company’s vice chairman, immediately took up the role.

Haseley says by doing drills, conducting training, anticipating potential issues, and having policies and procedures in place, “you stand a really good chance of coming away with your credibility and reputation in tact.”