In business, everyone knows the first rule of crisis management is swift action to reassure stakeholders that the company is addressing risks that have been uncovered or alleged. When the underlying business model has been called into question, as it has at two relatively young technology-based companies, abiding by that rule is that much more critical.

Then how to explain why one of the two companies, LendingClub, has followed the textbook crisis management plan while the other, Theranos, has failed to communicate thoroughly and effectively?

On the surface, the answer might be that as a publicly listed company whose board members clearly understand their fiduciary responsibilities to a broad range of shareholders, LendingClub knows what’s required of it to halt a declining stock price. Is it possible that without a stock price to defend and a commensurate sense of what shareholder value there is to preserve, Theranos may have been less aware of how dire the consequences of a tarnished, if not altogether ruined, reputation could be?

The tight timeframe of LendingClub’s response to questions about its ability to find appropriate investors to buy its loan packages—versus the much slower and undisciplined reaction by Theranos to allegations that its proprietary blood-testing technology was faulty—say a lot about the companies’ different approaches to managing a crisis.

After a high-growth year in 2015 during which it expanded into auto loans and mortgages and formed partnerships with, BancAlliance, and Sam’s Club, LendingClub’s stock price dropped more than 3 percent in January due to a negative global economic outlook. Although the stock price continued to weaken in February before seeming to stabilize and partially rebound in March and early April, it wasn’t until later in April that an external auditor was hired to investigate an internal report about altered dates on $3 million in loans and found that $22 million in loans that had been sold to an investment bank didn’t meet the bank’s investment criteria.

Within weeks, in its first-quarter earnings release on May 9, LendingClub provided a fairly detailed account of a review conducted by a board subcommittee, with help from independent outside counsel and other advisors, into the sale of the non-conforming loans and the subsequent repurchase and resale of those loans at par to another investor. In the same earnings release, the company said it had forced founding CEO Renaud Laplanche to step down after the board determined that he didn’t tell investigators all he knew and also had failed to disclose a conflict of interest around a personal investment, as reported by the Wall Street Journal.

“If you have two or more investigations going on … You have to have a really good process, system, and structure set up so you don’t have different people scurrying around for the same information.”

Rhoda Woo, National Leader, Deloitte Advisory Strategic Risk Services

In contrast, when an investigative report by the Wall Street Journal questioned Theranos’ claims about its technology in October, founder, CEO, and chairman Elizabeth Holmes lashed out at the newspaper, opted not to communicate additional information about how the technology worked, and waited more than six months to make changes in senior management and the board, including the removal of president, chief operating officer, and director Sunny Balwani.

Absence of denial was a key factor that distinguished LendingClub’s handling of its crisis from how Theranos dealt with its own, says Richard Morris, a partner at Herrick, Feinstein. He credits LendingClub being a publicly listed company whose board members probably had the appropriate counsel advising them.

“The CEO’s departure was rather quick from the time it was identified. Then you had a statement from the new CEO [recently appointed President Scott Sanborn] talking about their balance sheet and the fact that they’re here for the long term,” Morris says. “That seems to be the way to stop the continued rumors and concerns. Of course, time will tell.”

Because senior executives and board members are human, denial is a natural initial response to a crisis, says Davia Temin, CEO and founder of reputation consultant Temin and Co. But she has come to a strong belief that the faster a company can short-circuit the denial, the more quickly its leaders can grasp the gravity of the situation and take actions to counter the public assault and begin to put a solution in place.

“I can almost tell when I go in to meet with the board how this is going to transpire,” Temin says. “If the board says ‘Our shareholder value, our public reputation, the trust in this company are paramount,’ and [is willing to] do anything to fix it,” she knows the company will be able to rebound.

In a crisis, the first thing boards seem to grapple with is whether to make immediate changes or to try to tough it out. “We all can quote places where toughing it out worked. So it’s not just a binary decision,” Temin says, but it is informed by the other corporate boards that directors serve on, their business networks, their particular point of view, and their own areas of specialization. Pointing to organizations that moved too quickly where they could have toughed it out, she adds, “The real determinant is the wisdom to understand what is a fatal body blow and what is skin-deep.”


Below is an excerpt from LendingClub’s May 9 earnings release.
Lending Club conducted a review, under the supervision of a sub-committee of the board of directors and with the assistance of independent outside counsel and other advisors, regarding non-conforming sales to a single, accredited institutional investor of $22 million of near-prime loans ($15 million in March and $7 million in April). The loans in question failed to conform to the investor's express instructions as to a non-credit and non-pricing element. Certain personnel apparently were aware that the sale did not meet the investor's criteria.
In early April 2016, Lending Club repurchased these loans at par and subsequently resold them at par to another investor. As a result of the repurchase, as of March 31, 2016, these loans were recorded as secured borrowings on the Company's balance sheet and were also recorded at fair value. The financial impact of this reporting is that the Company was unable to recognize approximately $150,000 in revenue as of March 31, 2016, related to gains on sales of these loans.
The review began with discovery of a change in the application dates for $3.0 million of the loans described above, which was promptly remediated. The board also hired an outside expert firm to review all other loans facilitated in the first quarter of 2016 and the firm did not find changes to data in these or other Q1 loans.
Source: LendingClub

Rhoda Woo, national leader for crisis management solutions at Deloitte Advisory Strategic Risk Services, believes it is critical to establish the CEO’s intent, or clarify a strategy to address the crisis. She cites Ed Breen’s declaration after replacing ousted CEO Dennis Kozlowski at Tyco: “I’m going to turn this company into a gold standard of governance.” The CEO’s stating his intent makes it easier for other company leaders to determine what action to take and enables employees to better understand how to align their daily efforts with that goal, Woo explains. “It also unleashes a lot of energy from the management team because there’s a direction set forth and it allows people to use their own independent thinking and leadership as long as they’re aligned with the CEO.”

A key issue that each company confronts in a crisis is how to balance what needs to be done against the limited resources it has to work with. Whether it’s a decision to take employees off other projects that are less urgent or to bring in help from outside, crisis management requires a company to develop an efficient system, Woo says. This is particularly relevant when dealing with investigations by regulators, as is the case for both LendingClub and Theranos.

“If you have two or more investigations going on, those investigations will most likely ask for the same type of information or the identical information. You have to have a really good process, system, and structure set up so you don’t have different people scurrying around for the same information,” Woo says.

Temin sees a clash between Silicon Valley’s startup culture, which is often narrowly focused on potential for business disruption, and the more conservative approach to business that places priority on getting things right before bringing them to market. The startup culture’s emphasis on the grand idea and confidence that it can fix any bugs in the design as it goes along “may work for software, but it doesn’t work for financial services or everything having to do with human health, like biotechnology and pharma,” she says. “There are heavily regulated industries that are essential to human health and happiness and safety that have less of a tolerance for this kind of overstatement or black-boxism [characterized by the attitude], ‘We have an algorithm, our algorithm is great, trust our algorithm.’ ”

Another problem that newer companies face in a crisis is that they have not been around long enough to build a reputation for integrity, which can buy public goodwill when it is needed most. “The longer an organization has to build up a record of trustworthy behavior, to its customers, to its shareholders, in corporate governance, the more people will stick with that company when the inevitable bumps arise. It’s a bankable asset if you will.”

So what is a company to do if its business model appears to have an essential flaw?

Temin recommends that a company start by reminding its stakeholders about its founding mission and vision—for example, how the company was started to make credit available to people who, after the 2008 financial crisis, couldn’t get credit. The company should then say something like, “We may not have gotten it completely right, but we are totally dedicated to fixing anything we have not gotten right and coming out with a revised model that will survive, help further the mission, and create value all along the chain,” she adds.