Overview

The biggest crisis of 2003 was someone else’s crisis.

At 4:14 PM, August 14, power surges knocked out electric service to 50-million people from Ohio to Ontario and Michigan to New York. Residents and businesses were without power for up to three days.

New York City was dark. Electric trains and subways rolled to a halt. Business and industry in eight states and a significant part of Canada were without power and work came to a sudden stop.

Companies from grocery stores and gas stations to banks, automotive plants and all kinds of other manufacturing facilities were unable to operate because FirstEnergy Corp. of Ohio triggered a massive rolling black-out.

Detroit Edison, a subsidiary of DTE Energy, was out $16-million on costs associated with the blackout, including equipment repairs and overtime. In addition, Detroit Edison lost $14-million because it could not provide power to its customers.

SARS, another case of “someone else’s crisis” began in Asia in February, 2003, and within weeks cases were reported in 25 countries, including Canada. In each city where SARS was detected, it had an impact on people, but it also tested many businesses and industries.

Second Most Crisis Prone Year

2003 was the second most crisis prone year since the Institute for Crisis Management began tracking negative news coverage in 1990.

Crisis News Index 1994 - 2003

(This does not represent every crisis, but those business news editors determined were of interest to their readers)

2001 was the most crisis filled year in the ICM crisis database. That was the year of the corporate meltdown that included the beginning of the end for Enron, Worldcom, Arthur Anderson, Tyco, ImClone and Martha Stewart.

ICM definition of a business crisis?  Any problem or disruption that triggers negative stakeholder reactions and results in potentially damaging public scrutiny.

In 1990, ICM began monitoring 1500+ print business sections of newspapers and magazines, business and financial wire services, regional business publications and industry and trade publications, world-wide. ICM tracks 16 broad crisis categories:
•Catastrophes	•Hostile Takeovers
•Environmental	•Labor Disputes
•Class Action Lawsuits	• Mismanagement
•Consumerism Actions	•Sexual Harassment
•Defects and Recalls	•Whistleblowing
•Discrimination	•White-Collar Crime
•Executive Dismissal	•Workplace Violence
•Financial Damage	•Casualty Accidents

Origin and Type

While the number of crises was up again in 2003, the most important statistics are still those that reflect the causes and types of crises that strike businesses and not-for-profits.

On average, slightly more than half of all crises that strike large corporations and small and medium size businesses, as well as not-for-profits, are caused by management, compared to 28-percent of all crises caused by employees and 19-percent triggered by outside forces.

Origins of Crises

The type of crisis you are most likely to experience is important for your crisis planning purposes. When you talk about crisis management and planning, most people think about fires, explosions, natural disasters, workplace violence, even terrorism.

But, based on the ICM Crisis Database, you are far more likely to experience a smoldering crisis than a sudden crisis.

On average, 71-percent of all crises in the business and not-for-profit world are the type that start out small and may take days, weeks or even months before they get out of control and draw public attention. That’s down one-percent from 2002 while sudden crises are up one-percent to 29-percent.

Sudden VS Smoldering Crises

The reason sudden crises were up one-percent was due to an increase in the number of casualty accidents in the workplace during 2003.

There were 664 workplace incidents that involved death or significant injuries during the year.

One of the worst was a dust explosion in an automobile parts plant in Corbin, Kentucky that killed seven workers and injured 37 others.

A month earlier an explosion of fine powder used in the manufacture of rubber medical products, tore through a West Pharmaceutical Services plant in Kinston, NC, killing six and injuring dozens.

While casualty accidents were up 90%, workplace violence was down 45% and accounted for 501 events that caught the attention of business news editors. According to the United States Department of Labor, workplace violence kills about 700 workers a year in the US, and leaves an estimated one-million other workers emotionally or physically injured.

The biggest increase in a single crisis category from 2002 to 2003 was hostile takeovers, up 265%.

The percentage increase is huge, but the actual number of events drawing media attention is relatively small. There were only 31 cases of hostile takeovers that drew national media attention in 2002, while the number jumped to 118 takeovers in 2003.

While the percentage increase was the largest in any single category, the number of hostile takeovers compared to all other crisis categories was 118 out of 9,182 or 1.2-percent of all crises in 2003.

Biggest 2002 to 2003 Increases

Cases of discrimination in the workplace were up significantly in 2003 and two stalwarts of Main Street, USA were the targets. A group of former and present women employees accused Wal-Mart of discriminating against them in pay and promotions. At the same time, six former and current employees of Home Depot filed a federal lawsuit accusing the company of discriminating against them because they are black.

Negative news coverage of consumerism was on the rise in 2003. Activists kept up an almost constant attack on Yum! Brands and Kentucky Fried Chicken and Taco Bell.

Yum! Brands faced protests from PETA and farm workers over complaints ranging from how its chickens are killed to how tomato pickers are treated.

Product defects and recalls were up 18% and accounted for 14% of all crises that attracted major media attention.

At least six major car companies, including Ford, Chrysler/Jeep, Nissan, Honda, General Motors, and Mercedes Benz recalled millions of vehicles during 2003. General Tire and Bridgestone recalled thousands of tires.

A furniture company recalled 620,000 recliners because a mechanism in the foot rest could pinch fingers. Another company recalled 8,200 extension cords that could overheat.

GlaxoSmithKline recalled three Canadian asthma drugs, and counterfeit versions of Lipitor were on a recall list.

A toy company recalled 126,000 toy cars, trucks and wagons because small parts could break loose.

And if recalls were not enough for the toy industry, KB Toys reached a $3-million settlement in a class action lawsuit, one of scores of class action lawsuits filed against manufacturers, healthcare providers, computer manufacturers, mobile phone companies and big names like AOL.

Class action lawsuits amount to 10% of all crises reported in 2003, but the total number of class action lawsuits is down 40% from 2002. Class action lawsuits skyrocketed in 2001.

Hundred of thousands of consumers are included in a class action lawsuit claiming AOL double-billed them. IBM is the subject of lawsuits in Texas and California, alleging the company knew its computer drives were defective.

Consumer groups also sued Nextel and Cingular wireless. Sony Playstation 2 is defective according to one class action lawsuit and a California doctor won a $31-million suit against UnumProvident and another 2500 plaintiffs are also going after the nation’s largest disability insurer.

Crisis Categories Compared 1990-2003 (% of total crises each year)	1990	2002	2003
Catastrophes	5.5%	4.0%	4.0%
Casualty Accidents	4.8%	4.0%	7.0%
Environmental	7.8%	2.0%	2.0%
Class Action Lawsuits	2.2%	20.0%	10.0%
Consumer Activism	2.8%	2.0%	5.0%
Defects & Recalls	5.4%	13.0%	14.0%
Discrimination	3.3%	3.0%	5.0%
Executive Dismissal	1.3%	1.0%	2.0%
Financial Damages	4.2%	3.0%	3.0%
Hostile Takeover	2.6%	1.0%	1.0%
Labor Disputes	10.3%	11.0%	9.0%
Mismanagement	24.1%	11.0%	12.0%
Sexual Harassment	.4%	1.0%	2.0%
Whistle Blowers	1.1%	1.0%	1.0%
White Collar Crime	20.4%	14.0%	17.0%
Workplace Violence	3.8%	11.0%	5.0 %

2003 Crisis Categories

Labor disputes were down slightly in 2003, but they tend to be cyclical and will likely increase in number this year or next.

General Electric and Coca Cola were among the larger companies dealing with labor issues in 2003.

The Coke bottling company of Southern California fired a driver for drinking a Pepsi while on duty. The Teamsters, which represent the drivers, went on the offensive.

Teamsters International VP Jim Santangelo claimed he did interviews or talked to reporters from 27 countries and he appeared on CNN and WOR TV in New York City and late night TV show host Jay Leno talked about the labor dispute in his nationally broadcast monologue.

GE experienced a two-day strike in January over increases in health insurance co-payments. And the 24,000 unionized workers’ old three-year contract was due to expire in June.

GE had 13 unions to work with and managed to avoid a protracted walkout. But the rhetoric was harsh and the company was the center of extended media attention throughout much of the first half of the year.

Mismanagement and white-collar crime continued to be major sources of crises in the business world.

For the year 2003, mismanagement accounted for 12-percent of all negative news coverage and white collar crime totaled 17-percent.

The fallout of the 2002 corporate meltdown continued to plague the corporate world in 2003. The government went after the nation’s fourth largest local phone company, charging eight former and current executives with criminal and civil fraud.

Martha Stewart continued to keep the public focus on her criminal and civil securities fraud, guaranteeing on-going negative news coverage for her and her company.

A year after the Enron and Worldcom scandals, the public was still unwilling to trust corporate executives. 69% of respondents to a Golin Harris International trust survey said they “strongly agree” or “somewhat agree” they don’t know who to trust.

Business experts compared the corporate meltdown to a businessman’s Watergate and some suggested CEO’s and CFO’s would never see the level of trust their predecessors experienced.

Rebuilding corporate trust hit another set-back with another round of corporate scandals, including the unraveling of healthcare provider HealthSouth, Corp. Former HealthSouth CEO Richard Scrushy was indicted on 85 counts alleging he was the mastermind of a fraud scheme that netted him more than a quarter of a billion dollars.

Drug maker Bristol-Myers Squibb was caught in accounting shenanigans and had to restate financials dating back to 1997.

Dutch supermarket giant Royal Ahold, the third largest supermarket operating in the US admitted to inflating profits by $500-million during the preceding two years.

But it wasn’t all about accounting. Two former Tyson Foods managers were sentenced to one year of probation following a six-week trial in an immigration smuggling case.

Most Crisis Prone Industries

Most Crisis-Prone Industries in 2003 (ranked by percentage of database)
1.	Securities & Commodities (4)
2.	Supermarkets
3.	Gas/Oil Production (9)
4.	Investment Banking (4)
5.	Restaurants
6.	Aerospace Industry
7.	Telecommunications (1)
8.	Accounting/Audit Services
9.	Discount/Variety Stores
10.	Electric Power Gen. (8)

(*) 2002 Ranking

Much of the nation was shocked by 2003’s revelations of preferential treatment and self-dealing in the once conservative and highly respected mutual fund industry.

Before the year ended, the 40-year-old former vice-chair of Fred Alger & Co. became the first mutual fund executive to be sentenced to jail.

Richard Strong, built a small Milwaukee business into a national financial empire worth $43-billion in assets. He was reportedly worth $800-million.

He admitted to short-term trading of his own company’s mutual funds in violation of the funds’ rules. He resigned and promised to repay investors for their losses.

Investment Banking and Securities & Commodities ranked number four on the top ten list of most crisis prone business in 2002. And, except for 2001, they have been among the top ten most crisis prone businesses for nine years.

A subsidiary of bank holding company PNC Financial Services Group, Inc. agreed to pay $1.15-billion to avoid a criminal trial on charges of securities violations.

Investment bankers were once seen as smart, risk-takers. Then in 2003 they got a new poster-boy, Frank Quattrone, who was indicted on witness tampering and obstructing federal investigators.

The big supermarkets made it into the top ten in 2003 and continued to make headlines well into 2004 with labor problems and strikes.

Gas and Oil Production first showed up on the top ten list in 2002.

And restaurants made the top ten for the first time in recent years in 2003.

With fewer than half the restaurants it had in its best days and $100-million dollars in debt, Chi Chi’s was in bankruptcy when an outbreak of hepatitis A was linked to one of their restaurants in Western Pennsylvania. Three people died and 600 were sickened.

The Aerospace Industry took it’s first blow of the year when the Shuttle Columbia disintegrated over the US on its return from space.

Telecommunications dropped from the number one spot on the top ten list in 2002, after ranking fourth in 2001, first in 2000, fourth in 1999 and ninth in 1995.

Accounting/Audit Services made the top ten in 2003, after making headlines throughout the second half of 2002 as a victim of the corporate scandals.

PricewaterhouseCoopers, the nation’s largest accounting firm, agreed to pay $1-million to settle federal charges that it engaged in improper conduct in its audit work.

Wal-Mart and K-Mart were in the news regularly throughout the year and it wasn’t for their blue-light specials.

Electric Power Generating appeared on the top ten list for the first time in 2002. It dropped from 8th to 10th in 2003.

Most Crisis Prone Businesses

Most Crisis-Prone Business in 2003 (Ranked by number of database records)
1.	Healthsouth Corp.
2.	Enron North America
3.	Albertson’s Inc.
4.	Safeway PLC
5.	Wal-Mart Stores, Inc.
*6.	Merrill Lynch & Co.
7.	Verizon Wireless Inc.
*8.	Microsoft
9.	Rite Aid Corp.
10.	Kroger Company

Healthsouth Corp. followed in the footsteps of Enron to take the top spot in the top ten most crisis prone businesses in 2003 and Enron dropped to number two.

Enron continued to create negative public attention with its continuing economic and legal woes. In 2003 the federal government filed a lawsuit against Enron, its former directors and a number of executives for failing to protect workers’ retirement assets.

Enron laid-off seven percent of its pipeline employees and failed in efforts to sell some of its assets.

Merrill Lynch and Microsoft were the only companies held over from the 2002 top ten list.

Microsoft has only failed to make the top ten list once since 1997. Microsoft makes the list each year for a variety of reasons.

In 2003, it was a $750-millon settlement with Netscape and product liability issues. Class action lawsuits attacked Microsoft for selling software “riddled with security flaws.”

BusinessWeek dubbed 2003 as the time when “the New Normal began.” After the corporate meltdown of the year before, “many executives realized that their jobs would never be the same again. There would be more scrutiny and skepticism and even their successes would be met with less adulation.”

But as the news magazine noted, there would be some who didn’t get the “New Normal.”

Boeing Co. CEO Philip Condit resigned after the Pentagon began investigating his company for ethical misconduct.

Richard Grasso was forced out as head of the New York Stock Exchange.

And Vice-President Dick Cheney’s old company, Halliburton Co. is under fire from all sides because of no-bid contracts with the federal government and overcharges for fuel in Iraq and dining hall mismanagement.

There was some good news in 2003. According to a study by Governance Metrics International and reinforced by economists at Harvard and Wharton, companies with the strongest shareholder rights, outperformed firms with the weakest shareholder rights by 9.3 percent annually during the 1990s.

Based on a ranking of 1,600 public companies, measured against 600 corporate governance attributes, the GMI study concluded that investors “will consistently pay a premium for companies with strong corporate governance, relative to their peers.” According to SmartMoney, “In the decade that end in August 2003, highly rated companies returned an annualized 11.4-percent, compared with a loss of 2.5-percent for poorly rated companies.”

The bottom line remains that the well managed companies and organizations are far more likely to succeed, but still, bad things do happen to good companies and the really good companies are prepared and recover more quickly.

Every organization should have three crisis plans:

1. A crisis operations plan
2. A crisis communication plan
3. A business recovery plan

Ideally, those three plans should be integrated and seamless and key executives and managers should exercise those plans at least annually and preferably at least twice a year.

Institute for Crisis Management

President Larry Smith brings more than 40 years experience in media, government and public relations to help clients plan, train, and if necessary, manage their organization's crises

The Institute for Crisis Management is a company that concentrates on Crisis Communications Planning, Training and Consulting and serves clients throughout the US and abroad.

ICM develops communications strategies that can avert or at least minimize the disruption and financial impact of a sudden or smoldering crisis so the client business or organization can return to normal as quickly as possible.

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