OVERALL ASSESSMENT

The number of business crises reported each year by the news media has remained virtually level throughout the 1990’s and actually decreased 8% in 1995 with the absence of a major crisis such as Intel’s Pentium microchip problems.

At the same time, the ICM analysis of 56,000 business crisis news stories clearly points out that most executives and consultants who are concerned about crisis management have been focusing on the wrong kinds of crises.

The stereotypes of a business crisis, fires, explosions and oil spills, only accounted for 17% of the crisis news. The real problems have been white collar crime, labor disputes and faulty management, which have generated more than half of the negative business news coverage in the 1990’s.

Labor strife became the most significant crisis area for companies in 1995 with Boeing, Caterpillar, the Big Three auto makers, the Baby Bells and even the Detroit Free Press grabbing the headlines as they confronted their unions at the bargaining table and on the picket lines.

If anyone is wondering where the next crisis is likely to occur, consider the fastest growing crisis categories--class action lawsuits, executive dismissals, hostile takeovers and sexual harassment, which have all more than doubled since 1990.

The news stories on these management crises were small in number compared to white collar crime, labor disputes and mismanagement. However, they invariably get the media’s attention because of the gut wrenching personal and profes- sional problems that surface.

THE MOST CRISIS-PRONE INDUSTRIES

The crisis factors that caused businesses the most grief in 1995 were the increased militancy of the labor movement, the growth in class action lawsuits, and business crime, both white collar and workplace violence.

ICM’s analysis of the negative news coverage in 1995 reveals several industries that usually make the most crisis-prone list because of the nature of their business. However, they were joined in 1995 by several interesting newcomers.

Security brokers and dealers moved up from No. 6 the previous year to rank as the most crisis-prone industry in 1995. The dubious distinction resulted primarily from trading scandals involving some of the biggest names in the industry.

Kidder Peabody, Prudential Securities, Smith Barney, Merrill Lynch and Paine Webber, to name a few, found themselves in the glare of the media spotlight admitting guilt and paying millions in fines and lawsuit damage settlements for illegal actions by their brokers and traders.

The biggest scandal for the industry in 1995 involved Nick Leeson, a Singapore-based trader for Barings Bank in London, who ran up over $29 billion in illegal trades. Leeson subsequently went underground, triggering a worldwide manhunt that ended in his arrest and return to Singapore for trial.

The automobile industry always ranks among the most crisis-prone, coming in second in 1995. One factor was the number of recalls, for everything from trash trucks to police cars.

Chrysler led the industry in generating crisis news as it faced a hostile take-over threat from Kirk Kerkorkian along with government investigations of defective fuel tanks and rear door latching mechanisms on its industry-leading minivans.

In addition to having to appear in government hearings, auto executives also came under fire in court with a number of managers and dealers being found guilty of criminal actions involving the sales of cars. Meanwhile, the UAW increased the number and intensity of strikes against the auto makers and their suppliers.

Aircraft manufacturing also had more than its share of crises in 1995 with a majority of the negative news centered around the machinists strike against Boeing. The 69-day walkout disrupted aircraft deliveries to the airlines and was marred by violence on the picket line before it was finally settled.

Boeing’s crises were compounded by two unexplained crashes of its 737 passenger jets, structural flaws in its 767’s and problems with its new 777, including a loss of pressurization on a flight with the U.S. Secretary of Transportation on board.

The industry again in 1995 had to deal with crises involving illegal business practices. A Lockheed employee pleaded guilty to bribing an Egyptian official and a whistle blowing lawsuit was filed against McDonnell Douglas by the Justice Department for illegal costs on several Defense contracts.

The airline industry had to contend with media coverage of several fatal crashes in the U.S. and abroad in which human error was a probable factor, most notably the loss of an American Airlines 757 in Colombia just before Christmas.

Airline executives also found themselves embroiled in crisis situations including “informational picketing” and outright strikes by employees, accusations of predatory pricing and illegal reservation systems, fraud suits by frequent flyers, fines for false advertising on the Internet and delayed delivery of badly needed airplanes because of the strike against Boeing.

The ousting of two successive CEO’s by Kiwi International Airlines in less than a year was one of the bizarre airline crises in 1995. Another was the inflight asphyxiation of a load of pigs on a South African Airways cargo plane. They were inadvertently gassed when an air quality sensor failed.

Commercial banking made the list once again in 1995 due primarily to the scandals at Daiwa Bank in Japan, where one of its U.S. branches caused the bank to have to absorb $1.1 in bond trading losses, and Barings Bank in London in the aftermath of the Nick Leeson trading scandal.

Leeson’s arrest multiplied the regulatory and public relations nightmare for the bank’s officers, who already were faced with trying to explain how $29 billion in questionable trades could have been made without management’s knowledge or review. The bank subsequently went out of business.

An additional crisis in the banking industry was tied to hostile takeovers. Most notable was the protracted takeover battle between Wells Fargo and First Interstate Bank in California.

1995 was another year of uproar for the computer industry. Microsoft continued its running battle with the government, which stepped in to block Microsoft’s planned acquisition of Intuit, the leading producer of checkbook software.

Intel's Pentium chip crisis, which began in the last quarter of 1994 and was the computer equivalent of a tempest in a teapot, continued into the early months of 1995. Then Apple took over in generating negative news with management decisions that led to a back-log of unfilled orders of more than $1 billion, the departure of key management and declining profit margins making headlines during the last half of 1995.

With the expiration of the three-year agreements between the "Baby Bells" and the Communications Workers of America, the telecommunications industry was the focus of a series of labor disputes and strikes in 1995, particularly at Bell Atlantic.

Meanwhile, AT& T added its own management crises to the industry with a bitter strike, an insider trading scandal and its announcement of plans to split into three companies and eliminate up to 40,000 jobs.

Newspaper publishing was one of the newcomers to the list as the result of the strike against the Detroit News and Detroit Free Press. The strike had all of the earmarks of bitter labor disputes in the 1950’s with accusations of “goon tactics” and replacement workers being held hostage, picket line violence and mass rallies of union workers.

Newspapers also had more than their share of bizarre crises in 1995. The New York Times and Washington Post wrestled with the dilemma of whether to go along with the demands of the Unabomber to publish his 35,000-word manifesto in return for the promise of no more letter bombs. They did, and the bombing stopped.

Professional sports was another newcomer. While most people still think of sports as sports, the major league baseball strike made it clear that baseball has become very much a business for both the owners and players.

The economic impact of the conflict cost spring training communities in Florida and the Southwest U.S. untold millions in lost income. Those losses were subsequently multiplied within professional baseball itself as attendance dropped sharply, many teams lost money and two of the TV networks canceled their broadcasting contracts as a result of the eight-month strike.

Painfully aware of the public reaction to the baseball strike, the National Hockey League resolved a “lockout” just before the start of the 1995 season. The NBA players also saw how the fans felt and voted not to follow the recommendations of the highest-paid players, who urged a strike.

The legal profession was the other surprising newcomer on the most crisis-prone list. Part of the credit or blame goes to the Rose Law Firm attorneys, including the First Lady, involved in the Whitewater scandal. The other contributors were the attorneys and prosecutors in the O.J. Simpson trial. Between them, they had enough negative media coverage to make them household words and the butt of countless jokes on the late night TV talk shows in 1995.

On the regional level a federal prosecutor and six Miami attorneys were convicted and sent to prison for aiding the Cali drug cartel in smuggling 200 tons of cocaine into the U.S. Other legal horror stories included the arrest of attor- neys with an American legal firm in London who were laundering money for Russian gangs and charges against another attorney for destroying important evidence in the ongoing investigation of the Bank of Credit and Commerce International.

Another legal crisis was triggered by a noteworthy class action lawsuit against the tobacco industry which included a subpoena of the records from several of the industry’s law firms. A paralegal leaked copies of the documents to government officials and the news media, prompting a furor of legal action, government hearings and damaging news stories.

Although not on the top-ten list, the tobacco industry has operated in a crisis mode since the Congressional testimony in 1994 by seven tobacco company CEO’s denying cigarettes were addictive. Their televised statements were contradicted in 1995 by the leaked memos and the whistle blowing allegations of a former executive suggesting that cigarette manufacturers knew of, and con- trolled, the addictive qualities of the nicotine in their products to boost sales.

SMOLDERING VS. SUDDEN CRISES

In analyzing crises thus far in the 1990’s ICM has concluded that the classic stereotypes of a business crisis are not valid. Sudden crises actually represented 14% of the crisis news coverage in the 1990’s.

The real problem has been in the other 86%, which were “smoldering.” In cases such as sexual harassment, illegal actions by management, class action lawsuits and most labor disputes, senior executives were aware of the potential crisis but did not resolve it before it erupted in the news media.

The ICM research also indicates that executives, not employees, have been responsible for most of the crisis news coverage in the 1990’s. Management decisions were directly or indirectly involved in 78% of the 56,000 crisis news stories.

The question is what are senior executives doing to prevent costly crises involving their own management team? The analysis by ICM indicates not that much.

The root cause may be denial, complacency, greed or execu- tive egos not wanting to admit a management error. Whatever the reasons, middle and upper management have a hard time taking the necessary action to resolve costly crises while they are still internal business problems.

All to often, the result is that these smoldering crises wind up costing companies needless millions of dollars in lost business, government fines and penalties, legal fees and court settlements, diminished stock price and wasted management time. Another result is that someone gets fired--Executive dismissals have increased 170% in the 1990’s

OUTLOOK AND IMPLICATIONS

While the number of crisis news stories has remained relatively level thus far in the 1990’s, we believe that business crises and the news coverage they receive will escalate both in number and intensity throughout the rest of the decade.

Media coverage of business crises, especially on TV, will become more pervasive. With the number of 24-hour news channels and increased emphasis on business news, millions of viewers, especially customers and investors, will be painfully aware of any business crisis.

The crisis may not be a fire or explosion. It does not have to be. Even if it’s a court case, company officials are likely to find themselves facing TV cameras and reporters with their interpretation of who’s guilty for the Evening News viewers.

Litigation itself will become an increasingly serious type of crisis for any business, especially class action lawsuits. And don’t expect the plaintiff’s attorneys or the plaintiffs them- selves to take the judge’s admonitions to heart. The current legal wars between the tobacco industry and the anti-smoking forces make it clear that leaking confidential information may be illegal, but the people who do it become folk heroes in the eyes of the public, thanks to the media.

Labor disputes are the other area of crisis that will increase significantly. The new AFL-CIO leadership is more militant and union members will follow these leaders to protect their jobs in the current downsizing environment.

RECOMMENDATIONS

If they want to avoid the eruption of a costly smoldering crisis, top management needs an early warning system within the business that will bring these situations to their attention. The challenge will be in having a reliable notification system that will not kill the messengers.

There also has to be a realistic process for evaluating the severity and potential of a crisis going “public” at an early stage so the most cost effective options can be undertaken. Executive egos have to be put aside.

The best way of evaluating a smoldering crisis is to ask the question: How much will this problem cost us if it goes “public”? Consider the likely reaction of your employees, customers and investors as well as the competition, plaintiff’s attorneys, unions and government officials.

How much management time and financial pain can your company tolerate? If the costs exceed your pain threshold, it’s time to take action.

©1995; 1996 The Institute for Crisis Management. All rights reserved.