DEBUNKING THE STEREOTYPES OF CRISIS MANAGEMENT:

THE NATURE OF BUSINESS CRISES IN THE 1990'S

A Paper Presented at: The 5th Annual Conference on Crisis Management
University of Nevada at Las Vegas August 8, 1996

Abstract:

Four stereotypes influence basic perceptions of newsworthy crises events in businesses, not-for-profits, and governmental agencies: (a) crises have increased during the current decade; (b) most crises involve accidents, chemical/oil spills or workplace violence; (c) heavy industry causes most of the crises; and, (d) employees are responsible for most crises. Drawing upon the database of the Institute for Crisis management, the authors refute each stereotype suggesting the opposite as a more accurate description of business crises in the 1990¯s. The authors offer several observations including the suggestion that the concept "crisis" needs more accurate definition.

Crises have been defined by many authors, each seeking to describe the phenomenon. Gathering various elements from several definitions leads to list of characteristics. A crisis:

• suddenly occurs

• demands quick reaction

• interferes with organizational performance

• creates uncertainty and stress

• threatens the reputation, assets of the organization

• escalates in intensity

• causes outsiders to scrutinize the organization

• permanently alters the organization
  

The problem with most crisis definitions is that these elements also describe any number of internal problems that executives are paid to manage. Examples of such internal problems include the introduction of a major new competitive product, significant deterioration of the stock price, or the sudden resignation of a key executive.

The Institute for Crisis Management chooses to define crisis as a significant business disruption which results in extensive news media coverage and public scrutiny. This definition emphasizes certain of the defining elements (performance interference, threatens the organization, outsiders close examination) while de-emphasizing others (sudden, demanding quick response, creating uncertainty and stress, escalating intensity). The reasons for the de-emphasis will become apparent in our analysis. For this paper, crisis will be considered from the ICM perspective.

The purpose of this paper is to examine several beliefs about newsworthy crisis events -- beliefs apparent in popular and business press -- through a database of negative business news stories developed by the Institute. To accomplish the overall purpose, the paper will describe the information within the database, apply information gained through use of the data, and finish with several conclusions about business crisis events consistent with the data as gathered and analyzed.

METHODOLOGY

Content analysis of business crisis news stories published in the various print media comprises the methodology used by the Institute for Crisis Management. Using news stories rather than government statistics, ICM maintains an ever-growing database of more than 60,000 records from the printed press accumulated from the Dialogue information service.

More than 1500 sources are captured by Dialogue including nationally syndicated newspapers (New York Times, Los Angeles Times, Wall Street Journal, etc.), business news wire services, business magazines, business newsletters and trade publications, as well as selected regional newspapers (Louisville Courier-Journal, Indianapolis Star, San Francisco Chronicle, etc.). Records on business are down-loaded and analyzed quarterly. The evolution of the ICM database has paralleled the development of electronic databases and software for penetrating them. The improvements have permitted increased accuracy of story identification and decreased collection redundancy.

Presently the ICM database only uses printed stories. However, negotiations are underway which could add video news reports to the database. Such an addition may permit more accurate counting of the number and description of the content of the stories about newsworthy business crises.

The database uses Standard Industrial Classification (SIC) codes to locate types of industries experiencing crises. With more than 8000 industrial categories, the SIC system allows for relatively specific identification of types of organizations reported to have crises in print media. For example, SIC code #6021 identifies "banks," and SIC code #6035 classifies "savings and loans associations-federal." By selecting SIC codes #60xx-67xx ICM can identify the crises in all types of financial institutions: depository, nondepository credit, security and commodity brokers, insurance carriers, insurance agents, brokers and service, real estate, holding and other investment offices. While the database carries reports on business crises around the globe, the primary focus is on institutions within North America.

The search logic governing the selection of the crises includes a second criterion -- impact. The logic is constructed so that the selection of database records is based upon a term identifying a crisis situation and the actual, or potential, impact of the crisis. The item enters the ICM database only if the nature of the crisis is connected to a consequent of the crisis, real or potential. For example, for "fire" or "explosion" to be included in the ICM database, "fatality," or "xxx dollar loss," or "shutdown" (the impact) would have to be connected in the same record.

There are two consequences of establishing impact as a criterion as each enhances the integrity of the data. The database (a) includes only those situations for which negative outcomes to the business have been specified (improving the validity of a "crisis" database), and (b) probably underestimates the number of business crises because it skips stories in which neither the headline nor the descriptors describe the impact (improving the reliability). The result is a governing logic based upon 73 sets of terms. Representatives of Dialogue describe the logic as one of the "most complex and terrifying" search logics they have ever seen.

The ICM database creates 16 categories of crises types as the basis for analysis:

Each type represents a variety of similar events based upon language used by the print media to describe organizational crises. For example, the descriptors accident, blast, earthquake, collide, tornado, flood, derail, hurricane, blizzard, fire, and sink, cluster into the "business catastrophe" crisis type. Each crisis category, then, is comprised of several characteristics.

The database uses the language of the story headline and the content of the story to determine the degree of unexpectedness of the crisis event. For example, some crises occur suddenly with no warning --the bombings at Oklahoma City or the Atlanta Olympics, or the Exxon Valdez oil spill. Other crises smolder, the sparks are apparent but the organization¯s management is unwilling or unable to rescue the situation before it goes "public" -- Dow Corning breast implants, AT&T insider trading, or Department of Defense and Department of Energy disposal of chemical and radioactive waste. In short, the nature of the crisis -- sudden or smoldering -- can be identified.

Finally, the origin of the crisis can be identified; for example, teacher, worker, executive, vendor, customer, activist, investor. For analysis, the ICM database defines three origins of crises: management, employees, other (i.e., external agent-terrorist, natural phenomenon-hurricane, etc.). However, because the several descriptors remain in the database, the "other" category can be subdivided to provide more precise analysis.

Many records in the database also include company names and states in which the crisis occurred. Because of the manner in which ICM stores the data, the industry, the region (i.e. state), and the company can be identified sharpening analysis of individual events and trends.

ANALYSIS OF THE STEREOTYPES OF CRISIS MANAGEMENT

Stereotype #1: Business crises have increased significantly in the 1990's.

It only takes a few noteworthy crises to give the impression that the number of business crises has grown. Consider the first half of 1996:

• airlines (Valujet and TWA crashes, Delta engine disintegration and consequent passenger death)

• personal and corporate security (Unabomber, school bus hijacking, Olympics, World Trade Center and Oklahoma City bombings, drive-by shootings),

• financial calamities (ADM, Prudential, Daiwa Bank, Sumitomo Copper),

• automobile defects and recalls (Ford, Chrysler mini-vans, Mazda)

• fatality accidents (school bus hit by train, Amtrack wrecks)

However, assuming printed articles reveal the extensiveness of crises during any one year, the annual number has remained relatively constant during the 1990¯s, although we predict a 13% increase by the end of 1996. Figure #1 reports the total number of crises for each year since 1990. The number of business crises ranged from a low of 6,177 in 1993 to a high of 7,035 the following year and the expectation of 7,361 newsworthy crisis events by the end of this year.

Some years have a higher incidence of crises than others. For example, in 1994, USAir and American Eagle planes crashed, killing everyone on board, GM experienced a strike idling more than 30,000 workers, labor strife continued at Caterpillar, Eli Lilly¯s drug Prozac went on trial (again), Intel introduced the flawed pentium chip, and Jack-in-the-Box cooked up e-coli. We expect 1996 to be another bad year due to the prolonged news coverage of the Valujet and TWA crashes and the bombing during the Olympics.

Figure 1. Business Crisis News Stories: 1990-1996.

While the annual number of business crisis events has fluctuated little during the decade, significant changes within crisis categories have occurred during the past six years. Using the 1990 category total as a baseline for computing the percent of change during the past six years, a picture of growth or decay can be identified. Figure #2 reports the five highest ranking percentage of change. The greatest growth has occurred in sexual harassment, up 721% between 1990 and 1995.

Figure #2. Fastest Growing Crisis Categories: 1990-1995.

1. Sexual harassment (721%) 2. Class Action Lawsuits (358%) 3. Labor Disputes (65%) 4. Discrimination (58%) 5. Defects & Recalls (55%

By the middle of the decade, sexual harassment had grown to 115 of 6,539 incidents (2% of all crises during 1995). Class action law suits rank second in overall growth increasing 358%. In 1990, 86 ( 1% of the total) reports of class action suits were collected into the database. In 1995, 394 reports (6% of the total) were included.

The remaining crisis ranking within the top-five display far less dramatic growth: #3 -- labor disputes increased 65%, #4 -- discrimination grew 58%, #5 -- defects and recalls grew 55%. But the point is that business crises in numerous industries -- stimulated by sexual harassment, class action lawsuits, labor activity, legal action arising from race, age, gender, and life-style discrimination, and product defects detected after entry into the marketplace -- have escalated during the 1990¯s.

If those five crisis categories have increased over six years then which crises have increased most rapidly between the last two years? Answering that question may serve as a prediction of the nature of crises in the immediate future. Crises caused by consumer activism intensified the most between 1994 and 1995 increasing 331%.

Figure 3. Fastest Growing Crisis Categories: 1994-1995.

1. Consumerism (331%) 2. Class Action Lawsuits (225%) 3. Labor Disputes (42%) 4. Defects & Recalls (41%) 5. Casualty Accidents (36%)

Class action suits, which have some relationship to consumer activity, increased 226% in one year following five years of steady increasing frequency. The next three categories accelerated at a slower rate -- #3, labor disputes, 42%, #4, defects & recalls, 41%, #5, casualty accidents, 36%.

Will the growth of these types of organizational crises continue in the foreseeable future? Drawing from data collected during the first half of 1996, Figure #4 reports the crisis categories with the greatest projected growth for that year.

Figure #4. Fast Growing Crisis Categories: Projected.

Two of the three fastest growing categories -- sexual harassment and class action suits -- may be expected to continue developing. These increases suggest that executives of companies, nonprofit organizations and government agencies have failed to heed the lessons from the Judge Clarence Thomas-Anita Hill dispute.

The information from the database reveals that class action lawsuits, labor strife, and discrimination have grown steadily since 1990 with some acceleration in the most recent years. Sexual harassment has grown the most during the decade, however.

It is interesting to note that the growth of some types of crises has occurred while the total number of organizational crises have changed little suggesting that several categories of crisis have actually decreased during the past six years. Such is the case.

1. Environment damage (-63%) 2. Business catastrophe (-42%) 3. Mismanagement (-36%) 4. White collar crime (-7%) 5. Workplace violence (unchanged)

Environmental damage crises have decreased the most, down 63% during the 1990¯s. Business catastrophes decreased 42%during the same period as companies and government agencies, especially OSHA, have been moved to take action because of tragic accidents such as the Imperial Chicken plant fire in South Carolina. Mismanagement diminished 36%, followed by white collar crime, 5%, and workplace violence, virtually unchanged over the six years.

Perhaps a clue to the persistence of the stereotype that crises have increased may be found here. Although the number of instances decreased, any crisis involving damage to the environment and catastrophic accidents can be pictured, often dramatically. Television and print media use those pictures to chronicle contemporary life, repeatedly showing them on the several newscasts of the day and/or on the front page of newspapers and the cover of magazines. Our hypothesis is that the repetition of the visual image encourages the perception that crises are increasing for American business.

Despite changes in the nature of crises during the 1990¯s, the actual number of crises has steadied, or declined, during the period. The belief that crises are increasing appears to be a myth. Further, our analysis of the first myth builds a foundation for dispelling another, that organizational crises arise from accidents and other catastrophes.

Stereotype #2: Most business crises involve accidents, chemical and oil spills
and workplace violence.

From the previous discussion it was found that sexual harassment, class action lawsuits, labor disputes, discrimination and defects and recalls grew during the 1990¯s. None of these, even the defects and recalls, may be considered business accidents and catastrophes, either natural or person-made. With one exception, defects and recalls, they result from the "soft" side of organizational life, the development and maintenance of human relationships within a working environment. But, while not increasing, do accidents, chemical and oil spills, and workplace violence account for the most business crises? Three different analyses assist in answering the question.

Computation of the percentage of the total number of crises during the 1990¯s accounted for by each category of crisis provides one way to answer the question. Figure #6 reports the ranking of the 16 crises as a percentage of the total number of mentions in the database.

Figure #6: Rank-order of Percentage of All Crises 1990 - 1995

From this perspective, mismanagement is the most frequent business crisis accounting for nearly 1 in 5 crises (19%). White collar crime ranks a close second (18%) , followed by labor disputes (11%), business catastrophe (9%), and environmental damage (7%). While accidents and catastrophes do account for many business crises, they do not comprise the bulk of the crises in the database.

Another way to address the question is to add across categories to determine the percentage of crises attributed to sudden crises, spefically accidents, catastrophes and violence. The sudden crises categories include "business catastrophes (9%)," "casualty accident (3%)," "environmental damage (7%)," and "workplace violence (5%).quot; Combined, these categories only account for 24% of the total number of crises reported during the decade. Seventy-six percent of the crises occur because of other factors.

A third way to address the question is to compute the percent of sudden and smoldering crises as a percentage of the total number of crises in the 1990¯s. Generally, catastrophes, accidents and violence are thought to occur without warning, their unexpected nature, and their suddenness, intensifying the crisis. If suddenness is a feature of most crisis according to the myth, then the accidents and violence may be expected in the typical business crisis. However, smoldering crises account for approximately two-thirds of the crises experienced by companies, nonprofits and government agencies.

Figure 7. Percentage of Sudden and Smoldering crises: 1990-1996.

That is, the problem(s) exist within the organization, and may even be known to employees and managers of the organization, but, for one reason or another, they are not resolved before they go "public" in the news media. They linger, smolder for a time, and wait until something causes them to flare. Then, what may have been a controllable business problem becomes an uncontrolled business crisis. By this we mean that the problem has escaped the organization to then be covered by the media and investigated by government and judicial agencies.

The answer to the question -- do accidents, chemical and oil spills, or workplace violence account for the most business crises? -- is no. Most crises are neither accidental nor sudden. Rather, they reveal questionable, illegal or unethical activity by someone within the organization, frequently involving other members of the organization and/or people who routinely interact with organizational personnel. Not only is the problem existent, but someone in the organization knows, or has neglected to know, of its existence. The problem is not lack of knowledge, but rather an unwillingness to report the problem or to resolve it.

It also is to be understood that not all smoldering crises can be resolved before they are revealed to the public by the media. For example, the accused in a sexual harassment challenge may reject a settlement offer. Or, another example, the organization may be required by law to report the discovery of fraudulent activities once uncovered.

Why do people believe that accidents and violence serve as the typical business crisis? The memory power of a dynamic and dramatic visual image, as mentioned previously, offers one explanation. The media repeatedly displays the pictures of these events, not only at the time of occurrence but on anniversaries and whenever similar cases occur, reinforcing the frightening and violent nature of the organizational problem. The operational problem may disappear quickly -- fires are extinguished, oil spills are cleaned, employees return to work -- but the visualization of the event continues.

If most crises smolder, if someone knows of their existence, then why do they continue? Two comments about management and one about employees may answer the question. Executives may tend to deny the problem¯s existence or minimize the seriousness of its potential damage to the business. The failure of Barings Bank management to deal with the financial discrepancies of one its most successful traders in 1995 provides one example. In this case, denial caused billions in losses and ultimately forced the bank to fail. Ignoring copper trading irregularities by Sumitomo provides another. ICM hears too often hear as the reason for disinterest in crisis communication is that "It can't happen here." We consider this reaction as a form of management denial.

The organization vulnerability to crisis is often compounded by management when it has established a culture--real or imagined-- which "kills the messenger." Dismissal or reprimand follows the delivery of "bad news," the reporting of an organizational problem. The firing of the ADM officer, although a bit more complicated than merely reporting bad news, furnishes one example of "kill the messenger" mentality.

Employees often confined to, or imagining themselves in, an organization with the "kill" culture do not report knowledge or suspicion of wrongdoing, nor actual errors. Employees of Ball Memorial Hospital, Muncie, Indiana, radiology department knew some patients were being overdosed with radioactive isotopes but said nothing for fear of reprisal by their supervisor. Eventually the story appeared, causing severe financial and reputational damage to the hospital, leaked by an ex-employee to the press.

If accidents and spills fail to comprise the majority of organizational trials, then it may follow that most crises do not happen in heavy industry.

Stereotype #3: The industrial sectors of American business cause most of the crises.

Over the course of the decade the majority of crises have arisen in the non-manufacturing sectors of the United States economy, reflecting the overall change from a manufacturing to a service economy. To illustrate that conclusion examine Figure #8 which reports, in rank-order, the most crisis-prone industries for the years of the 1990¯s. By "crisis-prone" we mean compiling the greatest of records within the ICM database.

Figure #8: Rank-order of Crisis-Prone Industries by Year

Throughout the past six years only two industries have appeared among the top-ten crisis-prone every year: security brokers/dealers, and banks and other depository institutions. Appearing among the top-ten list five of the six years are found telecommunications, insurance carriers, and auto/truck manufacturing.

Only vehicle manufacturing might be considered heavy industry. If you remember the past few years, labor strife and defects and recalls resulted in auto/truck manufacturers being faced with numerous crisis situations rather than accidents, spills or workplace violence (although occasionally labor strife resulted in physical confrontations).

A listing of the top-ten companies experiencing crises for each year of the decade also supports the conclusion that non-manufacturing businesses are the major contributors to the total number of crises. While heavy industry names appear on the list, they appear not because of accidents, but because of labor strife, or defects/recalls. Boeing and Caterpillar are prime examples. The automotive companies Ford, GM and Chrysler have made the list because of defects and recalls of their products and/or lawsuits against their products. The fires associated with side-tank GM pick-up trucks is a case in point since it triggered a chain reaction of crises including lawsuits, government investigation, and the GM vs. NBC confrontation

Figure #9: Rank-order of the Most Crisis Prone Companies by Year

Why is there a perception that heavy industry causes the most crises? First, the belief seems a natural outcome from believing that most crises involve accidents, chemical/oil spills or workplace violence. Second, many people have difficulty in viewing labor disputes, class action law suits, financial damages, white collar crime, and hostile takeovers as "crises."

Our conclusion, based on reviewing the crises thus far in the 1990¯s, is just the opposite. These smoldering crises have even greater potential for threatening the profitability of the business, the careers of executives, and the very existence of the organization than do sudden crises.

In a sudden crisis the public, news organizations and government officials know that the organization¯s top management is not to blame for the catastrophic situation. In fact, management will receive a degree of sympathy and support during the first few days. However, if it is a smoldering crisis, the worm turns immediately on top management. The first reaction of the news media, the public and government officials will be to question management¯s actions. The question on everyone¯s mind will be "How could you have allowed this to happen?"

Because of the prolonged time period of smoldering crises, they (a) drain dollars over long periods of time away from the principle business activity, (b) divert management and employee attention from the central activity of the organization, and (c) undermine customer confidence in the ability of the organization to perform its primary function -- providing goods or services.

The trust problem may be particularly the case in industries which sell "service" the purchase of which requires customer "trust" in the quality of the service performed since, frequently, no tangible product appears for inspection. Defects in auto construction may be apparent daily in the starting, handling and performance of the vehicle. However, to uncover financial fraud requires consistent review of a organizations financial records as well as training to uncover reporting irregularities. Most consumers have experience with driving a car but little experience in reading complex financial records. In short, to violate the "trust" of the customer of a service company may have greater negative long-term effects upon the continuation of the organization.

Stereotype #4: Employees are responsible for most business crises.

Following from the beliefs that accidents and heavy industry are most involved in organization crises may be the belief that employees or "natural events" are responsible when most crises occur. This belief is not supported by data.

By clustering the titles of various organizational positions (CEO, chairman, supervisor, employer, worker, employee, operator) the ICM analysis of organizational crises suggests the vast majority are caused by managers, not employees or outside agents. Managers annually cause approximately 66% of business crises, while employees cause roughly 20% with the remaining 14% caused by "acts of God" or agents external to the organization (i.e., terrorists, activists, competitors).

Figure #10. Origins of Business Crises: 1990-1996.

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Another method to examine the causes of business crises would be to rank-order the nature of the crisis by year. While some crises could be caused by management or worker or external agent, the ranking reported in Figure #11 may

Figure #11: Rank-order of Nature of Business Crisis by Year

support the conclusion that management causes of most crises. In every year but one, errors by management account for most crises. Even white collar crime (bribe, collusion, conspire, embezzle, kickback, payoff, money laundering ) ranked either one or two for each year of analysis. These crimes may involve managers moreso than workers because managers occupy positions which permit greater independence of unsupervised action.

Examples of headlines may expose the nature of crises caused by management. While admittedly a selective listing, the headlines illustrate the point that managerial action causes most business crises.

Figure #12: Headlines

Former brokers indicted in crackdown

Hibbard Brown official pleads guilty to fraud

Ex-Honda sales chief admits taking bribes

Bias suit sites Nationsbank Money manager says he expects SEC charges

Scarsdale bank manger held in theft for an elderly woman

Justice Dept. hails prosecutions at banks, S&Ls;
report says 3,700 senior executives, owners of failed thrifts have been sent to prison

CEO fired after derivatives loss

Court rules frequent fliers can sue for fraud

7th guilty plea in AT&T insider case

Why does the myth exist that employees or external agents cause most crises? ICM's conclusion is that the belief follows from the reasons for assuming the "truth" of the previous three myths. That is, accidents, spills and other crises result from operations. If a person believes these categories account for most crises then the belief suggest that a "worker" committed some error. Frankly, few managers &quote;operate" the processes of manufacturing. However, our analysis recommends a different conclusion -- management decisions or indecision are the roots most business crises.

CONCLUSION

The analysis of business crises during the 1990's recommends that four beliefs commonly held about such crises are not based upon accurate information. In short, the beliefs are false stereotypical perceptions:

business crises have not increased but have remained relatively constant accidents, spills, or workplace violence are not the dominant crises "heavy industry" does not experience the most crises employees are not responsible for most business crises

What analysis based upon the ICM database did reveal about crises is:

the nature of crises may be changing from operational to human causes smoldering crises outnumber sudden crises service industries experience the most crises heavy industry crises may involve labor disputes, and design or manufacturing defects management, either through poor judgment or criminal acts, causes the majority of crises faced by business the increasing crisis categories -- labor disputes, class action lawsuits, sexual harassment, discrimination -- expose a conflict between individuals within organizations and the organizations themselves

The findings suggest at least two additional comments. First, the conception of organizational crisis needs to be changed to diminish the sudden, coincidental perception while increasing the smoldering, mismanaged nature of crises. To the justification offered by the analysis in this paper can be added the observation that most sudden crises, while momentarily disruptive, come under organizational control rather quickly and disappear.

What does not disappear quickly, however, may be the consequences of the "sudden" happening -- governmental (elected and regulatory) investigation, legal actions and stock value declines, distrust by employee and customers of the company. Furthermore, most smoldering problems can be located and resolved before they flare into uncontrollable crises if the climate of the organization and the means to report them can be created.

Second, the preponderance of smoldering crises and the recent growth of individual vs. organizational crises suggests that most crises can be prevented if identified and corrective actions taken. We believe that thousands of smoldering crises are resolved in this manner by astute employees, middle managers and senior executives because the public never hears about them. But to do so requires a shift of managerial attitudes and business cultures. It also requires mechanisms for locating and reporting smoldering crises without endangering the reporter while protecting the rights of the participants until a full investigation can occur.

One start toward reconceptualizing crises and emphasizing prevention is to debunk stereotypes currently held-- the central purpose of this paper.

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