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    Handling the fallout of a corporate scandal requires preparation, honesty and transparency, writes Tony Featherstone.


    A well-meaning organisation acts decisively on an unfolding scandal. The CEO fronts the media early, accepts responsibility and says the problem is being fixed. His response is honest, open and free of “spin” – and yet extraordinarily damaging.

    Going public so early damages the CEO’s precious reputational capital. Investors question if he has sufficient control. The firm’s lawyers are unhappy because the admission of guilt exposes the organisation to liability and a potential shareholder class action.

    As the scandal intensifies, the chair fronts the media to lend support. In doing so, he unwittingly creates a perception that management has lost board support. The chair is so busy finessing the media that he forgets about updating key shareholders. Even worse, a non-executive director provides background briefings to media commentators, to quell the public relations damage. The director has limited understanding of market expectations for the listed company and breaches its continuous disclosure obligations.

    Welcome to the world of crisis management at a time when wrongdoings within organisations are harder to contain and when bad news spreads rapidly in a 24/7 news cycle.

    There has been no shortage of crises in the past few years. They range from the Nine Network’s handling of the 60 Minutes Beirut kidnapping controversy, to BHP Billiton’s dam collapse in Brazil, and numerous banking scandals. Several not-for-profit organisations have also experienced media crises over fundraising revelations over the years.

    The above scenario, of course, is one of many that could play out. Every crisis is different. A CEO accepting responsibility early and offering solutions makes perfect sense in some situations. But the danger for boards is adopting generic, “textbook” approaches to crises, or straying too far into management’s terrain with public responses to problems.

    “Boards should generally stay in the background as crises play out in public,” says investor relations expert Warwick Bryan. “Management should deal with the problem and the chair should work behind the scenes to address any shareholder concerns. One notable exception is when the crisis involves the CEO in which case the chair may need to become the public face of the organisation.”

    Bryan has seen plenty of corporate crises in an investor relations career spanning three decades. He chairs the Australasian Investor Relations Association (AIRA) and is best known as the former executive general manager of investor relations at the Commonwealth Bank of Australia (CBA). Bryan left CBA last year and now works for capital markets adviser, Reunion Capital Partners.

    He says the board has two main roles during a public or investor relations crisis: to act as a sounding board and adviser for management and to be available for key shareholders. “It can be very useful for the CEO to access directors who have experienced similar problems and gain their experience and insights about handling a crisis with the media and investors.”

    The chair and board’s existing relationships with shareholders can help the engagement process in a crisis situation, says Bryan. “The last thing you want is a chair having his or her first interaction with an investor when things are going wrong. Ideally, they should already know key investors, have established an ongoing dialogue and be accessible should a shareholder want to engage.”

    Boards, says Bryan, can act as a listening post during a crisis. “The chair, working in the background, needs to understand the market’s concerns and relay that information to management. That input can help shape the message and communications strategy.”

    Bryan says boards should be prepared for crises. “There should be detailed policies and procedures in place for managing crises. Boards should rehearse their response to a mock crisis at least once a year so they can monitor how prepared management is and understand what role (if any) they need to play in the event of an emergency.”


    Naive approach

    Mark Westfield, a leading investor and public relations expert, has seen corporate crises from both sides of the fence. He was a business commentator for more than 20 years and is now a strategic media consultant at Westfield Wright, which has acted for a number of companies in crisis management.

    He says: “Very few companies can say they will not be affected by a crisis, to varying degrees, at some point. The board should ensure the organisation’s crisis-management policy includes the retention at short notice of external communications advisers to bring a fresh perspective and the best messaging and media contact skills.”

    Westfield says too many companies act naively during crises. “They go into their bunker and think the crisis will go away. Or they go on the front foot with a lot of corporate ‘spin’ that the media sees straight through and which inflames the situation. You can’t unscramble the egg once it’s broken; you have only one chance to adopt the most effective media strategy to manage the crisis and rebuild confidence amongst investors, and in many cases the public.”

    Focusing on crisis-management solutions rather than problems is critical, says Westfield. “The best response usually involves the organisation communicating that it is taking steps to address the issue. The steps might be broad at the start and get more detailed as the crisis unfolds and information comes to hand. The key is being proactive and forward-looking.”

    Organisations should be as honest as possible. “The market craves transparency during a crisis,” says Westfield. “You don’t want investors to lose confidence or give them an opportunity to sell because they don’t know what’s going on or, worse, lose trust.”

    AIRA CEO, Ian Matheson FAICD, says listed companies need to differentiate between public relations and investor relations issues. “Some crises generate a lot of media coverage but may have no material impact on the company’s earnings. Other crises do both. The key is knowing how to assess crises and having a plan in place.”

    Matheson says responding early is critical. “The crisis might come out of left field but the investment community wants to know the company is aware of the problem and is taking steps to address it,” he says. “A company statement to the ASX that acknowledges the issues is sometimes all that is required at the start.”

    As more facts emerge, the CEO should be available to the investment community and financial media through a conference call or webcast. “That gives institutional investors a chance to ask questions and helps keep the market fully informed.”

    Matheson says boards should ensure directors have sufficient understanding of investor relations and the media. “That typically comes through former CEOs and chief financial officers who are on the board and have experienced crises previously. Boards should also have a direct line to the company’s investor relations manager to tap his or her knowledge of market perceptions before and during a crisis. Boards cannot operate in an ivory tower when it comes to investor relations and sign off on decisions without understanding how they could affect market perceptions and the share price.”

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