CRISIS MANAGEMENT FOR BUSINESS

The head in the sand approach to solving problems is not uncommon in everyday life. The concept of not getting involved has become more rapidly adopted by our citizenry. People readily subscribe to the maxim: The less involved you are the better off you are. It is also not uncommon in business situations, including at the very top positions. More and more CEO’s and other executives wish to insulate themselves and not sully their hands with messy issues, instead of solving them which is what they are paid to do.

When an organization’s leadership wishes to maintain clean  hands instead of confronting crises, the can is kicked down the road or left to those who do not have the authority, knowledge, or responsibility to handle. The result is often a rudderless ship, compounded problems for the organization, and a CEO who either throws other people under the bus or is made to resign leaving a bleeding hulk of a company.

Take the case of the British Broadcasting Corporation. For many years a popular, long-time host at BBC, Jimmy Savile, was suspected of sexually abusing young people, sometimes even at the premises of the BBC. The company recently came under blistering attack when it was learned that an investigation of Savile had been cancelled by the editor of BBC’s Newsnight program last year. Newsnight is an important current affairs program of the BBC. Mark Thompson, the BBC’s Director General until a few months ago claims to have had no knowledge of the accusations against Savile although there were many opportunities to delve into the matter if he chose to do so.

Another recent example is Stephen Green, now Lord Green. Lord Green became chief executive of HSBC in June 2003 and was appointed chairman in 2006. In December of 2012 HSBC entered into a Deferred Prosecution Agreement with the Department of Justice (DOJ), criminal money laundering activities and agreeing to pay fines and penalties totaling $1.9 billion. According to the Huffington Post, in 2005 Green was also made aware of the bank’s alleged ties with “rogue” regimes in theMiddle East. A US Senate investigation released internal emails showing how in the same year Lord Green was warned by an internal whistleblower in the bank’sMexicosubsidiary that compliance staff had “fabricated records”. He was also told in 2008, two years after being appointed executive chairman, that the Mexican authorities had uncovered evidence of money laundering that “may imply criminal responsibility of HSBC”.

Often, top management wishes to be insulated from bad decisions already made, and hard decisions that need to be made, even with the knowledge that, more often than not, the buck stops with them and severe harm can come to the company.

A CEO and his/her lieutenants are charged with monitoring the ship as a captain of a vessel or plane would. Rectifying what is wrong is a vital part of the job. Time does not absorb and dissolve bad decisions or situations. It only heightens the culpability of the parties who either made no attempt to rectify, or tried to white-wash them. Recently the DOJ and the SEC jointly released its 120 page Resource Guide to the Foreign Corrupt Practices Act (FCPA) which essentially prohibits and makes criminal the bribery of foreign officials. The Act was first passed in 1977, was amended a couple of times. The Guide explains what the DOJ and the SEC look for when it investigates, including the conduct of company when it learns of violations and the remedial steps which are taken to correct violations.

The FCPA states that it shall be unlawful for a company or its officers or directors to offer to pay, pay, promise to pay or authorize the payment of any money, gift or anything of value to foreign officials, or a foreign political party or official thereof, or foreign political candidate including to any person while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly to any foreign official, foreign political party or official thereof or foreign political candidate for the purpose of influencing any act or decision of such official, inducing any act in violation of the official’s duty or securing any improper advantage.

The Guide states that Congress meant not only “to impose liability on those with actual knowledge of wrongdoing, but also on those who purposefully avoid actual knowledge” and quotes H.R. Conf. Rep. No.100-576, at 920 (1988):

[T]he so-called head in the sand problem – variously described in the

pertinent authorities as “conscious disregard”, “willful blindness” or

deliberate ignorance” – should be covered so that management officials

could not take refuge from the Act’s prohibitions by their unwarranted    obliviousness to any action (or inaction), language

or other “signaling devise” that should reasonably alert them of the “high probability” of an

FCPA violation.

It is very likely that in the future the DOJ will adopt various theories expounded in the Guide to other criminal prosecutions besides those arising from the FCPA. For example, in December, 2012, in the highly publicized HSBC money laundering case, the DOJ imposed its FCPA risk based guidelines to the bank’s flawed country risk-rating methodology. It is only a matter of time before we see the “head in the sand” approach to management come under significant direct attack.

Thus, it is time for boards of directors to insist that top management take full responsibility to right the wrongs of their organizations.  It is incumbent on top management, and lower levels in turn, to clarify lines of responsibility and authority, to define the values of their organizations, to impose clear lines of accountability and to review regularly issues that arise. Confronting and solving problems is a big part of the job. Basking in increased sales, profitability and market share at the expense of ignoring core issues is a dangerous path that has often set back businesses several years and cost, or should have cost some CEO’s their jobs.

The JPMorgan $2 billion debacle stunned me as it did everyone else. It was like catching the self-righteous little kid with the smoking slingshot in his hand.

Well, not quite. I got to thinking. Yes, it’s true that Jamie Dimon has this holier than thou attitude and perhaps it’s nice to see him knocked down a peg or two. But many crises are without question caused by those employees who you think you know – but don’t. Or caused by the hierarchy or the controls you’ve established but which really don’t work. You look out over your domain and deem it good, but there is always someone or some circumstance or some poor decision that puts you and your company in the hot spot.

 Yes, the buck stops here and the CEO should always take the rap (instead of throwing someone or a few  people under the bus and taking the $23 million), but that doesn’t mean the CEO can really plug every hole that springs a leak. It would require too many thumbs. Dimon was frank and honest, but he did forget to say it was on his watch and he accepted full responsibility. You can’t have everything. But, what do you do when your trusted employee or employees do something dumb, or worse.

 Several months ago I wrote about Charlie Sheen. I also wrote about Christian Dior’s John Galliano. For those who don’t recognize the names, suffice it to say that both of these guys gave their employers and themselves black eyes and heartburn. CBS and C.D. each acted fairly quickly and dumped its famous and talented employee, regardless of his value. They restructured. They went on and in a matter of a couple of weeks after their decisions, the crisis each faced disappeared.

 Crisis management calls for decisive action. That doesn’t mean just dumping a perpetrator. It means analyzing a situation to see if the organization continues to be vulnerable. It means identifying the basic problem and rectifying it. Do potential employees have to be tested? Drugs? Psychological testing? Do they have to be supervised more closely? Should they be cleared to give public statements? Do employment contracts have to be tightened up? Do the work environments have to be more closely supervised? Do supervisors have to have greater responsibility for the conduct of their departments? Do department managers and regional vice presidents have to be more hands on? Should they be required to know all the employees under them? Should the work environments be evaluated for potential risk? Are there checks and balances? Are there activities being conducted that are beyond the scope or the purposes of the business  or the established guidelines or policies of the company?

Crisis management should lead to problem solving not problem white-washing. JPMorgan Chase has to look well within itself to answer these types of questions. So does the rest of the banking industry. The crucial question that needs to be answered is whether the reins on the biggest banks should be tightened: re-institute Glass-Steagall? Put real teeth into the Volcker Rule? Something has got to give and the big boys should act like big boys. The financial fate of the nation depends on it and the right to massive profits is not justification  for behavior that jeopardizes the well being of the country.