Every company must be ready for crisis

Original published in the The State/Columbia, S.C. on April 16, 1989

Pity poor Exxon – and pity any business that makes the same basic errors Exxon seems to have made in crisis preparation and management.

Exxon spent millions to win our favor by paying arts groups and public television to bring us the finest in music, ballet, opera and theatre. And, frankly, Exxon won me over. I’ve always thought of Exxon as the responsible citizen of the oil patch. I saw Exxon as smart, too. Chairman/CEO L.G. Rawl has been cited for his quiet but determined pruning of the behemoth. This was also much of the attitude towards BP, and not to mention their ‘Beyond Petroleum’ eco-friendly logo design and arts reach-out plan.

Now, trust and admiration are disappearing in an oil slick in Alaska’s frigid waters. Is that solely because of an unqualified third mate and a captain who flunked the Coast Guard’s blood-alcohol test? No. Chairman Rawl will have to sit down to his own “banquet of consequences.”

Soon the board and top management of Exxon will convene to ask themselves, “What did we do wrong?” Here is what I’d counsel Exxon’s board if they asked me that question today:

Much of this counseling would apply to BP today.

Exxon appears to have violated every basic tenet of sound crisis preparation and management. It may have been complacency, hubris or a willingness to take a chance with the public welfare. But Exxon’s management knew better, or it should have known.

What are those basic rules of crisis preparation and crisis management?

1. Identify and qualify the potential impact of the risks: Exxon and its co-conspirator in complacency, the Alaska state government, estimated the probability of a monster oil spill as low. So they just downplayed the impact of a potential major spill.

A crisis impacts more than a company’s financial statements; it also can destroy or damage its strategic business advantage.

But Exxon probably will find its largest cash outlay goes toward resolving litigation.

Eric, Schweitzer, a Greenville attorney who is chairman of the American Bar Association’s toxic tort committee of the Business Law Section, notes that Exxon may have liability under the Clean Water Act, the Rivers and Harbors Act and the Port and Tankers Safety Act, as well as under state statutes. As we have seen with BP this is true and they were responsible under many of these and other agencies. And then there’s the biggest potential liability – for gross negligence and misconduct. Exxon need only think about Texaco and Pennzoil to remember what punitive damages an inspired jury can assess.

Money alone cannot measure the liability that leaped onto Exxon’s balance sheet on March 24^th. What happens the next time Exxon says, “Trust us. We’re a responsible company”? From popular opinion we can clearly see that BP’s position has been greatly depreciated due to the recent crisis.

2. Identify the risk prevention/reduction options: The easiest crisis to handle is the one that was prevented. Once the risk prevention/reduction options are identified, there are three choices:
a. Do something (remove the risk in whole or part).
b. Do nothing (in effect, self-insure).
c. Lay-off the risk (buy insurance).

Exxon apparently used all three choices but appears to have relied most on the “do nothing” option. It even “force-reduced” most of its oil spill cleanup team.

Traditional excuses for taking little or no crisis prevention action seem to be unacceptable to today’s juries and lawmakers. Defenses such as “Those health and safety measures aren’t economically viable,” or “We are meeting industry standards,” or even “we are meeting federal, state and local government standards,” are no longer good enough.

Today’s only acceptable standard of corporate behavior is tough: Can the corporation demonstrate to a skeptical jury under challenge of a skilled litigator that, at every step of each process for each product at each facility at all times, its prime objective is to protect the health, safety and economic welfare of its customers, employees and neighbors?
How would Exxon score by these standards?

3. Plan crisis operations in detail in advance: The public, including those who will someday be on the jury, is likely to make-up its mind within the first few hours of hearing of the crisis. It appears Exxon took few steps in the first few hours at Prince William Sound to demonstrate that it deserves the benefit of the jury’s doubt.

The great weakness in every crisis plan is always communications.

Specifically, notification failures and operations failures.
Chairman Rawl’s early public comments indicate that he didn’t know or didn’t appreciate the magnitude of the problem. Missteps included statements to reporters that Mr. Hayward wanted his life back as Gulf residents struggled to deal with the spill. Operationally, there wasn’t enough communications gear, and much of what was available didn’t work.

4. Train, test, refine the crisis plan – at least once yearly: The best plan in the world may not work because of unanticipated weather, mechanical failure or people failure.

Exxon relied on Alyeska Pipeline Service Co. to carry out the contingency plan. Alyeska was less than zealous in testing that plan. The lesson: Stay on top of any vendor whom you might be betting your corporate life or career. As Tony Hayward has stepped down, beginning in October.

Is Exxon likely to go the way of Texaco? Will BP go the way of Texaco? It is unsure especially because BP’s shares were down 40% following the Deep Horizon Nightmare. Unlikely – and I hope not. Exxon really did win me over with all those concerts and ballets, operas and plays. I hope that right now Chairman Rawl is making recovery plans for Exxon. In an effective crisis plan, while line management is containing the crisis, the CEO is planning to recovery.
What of other companies? The next crisis call may be theirs. And every company must be able to demonstrate prime interest is the public’s protection. In a crisis, the corporate team must be ready to handle customers, critics, employees, legislators, the press – and the jury.

Written by Lloyd N. Newman, Newman was the previous president of The Newman Partnership, Ltd., an international firm of crisis conflict consultants. He was an adjunct professor of communications strategy in New York University’s Management Institute.
Notes added by a member of The Newman Partnership, Ltd. in 2010.