Six Lessons in Crisis Management for Private Company Boards

Six Lessons in Crisis Management for Private Company Boards

A governance legend lays out advice for crisis management.

I have been asked to share some of my personal experience on the subject of managing crises—and I must confess that I have somehow managed to be involved in more than a few over my career—probably even created a few!  I guess this simply goes with having served on the boards of family-held businesses, closely-held businesses, not-for-profits, and participating in over 500 meetings of Fortune 100 boards.  Every time that I think I have seen it all, something new appears!  This has been particularly true since I allegedly retired and have been devoting much of my time to chairing “after-the-fact” investigations and reviews of various governmental and business crises.
 
Many of the crisis management techniques I have learned over the years seem to apply equally well to large and small firms, both public and private—with the principal difference among them being that smaller organizations generally lack the financial staying power of large organizations and that run-of-the-mill problems therefore more readily become existential.  But simply being big isn’t enough:  ask Enron or Arthur Andersen about that!
 
Crises come in two flavors:  existential ones and those that through bad handling you can make existential.  The latter are the more common, but I have faced two of the former in my personal activities—the first occurred when I worked at Martin Marietta, now the “Martin” of the Lockheed Martin Corporation, and was managed by my boss and predecessor as CEO, Tom Pownall, together with our Board.  The second occurred on my watch as CEO.  Neither did we initiate.
 
The first began when the Bendix Corporation initiated a surprise hostile takeover attack on Martin Marietta.  So quickly did they act that before we could even begin to respond they had acquired 72 percent of our shares. That is, they owned us…lock, stock and barrel—particularly the stock part!  
Believing that it was not in our shareholders’ or customers’ interest to have a systems company such as Martin Marietta run by a component manufacturer such as Bendix, our board decided that before Bendix could stop us we would buy a majority of Bendix’s shares—which we did.  The near-term result was that we each quite literally owned the other’s company.  This was particularly perplexing because we occasionally competed against each other for new business.  Under this strange circumstance, we wanted them to win the competitions since, if they did, we got most of the profit.  After all, we owned them.  The trouble was that they wanted us to win since they owned us!  It was an entirely new concept in competition.  The long-term result was that Bendix ceased to exist and Martin Marietta assumed an 82 percent debt-to-equity ratio…far above anything I ever imagined.
 
The other truly major crisis in my career occurred not long thereafter when the Warsaw Pact and the Soviet Union rather unexpectedly disintegrated—without a shot being fired.  Soon, defense spending collapsed and within about five years, three-fourths of the U.S. aerospace companies and 40 percent of their employees had simply “disappeared.”  At Martin Marietta, our survival strategy was to combine our business with other firms also suffering from severe overcapacity; close unneeded facilities; operate at full efficiency; and thereby capture market-share.  During those five years—the result of combining all or parts of 17 different firms—we went from being a company with about $4B of revenue to being a key part of a $44B company with enormous capabilities and 182,000 employees.
 
Let me share with you six lessons that I have learned about dealing with crises.  Hopefully you will never need them.
 
What were they thinking?
Lesson number one is both obvious and frequently overlooked.  It stems from a question I have asked myself over and over when observing crises.  That question is, “What were they thinking?”  The best way to handle a crisis is, of course, not to have it—but this is not always possible.  Next best is to contain it.  In both instances, before taking any action it pays to think to yourself, “What could be the consequences of what am I about to do or say?”  Remember when, during the problem with unintended acceleration crashes, the head of Audi U.S.A. remarked, “The problem is that we need to teach Americans how to drive?”  Or when the cars on the brand new Washington DC subway flexed so much when fully loaded that they wouldn’t open to let the passengers out?  The head of the transit system explained, “We would have great cars if it weren’t for the passengers!”
 
But, in the “What were they thinking” category the Grand Prize goes to Volkswagen for cheating on emissions tests.  It appears now that Mitsubishi is now trying to emulate Volkswagen’s success in this regard.  Technical issues are one thing…ethical transgressions are another.  Then there is Enron, cooking the books, and Daimler, buying Chrysler with the idea of “transplanting” its German culture into an American company by fiat…no pun intended.  
 
What were they thinking?  The answer has to be, “They weren’t.”
 
Tell the truth and tell it fast
Lesson Number Two of crisis management is, in the words once shared with me by Warren Buffett, “Tell the truth and tell it fast.” I will always believe that, for example, had Presidents Nixon and Clinton simply and promptly told the public what had happened, apologized—sincerely—and promised that it would never happen again, both would have been forgiven and that they and the public would have been spared prolonged, painful episodes.
 
At the heart of this lesson is, of course, telling the truth to yourself.  One must acknowledge the facts, no matter how painful that may be.  Never seek to cover them up; it is the latter that usually turns small crises into big crises, whether they be purely business issues or especially ethical issues.  When the balance sheet is in trouble, it serves no useful purpose to pretend to yourself that it is not in trouble.  And when an ethical transgression has occurred, if you seek to hide it you become complicit in the transgression.
 
Many years ago when I was CEO of Martin Marietta I learned from The Washington Post—incidentally, not a good way to learn about what is happening in your company—that one of our very senior managers had done something very wrong; fortunately, not illegal.  Further investigation into the situation revealed that there was another half to the story that was equally unattractive—but, again, not involving illegalities.  You can imagine how pleased I was when I learned that the powerful John Dingle, chairman of the House Surveys and Investigations Committee, was going to hold a hearing—and that I, as CEO, was going to get to be the prime witness.  Sort of like being the guest of honor, I guess.
 
About two weeks before the hearing I went to see Chairman Dingle—you may remember him; he was one tough fellow with a staff of junkyard dogs!  I told him that what he had read in the Post was, unfortunately, true.  I went on to say that there was another half to the story that was equally unattractive and I proceeded to share it with him.  I closed by saying that I wanted to apologize for what had happened, explained that we had taken strong measures in response, and that I believed such an event was very unlikely to ever occur again at our company.
 
As I finished my soliloquy, throughout which the Chairman had said nothing, I was puzzled to see him grinning.  Finally, he broke the silence, saying, “How am I going to have a hearing if you are going to do that?  I need to take all morning on TV to drag that out of you.”    
 
The hearing was cancelled…and John Dingle and I became friends.  
 
Independent eyes
Lesson Number Three is to get an independent set of eyes to look into whatever went wrong.  We are all unwitting victims of our hopes, our experience and our prejudices.  In the case I just mentioned, I asked a retired director of the FBI who was then working at a Washington law firm to look into our situation.  During my “so-called” retirement I have been asked to review dozens of potential or actual crises, certainly not because I knew more about the subjects at hand than those who had been living with them, but presumably because I could offer a fresh perspective.    
 
Indeed, the best way to look “into the box” often is to find someone who is “out of the box.”  An independent accountant may view your cash flow statement quite differently from the way you do.  The day I retired from the corporate world and became a professor, I asked Warren Buffett what was the most important thing I should teach my students.  Without hesitation, his answer was, “Always have someone around who will tell the emperor he has no clothes.”
 
There are of course lots of sources of good advice.  For example, when sitting in board meetings I would occasionally be reminded of some relevant passage from Shakespeare.  One could never have a better outside advisor than Shakespeare:  he understood people better than almost anyone else who ever lived.  On one occasion when we were debating whether to accept an offer for a piece of the company that had been a loss-leader for four straight years or to hold out for a better offer, I was swayed by Shakespeare’s advice to a…shall we say…not overly attractive Phoebe.  As it happened, Phoebe had finally received an offer of marriage and was debating whether to accept or to hope for a better opportunity.  When she asks her friend Rosalind for advice, Rosalind responds, “For I must tell you friendly in your ear, sell when you can:  you are not for all markets!”  (We took Rosalind’s advice!)
 
Listen, but maintain control
Lesson Number Four is to listen to the lawyers and bankers, but don’t let the lawyers and bankers manage the crisis.  Obviously, one must abide by the law, but in a crisis there is one thing even more important than a firm’s financial exposure, and that is a firm’s reputation.  Balance sheets can be fixed; reputations are never totally repaired.
 
Turn lemons into lemon aid
Lesson Five is that crises afford wonderful opportunities to accomplish things that were needed but, in more sanguine times, are deemed “too hard.”  The classic case of turning a crisis into an asset relates to Jim Burke and his leadership of Johnson & Johnson during the Tylenol murder incident.  Disregarding the advice of his lawyers, accountants and bankers, Johnson & Johnson, although having no real responsibility for the tragic series of events that had occurred, recalled every bottle of Tylenol in the supply chain, simply out of concern for their consumers.  Johnson & Johnson overnight became the household word for doing the right thing; the antithesis of Enron.
 
The board’s role
Which brings us to Lesson Number Six, which is that the role of the board is not to manage a crisis.  That is the role of the CEO—unless, of course, the CEO is part of the problem—in which case the board has not one but two crises to address.  The role of the board is to provide advice, guidance, oversight and resources.  Crises are not managed well by committee.