Crisis Management

The issues

Sir Trevor Chinn, President of RAC Plc (formerly called Lex), has been through many crises in his long business life. The question put to him at a recent JABE seminar on 'Reacting to Crisis' was 'how does one cope and prepare for such eventualities?' The following is a summary of his response.

A crisis threatens the balance of a company and really tests managers and, above all, senior managers.

In every company it is essential for management to decide what the company's values are. Quality, customer service, commitment to employees, technological innovation, brand development, integrity and openness - some or all of these normally being core elements of a business strategy - cost money. A crisis usually threatens these expenditures and at a time of crisis, everybody is watching the decisions that the board and Chief Executive will make. This, therefore, is the testing time for the real commitment of the company towards its value system.

It is not uncommon that, in a crisis, two of the company's values come into conflict. There must be a hierarchy of values in a company. The survival of the company should be paramount, followed by the survival of the employees.

The easiest decision in a crisis that puts a strain on resources is to cut back on advertising, training, research and development and to make people redundant. That is not to say that one should not do some of these things because, typically, when business has been good these budgets may have swelled. However, one should not cut back excessively on these areas if the company is to emerge from the crisis essentially the same as before.

The biggest challenge is people - employees. Typically, people pay the price for top management's mistakes. It is therefore most important to be very careful when you hire people because you take the risk of possibly having to lay them off. In 1990 the car industry suffered overall losses of 30% and Lex had to make big cutbacks. The company had no choice but to lay people off. The question was how to do this? Sir Trevor understood that one ought to be sympathetic to people in such situations and therefore set up an outplacement programme to help people find new jobs. Fortunately, because Lex had always employed good workers, they had no problem finding other jobs. Management, including Sir Trevor, took a wage cut in order to lead by example.

However, in certain situations a crisis can be so damaging that the survival of the company is at stake.

In 1981 Lex went into business selling semi conductors. At that time technology companies typically pursued a policy that there should be no lay-offs because technological industries are by nature cyclical and it was considered important to keep good people on board. In 1984 there was a big fall in the semi conductor market. Lex had adopted the policy of no lay-offs and as a result put themselves under great pressure. However, they were able to work their way through the difficulties with voluntary redundancies and natural wastage. It taught Sir Trevor that one cannot make policies such as 'no lay-offs' if the company cannot be certain of being able to follow that policy and survive. There is nothing worse than advertising the policy management will observe and then failing to do so.

In 1974 the automobile industry had found itself in very difficult circumstances due to the oil crisis from the year before. The market fell by 35%. Lex was in real trouble and there was doubt as to whether the organisation could remain solvent. They were presented with a tax scheme which would save them money. Sir Trevor agonized over the scheme because, although it made business sense and was technically legal, there was a problem with the ethical correctness of the scheme. The company's auditor knew the scheme was legal but advised that it did not measure up to the high standard of integrity to which Lex was committed. That, for Sir Trevor, was the end of the issue and Lex did not go ahead with the scheme.

Over the years many people have returned to work for Lex, after having previously left for other companies. When asked why they returned they always gave one of two answers; either that in the other company the standard of integrity observed at Lex was lacking, or that the level of professionalism was considerably lower than that of Lex. It follows that a company that values integrity will, in the nature of things, tend to employ people who attach importance to ethical principles.

Crises do actually have their positive aspects, in that they demand the most of management. A business that has been through a crisis usually comes out stronger as a result because people have been prepared to uphold and strengthen company values in the face of adverse business conditions.

In a time of crisis it is the job of the Chairman or the Chief Executive to handle the toughest decisions themselves and to rally everyone around. One cannot really delegate these functions during situations of trauma. You have to make people feel that they matter to the company and are not just superfluous to requirements.

Despite Lex running a risk assessment programme every year, the things that did end up going wrong almost invariably did not feature on the list of things that the company had anticipated might go wrong because what went wrong was usually a collection of minor things that did not figure on the 'radar screen'. The issues looked at during any risk assessment tend to be potential big crises.

A television programme called Rogue Traders claimed that one of RAC's subsidiary companies was fitting batteries into cars unnecessarily. The information came from a whistleblower within RAC who had not directly approached the management first, thereby exposing the fact that the company had not created an adequately open environment where senior management could be approached with confidence. This lack of openness had created a crisis that had a negative effect on their reputation. RAC have now designated one non-executive director to be the recipient of all 'whistleblowing' information.

It must be the job of the non-executive director to ask awkward questions to help prevent a crisis. One of the participants at the seminar, Maurice Moses, a Director of Numerica Plc, who works with under-performing companies, pointed out that crises tend to creep up on you unsuspectingly. One puts off a mini crisis, hoping that things will improve next year, and if this is not dealt with but left, then a mini crisis can often escalate into a major one.

Similarly, in personal relationships, a marriage rarely falls apart through a single crisis but rather due to the gradual drifting apart of the couple.

Resolving Crisis

• It is very difficult to train people for a crisis because a it is invariably something that one is not prepared for
• It is essential to remain calm because in a time of crisis one needs to be able think things through very carefully
• Ensure that you take some rest because it is not a good idea to make tough decisions when one is tired
• Understand what is happening. Seek the analytical truth. Companies can do this by using consultants to get to the analytical truth about the industry, the competitive environment etc. This will lead to managers having discussions based on facts and therefore one can come to an objective decision more easily. Most discussions tend not to be data driven but are subjective 
• Do not delegate tough decisions, rather deal with the situation yourself 
• Know what your values are and be aware of the short and long-term costs of neglecting these values. Abandoning a value for short term profit might have a devastating effect on the company in the long run 
• Face problems as they emerge, do not let them snowball into a major crisis

JABE consultant and communal Rabbi, Zvi Lieberman, is in a position that seems poles apart from that of Sir Trevor, but believes that a crisis has the same affect in all areas of work.

For him as a Rabbi, his community is his organisation, so when a married couple comes to him in distress it is very much like a company crisis. Thus, when dealing with married couples with a crisis in their relationship, similar rules to those that govern crisis management within RAC will apply.

The wise man, his eyes are in his head; but the fool walks in darkness. Ecclesiastes 2: 13 & 14

A wise person is one who can truly see the effects of a decision. We tend to prefer to interact with those who provide us with positive feedback, as it reflects our personal bias although that is not always realistic.

A key factor is to recognize the assumptions we make. One should question one's assumptions at a time of crisis because one may find a new way of addressing a situation by looking beyond them. Every person within the company needs to question themselves as to whether their assumptions are honest or perhaps a little biased.

Only when one can see the relevant information up front, having taught oneself to examine and be sensitive to the various possibilities, can one respond to a crisis in an honest, open-minded way.

Guidelines

• Recognition: Recognise the kind of situation you are in 
• Identity: Understand what kind of person you are and the values you hold dear
• Rules: What a person like you ought to do in this kind of situation