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CHAPTER 10

The Underlying Role of Ethics in Crisis Management

255

Opening Case: Hawks Nest

In southern West Virginia, there is an engineering feat that few people know about except for the locals and the tourists who happen to stop by the small roadside park overlooking the project. It is an underground tunnel, about 3 miles long, that car- ries water from a dam to a small hydroelectric plant perched securely on the side of a mountain. The purpose of the project was to supply electricity to the Union Carbide plant, then located in Alloy, West Virginia, about 6 miles away. The tunnel was built in the 1930s during the Great Depression, mostly by poor workers who migrated to the area seeking employment (Cherniak, 1986).

The project itself was somewhat ingenious because it solved a problem faced by Union Carbide. Additional electricity was needed to power its new plant, but the prospects of supplying it with hydroelectric power appeared bleak because the

Landscape Survey Strategic Planning Crisis Management Organizational

Learning

The Internal Landscape

The External Landscape

Chapter 10: The Underlying Role of Ethics in Crisis Management

Chapter 9: The Importance of Organiza- tional Learning

Chapter 8: Crisis Communi- cations

Chapter 7: Crisis Management: Taking Action When Disaster Hits

Chapter 4: A Strategic Approach to Crisis Management

Chapter 6: Organiza- tional Strategy and Crises

Chapter 2: The Crisis Management Landscape

Chapter 3: Sources of Organiza- tional Crises

Chapter 5: Forming the Crisis Management Team and Writing the Plan

Crisis

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New River—one of only a few rivers in the United States that flows north—was (and still is) a slow-moving, narrow band of water that does not have enough force to power a hydroelectric plant in that location. The engineers came up with a clever solution: construct a dam to build up water volume and then pitch it in a down- ward direction to give it force (Cherniak, 1986). A small hydroelectric building with four turbines was positioned where the water emerged with great force from the tunnel. The result was a facility that makes electricity to this day (Crandall & Crandall, 2002).

But there is a darker side to this project. The tunnel contractor, Virginia engi- neering firm Rinehart and Dennis, drastically cut corners to save on project time and expenses. Workers were required to enter the dusty tunnel to begin clearing out the debris shortly after explosives had been detonated. Although engineers were supplied with respirators, those doing the manual labor were not. When silica rock was encountered, the resulting fine dust that the explosion had created was inhaled by the workers as they removed debris from the tunnel shaft. As a result, many of these laborers developed silicosis, a debilitating lung disease that eventually causes death. This disease is avoidable if respirators are worn.

Rinehart and Dennis also used another cost-cutting measure: dry drilling. Wet drilling should have been used to minimize dust levels. The downside is that wet drilling slows the extraction process, unlike dry drilling, which is faster but creates more dust (Orr & Dragan, 1981; Rowh, 1981). The additional dust associated with the dry drilling, coupled with the lack of respirators, led to sickness in these workers.

The number of deaths attributed to the Hawks Nest Tunnel can only be estimated because Social Security records did not exist at the time (Cherniak, 1986). The estimates vary depending on the source of information. Rinehart and Dennis submitted a figure of 65 total deaths, whereas Union Carbide, the ultimate user of the Hawks Nest tunnel, counted 109 fatalities. In his account of the Hawks Nest incident, Martin Cherniak estimates a total of 764 deaths. Regardless of the exact number, the figures are high relative to today’s standards of industrial safety. As one might expect, the death estimates become more conservative as the source of information moves closer to the tunnel contractor (Crandall & Crandall, 2002).

Although details about the Hawks Nest Tunnel incident are not widely known, a number of management scholars have taken an interest in studying the event because of the apparent disregard for worker safety. It is a case involving excellent productivity (the tunnel was built in only 18 months), a racial element (many of the workers were poor blacks), and a disregard for worker safety (requiring work- ers to toil in the dusty tunnel without protection for their lungs). Two novels have been written on Hawks Nest. Hawk’s Nest, by Hubert Skidmore (1941), was banned because of pressure from Union Carbide (Nyden, 2009). Today, the book is back in publication with a new publisher. A more recent novel, Witness at Hawks Nest, by Dwight Harshbarger (2009), relies on academic research of the events of the time to create the characters for his story.

Because this event occurred nearly 80 years ago, many might assume that seri- ous safety concerns no longer exist, at least in developed nations like the United States. Unfortunately, a mind-set of promoting profits over worker safety still exists

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Chapter 10. The Underlying Role of Ethics in Crisis Management 257

among some organizations, as seen with a recent example in the same state, the unfortunate disaster at the Upper Big Branch mine near Beckley, West Virginia, which resulted in the deaths of 29 miners in 2010. The numerous safety violations and disregard for employee welfare by mine owner Massey Energy illustrate ethi- cal concerns and a disregard for worker safety that have not yet been completely eradicated in the United States. Ironically, the Hawks Nest Tunnel and the Upper Big Branch mine are fewer than 50 miles apart!

Opening Case Discussion Questions

1. Why do you think there is so much discrepancy on the number of reported deaths at Hawks Nest?

2. Why would a once-reputable firm such as Rinehart and Dennis fail to take the measures necessary to protect its workers?

3. Both Hawks Nest and the Upper Big Branch mine were underground work locations. Does this have any significance in the hiding of safety violations? If so, how?

4. Why would a modern organization like Massey Energy repeat the legacy of Hawks Nest by compromising worker safety?

Opening Case References

Cherniak, M. (1986). The Hawk’s Nest incident: America’s worst industrial disaster. New York: Vail-Ballou.

Crandall, W. R., & Crandall, R. E. (2002). Revisiting the Hawks Nest Tunnel incident: Lessons learned from an American tragedy. Journal of Appalachian Studies, 8 (2), 261–283.

Harshbarger, D. (2009). Witness at Hawks Nest. Huntington, WV: Mid-Atlantic Highlands. Nyden, P. (2009, August 2). Novel offers personal look at Hawks Nest disaster. Republished

from the Charleston Gazette. Retrieved July 13, 2012, from http://www.witnessathawk- snest.com/nyden.html.

Orr, D., & Dragan, J. (1981). A dirty, messy place to work: B. H. Metheney remembers Hawk’s Nest tunnel. Goldenseal, 1 (7), 34–41.

Rowh, M. (1981). The Hawks Nest tragedy: Fifty years later. Goldenseal, 1 (7), 31–33. Skidmore, H. (1941). Hawk’s Nest. New York: Doubleday, Doran and Co.

Introduction

There is an underlying problem in many of the crisis events discussed in this book. This problem does not manifest itself in every crisis, but it is substantial nonetheless. Why do seemingly preventable crises occur again and again? Sometimes the answer can be found with a firm’s employees, particularly its managers and top-level business executives and their desire to gain unfairly at the expense of another party. Put simply, an unabated desire for profits without regard to sound moral principles can trigger an organizational crisis. This problem appears in many

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258 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

forms, but the results are usually the same: an organizational crisis of some type, stakeholders who have been hurt, and prevention that would have cost pennies in comparison to the damage done.

The Hawks Nest Tunnel incident was one of the first major industrial crises in the United States. Although the tunnel was a remarkable success, the human resource tragedy was enormous. The deaths of these workers were entirely pre- ventable, but tunnel contractor Rinehart and Dennis decided that breathing protection and other safety measures should be abandoned in order to maximize profits. The contractor did not escape unscathed, however. Within five years of the project, its assets were liquidated—a victim of bad publicity, lawsuits, and loss of revenue.

In an age when Enron, the Catholic Church, Penn State, and Massey Energy are more commonly known scandal-ridden organizations, why focus here on a human tragedy that occurred more than half a century ago? The Hawks Nest Tunnel inci- dent clearly illustrates the fact that some crises have human roots that can be traced back to unethical or irresponsible behavior by key decision makers. In addition, such behaviors are not confined to any specific time period in history. Human- induced crises have always occurred and will continue to occur, an inescapable reality. However, some organizations do a better job than others at avoiding these types of crises because they emphasize ethical behavior among their members. This too, is an inescapable fact, and a cause for hope.

In this chapter we examine human-induced crises more closely, specifically those linked to unethical behavior. The chapter begins with an overview of busi- ness ethics. We then examine the four stages of the crisis management framework and their relationship to crises that are caused by ethical breaches. The chapter concludes with a note on the relationship of trust with a crisis.

What Is Business Ethics?

Business ethics examines issues of right and wrong behavior in the business envi- ronment (Carroll & Buchholtz, 2012). Some business practices can be legal, but are not necessarily ethical. Put differently, a business may be acting within the law, but not necessarily doing the “right thing.” Such behavior from a callous executive might reveal statements such as, “Well, we didn’t break any laws,” or “Our job is to maximize profits, period.” Such behavior can also get a company in trouble.

A related but distinct concept is corporate social responsibility (CSR), which maintains that businesses should seek social benefits for society as well as economic benefits for the business (Post, Lawrence, & Weber, 2002). The concept of CSR is aligned with what has become known as the stakeholder model, a viewpoint that seeks to recognize and meet a wide range of groups that have some type of con- nected interested in the organization. The goal is to balance the needs of the stake- holders in a way that is both beneficial to the organization and to the stakeholders. This thinking is different from the shareholder model, which seeks value maximiza- tion for the owners of the firm. With the shareholder model, stakeholders are not

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Chapter 10. The Underlying Role of Ethics in Crisis Management 259

as highly valued as they are in the stakeholder model unless they have some bearing on wealth maximization (Berman, Wicks, Kotha, & Jones, 1999). A simple example illustrates this difference. When a firm has excess profits, it can choose to distrib- ute those profits in a number of ways. Under the shareholder model, earnings can be funneled back into the company to increase efficiency and productivity (and hence future profits) and/or distributed to the owners in the form of dividends. The shareholder model implies that the owners are to receive the top priority in the distribution of these funds. Under the stakeholder model, excess cash may be given to the local community (sponsoring a youth baseball team or a scholarship at a local university), to the employees in the form of a raise or bonus, or perhaps to upgrading the company’s technology so it is more environmentally friendly. The point to remember is that cash that could have gone to the owners went to some other stakeholder instead. In terms of crisis management and long-term viability, it is important for firms to recognize the needs of multiple stakeholders (Alpaslan, Green, & Mitroff, 2009).

A popular framework for looking at the two concepts of business ethics and CSR is shown in Table 10.1. In this framework, proposed by Carroll and Buchholtz (2012), CSR is made up of our four parts: economic, legal, ethical, and philan- thropic responsibilities. Above all, businesses must meet their economic responsi- bility by being profitable while operating within the confines of the law.

Table 10.1 The Components of Corporate Social Responsibility

Component of CSR

Key Thought to Understanding Manifestations

Economic responsibility

Be profitable. Maximize sales revenues. Reduce operating expenses. Increase profits. Maximize shareholder wealth.

Legal responsibility Obey the law. Abide by all legal regulations. Operate within industry standards. Maintain all contract and warranty obligations.

Ethical responsibility Avoid questionable practices.

Go beyond just obeying the law; abide by the spirit of the law as well. Avoid practices that may appear to be suspicious, even if they are legal. Do the right thing, and be just and fair to all stakeholders.

Philanthropic responsibility

Be a good corporate citizen.

Make financial contributions to external stakeholders in the community. Seek to be a good neighbor in the community by making it a better place to live. Look for ways to support education, health or human services, and the arts.

Source: Adapted from Carroll and Buchholtz (2012), pp. 37–38.

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260 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

There is also a realm of business behavior that goes beyond obeying the law. Ethical responsibility seeks to avoid behaviors that are questionable though not necessarily illegal. Practically speaking, it is not possible to develop laws to prohibit every unethical business activity. Consider also that many companies sell products or services that are legal but are considered by many to be unethical in some con- texts. Hartley (1993) documents the now-infamous PowerMaster Beer controversy in which malt liquor, a legal product, was heavily marketed to poor urban areas, markets in which crime and youth despair were prevalent. This combination cre- ated an unethical situation in the eyes of many community stakeholders, who saw this product contributing to even higher crime problems in urban neighborhoods. More recently, the mortgage crisis of the early 2000s that adversely affected an entire industry could have been avoided if individual lenders had simply refused to issue loans with terms that were likely to create a substantial repayment hardship down the road for borrowers. To their credit, several lenders refused to issue such profitable loans on ethical grounds, a high road not taken by most in the industry (Parnell & Dent, 2009).

Finally, it can be argued that companies have a philanthropic responsibility: the obligation to be good corporate citizens. Some seek to fulfill this responsibility by contributing time and money to the communities in which they operate. Many businesses make financial contributions to school systems as well as colleges and universities. Others encourage their employees to volunteer in their communities and will often compensate these employees for their time invested in civic causes.

Carroll and Buchholtz (2012) maintain that three CSR components—economic, legal, and ethical—are also the most closely tied in with business ethics. Considering organizational crises, it is clear that many are comprised of one or more of these components. In Table 10.2 we provide examples based on the assumption that business ethics crises are motivated by a desire to gain financially at the expense of another stakeholder. For example, at the heart of the economic component is the need to make a profit for the business. Chief executive officers (CEOs) and other top managers are especially cognizant of this need to increase profits because their compensation is usually tied in with how well the firm is performing financially. But doing so without regard to morality can result in breaking the law (the legal component) or taking part in questionable ethical practices (the ethical compo- nent), both of which can result in organizational crises.

Business Ethics and the Crisis Management Framework

Many of the crises discussed in this section are examples of what have been labeled “smoldering crises.” The Institute for Crisis Management (ICM) notes that these crises start out small and can be fixed early on, but instead they are allowed to fester until they become full-blown crises and known to the public (Institute for Crisis Management, 2011) . What makes some smoldering crises ethically induced is that they do not have to occur in the first place. If such a crisis does occur, it can be mitigated through ethical decision making, although not all executives will proceed in this manner. Instead, some escalate the crisis by making additional unethical decisions until the crisis spins out of control.

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Chapter 10. The Underlying Role of Ethics in Crisis Management 261

A classic case of unethical decision making concerns the Beech-Nut apple juice case, an example that also illustrates a smoldering crisis that should have been stopped early on. During the late 1970s, Beech-Nut Nutrition Corporation found out that it was the victim of a scam when it discovered the supplier of its apple juice concentrate was selling it fake apple juice. This discovery was especially

Table 10.2 Ethical Crises Components

The Basis for an Ethical Crisis

Ethical Crisis Component Examples of Crises

Economic: The basic motive is a desire to gain financially, often at the expense of another stakeholder.

Legal: These cases involve behavior on the part of company employees that violates the law.

Company misrepresents its accounting statements by hiding debt, overstating profits, or other forms of fraud. Examples: • Tyco (late 1990s to 2002) • Adelphia Communications Corporation (2002) • Enron (2002) • HealthSouth (2002) • Qwest Communications International (2005) • Bernie Madoff (2009) Company knowingly sells a defective product. Examples: • A. H. Robins Dalkon Shield (1984) • Dow Corning silicone breast implants (1992) Company falsely advertises its product. Example: • Beech-Nut apple juice (1982) Company violates safety standards in the workplace. Examples: • Rinehart and Dennis (1930s) • Warner-Lambert Company (1976) • Film Recovery Services, Inc. (1985) • British Petroleum Texas City explosion (2005) • British Petroleum Deepwater Horizon explosion (2010) • Massey Energy (2010).

Ethical: These cases involve behavior on the part of company employees that is questionable but does not necessarily violate the law.

Company sells a product that is legal but not necessarily beneficial to society. Examples: • Nestlé Infant Formula (1970s) • PowerMaster Beer (1991) • The tobacco industry (ongoing) • Ashleymadison.com (ongoing) Company outsources production to suppliers that impose harsh conditions on their employees (e.g., sweatshops). Examples: • Discount retail chains (ongoing) • Clothing manufacturing companies (ongoing) • Appliance manufacturing companies (ongoing)

Note: Some of these examples may not be familiar. These will be examined in more detail in the Chapter Exercise. Sources: Adapted from Carroll and Buchholtz (2012); Coombs (2006, 2007); Hartley (1993); Sethi, and Steidlmeier (1997).

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troublesome because Beech-Nut advertised its apple juice as “100% fruit juice, no sugar added.” Because of the bogus apple juice concentrate from its supplier, this advertisement claim was not true. At that point, Beech-Nut could have reported the incident, pleaded ignorance, and most likely escaped any prosecution because it was an innocent victim (“Bad apples,” 1989; Hartley, 1993). However, this supplier was providing its product at 25 percent below the market rate, and the cost savings was too attractive for Beech-Nut executives to pass up.

Rather than ceasing to do business with its supplier, Beech-Nut chose to con- tinue buying the counterfeit concentrate from them! From 1977 to 1983, Beech-Nut sold its juice as 100 percent pure when, in fact, it was nothing more than a “100% fraudulent chemical cocktail,” according to an investigator close to the case (Welles, 1988, p. 124). What should have been a decision to change suppliers became an ethical misconduct crisis. Beech-Nut president Neils Hoyvald, and John Lavery, vice president for operations, were the main parties who instigated the cover-up. When the crisis was over, both men were found guilty of violating federal food and drug laws. Hartley (1993) estimates the crisis that never should have happened cost Beech-Nut $25 million in fines, legal costs, and lost sales.

Table 10.3 depicts the crisis management framework in relation to business ethics issues. The next sections develop the four areas of the crisis management process.

Landscape Survey: Uncovering the Ethical Boulders

The landscape survey looks for clues in the organization’s internal and external environments that may indicate the presence of an unethical event brewing. Potential crisis indicators include the ethical environment of the board of directors, the safety policies of the organization, the economic motives among top executives and management, the degree of industry vulnerability, and the vulnerability of the organization in the global environment. These indicators are discussed next.

The Company Founder, CEO, and the Board of Directors

The ethical environment of the organization is an indicator of the potential for a future crisis. The founder of the company holds a considerable amount of influence in forming this ethical environment. For example, Enron, WorldCom, Adelphia, HealthSouth, and Tyco have all faced ethical scandals. What these firms had in common was their founders, all hardworking entrepreneurs, were at the helm when the crises hit (Colvin, 2003). Furthermore, those in charge of these companies had at least three characteristics in common that led to the scandals. First, these companies had not learned to question the founder or CEO when nec- essary. Rather, their CEOs were powerful individuals who seemed to answer to no one. Second, an element of greed was apparent at the top levels of these companies. It was as if an entitlement mentality prevailed, with those running the company

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Chapter 10. The Underlying Role of Ethics in Crisis Management 263

receiving extraordinary amounts of compensation because they felt they deserved it. Finally, all of these companies had leaders who seemed to focus on short-term gains by increasing stock prices without regard to the long-term sustainability of the company. The link between CEO compensation and stock price is an underly- ing factor in many of the scandals that hit these big corporations (Colvin, 2003). As stock prices increases, CEO compensation typically follows.

This factor presents the corporation with a dilemma. On one hand, CEO compensa- tion should be linked to firm performance; on the other hand, this linkage can be abused in favor of short-term performance versus long-term survival and growth. In response to this quandary, some firms have favored the balanced scorecard approach (Kaplan & Norton, 2001), an approach that has pushed the practice of accounting to track long- term as well as short-term performance results. Thousands of companies have now adopted this approach in the United States and abroad (Parnell & Jusoh, 2008).

Landscape Survey Strategic Planning

Crisis Management

Organizational Learning

The Internal Landscape

■ The company founder, CEO, and the board of directors

■ The safety policies of the organization

■ The economic motives among top executives and management

■ The disconnect between organizational mission and existence

■ The enthusiasm for crisis management planning and training

■ The ethical culture of the organization

■ The management of internal stakeholders

o Owners o Employees

■ The evaluation of the ethical management process

■ The commitment to organizational learning

The External Landscape

■ The degree of industry vulnerability

■ The vulnerability of the organization in the global environment

■ The existence of government regulations

■ The existence of industry standards

■ The management of external stakeholders

o Customers o Suppliers o Government

entities o Local

community o The media

■ The benefits of industry renewal

■ The inevitability of new government regulations

■ The anticipation of new stakeholder outlooks

Table 10.3 Crisis Management Framework in Relation to Business Ethics

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A major factor that has created this problem is the failure of boards of directors to challenge the CEO (Zweig, 2010). As a result, more scrutiny of corporate boards is starting to occur, with boards facing more accountability and disclosure man- dates (Thorne, Ferrell, & Ferrell, 2003). The situation at WorldCom is an example of a board that continually gave in to the desires of then-CEO Bernard Ebbers: “As CEO, Ebbers was allowed nearly imperial reign over the affairs of the company with little influence from the board of directors, even though he did not appear to pos- sess the experience or training to be qualified for his position” (Breeden, 2003, p. 1). Two areas of questionable CEO freedom were requested by Ebbers and approved by the board. The first involved the approval of the collection of $400 million in loans, and the second a rubber-stamping of his request to compensate favored executives to the tune of $238 million. The arrangement was made without stan- dards or supervision and allowed Ebbers to compensate whomever he wanted and in whatever amount he wished (Breeden, 2003). Ultimately, these schemes, along with others, culminated in a crisis that resulted in the largest accounting fraud case in the United States.

Crisis cases like WorldCom illustrate why boards have to be more than just a rubber stamp for the CEO. In response, some boards are taking a more aggres- sive approach to holding the CEO accountable for ethical behavior. Case in point: Boeing’s former CEO, Harry Stonecipher, lost his job after it was revealed he was having an affair with another Boeing executive (Benjamin, Lim, & Streisand, 2005). The relationship violated company policy.

The Safety Policies of the Organization

The organization’s safety policies, or the lack of them, have a direct link to the ethical climate of the organization. Ultimately, the adherence to such policies can determine whether or not a major crisis occurs. An ethical stance on the part of management promotes an environment in which all stakeholders (particularly employees) are safe from bodily and emotional harm. However, as every manager and top executive knows, safety costs money and can detract from the bottom line in the short run. In the long run, though, these expenditures can save the company millions and maybe even the company itself.

In looking back at industrial accidents, organizational researchers have never reached a conclusion that indicated that too much money was spent on safety (Crandall & Crandall, 2002). In fact, executives who have experienced a safety issue such as an industrial accident resulting in injuries or deaths probably wish they had spent more. For example, in the 1983 Bhopal, India, gas leak incident, Union Carbide and local government officials in India should have focused more on cor- recting safety problems that had already been widely documented at the plant prior to the accident (Sethi & Steidlmeier, 1997; Steiner & Steiner, 2000).

Safety measures involve short-term expenses but produce long-term savings by avoiding accidents. Hence, well-crafted remedies need not always be viewed as expensive. Money spent to prevent employee injury and death is not money wasted; it may well save the company millions in lawsuits, as well as the company’s

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reputation, not to mention the saving of human lives. The Hawks Nest Tunnel contractor, Rinehart and Dennis, could have implemented at least three relatively low-cost measures—better ventilation of the tunnel shaft, wet drilling, and pro- viding respirators for workers—to make working conditions safer and thereby prevent workers from developing silicosis. While it is difficult to determine the exact cost of these measures, it is clear that they would have saved many lives. A focus on safety would have also likely prevented the downfall of the company that occurred within 5 years of completing the tunnel.

The Economic Motives Among Top Executives and Management

Economic motives are often linked to unethical and illegal behavior on the part of top management. The reason for this behavior is easy to see. Management com- petence is measured by key performance indicators such as sales, profits, and mar- ket share, all of which can ultimately drive the price of the company’s stock. Boards of directors typically reward the CEO when stock valuations increase, because this represents an increase in wealth for the shareholders. At first, this scenario of rewards for stock valuation increases sounds like a win-win situation, but as many recent business crises indicate, abuses can occur that ultimately are not in the best interest of the corporation or its stakeholders. Two such abuses are hiding debt and questionable cost-cutting measures.

Hiding Debt

Hiding debt creates the illusion that the firm is performing better than it actu- ally is, thereby encouraging a false sense of optimism and confidence. The result is that stock prices rise in the short term, and shareholder values increase. The CEO is also rewarded because of the firm’s attractive stock price. However, this process is motivated by an attempt at excessive financial gain at the expense of other stake- holders, such as employees or the community in which the company resides. In the short run, this unethical strategy can produce financial benefits for the CEO and the shareholders. In the long run, however, it is a prescription for a major crisis.

Enron remains the poster child for this abuse when the company spiraled down- ward after its elaborate schemes for hiding debt became known. Enron’s debt was hidden through an accounting strategy known as “off-balance sheet” partnerships called special purpose entities (SPEs). These partnerships were allowable under accounting loopholes at the time and were initiated by then-chief financial officer (CFO) Andrew Fastow. The SPEs were actually joint ventures with various groups of investors, but because they were separate entities they were not part of the Enron balance sheet. The sole purpose of these SPEs was to remove unwanted assets and liabilities from Enron’s balance statements (Boatright, 2012).

The structures of SPEs have trigger mechanisms that require repayment of the debt under certain circumstances (Henry, Timmons, Rosenbush, & Arndt, 2002). It was these trigger mechanisms that began the “visible” crisis at Enron. That crisis became known with the October 16, 2001, announcement that Enron was taking a

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$544 million after-tax charge against its earnings related to transactions involving its SPEs (Powers, 2002). The result was a third-quarter loss of $618 million and a $1 billion reduction in the company’s asset value. From that date, the implosion of Enron was rapid and dramatic. Enron’s stock price fell from $33 on October 16 to $15 on October 26. On December 2, Enron laid off 4,000 employees and filed for bankruptcy. Only a year earlier, Enron had been touted as a socially respon- sible firm leading the way in alternative energy, ranking the seventh largest on the Fortune 500 list with a stock price of $90 (DesJardins, 2009). The downfall of Enron later paved the way for the Sarbanes-Oxley Act and other regulations.

Questionable Cost-Cutting Measures

Questionable cost cutting is the other abuse that can arise from unethical motives. Such cost cutting is the profit motive at work and will cause some manag- ers to do just about anything. Trimming costs delivers dollars to the bottom line, but doing so without regard for worker safety has resulted in many examples of industrial tragedies. In 1976, when Warner-Lambert was introducing a new line of chewing gum, it took shortcuts in the manufacturing area by allowing high levels of dust near the machinery. The company could have installed a dust collection system, a move that would have reduced dust levels significantly. The cost was seen as prohibitive, however, so the opportunity to buy the system was ignored. The result was a dust explosion that killed six employees and injured 54 others (Sethi & Steidlmeier, 1997).

Although cost cutting is a normal and necessary business activity, it was the major factor in the many deaths that resulted from building the Hawks Nest Tunnel. The use of dry drilling to expedite the project time was discussed earlier. Shortening the proj- ect time reduces expenses and increases the bottom line. The decision not to provide tunnel workers with respirators is especially troubling. The only explanation for this seems to be the additional cost that would have been incurred.

The Hawks Nest incident illustrates the connection between ethical decision making—doing what is just and fair for—and protecting worker safety. Perhaps the most famous abuse of worker safety in the United States was the 1911 Triangle Shirtwaist Company fire that occurred on the 10th floor of a factory in New York City. The fire spread rapidly due to the large amounts of linen and other com- bustible materials close by. One hundred forty-six employees died, most of them immigrant women who were either burned in the blaze or jumped to their deaths. Sadly, the fire escape routes for these employees had been locked by management in order to prevent theft (Greer, 2001; Vernon, 1998). Some may argue that revisit- ing cases like Hawks Nest and the Triangle Shirtwaist fire is not necessary today. After all, labor unions, labor laws, safety inspectors, and various watchdog groups discourage this kind of behavior (Shanker, 1992). Unfortunately, history has a way of repeating itself.

On September 3, 1991, a fire erupted at the Imperial Food Products poultry plant in Hamlet, North Carolina. A hydraulic line ruptured, spilling a flamma- ble liquid throughout the kitchen. The vapors from the line were ignited by the gas burners from the flying vats, creating a large fire in the 30,000-square-foot

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plant (Lacayo & Kane, 1991). Before the day was over, 25 employees, most of them single mothers, would perish. “The plant had no sprinkler or fire alarm system, and workers who got to the unmarked fire exits found some of them locked from the outside. Imperial’s management was using the same ‘loss con- trol’ technique as the bosses at Triangle—and with the same results” (Shanker, 1992, p. 27). Many of the victims, unable to open the locked fire exits; died in a cluster by the doorway. Others were found in a freezer where they had sought refuge. The owner claimed that the fire exit doors had been locked to prevent theft of the chickens.

An $800,000 labor code fine was levied against the company. Fourteen months after the fire, a $16 million settlement was reached between the insurers and the claimants. Plant owner Emmet Roe was sentenced to 20 years in prison after plead- ing guilty to manslaughter (Jefferson, 1993). Eventually, Imperial went bankrupt. As these examples illustrate, unchecked greed comes in various forms and can hurt other stakeholders in the process.

The Disconnect Between Organizational Mission and Existence

At this point in our discussion, a more philosophical question should be raised concerning the organization’s mission: Does the organization exist for its mission, or does the mission exist to guide the organization? The mission should clarify the purpose for the organization’s existence (Parnell, 2013). Some organizations seem to lose touch with their missions over time, a situation that can lead to ethi- cal breaches.

Schwartz (1990) noted that an organization can exist to do work (its mis- sion), or it can do work in order to exist. This observation is not just a play on words but has tremendous implications in the area of managerial ethics. For example, Barth (2010) notes that the Catholic Church operated in this mode early in its crises concerning priests who were sexually abusing children. The church seemed more interested in protecting its structure than with protect- ing the children who were victims. Rather than removing the predatory priests altogether, the church chose merely to transfer many of them to other parishes. Whether intended or not, the Catholic Church was communicating that the careers of the priests were more important than the people they were appointed to serve. A disconnect between the organization’s mission and the reason for its existence had occurred.

In the business sector, there can be a similar disconnect between a corporation’s top management and the firm’s shareholders. The result is called the agency prob- lem and occurs when managers (i.e., the agents of the shareholders) place their personal goals over those of the owners (Parnell, 2013). For example, Enron’s CFO Andrew Fastow benefited greatly from his involvement in the SPE transactions. The Special Investigative Committee of the Board of Directors at Enron noted:

Enron employees involved in the partnerships were enriched, in the aggregate, by tens of millions of dollars they should have never received—Fastow by at

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least $30 million, Kopper by at least $10 million, two others by $1 million each, and still two more by amounts we believe were at least in the hundreds of thousands of dollars. (Powers, 2002: 3–4)

Andrew Fastow and Michael J. Kopper were identified as active participants in managing the SPEs. Both gained considerably as a result of activities that were ultimately detrimental to Enron. Agency theory illustrates how some in top man- agement view themselves as independent contractors, free to do whatever they wish for their own self-interest.

The Degree of Industry Vulnerability

Some industries seem to be more crisis prone from an ethical perspective. For example, professional wrestling and baseball have had a history of steroid use. Professional cycling, particularly with events like the Tour de France, has faced charges of performance-enhancing drugs among participants. The coal mining industry has a long history of sacrificing miner safety. Indeed, the United Mine Workers of America (UMWA) has a history of being one of the most aggressive unions in existence, due mostly to the abuse of coal miners who have been subject to unsafe working conditions by the mine owners. Certainly, coal mining safety has improved in recent years, but rogue coal companies still seem to exist.

Looking through the lens of “ethical rationality” (Snyder, Hall, Robertson, Jasinski, & Miller, 2006), the challenge is to determine whether an industry is more vulnerable to a crisis because of a higher degree of unethical occurrences. The link between industry-specific factors and unethical behaviors has not been as widely addressed, although some attention has been focused on aircraft manufacturers. Both Lockheed and Northrop were found to have made improper cash payments to overseas sales agents in the 1970s in order to secure contracts to sell aircraft (Securities and Exchange Commission, 1976). More recently, Boeing has been plagued by a number of ethical problems, perpetuated by what has been called a “culture of silence” by Boeing general counsel Douglas Bain. The culture stems from a lack of speaking up on ethical issues, a problem that has plagued the com- pany for a considerable amount of time (Holmes, 2006).

The Vulnerability of the Organization in the Global Environment

As a firm expands its international presence, its vulnerability to an ethical crisis may also increase. Three reasons for potential ethical problems include the temptation to make illegal cash payments, the possibility that a defective product will emerge from a foreign country, and the potential to be linked with sweatshop manufacturing.

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The Temptation to Make Illegal Cash Payments

Major scandals often result in new legislation. As a result of the Lockheed bribery scandal, the Foreign Corrupt Practices Act was passed in 1977 (Hartley, 1993). The act prohibits offering cash payments to foreign government officials for the purpose of obtaining business. In addition, foreign companies whose stock is traded in the United States are subject to review by the Department of Justice (Carroll & Buchholtz, 2012). Critics often complain, however, that the act places American firms at a disadvantage when competing for foreign contracts in coun- tries where legal infrastructure requiring that all companies play by the same rules does not exist. In many parts of the world, offering bribes is an accepted way to conduct business. To further complicate the matter, the act does allow some cash payments, called “grease payments”—smaller amounts of cash used to encourage foreign officials to do what they are supposed to do anyway (Carrol & Buchholtz, 2012). A “bribe,” on the other hand, is a large cash payment used to entice a foreign official or agent to do something not normally done in the course of business, such as buying from a particular vendor.

As companies expand globally, the temptation to use illegal cash payments increases. Wal-Mart recently found this out in its expansion efforts in Mexico. An April 22, 2012, New York Times article broke the case involving bribe pay- ments by Wal-Mart management in Mexico. The trigger point for the crisis was a 2005 e-mail to Wal-Mart headquarters sent by a former Wal-Mart executive who had arranged a number of bribe payments to help facilitate the company’s devel- opment in the Mexican market. The former executive, Sergio Cicero Zapata, had worked for Wal-Mart until 2004 in the company’s real estate development department (Barstow, Xanic, & McKinley, 2012). Two retirement systems, the California State Teachers Retirement System (CalSTRS) and the New York City Pension system, have sued Wal-Mart for mishandling the bribery allegations and covering up the details of the investigations (“NYC pension funds,” 2012).

The Possibility That a Defective Product Will Emerge From a Foreign Country

Two problems result when a defective product emerges from another country. First, the product itself can pose a danger. Toymaker Mattel found this out in 2007 when it had to recall more than 22 million toys manufactured in China due to high levels of lead and other toxins (Barton, 2008). What makes this case noteworthy is that Mattel has a long history of safety and social responsiveness. In fact, Mattel owns and operates its factories in China. However, one of its plants either violated a policy by using the lead-laden paint or a supplier provided the paint unknowingly to Mattel (Hartman & DesJardins, 2011).

Second, a foreign-sourced defective product can lead to negative feelings by citizens in the home country. Because many U.S. manufacturing jobs have been lost to foreign sourced companies, a defective product that emerges on the market is a reminder that the product could have been made back in the home country

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instead of being outsourced, presumably without any quality concerns. The result is a public relations crisis for the home country company because citizens may feel resentment for offshoring in the first place.

The Potential of Being Linked With Sweatshop Manufacturing

Companies that outsource processes to overseas vendors may face potential association with sweatshops—manufacturing facilities that pay low wages, employ child labor, have poor working conditions, require long work hours, and otherwise abuse their workers. Their use has increased as companies seek to lower costs but can also cause companies to be hit with public relations crises. Wal-Mart, Nike, Liz Claiborne, and Disney are large, high-profile companies that have been linked with sweatshops in the past.

Sweatshops are the ultimate “guilt by association” crisis. Although some prog- ress has been made in recent years to improve working conditions in developing countries, the issue will not go away anytime soon. Although a company can “require” its subcontractors to abide by certain working condition standards, the enforcement of these standards can be difficult. Typically, independent monitors are sent to investigate working conditions in plants that are supposed to be com- pliant with certain standards. However, this system is not foolproof, as inspectors can be deceived by the very companies they are inspecting. One inspector related how pregnant employees were hiding on the roof of a facility in Bangkok during inspection visits. Another company coached employees on how to answer questions posed by an inspector. The strategy was meant to communicate to the inspector that everything was fine at the plant (Frank, 2008).

Despite inspection monitoring, even companies with good ethical reputations can encounter problems. In 2007, some clothing from the retail chain The Gap was traced back to sweatshops in India. In this example, children as young as 10 years of age worked 16 hours a day to produce the garments (Hansen & Harkin, 2008).

Strategic Planning: Confronting the Ethical Boulders

The strategic planning process should generate initiatives to improve the ethical cli- mate of the organization. Improving this climate can reduce the company’s vulner- ability to an ethics-related crisis. Specific efforts should be directed to generating enthusiasm for crisis management and training, focusing on the prevention of ethi- cal breaches, and abiding by both government regulations and industry standards.

The Enthusiasm for Crisis Management and Training

Neglecting to prepare for a crisis is in itself an ethical problem. Unfortunate events can occur to an organization at any time, and the company’s stakeholders expect that it will have a plan to meet these crises. The lack of a crisis management

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plan (CMP) and the subsequent training that accompanies it will only draw nega- tive perceptions from employees, suppliers, customers, government agencies, and the general public when a crisis does occur. Nobody thinks favorably of an organi- zation that was not prepared.

Simply forming a crisis management team (CMT) and generating a crisis plan is not sufficient. Enthusiasm for the crisis management process and the accompanying train- ing must also be present. For this reason, the organization should seek a crisis manage- ment champion from within who will spearhead the process of building an ongoing crisis management program. If the organization is new to crisis planning, an outside consultant should be retained to help the CMT write its first plan. It goes without say- ing that top management should always support the firm’s crisis management efforts.

The Ethical Culture of the Organization

The best approach to dealing with an ethical crisis is to prevent it from happen- ing in the first place. An ethical rationality approach seeks to address events in the life of the organization from a morally driven response perspective (Snyder et al., 2006). However, to a great extent the organizational culture dictates how ethical or unethical decision making will be in the company (Heineman, 2007; Vallario, 2007). For this reason, a cultural change in the organization is also necessary to improve ethical decision making. Changing the culture of an organization requires unseat- ing the deep thought patterns that have prevailed in previous years, particularly if those patterns of behavior are unethical. Even Enron had a code of ethics, but the culture of the company overshadowed the significance of that code. Likewise, the failed accounting firm Arthur Andersen produced an ethics video series once used in U.S. business schools (Fombrun & Foss, 2004).

Changing the culture of an organization is a large undertaking; culture is, after all, the prevailing belief system within the organization. Some cultures simply look the other way when an ethical breach occurs, whereas others are committed to ethical stan- dards in any business decision. All cultures look to upper-level management for cues to right and wrong behavior in the organization (Trevino, Hartman, & Brown, 2000). Table 10.4 overviews the best practices companies take to change their ethical cultures.

The Existence of Government Regulations

Government regulations exist to protect employees, consumers, and the local community. Unfortunately, such regulations can sometimes be sidestepped by businesses, which can lead to catastrophic outcomes in the future. Ignoring regula- tions is a decision, one that is conscious and deliberate. Many organizations find themselves in trouble with government regulations because of unethical or illegal decisions made by management or other key employees.

In 1997, the Andrew & Williamson Sales Company sold strawberries grown in Mexico to the U.S. Department of Agriculture (USDA). However, there was a major problem with this deal. The USDA distributes food to public school systems, and

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Table 10.4 Best Practices Organizations Take to Change Their Ethical Cultures

Measure Taken Description

Installing a code of ethics Organization-wide ethical principles and behaviors are outlined in a pamphlet or manual. Managers and employees review the code on a regular basis and sign it, indicating their willingness to abide by the code.

Implementing ethics training

Short classes and workshops that highlight ethical issues and how to respond to them are offered to employees.

Providing an ethics hotline Employees have a person or department within their organization to whom they can report ethical violations. A hotline can also offer guidance on specific ethical issues an employee may be facing.

Requiring that top management articulate and set the ethical example

Executives in top positions in the company—the CEO, president, and vice presidents—need to realize that lower-level managers get their cues on ethical matters by watching those higher up. Thus, top managers are encouraged to model the right example.

Requiring managers to attain realistic, but not impossible goals

Goals set for managers are well conceived and realistic. Unrealistic goals encourage unethical decision making because managers may feel they must cut corners to attain the goal.

Disciplining for ethical violations

When an ethical violation is discovered, the company works quickly to correct the situation and punish the person responsible.

Scheduling regular ethics audits

As in a financial audit, the company periodically checks itself in a systematic manner to see if it is following proper ethical guidelines in its business processes.

Appointing of chief ethics officers

Ethics officers who serve in top management are being used in some larger companies. Such officers may report directly to the CEO and the board of directors. Their charge is to promote the ethical standards of the organization and to monitor employee concerns.

Sources: Carroll and Buchholtz (2012); Fombrun & Foss, C. (2004), 284–288; Post et al.(2002).

government regulations require that strawberries sold to these school systems be grown in the United States. As part of a cover-up, Andrew & Williamson submitted falsified certificates of origin that indicated the strawberries were grown domesti- cally (Salkin, 1997). Although the company thought its deed would go unnoticed, a

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Chapter 10. The Underlying Role of Ethics in Crisis Management 273

major health crisis soon erupted. A number of public school students in Michigan were stricken with hepatitis A, and the ailment was linked to the strawberries sold by Andrew & Williamson. Eventually outbreaks of the hepatitis A strain resulted in 213 cases in Michigan, 29 in Maine, and seven in Wisconsin (Entis, 2007). What started out as an illegal scheme to move excess inventory out of the warehouse resulted in a major crisis across a number of states. When the ordeal ended, Frederick Williamson resigned as president and was sentenced to 5 months in prison, followed by 5 months of home detention. The company was also forced to pay $1.3 million in civil damages, as well as $200,000 in criminal penalties (Entis, 2007).

In the Hawks Nest project, Rinehart and Dennis ignored existing regulations if these slowed down the construction of the tunnel. For example, wet drilling was the required practice because this procedure kept dust levels to a minimum (Cherniak, 1986; Tyler, 1975). Testimony before the U.S. Congress revealed that employees were posted to watch for incoming mine inspectors (Comstock, 1973). When the arriving inspectors were “announced,” wet drilling would begin until the inspectors had left the area. Dry drilling would then resume to expedite extraction.

The Existence of Industry Standards

Industry standards are often set by associations for their members to follow. The intent is to set guidelines concerning a particular practice, such as quality control or safety adherence. These guidelines are then adopted by companies in the industry association as the minimally acceptable standard (Vernon, 1998). Such efforts have also been referred to as self-policing (Becker, 2006) or self-regulation (Hemphill, 2006). Certain professions—including physicians, attorneys, college and university professors, engineers, pharmacists, and accountants—also have standards for their members.

Guidelines for ethical conduct can be proposed by industry associations. In 2001, an industry group of 14 Wall Street firms established ethical conduct stan- dards governing compensation and stock ownership for analysts. This move was prompted by some of the industry leaders, including Goldman Sachs, Merrill Lynch, and Morgan Stanley Dean Witter, to address emerging ethical problems (Carroll & Buchholtz, 2003). In another example, Financial Executives International (FEI) requires all of its members to review and sign a code of ethics. They also recom- mend that the financial executive deliver the signed copy to the company board of directors. FEI has become a model for companies seeking to comply with Sarbanes- Oxley and New York Stock Exchange mandates (Vallario, 2007).

One caveat should be offered concerning industry standards. Requiring that member companies have a code of ethics is a step in the right direction, but it does not ensure all companies will have leaders who always make ethical decisions. Enron’s 62-page code of ethical conduct was not an ingrained part of the Enron culture (Becker, 2006). In a similar vein, many clothing retailers maintain an “ethi- cal sourcing” or “compliance monitoring” link on their company websites, suggest- ing that they monitor the actions of their foreign suppliers (Frank, 2008). However, compliance can be a game, as one sweatshop inspector noted:

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The simplest way to play it (the game) is by placing an order with a cheap sup- plier and ending the relationship once the goods have been delivered. In the meantime, inspectors get sent to evaluate the factory—perhaps several times, since they keep finding problems—until the client, seeing no improvement in the labor conditions, severs the bond and moves on the next low-priced, equally suspect supplier. (Frank, 2008, p. 36)

According to this sweatshop inspector, some companies can promote ethical sourcing because they use monitors but can continue to purchase from suspect fac- tories, one after another, each time claiming the factory was deficient and severing the tie. With so many substandard factories to choose from, the game need not end.

Crisis Management: Further Considerations During an Ethical Crisis

A crisis should be managed in an ethical manner. “Decision-makers who under- stand the needs of a wide range of stakeholders as part of their strategic decision- making will make more ethical decisions during a time of crisis” (Snyder et al., 2006, p. 376). Thus, ethical rationality is a habit that must be ingrained in the culture and daily operations of the organization (Fritzsche, 2005). Ethical ratio- nality involves the careful management of the organization’s internal and external stakeholders throughout the crisis.

The Management of Internal Stakeholders

Employees and owners are the internal stakeholders who must be managed with integrity when a crisis occurs. Typically, it is the crisis communication function that should be approached in an honest, straightforward manner. Employees are often forgotten in the ordeal. It is important they receive truthful and timely information updates as the crisis progresses.

As for the owners, it should be acknowledged that the crisis may manifest itself in the form of financial loss. If the shareholders are geographically dispersed, the impact of the loss may not be felt until quarterly reports are distributed months after the crisis commences. Likewise, if the company is incorporated with many stockholders, then they, like the employees, may be left in the dark on the details of the crisis at hand. This is not ethical. When the news is bad, the company has an obligation to inform its employees and owners as to what has happened and what is being done to address the crisis.

The organization’s website as well as social media tools can be used to com- municate with these stakeholders. Updates on the state of the crisis should be made on a regular basis. In addition, the organization should use its managers and supervisors to communicate the details of the crisis to employees. To supple- ment this type of communication, an organization-wide memo or letter should be circulated to all employees. In addition, face-to-face meetings with employees are

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always advisable; these provide opportunities for questions and answers, which in turn provide information that can clarify misunderstandings or rumors that may be circulating about the crisis.

The Management of External Stakeholders

External stakeholders include customers, suppliers, government entities, the local community, and the media. As with internal stakeholders, the ethical approach is to make sure that communication to these groups is honest and timely. For example, if the crisis is an untrue rumor, it should be addressed quickly and stated that it is untrue (Coombs, 2007; Gross, 1990). Again, the organization’s website can be an excellent vehicle for updated information on the latest developments of the crisis. Setting up a link on the website that directly addresses the crisis is a good practice.

Management should also take advantage of Twitter, a social media tool. With Twitter, the company can send a quick message to its followers on an update to the crisis. The messages can be linked back to the company’s website, where more detailed information on the crisis can be accessed. In addition, Twitter hashtags can be created to help readers sort through the previous tweets on a topic related to the crisis (Deveney, 2011).

Organizational Learning: Lessons From the Ethical Crisis

Recovering from an ethical crisis requires a commitment to pursue better behav- ior in the future. But not all individuals involved will take responsibility for their actions, and some of them will pay for their actions with prison time. Collectively, the organization must also speak with one voice and make it plain that it proposes to remedy the problems that led to the ethical incident to begin with, and to con- tinue with aboveboard behavior in the future.

The Evaluation of the Ethical Management Process

Organizations guilty of moral lapses are usually caught in the process. Unlike a crisis brought on by a natural disaster (e.g., earthquake, torrential weather, or some other act of nature), when the organization is an obvious victim, an ethical crisis generates little public sympathy. Furthermore, sentiments often run against the company, even if it is not to blame for the crisis. For example, if damaging weather hits a company warehouse and knocks out its storage and operations, some critics will still question why the company was not more prepared.

Ethical decision making not only anticipates how to handle the crisis but how to address the organization’s critics as well. This observation is why Bertrand and Lajtha (2002) noted that every crisis can be interpreted as a sign of a loss of trust. In this example, stakeholders lose trust in the organization when something unfortunate

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occurs, whether or not it was caused by the organization. This is not a pretty scenario, but it is real. To witness this phenomenon, simply watch the comments section of any major online news website. Critics frequently emerge to blame just about anyone for a given calamity. When a company is in the midst of a crisis, it will often be perceived by others as blameworthy, even if it did not cause the crisis at hand.

Because some stakeholders respond to with a loss of trust in the organization, management should acknowledge the various viewpoints that exist in the external environment. Certainly, many people in society have a strong distrust for corporate America in general, perceiving that companies will do whatever it takes to increase sales and make a profit. Unfortunately, the actions of some firms appear to justify this perception. Not surprisingly, many will be critical of a company when it is faced with a crisis regardless of whether or not the firm is at fault. Other stakeholders will be more rational and will see the crisis from a more realistic perspective. In their minds, the organization may not have experienced an unfortunate negative event. Either way, company management needs to communicate that it is doing everything it can to learn from each crisis and to improve at making ethical decisions in the marketplace. Of course, management should not only communicate this message—the message should be sincere. Again, the external stakeholders are trying to rationalize this ques- tion in their minds: “Can we trust the company?”

The Commitment to Organizational Learning

Chapter 9 focused on the process of organizational learning after a crisis. Crises involving ethical breaches should not be repeated. Once an ethical crisis has been resolved, the organization must commit itself to a learning process that seeks to avoid repeating the mistake. Unfortunately, crisis management history teaches us that some companies resort to a “defense-and-attack” mode (Nathan, 2000, p. 3), a tactic that in itself is unethical. The A. H. Robins company used this tactic to discredit the victims who used the Dalkon Shield, a contraceptive device that was surgically inserted into the uterus. When recipients of the Shield became sick, the company resorted to attacking the victims and questioning their sexual practices and partners (Barton, 2001; Hartley, 1993). This is no way to fight a crisis, and A. H. Robins paid dearly in the end by enduring an endless onslaught of consumer lawsuits.

It is also not appropriate for a company to attack its suppliers publically as the cause of the problem. While the problem may be traced to a supplier, positioning the company in a way that appears to avoid responsibility only displaces the blame. Some critics will always respond by saying, “Well, then why did you use that sup- plier to begin with?” Again, if crisis are an issue of trust, then the public is asking, “Can we trust you as a company to tell us the truth?”

What is expected by both internal and external stakeholders is a commitment by the company to “get it right” by abiding by the law and staying within ethical guidelines. This learning process may involve a number of measures, including get- ting rid of the executives and managers who caused the problem in the first place. New controls may need to be implemented as well.

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The Benefits of Industry Renewal

Some industries seem to have more problems with ethical matters than others. This statement may sound odd, given that people, not industries, commit unethical acts. But some industries have had more “experience” in this area than others. The tobacco industry certainly falls in this category. Many question the ethics of selling a product that causes serious health problems. The tobacco industry maintained for years that cigarettes were not harmful, even though illnesses from tobacco represented a heavy burden on the health care system. In 1998, however, 46 state attorneys general reached an agreement with the five largest tobacco manufactur- ers in the United States. The settlement required the companies to pay billions of dollars to the state governments each year, ostensibly to alleviate the burden on the state health care systems (Thorne et al., 2003).

In terms of industry renewal, there has been a decline in tobacco advertising aimed at youth and teenagers, a problem that existed during the Joe Camel advertising days in the late 1980s and 1990s. Joe Camel was a recognizable character that appeared in advertisements for Camel cigarettes, a product manufactured by R. J. Reynolds (RJR). Unfortunately, the character was recognized by minors as well. One study found that among children between the ages of 3 and 6, more than half could associate the Joe Camel character with a cigarette (Shapiro, 1993). The Joe Camel campaign lasted from 1987 to 1997, a time during which underage smoking increased. In 1997, the Federal Trade Commission (FTC) asked RJR to remove the character from any venue where it might be seen by a child (Carroll & Buchholtz, 2012). RJR complied, thus beginning a period of industrial renewal in the tobacco industry.

The catalyst for industry renewal in the tobacco industry was ultimately a push from state governments. However, some industries have attempted to change their ethical problems before the government has had a chance to intervene. Marketing practices within the pharmaceutical industry represent one example of an industry establishing its own reforms. Prior to these reforms, gifts and other incentives were frequently lavished on physicians by representatives advocating the use of their company’s drugs (Hemphill, 2006). The intent was to influence the prescription process, which in itself was not unethical, but the means to achieve this goal was of growing concern. In response, the American Medical Association (AMA) adopted ethical guidelines in 1990 on gift-giving practices. The initial responses were positive, but, as Hemphill (2006) noted, a reappraisal of pharmaceutical marketing codes of conduct needs to be performed.

The Inevitability of New Government Regulations

After a major crisis, the government may impose new regulations. This is espe- cially true if the company is large and efforts at self-policing have not been effective. The intent of self-policing is to generate positive change without government man- dates (Becker, 2006). Hartley (1993) has noted a general progression from public apathy, to media attention, to public outcry, and finally to government regulation. Table 10.5 overviews this progression.

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278

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Chapter 10. The Underlying Role of Ethics in Crisis Management 279

Today, we see numerous examples of how the government seeks to protect society through regulation. The Environmental Protection Act resulted from public outcry against the pollution crises. The Occupational Safety and Health Administration was a government response to safety inadequacies in the workplace. Although the effectiveness of such government interventions can be debated, their links to previous crises is clear.

The Anticipation of New Stakeholder Outlooks

There is a sad irony in the realm of organizational crises events: a significant loss of human life often launches a company into immortality. Unfortunately, this is a stakeholder memory that is hard to erase. For many people from the Baby Boomer generation, just mentioning the company Union Carbide immediately brings to mind the Bhopal, India, gas leak disaster that killed thousands in 1983. Indeed, a Google search using “Union Carbide” produces many references to this disaster. The name and incident association is strong. Likewise, the Hawks Nest Tunnel contractor Rinehart and Dennis will not be remembered for its previous successful engineering projects; instead, its name will forever be associated with the needless loss of hundreds of workers who died from silicosis while building the tunnel.

There is another irony to the Hawks Nest crisis. The company receiving the electricity that was produced by the tunnel project was Union Carbide. There has been some speculation as to how active Union Carbide was in the tunnel crisis. Some critics have assumed the firm was guilty by association, while others claim the company was not involved in promoting unsafe working conditions for the tunnel workers (Deitz, 1990; Jennings, 1997). Nonetheless, name recognition has a strong emotional component; it is associated with good products and services, but it can also be associated with death.

There are other stakeholder outlooks that can result from crisis events. Consider the following crisis events and how they changed the viewpoints of many people:

■ The September 11 terrorist attacks forced air travelers to accept new secu- rity measures. They have also created the mind-set that the ethical thing for companies to pursue is the safety and welfare of their customers. This viewpoint was implied in the past but today is expected from companies in safeguarding their people.

■ As the manufacturing of goods is outsourced to overseas vendors, firms can lose direct contact with the means of production (Bertrand & Lajtha, 2002). This anxiety rises when products shipped to the domestic country are flawed in some way, such as toys with lead paint. The question of ethics arises when those who have lost their jobs to outsourcing end up purchasing products—some of them defective—from other countries. In light of the global outsourcing problems mentioned —and a weakening U.S. dollar—a number of companies are considering the use of reshoring, bringing manu- facturing back to the home country.

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280 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

■ Recent weather patterns suggest that global warming is occurring. Some scientists link global temperatures to human activity, namely the produc- tion of carbon emissions. The ethical viewpoint held by many is that firms should reduce emissions because this may be an issue of long-term survival.

■ Hurricane Katrina and the ineffective government response prompted wide criticism. Many cite the poor communication and coordination among gov- ernment agencies that should have been prepared to manage these types of problems. The ego and turf wars that existed among city, state, and federal branches of the government were also obvious and invited the scorn of many who felt let down when elected officials did not work in the best public interest.

The Problem of Loss of Trust

Bertrand and Lajtha (2002) have concluded that all crises can be interpreted as signs of a loss of trust. If this statement is true, then the ethical repercussions are enormous. What this means is that no matter the crisis, some stakeholders will feel a loss of trust in the organization.

Consider these examples when the party obviously at fault is not included in the blame equation, and yet blame is deflected back onto the organization. The coun- tering questions that follow each event are often raised by the media or can be seen on blogs when similar events occur.

■ A recently fired employee walks into his former place of work and kills his supervisor along with several other employees: Why was the employee allowed back on the premises? What did the company do to make this employee so agitated?

■ An employee is killed on his factory job because he did not follow standard procedures in performing a work task, thus leading to the fatal accident: Why did the company hire this person in the first place? How many simi- lar accidents have occurred at this workplace? Why did the company not enforce its own procedures?

Responses like these are common when a crisis occurs. In an attempt to make sense out of what has happened, many people will cognitively distort the situa- tion and assign an ethical cause to the crisis; in their minds, the cause is often the organization. Bertrand and Lajtha’s comment about the loss of trust is based on a perception. Nonetheless, perceptions can influence behavior more than reality. Hence, ethical decision making must be at the forefront of all management actions.

Summary

Business ethics examines the morality of behavior in the business world. Unethical behavior can be legal, yet damaging to the organization. In practice, all businesses should consider four responsibilities to their stakeholders: (1) making a profit, (2) operating within the law, (3) behaving ethically, and (4) supporting social and community activities that relate to the mission of the firm. The basic motive that

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Chapter 10. The Underlying Role of Ethics in Crisis Management 281

triggers an ethical crisis is often the desire to gain financially, often at the expense of another stakeholder.

The four stages of the crisis management framework reveal the underlying role of ethics in crisis management. The landscape survey uncovers the ethical weak points that may exist within the organization and its industry. The strategic planning stage promotes what can be done to improve the ethical climate of the business and its industry in general. The crisis management stage examines the ethical behaviors involved when addressing a specific crisis. Finally, the organizational learning stage promotes improving an organization’s ethical performance by learning from a specific crisis event.

Chapter Exercise

Table 10.2 lists a number of crisis events that the class may not be familiar with. Select several unfamiliar cases. Outside of class, research each case and write a one- page summary of what happened and the outcome of the case. Discuss these in class. Be sure to address the following topics:

■ What crisis did the organization face? ■ How did mismanagement contribute to the crisis? ■ How was the crisis finally resolved and what legal implications were present

(the settlement of lawsuits, etc.)?

Questions for Discussion

1. Provide an example of an ethical problem that has occurred either where you currently work or have worked in the past.

2. Using the crisis management framework (Table 10.3), conduct a landscape survey and determine the current status of potential ethical issues in your present organization and in the industry in which your company operates.

3. Identify a well-known crisis event that involved an organization that vio- lated an ethical standard but did not actually break the law. What defense did the organization provide for its behavior? What could the organization have done differently?

3. How can the ethical culture of an organization be improved?

4. Why is the example provided by top management so important in promot- ing the ethical culture of the organization?

5. What examples of major crises illustrate how government intervention can help prevent a similar crisis in the future? Consider Table 10.5 as a starting point in your discussion.

6. Why is a crisis also a symbol of a loss of trust in the organization?

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282 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

Mini-Case: The Melamine Milk Crisis in China

Melamine is a product that is used in the making of plastics and laminates. Unfortunately, it has also been illegally added to milk to boost its protein rating. The product is extremely dangerous once consumed and can cause kidney stones and renal failure (Pickert, 2008). In China, a scandal erupted in which dairy mid- dlemen were spiking milk with melamine after they had watered down the milk to extend the product usage. The higher protein content enabled these middlemen to command higher prices on the market (Long, Crandall, & Parnell, 2010).

One Chinese company, the Sanlu Group, was purchasing melamine-laced milk for use in its baby formula. Initially, Sanlu management was unaware of the melamine presence in the product. However, some Sanlu staff eventually discovered the melamine but continued to produce and distribute their baby milk formula, even months afterward (DeLaurentis, 2009). The case is reminiscent of Beech-Nut’s 1979 discovery, discussed earlier in the chapter, of fake apple juice concentrate that it had unknowingly purchased from one of its suppliers (Hartley, 1993). Rather than abandoning the supplier, Beech-Nut executives continued to use the supplier covertly and eventually found itself in the midst of a major crisis.

The fallout from the Beech-Nut apple juice scandal did not include health problems for the babies that consumed its apple juice. Unfortunately, the same outcome would not be true for the Sanlu Group. On June 28, 2008, an infant with kidney stones was admitted to a hospital in Gansu’s provincial capital of Lanzhou. The parents told doctors they had been feeding their baby milk produced by the Sanlu Group. Within two months, 14 infants with similar problems had been admitted to the hospital. Other cases were reported in provinces of the Ningxia Hui Autonomous region, Shandong, Jiangxi, Hubei, Shanxi, Jiangsu, Shandong, Anhui, and Hunan. All of the affected infants had been fed the milk formula produced by the Sanlu Group (Long et al., 2010).

By September 2008, the cases of melamine-induced sickness escalated over a much wider geographic area. The World Health Organization (WHO) reported more than 54,000 children in China had sought medical treatment, with four fatalities reported (Schlein, 2010). In other countries, reports of the melamine scandal began to surface. Bans on the Chinese-made milk products were reported in Japan, Malaysia, Bangladesh, Tanzania, and Gabon. The 27-nation European Union also put a ban on all baby food containing Chinese milk (Long et al., 2010).

The Sanlu Group moved slowly in its response to the crisis. In fact, even before the hospitalization of children in June, the company had received complaints about its baby formula milk in March 2008. At that time, the Sanlu Group claimed its products had repeatedly passed quality tests, met national quality standards, and that sick babies must have been fed counterfeit milk powder that used the Sanlu brand name. However, the company later learned that melamine had indeed been introduced into its milk supply. The discovery occurred in early August when its co-owner, New Zealand-based Fonterra, used melamine-testing equipment to verify the presence of the substance. At that time, Fonterra owned 43 percent of the Sanlu Group (“Sanlu Dairy,” 2009). Although Sanlu confirmed the melamine contamination in August, it did not report the problem to the Chinese government,

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Chapter 10. The Underlying Role of Ethics in Crisis Management 283

nor did it reveal the information to the public until September 11. So why the delay? It appears there was concern about social stability during the August 8–24, 2008, Summer Olympic Games, because a food scare would be damaging given the events that were about to take place in Beijing (Liu, 2008).

For Fonterra, the situation was especially delicate, as it was now faced with a crisis of life and death, literally. It was also concerned about saving the face of its Chinese partner. Nonetheless, Fonterra executives, realizing they had a major problem on their hands, contacted the New Zealand embassy, which began the process of alerting the Chinese central government of the food contamination problem.

Once the matter became public on September 11, the Sanlu Group received much criticism from Chinese parents and the public. Zhang Zhenling, Sanlu’s vice president, delivered an apology letter on behalf of the company at a news briefing on September 15. The apology expressed regret and included a declaration to recall all the infant milk powder produced prior to August 6, as well as an optional recall for milk produced after that date if consumers had concerns about sick infants. The late apology and the dismissal of Sanlu president Tian Wenhua did did not satisfy the public sufficiently, and many citizens lost confidence in the Sanlu brand (“Four officials sacked,” 2008). Within four months of the scandal going public, the Sanlu Group declared bankruptcy.

Mini-Case Questions

1. The Sanlu case illustrates how a supplier can be the cause of a crisis for the affected organization. However, blaming the supplier instead of taking responsibility is not an acceptable strategy in the eyes of the general public. Why do you think this is the case?

2. This case also illustrates the problem a company like Fonterra can face when it partners with companies in other countries. Identify other examples of a partner company being drawn into a crisis as a result of the actions of another company.

3. From a cultural perspective, it is important for students to know what hap- pened to some of the executives involved in the scandal, because penalties for the Sanlu Group crisis were rather extreme by American standards. Conduct an Internet search and find out what happened to the executives and managers involved in this scandal.

Mini-Case References

DeLaurentis, T. (2009). Ethical supply chain management. China Business Review, 36 (3), 38–41. Four officials sacked following baby milk scandal. (2008, September 17). China Daily

Online. Retrieved July 25, 2012, from http://www.chinadaily.com.cn/china/2008–09/17/ content_7034236.htm.

Hartley, R. (1993). Business ethics: Violations of the public trust. New York: Wiley. Liu, M. (2008, October 6). Saving face goes sour. Newsweek, 7.

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284 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

Long, Z., Crandall, W., & Parnell, J. (2010). A trilogy of unfortunate events in China: Reflecting on the management of crises. International Journal of Asian Business and Information Management, 1 (4), 21–30.

Pickert, K. (2008, September 17). Brief history of melamine. Time Online. Retrieved July 25, 2012, from http://www.time.com/time/health/article/0,8599,1841757,00.html.

Sanlu Dairy assets to be sold off. (2009, March). Dairy Industries International, 11. Schlein, L. (2008). China’s melamine milk crisis creates crisis of confidence. Voice of

America News Online. Retrieved July 25, 2012, from http://www.voanews.com/english/ archive/2008–09/2008–09–26-voa45.cfm?CFID=64268891&CFTOKEN=95716309.

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porate citizenship. New York: Houghton Mifflin.

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Trevino, L., Hartman, L., & Brown, M. (2000). Moral person and moral manager: How executives develop a reputation for ethical leadership. California Management Review, 42 (4), 128–142.

Tyler, A. (1975, January). Dust to dust. Washington Monthly, 49–58. Vallario, C. (2007). Is your ethics program working? Financial Executive, 23 (4), 26–28. Vernon, H. (1998). Business and society: A managerial approach (6th ed.). New York:

McGraw-Hill. Welles, C. (1988, February 22). What led Beech-Nut down the road to disgrace? Business

Week, 124–128. Zweig, D. (2010). The board that couldn’t think straight. Conference Board Review ,

47(2), 40-47.

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Opening Case: The Problem of Hanging Out With the Crowd

Most people would think that meeting with friends at a concert or sporting event would be a pleasant experience, and it should be. Yet, under certain conditions, it could also get you killed. Such a scenario can occur when a group of people is packed tightly in a small space. The result is what crowd behavior scholars call a “crush” or “stampede.” People become so tightly entwined that they cannot breathe, or if they happen to fall, are trampled to death.

The Crowd Crush

An example of a well-documented crowd crush occurred in Cincinnati, Ohio, at a December 3, 1979, concert by the rock band, the Who. Approximately 8,000 fans had assembled outside the Riverfront Coliseum to gain entry when pushing started from those in the back of the line. Because the doors had not been opened, those in the front responded by pushing back, creating shock waves throughout the line. As people began to fall, others fell on top of them and were trampled. Eleven people died as a result of the crush (Seabrook, 2011).

At similar event 20 years later, eight people died and dozens were injured dur- ing a Pearl Jam concert in Roskilde, Denmark. The open-air concert did not have assigned seating and was part of a larger four-day festival that attracted 90,000 people (Ali, 2000). During this crush, thousands of fans were pushing forward toward the stage. A barrier broke between the stage and the crowd, and a number of fans lost their footing and were trampled.

Research indicates that in developing countries, religious festivals are the most likely events to develop into crowd crushes. However, in developed countries, rock concerts and soccer matches are potential breeding grounds for crushes as well

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(Seabrook, 2011). In Chapter 7, we discussed one such event, the 1989 Hillsborough crush at a soccer match in Sheffield, England, that resulted in the deaths of 95 soccer fans (Elliott & Smith, 1993). However, potential crowd crushes are com- mon occurrences after sporting events when fans rush a basketball court or football field to celebrate. Anyone who falls risks being trampled to death. At football games, fans risk being hurt when the goal post is brought down. Planning for these events and establishing crowd control policies in advance are required to keep fans safe.

Paul Wertheimer is one of a limited number of researchers who studies the impact of crowd behavior on human safety. After the 1979 Who concert, Wertheimer was appointed to investigate the event and make recommendations on how to prevent future occurrences. At the time, he was working as a public information officer for the city of Cincinnati. Wertheimer traveled all over the country and learned how crowds were managed at other public venues, includ- ing concerts. This learning process developed into a lifelong passion and career as a crowd management consultant. Wertheimer even conducted field research by venturing into mosh pits at rock concerts to learn more about crowd behavior, an effort that earned him the nickname, “the old man in the pit” (Seabrook, 2011). His expertise on crowds culminated into a big event in his own career in July 2010, as he testified in a trial involving Wal-Mart. Circumstances surrounding this case are described next.

Black Friday at Wal-Mart

The day was November 29, 2008, also referred to as “Black Friday,” the biggest retail day of the year in the United States. Typically, retailers offer deep discounts on certain items to entice shoppers to begin a month-long surge of retail activity that ends with the Christmas holidays. At a Valley Stream, New York, Wal-Mart near New York City, 2,000 customers were waiting impatiently to enter the store at 5:00 A.M . for the advertised Blitz Day. When the doors were finally opened, a stampede commenced that knocked down the security employee at the entrance, Jdimytai Damour. Damour, 34, was a large individual at 6 feet 5 inches and 270 pounds, but his large frame did not save him from being trampled to death. The Nassau County medical examiner ruled that he died of asphyxiation. Eleven other people were also injured in the incident (Lynch, 2009).

A major problem with the event at Wal-Mart was the heavy media attention that had advertised bargains, but only limited quantities of merchandise were available. According to Nassau County Police Commissioner, Lawrence Mulvey, “When you advertise products, and you market it heavily, and it garners public interest, and it’s great bargains with limited quantities of merchandise, and you have a crowd that can grow beyond the quantity available, it is a recipe for disaster” (Neff, 2008, p. 23).

Another problem with the event is simply the dynamics of a long queue (i.e., line of people). Individuals at the back of the queue are not aware of what is going on at the front. Typically, those in the back often push forward, not realizing that at that very moment, someone may be trampled underneath others who are being carried along with the flow of the crowd. Author John Seabrook described it this way in a recent article in the New Yorker:

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The transition from fraternal smooshing to suffocating pressure—a “crowd crush”—often occurs almost imperceptibly; one doesn’t realize what’s happen- ing until it’s too late to escape. Something interrupts the flow of pedestrians—a blocked exit, say, while an escalator continues to feed people into a closed–off space. . . . At a certain point, you feel pressure on all sides of your body, and realize that you can’t raise your arms. You are pulled off your feet, and welded into a block of people. The crowd forces squeeze the air out of your lungs and you struggle to take another breath. (Seabrook, 2011, p. 33)

While some have written off such crowd behavior as a sort of bizarre mob psy- chology, in reality, individuals in the crowd lose control at a certain point when the crowd resembles a single fluid entity. Crowd researcher John Fruin noted that an occupancy rate of seven persons per square meter causes the crowd to act more like a fluid mass. Under these circumstances, a person no longer has control over physical movement and may not even be able to breathe. That is why many people who die in crowd crushes experience compressive asphyxia (Fruin, 1993). However, blaming “the crowd” for trampling a person is not always valid, because crowd movement is based on the shock waves that are sent through it. Such shock waves can be initiated by someone pushing from the back of the queue. Under these circumstances, a dense crowd can only move forward, trampling anything that happens to be in its way.

The Aftermath

Rather than face a criminal prosecution, Wal-Mart opted to pay $1.5 million to Nassau County Social Services. In addition, the retailer set up a $400,000 fund for the victims and agreed to develop a crowd management plan for all of its New York stores (Lynch, 2009). The Occupational Safety and Health Administration (OSHA) also cited the company for inadequate crowd management during the Black Friday event. Advertising has also changed since 2008. Wal-Mart no longer calls Black Friday “Blitz Day” but rebranded it as “The Event” (Seabrook, 2011).

Opening Case Discussion Questions

1. What is the best way to manage a Black Friday event? As you discuss your answer, consider the following alternatives:

■ Increase security? ■ Advertise unlimited quantities on sale items as long as they are pur-

chased by a certain day? ■ Decrease advertising?

Consider the revenue and expense implications of each alternative.

2. Do you think Wal-Mart was unfairly implicated in the death of its employee? Should “the crowd” be considered at fault as well? How can individual responsibility be assigned when someone is injured because of a crowd?

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3. Some outdoor concerts have no assigned seating, enabling concert promot- ers to sell more seats and encouraging patrons to arrive early and rush to the best ones. What guidelines should be provided for issuing tickets for events such as these?

Opening Case References

Ali, L. (2000, July 20). A horrible nightmare. Newsweek, 32. Elliott, D., & Smith, D. (1993). Football stadia disasters in the United Kingdom: Learning

from tragedy? Industrial and Environmental Crisis Quarterly, 7 (3), 205–229. Fruin, J. (1993). The causes and prevention of crowd disasters. Paper presented at the First

International Conference on Engineering for Crowd Safety, London, England. Lynch, M. (2009, May 7). Wal-Mart to pay $1.9 million in stampede death. Women’s Wear

Daily, 14. Neff, J. (2008). Marketing blamed in Wal-Mart death. Advertising Age, 79 (45), 23. Seabrook, J. (2011, February 7). Crush point. New Yorker, 32–38.

Introduction

The opening case illustrates a problem that many may not consider when discuss- ing crisis management, the potential of dying in a crowd. As the case illustrates, there are two ways this might occur: being trampled to death or being suffocated while standing. This is nothing new; such crowd crushes have occurred many times in history. With the world’s growing population, the potential will continue to exist. Since more is known about crowd crushes today than was 30 years ago (when the Who concert tragedy took place), more is expected of organizations in making sure such accidents do not occur. The burden is on the business, not the crowd, to ensure that the environment is reasonably conducive to safety.

In this final chapter, we examine other trends emerging in the area of crisis management by examining each of the four phases of the crisis management framework. Table 11.1 presents an overview of these trends. As you study each of these phases, consider how they can affect your career.

The Landscape Survey

Throughout the book, the landscape survey has examined the organization’s envi- ronment and identified the trends therein. Now we consider trends that may appear on the horizon.

The Internal Landscape

The internal landscape considers the state of the organization and its ability to withstand—or even cause—a crisis. What follows is an identification of emerging internal landscape trends and how you may be affected.

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The SWOT Analysis Will Become an Important Tool in Assessing Crisis Vulnerability

In Chapter 4 we discussed the importance of using the SWOT analysis (strengths, weaknesses, opportunities, and threats) to detect crisis vulnerabilities. We discovered that organizational strengths can precede certain crises. A charis- matic chief executive officer (CEO) or an athletic coach with a loyal following can be a wonderful asset to the organization. It can also hide a “smoldering crisis” that

Table 11.1 Emerging Trends in Crisis Management

Landscape Survey

Strategic Planning

Crisis Management

Organizational Learning

The Internal Landscape

■ The SWOT analysis will become an important tool in assessing crisis vulnerability.

■ The link between crisis and moral failure will strengthen.

■ Virtual crisis management plans will become the norm.

■ Crisis management planning will be integrated into the organization’s strategic planning process.

■ Contingency responses to specific crisis events will become more common.

■ The organization’s website and social media networks will become chief communications tool during a crisis.

■ Organizational learning will provide an important feedback loop necessary for the strategic planning process.

■ Learning after a crisis will lead to the abolishment of the status quo.

The External Landscape

■ Victims of crises will become more visible and powerful as stakeholders.

■ A crisis will be viewed as a reason to mistrust an organization.

■ Crisis management teams will engage in more planning with crisis teams from outside their organization.

■ The focus efforts of crisis management will expand to include a wider range of stakeholders.

■ Sustainable development will become more of an expectation.

■ Social media will play a greater role in determining the outcome of a crisis.

■ Time will be a key measure that will be used to evaluate an organization’s response to a crisis

■ Crisis management frameworks and models will become more complex and sophisticated.

■ Crisis research will continue to use cases but will incorporate more statistical analysis as well.

■ Crisis research will take on a long-range perspective.

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can lead to a major crisis. Likewise, opportunities, those options external to the organization that can signal new growth, can also lead to crises. Many companies have enthusiastically expanded production and markets to overseas locations only to encounter crises along the way.

The SWOT analysis not only reveals vulnerabilities but also helps identify the organization’s strategic options. By conducting a thorough assessment of its strengths, weaknesses, opportunities, and threats, a business can build a matrix of options that are better aligned with its capabilities and limitations (Parnell, 2013). The SWOT analysis should always include input from internal and external stakeholders. Long- term decisions that rely on internal assessments can be shortsighted. Stakeholders such as employees, suppliers, and business advisory boards see the organization differently from top management, and thus their insights can be invaluable.

The Link Between Organizational Crises and Moral Failure Will Strengthen

Some have taken the viewpoint that crisis events can be likened to moral fail- ures on the part of the organization. This thinking is understandable, given the number of ethically related organizational crises that have occurred over the past three decades. The Institute for Crisis Management has noted that the majority of organizational crises are human induced, with management initiating more than 50 percent of all crises, while employees account for 32 percent (Institute for Crisis Management, 2011). The institute further classifies 61 percent of all crises to the category of “smoldering.” Such crises start out small, internal, and manageable but escalate into crises that are visible to the public. A greater emphasis needs to be placed on addressing these smoldering crises before they become full blown.

In this book we have discussed a number of smoldering crises that were not properly addressed by management. Many of these were due to ethical breaches in the organization. Adequate attention was not focused on remedying the core prob- lem, and the situation escalated to a crisis. Based on the nature of human behavior and the record of ethical breaches leading to crisis, such breaches will likely con- tinue despite the best efforts of business schools, religious leaders, and management writers. What does appear to make a difference in reducing such moral shortcom- ings in a given organization is the example set by upper management (Carroll & Buchholtz, 2012). It is encouraging that many organizations are able to achieve a high level of ethical integrity in the way they conduct business.

The implication for management is to set the ethical tone of the organization at the top levels of the company. In the absence of knowing what to do, employees will look one level higher for cues on how to respond in a certain situation. Promoting good business ethics can go a long way in preventing an organizational crisis caused by unethical behavior.

The External Landscape

Within the external landscape, emerging issues are focusing in two areas: the growing power of victims of a crisis and the eroding trust stakeholders experience

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when an organization is either the cause of a crisis or it is negligent in carrying out its duties during a crisis.

Victims of Crises Will Become More Visible and Powerful as Stakeholders

In the past, victims of crisis events have been acknowledged to some degree but were eventually forgotten. Indeed, certain victims, particularly those of natural disasters, are often poor and are considered outcasts in society. As a result, they are not long remembered. Patrick Lagadec (2004) made this observation in examining the fatalities from the killer heat waves in France (2003) and Chicago (1995). In both events, those who died were often the poor, the elderly, and those who were isolated to some degree from society. After Hurricane Katrina in 2005, victims of the storm began to receive much media attention. One of the reasons these victims were heard was because of the ineptness of government agencies when responding to this disaster.

Today, victim visibility has been enhanced by the presence of social media. An Internet search of a crisis event also includes YouTube videos that are available depicting the event. Videos can be played and replayed, perpetuating the memory of the crisis and its victims. Hence, victims are less likely to be forgotten if they can be viewed on a laptop on a moment’s notice.

A Crisis Will Be Viewed as a Reason to Mistrust an Organization

A crisis can be an issue of trust (Bertrand & Lajtha, 2002). This viewpoint main- tains that the organization shares some of the blame for the crisis, either in causing the crisis or in how it managed the crisis response. Even in the event of a natural disaster, the organization can be blamed if it was not adequately prepared. Hence, stakeholders perceive that organizations get the blame they deserve, and in propor- tion to their degree of unpreparedness. While such an attitude does not always seem fair, the onslaught of media attention that accompanies crisis events certainly seeks a party to blame (Boin, ’t Hart, McConnell, & Preston, 2010). Valid or not, this scapegoat mentality does help add meaning to an otherwise meaningless situation. Even if an organization is not to be directly blamed for the results of a crisis, a loss of public confidence is still a likely outcome (Bertrand & Lajtha, 2002).

Management is a symbol of trust that the organization has with its stakeholders. Within the organization, leaders must be trusted to manage the crisis as effectively as possible. Employees also expect that management will not induce a crisis. Such a crisis would create a trust issue if management made ill-advised cuts in safety train- ing or equipment. Should an employee be injured due to a cutback of this sort, then employee trust in the organization would be compromised.

External stakeholders also trust the organization to prevent crises when possible and mitigate them when they do occur. As we have discussed previously, the media, the community, and the customers are often critical of the organization when it does not manage a crisis effectively. Simply stated, the issue of trust is becoming more important. If stakeholders lose confidence in the organization, its ultimate

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survival may be in jeopardy. All stakeholders want to be able to say, “We trust you as an organization to do the right thing.”

Strategic Planning

Strategic planning is the proactive stage when management has a chance to plan for future crisis events. The trends and implications in this important area are discussed next.

The Internal Landscape

Virtual Crisis Management Plans Will Become the Norm

Prior to the availability of the Internet, crisis management plans (CMPs) were kept in bound guidebooks. Such notebooks were similar to other standard operat- ing procedure (SOP) materials that organizations kept on their bookshelves. Today, increasing numbers of organizations are posting these plans on their websites. This approach makes the plan readily available to all stakeholders with Internet access, and its general distribution ensures the plan can be accessed in a wider geographic context. It also enables crisis planners to evaluate other published plans when formulating or revising their own. Finally, because these plans are electronic documents, they can be easily edited and redistributed, unlike bound documents in notebooks, which take more effort to change.

One implication of this trend is that the organization’s information technology (IT) department must be actively involved in the distribution of the crisis manage- ment plan. This relationship is a welcome one, since IT is an integral part of crisis recovery.

Crisis Management Planning Will Be Integrated Into the Organization’s Strategic Planning Process

The planning process for a crisis has traditionally been implemented by desig- nated crisis management teams (CMTs). In the early days of crisis management, companies with such teams typically had them operate outside of the strategic management process (Preble, 1997). An emerging trend is to incorporate crisis management and strategic planning (Chong & Park, 2010; Coombs, 2006; Parnell, 2013; Preble, 1997), a theme consistent with this book. The advantage of this approach is that it makes crisis awareness an ongoing process that is reviewed in conjunction with the organization’s long-range plans. Crisis vulnerability plan- ning is incorporated into the SWOT analysis component of planning. The impli- cation for management is that it must ensure that the entire crisis management process does not take place in a far corner of the organization, away from the main players who need to be included. Crisis management should be part of an ongoing strategic planning process, not a separate activity that occurs only occasionally.

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The External Landscape

In the strategic planning area, the crisis management team is also interacting with teams outside of the organization.

Crisis Management Teams Will Engage in More Planning With Other Crisis Teams From Outside Their Organizations

Traditionally, one crisis team is organized for each organizational unit. For example, a large company with several plants may have one crisis team for each manufacturing facility. In addition, there may also be an overall team for the entire organization. This type of arrangement works well when the crisis event is localized.

In crises that are more complicated and geographically diverse, organizational crisis management units must interact with similar teams from other organizations. In addition, a host of government agencies may also be involved in this network of crisis teams. These interlinking crisis teams that form during an event such as a natural disaster have been called “hastily formed networks” (Denning, 2006). Hurricane Katrina led to the formation of a number of hastily formed networks among aid agencies, crisis management teams, military units, emergency response teams, and local governments.

With a crisis like Hurricane Katrina, it is important to note that a unified chain of command may not exist within a local geographic area. What results is a modi- fied chain of command that considers both the various stakeholders who are part of the disaster and the disaster relief efforts. Typically, a hurricane response is coor- dinated by local governmental agencies, but in the case of Katrina, the city of New Orleans lacked some key resources and did not manage others effectively (Berinato, 2010). The result was a hastily formed network that was coordinated by a number of agencies.

The implication of this trend is important. Crisis management team leaders must begin to network with their counterparts in other organizations. There are opportunities for knowledge transfer as well as the planning of disaster drills. The time to interact with these groups is before the crisis occurs. In this way, crisis team members are familiar with their counterparts and have already developed working relationships.

The Focus Efforts of Crisis Management Will Expand to Include a Wider Range of Stakeholders

The traditional focus of crisis management originally focused primarily on media relations (’t Hart, Heyse, & Boin, 2001; Marra, 1998). The thinking was that a good relationship with the media would help ensure that the public perceives the company in a positive manner.

Today, the scope of crisis management outreach is beginning to adopt a broader stakeholder approach. This approach advocates meeting the needs of the multiple groups that have distinct vested interests in the organization (Carroll & Buchholtz, 2012). Certainly, employees represent one such stakeholder group (Lockwood, 2005).

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This sometimes forgotten group needs to know both the good and the bad news that occurs during a crisis. Employees are a key resource and can help pull the firm through a perilous time.

Other stakeholders who may be affected by a crisis include customers and the local communities in which they reside. The response by several large private-sector companies to Hurricane Katrina in New Orleans and the surrounding areas pro- vides an example. Wal-Mart, Home Depot, and FedEx tracked the hurricane and moved aggressively to meet community needs after the storm hit (Olasky, 2006). While they certainly desired to increase business as well, these firms were poised to fill a humanitarian role in the aftermath of the storm.

The implication for crisis managers is to expand the scope of organizational response to include aiding local stakeholders when possible. Such a strategy is especially welcomed when a local geographical area has been affected by a natural disaster. This response will vary according to the type of services offered by the organization. Several applications become apparent:

■ Food service establishments may offer certain products during times when these items may be scarce in the community. Offering products for free or at a reduced cost may be feasible. However, raising prices to reflect scarcity will be viewed by many as a form of inappropriate opportunism and will create commu- nity ill will that can last long after the crisis subsides. The community will perceive that the business took advantage of the victims.

■ Retailers can ensure that adequate supplies of staple items such as flash- lights, batteries, and portable stoves will be available. Managers who place orders for these items must be able to anticipate the kind of emergency products that will be needed and order accordingly. Again, opportunistic price increases will create bad feelings in the community. Organizations with access to automotive or van fleets may be able to offer transportation for the elderly or needy. This service could be accomplished by offering pickup and delivery for needy citizens to local stores, similar to what a bus service would offer in a city. Although offering this type of service may sound preposterous to some managers, doing so on a temporary emer- gency basis will be appreciated and well received by the community.

To summarize, planning for a crisis means considering the interests of both the company and the stakeholders in the community.

Sustainable Development Will Become More of an Expectation

Sustainable development has been emerging as a trend in recent years, and many organizations are now embracing sustainability as part of the strategic mis- sion. Executives and others must learn more about sustainability issues associated with the use of nonrenewable resources. Of course, the government will play a role as well. Sustainable development should not be confused with protecting the environment from pollution and avoiding calamities like oil spills, although these

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incidents certainly waste resources. The former is associated with accidents, while the latter concerns everyday business practice. Hence, sustainable development implies that organizations use resources in a manner that conserves resources for future generations as well (Stead & Stead, 2004). In other words, resources that are utilized, such as trees, should be renewable. Nonrenewable resources should be used sparingly and with an eye for the future. An outgrowth from this movement is that companies must not only practice sustainability, but those practices should also exist through their supply chains.

The relationship between crisis management and sustainable development must also be acknowledged (Crandall & Mensah, 2008). These two areas are closely related because an environmental crisis triggered by an organizational mistake can quickly consume sustainable resources. Oil spills are at the forefront of the news when they occur. Consumers become angry when the environment is damaged and nonrenew- able resources are squandered, and public disdain mounts daily for the affected oil companies. But other less obvious examples exist in the crosshairs of crisis and sustainable development. Sustainable development efforts are costly in terms of both time and money. A company that ignores sustainable development will soon find itself lagging behind its rivals. This in itself can result in a crisis, because no company needs to be playing catch-up. Such a scenario can create a public relations problem when the company must explain to its public stakeholders why it has not been embracing sustainability when other companies have been doing so for years.

Consider one company that has been an industry leader in sustainable develop- ment. Atlanta-based Interface manufactures modular carpet and has been innovat- ing in the area of sustainability since 1994. Modular carpet requires considerable energy resources and space to manufacture and requires considerable landfill space when disposed. In its quest to be a leader in sustainable development, Interface cre- ated a model that describes the closed-loop process it seeks in its manufacturing and disposal processes (Nelson, 2009). The model at Interface builds on a foundation of seven principles:

1. Eliminate waste. Not just reduce it, but eliminate it altogether in the pro- duction process.

2. Produce only benign emissions. Eliminate all harmful emissions in the manufacturing of its products and in the products themselves.

3. Use renewable energy. Reduce the use of nonsustainable energy sources (oil) and increase the usage of renewable ones, such as wind, solar, and landfill gas. By 2020, the goal is to operate all facilities with only renewable sources of energy.

4. Close the loop. Design the manufacturing process so that waste byproducts are recycled into some aspect of the manufacturing process.

5. Use resource-efficient transportation. Transport the company’s people and products in a way that reduces pollution, greenhouse emissions, and oil consumption.

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6. Sensitize stakeholders. Educate the company’s stakeholders (employees, partners, customers, communities, suppliers, and owners) on the need to promote a culture of sustainability in the community.

7. Redesign commerce. Become a role model to other business, supply chains, and industries on how sustainability can be incorporated in business prac- tices (Nelson, 2009).

Interface’s strategy is aggressive, to be sure. However, it does give other compa- nies a benchmark to begin their own sustainable development initiatives.

Crisis Management

Crisis management is the reactive phase of the four-stage model outlined in this book. Specifically, it is the stage at which the organization responds to a given crisis. Emerging trends within the internal landscape are discussed next.

The Internal Landscape

Contingency Responses to Specific Crisis Events Will Become More Common

Conventional crisis planning has typically followed a standardized procedure in addressing incidents. As a result, most crisis plans contain specific procedures to follow in a particular event. For example, bomb threats are common crisis events that are addressed, and plans for these usually contain a step-by-step procedure for responding. Another example is the evacuation of a building, a procedure that should be carried out in an organized, methodical fashion. Responding to complex crises, however, will also involve contingency approaches. This line of thinking maintains that there may not be one best approach to addressing every crisis.

Shrivastava (1993) noted the beginning of a shift from procedures to broader- based crisis skills in the early 1990s. Included in this skill set are “decentralized decision making” and “managerial autonomy and flexibility” (p. 28). This way of thinking recognizes that flexible contingencies may be required along the way. Bertrand and Lajtha (2002) refer to this ability as the “breaking of inflexible mind- sets” or “training oneself to deal with the unexpected” (p. 186).

While becoming more adaptive in its response, the organization may develop greater resilience, the ability to recover from an unfortunate event such as a cri- sis (Horne & Orr, 1998; Sutcliffe & Vogus, 2003). Resilience is not a step-by-step methodology in terms of crisis response, but is more of an inherent trait of the organization that takes advantage of its ability to adapt and improvise when a crisis unfolds (Somers, 2009).

The implications for management are twofold. On one hand, crisis planners need to anticipate specific vulnerabilities and how they should be managed in a step-by-step process if the threat can be addressed in this manner. On the other

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hand, the crisis response should maintain flexibility in more complex situations. Making adjustments along the way is part of contingency thinking, and this in itself is both an art and a science. Crisis response, then, requires a set of plans that become the backbone for managing the event. It also requires a degree of improvi- sation, an ability to create new responses in light of new information that the crisis may reveal.

The Organization’s Website and Social Media Networks Will Become Chief Communications Tools During a Crisis

The organization’s website will become the main communication vehicle to its stakeholders during a crisis. Unfortunately, some crises have caused websites to “go down,” rendering them useless. Union University, a small private college in western Tennessee, experienced this in February 2008 when a tornado hit the campus, dam- aging buildings and causing the website to become unavailable for several hours. Yet Virginia Tech was able to remain online by loading a simplified “light version” of its website after the April 2007 shooting rampage by student Seung-Hui Cho (Joly, 2008). The website became the key communication device with the public during the ordeal. Following the shootings, the website received up to 150,000 visits per hour. It normally transfers 15 gigabytes a day, but on the day of the shooting the Web server transferred 432 gigabytes (Carlson, 2007).

One of the more interesting outgrowths of the Internet is the use of social media tools in crisis communication. Social media enable firms to disseminate informa- tion even if the organization’s website becomes inoperable. Such was the case after the aforementioned Union University tornado. The university’s website was not operating after the storm, so a blog was set up at blogspot.com to provide updates on the damage and recovery. In addition, the university was able to use its Facebook page to share updates, photos, and videos (Joly, 2008).

Crisis managers must educate themselves about the various social networking tools available. Unlike websites, which often require individuals with specialized skills to operate, social networking tools are relatively easy to use and manage. However, social media also include the added burden of communicating in a two- way environment, sometimes referred to as Web 2.0. Managers should become proficient with Facebook and Twitter if they have not done so already, because both can be useful for crisis management situations (Crowe, 2010).

The External Landscape

Social media will become more powerful due to its ability to transfer news quickly about a crisis. Two implications of this trend are discussed next.

Social Media Will Play a Greater Role in Determining the Outcome of a Crisis

Social media will become more powerful in their ability to influence the out- come of a crisis. To understand this power, one must go back to the early 1990s

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when their use was becoming popular. One of the first companies directly affected by an Internet-related crisis was Intel, when its flawed Pentium chip surfaced in 1994. The crisis began rather innocently when math professor Thomas Nicely at Lynchburg College in Virginia found a computer error when he was working on a math problem. He e-mailed a colleague about the matter, and soon his spreadsheet problem demonstrating an Intel calculation error was all over the Internet (Weiss, 1998). Intel had become one of the first victims of substantial negative Internet publicity, a phenomenon known as “flaming.”

In terms of crisis management, the power of the Internet can be seen in its ability to transmit information—usually negative—about a company to a large audience. Social media tools add the ability to communicate in real time using media other than the printed word, through computers and even cell phones. Because of this power, social media will also become more pivotal in influencing the outcome of a crisis. We reviewed several cases that were influenced by social media in Chapter 8.

Time Will Be a Key Measure That Will Be Used to Evaluate an Organization’s Response to a Crisis

In a social media reality, organizations are under greater pressure to respond to crises more rapidly. The longer a company waits to respond, the more likely stake- holders will perceive it as either indecisive or has something to hide. Waiting more than 24 hours to issue any kind of a statement is no longer acceptable. Statements need to appear on the organization’s website within a few hours (or less) of the crisis. The company’s Facebook page should be used to convey information and encourage dialogue with external stakeholders when necessary. Those stakehold- ers who follow their news using Twitter will expect updates at least twice a day (González-Herrero & Smith, 2010).

Organizational Learning

Organizational learning after a crisis is necessary so that the company’s crisis response will be more effective when the next incident arrives. Learning also helps to prevent certain types of crises from reappearing in the future. The discussion following outlines the importance of establishing a feedback loop in the strategic planning process and abolishing the status quo when necessary.

The Internal Landscape

Organizational Learning Will Provide an Important Feedback Loop Necessary for The Strategic Planning Process

Many in the crisis management field have called for a renewed focus on the postcrisis stage, when learning and evaluation need to take place (Deverell, 2009; Racherla & Hu, 2009; Veil, 2011). What is significant about organizational learning is that it initiates the feedback loop (see Chapter 9, Figure 9.3) that is necessary in the strategic management framework (Racherla & Hu, 2009).

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The implication of this emerging trend is significant and remains a central theme of this book. Indeed, the crisis management process, from landscape sur- vey to organizational learning, needs to be an integral part of the organization’s strategic planning process. The days when crisis management consisted of a small, select group of managers who wrote the crisis plan and met occasionally are gone. Crisis events affect strategy in the long run; therefore, planning, managing, and learning from these events must be carried out within the strategic management framework.

Learning After a Crisis Will Lead to the Abolishment of the Status Quo

Returning to “business as usual” after a crisis has been the traditional goal of many organizations. However, a crisis offers an opportunity to change or even abolish the status quo. “Crises are, by their very nature, an invitation to abandon standard ways of doing things. They offer an opportunity to think and work lat- erally and to de-compartmentalize/break down encrusted silos in the company” (Bertrand & Lajtha, 2002, p. 186). Inherent in this mind-set is the notion that a crisis can trigger the forces of renewal in an organization (Dynes, 2003; Olshansky, 2006). Some liken the changes after a crisis to a process called “self-organization.” This metamorphosis occurs when an organization works through a crisis and transforms into a more adaptable organization (Murphy, 1996). For example, the Red River Valley flood of 1997 and the subsequent organizational renewal that took place were analyzed through the lens of chaos theory. The local govern- ment of Fargo, North Dakota, emerged as a new leader in that geographic area, taking over the lead in emergency response management from the county, which had formerly carried out this function. In other words, the status quo of how emergencies had been managed in the past was now broken and replaced with a better system (Sellnow, Seeger, & Ulmer, 2002). In a similar vein, crisis planning at movie theaters changed forever when James Holmes entered a packed theater in Aurora, Colorado, and shot 70 people on July 20, 2012 (Berzon, Banjo, & Audi, 2012).

The implication for crisis managers and strategic planners is one of hope. Although crises are negative events, they can engender positive change. However, for this positive change to occur, the learning process must be tied back to the strategic planning process. Managers need to be cognizant of their role as potential change agents in their organizations.

The External Landscape

Outside of the organization, an abundance of learning on crisis management is continually taking place. This area includes the work of crisis scholars who conduct research at colleges and universities. Generally, this type of research falls into three categories: conceptual, empirical, and industry application studies (Tavitiyaman, Leong, Dunn, Njite, & Neal, 2008). The following are emerging trends in the field of crisis management research.

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Crisis Management Frameworks and Models Will Become More Complex and Sophisticated

Frameworks of crisis management have traditionally been simple, with most depicting a sequential format for understanding the evolution and resolution of a crisis. The most basic framework consists of a precrisis, crisis, and postcrisis sequence as overviewed in Chapter 1. Smith (1990) and Richardson (1994) utilized this approach in their studies. Four- and five-stage frameworks have also been pro- posed (see Fink, 1996; Hosie & Smith, 2004; Myers, 1993; Pearson & Mitroff, 1993); this book also employs a four-stage approach. Crisis frameworks have also been offered for types of crisis categories as well as crisis management communication strategies. Such strategies were examined in Chapter 8.

Although frameworks offer a general approach to understanding the compo- nents of crisis phenomena, models are designed to examine the different variables that interact with each other before and during a crisis. Some progress has been made in the area of organizational crisis model building. Shrivastava, Mitroff, Miller, and Miglani (1988) offered one of the first industrial crisis models. Sheaffer, Richardson, and Rosenblatt (1998) studied the 1995 collapse of Barings, a con- servative and once solid British bank, and proposed two models, a crisis–causal antecedents model and an early warning signals model. Pearson and Clair (1998) examined the crisis management process and proposed a success–failure outcomes model. Elsubbaugh, Fildes, and Rose (2004) developed a crisis preparedness model using data from the Egyptian textile industry. More recently, Jin and Liu (2010) developed a blog-mediated crisis communication model to help public relations professionals adopt strategies when responding to blogs.

Crisis Research Will Continue to Use Cases but Will Incorporate More Statistical Analysis as Well

Crisis management research has been dominated by the case study approach (Carmeli & Schaubroeck, 2008). Indeed, much can be gleaned from examining a past crisis in detail. In the 1980s, Union Carbide’s Bhopal disaster, Johnson & Johnson’s Tylenol cyanide sabotage, and the Exxon Valdez oil spill were well docu- mented. A number of high-profile events made valuable case studies in the 1990s, including the bombing of the Murrah Federal Building in Oklahoma City, the crash of ValuJet Flight 592 in Florida’s Everglades, and the Luby’s Cafeteria massacre in Killeen, Texas. Since the beginning of the millennium, the September 11, 2001, toppling of the World Trade Center Towers, Hurricane Katrina in August 2005, the Asian tsunami of December 2004, and the 2008 China earthquake (also known as the Great Sichuan Earthquake) have been subjects for case studies. The late 2000s and early 2010s brought three more events that will no doubt be studied intensely as case studies: the BP Deepwater oil spill, the Toyota recall, and the Colorado movie theater crisis.

Although crisis management case studies will continue to be popular, research incorporating multivariate statistical analysis will likely expand. Such empirical research is necessary as researchers seek to construct models that help manag- ers assess their organizations and prepare for crises in a systematic manner.

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In an early empirical study, Marcus and Goodman (1991) examined corporate announcements pertaining to crises and firm stock values. Greening and Johnson (1996) used regression analysis to discover how management teams and strate- gies correspond to catastrophic events. Sheaffer and Mano-Negrin (2003) used factor analysis to examine executive orientations to crisis management policies and practices. More recently, Choi, Sung, and Kim (2010) employed hierarchical regression analysis to examine the dynamics of group behavior in crisis manage- ment teams. The intricacies of these methods are beyond the scope of this book, but the use of such tools demonstrates the growing sophistication of crisis man- agement research.

Research combining case studies and empirical analysis are not common but have significant potential. The Transboundary Crisis Management (TCM) data are housed in the Moynihan Institute of Global Affairs at Syracuse University in New York. Case studies have been analyzed, and various nominal and ordinal variables have been extracted from each case for statistical analysis. The data set was devel- oped by social scientists and graduate students using a rigorous case writing meth- odology and a coding scheme. More than 100 cases have been analyzed, including terrorist incidents, pandemics, and economic crises (Hermann & Dayton, 2009). All of the cases have expanded over wide geographic borders; hence the name trans- boundary crises . In the past, case studies and empirical research have often emerged separately.

Crisis Research Will Take on a Long-Range Perspective

The traditional approach in crisis management research has been to analyze short-term events, typically single-event crises. The study of these events includes an analysis of the various phases of the crisis from the precrisis stage to the learning stage. However, the long-term effects of these crises have not been widely evalu- ated. Revisiting the sites and stakeholders involved in a crisis to determine what learning and policy changes have been implemented is often appropriate (’t Hart et al., 2001). A long-term view of crisis also looks at the precursors of these events. Analyzing variables such as the organizational culture and other mini-steps that led to the crisis can yield useful information to both researchers and managers.

Although the area of crisis research may appear to have little significance for students, or for practicing managers, for that matter, nothing could be farther from the truth. Research data are drawn from the activities and experiences of practic- ing managers whose organizations are engaged in crisis management. In the future you may be called on to answer a questionnaire for a research study that is being conducted to learn more about organizational crises and their management. If you have an opportunity to participate in such a survey, do so enthusiastically, because ultimately, it will assist the researchers, who are attempting to learn how organiza- tions can respond more effectively to a crisis. In some cases, you may even be asked for an interview. Perhaps your organization experienced a crisis and the researchers want to learn more about how your crisis management team responded. Referring the researcher to your official company spokesperson will help that person gain insights that are not possible through a survey.

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Summary

This chapter examined the emerging trends in the field of crisis management. One of the key trends mentioned is also a central theme of this book: that crisis manage- ment should be seen as an integral part of the strategic management process. In the past, much of what we call crisis management planning existed in a vacuum, away from the strategic planners who guided the future of their organizations. In the future, a change in this approach to crisis planning will be required.

Questions for Discussion

1. Why do you think crisis management has not always been heavily empha- sized in the strategic management process?

2. Hastily formed networks are an emerging trend in crisis management, par- ticularly in the area of disaster management. If a major storm were to hit your local area, what groups do you think should be part of the network to coordinate crisis and disaster relief?

3. Sustainable development is a trend in many organizations. What efforts at sustainability do you see at your college or university? What is being done where you work to implement sustainable development? What changes do you recommend?

4. Searching for the positive side of a crisis might seem contradictory, but it is an emerging trend. What positive outcomes can you see that resulted from a crisis in an organization in your area or perhaps where you have worked? How did the organization improve itself? Were any laws or regulations changed?

5. Much has been written on the importance of business ethics, and yet it continues to cause many crises in businesses. Why do you think ethical violations continue to be a source of crises in organizations today?

6. Crisis management research is a developing field. What areas do you think need to be researched more in the future?

Chapter Exercise

Many organizational crisis management plans are now available online. In this exercise, the class will examine different plans posted on company websites. Begin by locating your college or university’s CMP online. As an alternative, you may wish to locate plans that exist where the students work or at a prominent organization in your community. Once the organizations have been identified, evaluate each as a class and consider the following:

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■ How long is the CMP? Do you think it is too short, or perhaps too long? ■ What items are left out of the plan that should have been included? ■ Which organizations did not have a plan posted that should have had one

publically available? Why do you think the plans were not posted? ■ Do the plans post potential crisis vulnerabilities that the organization may face? ■ Do the plans acknowledge the presence of potential environmental crises

that may occur? ■ Do the plans include provisions for postcrisis debriefing? In other words,

are their opportunities for organizational learning to occur?

Closing Book Case: The Great Boston Molasses Flood

It may seem odd to end a chapter on the future of crisis management with a classic industrial crisis in the United States. But a close look at this unusual incident reveals a number of themes that have been addressed in this book, plus some items that provide an eye for the future.

The Flood

The scene was Boston, Massachusetts, on a warmer than average winter day, January 15, 1919. In an industrial area of town, the United States Industrial Alcohol (USIA) Company was the location for a huge storage tank of molasses that mea- sured 58 feet tall (almost as tall as a six-story building) and 90 feet in diameter. On that fateful day the tank was filled with 2.3 million gallons of the dark sugary liquid (Park, 1983). At around 12:30 P.M ., the tank split open and spewed its contents onto the local firehouse, an elevated train, numerous houses and buildings, and a number of innocent bystanders. The tidal wave of molasses took out the supports of a nearby train, causing the track to sag to street level. The liquid wave literally knocked over the fire station and pushed it toward the sea. In the adjacent Public Works Department, five men eating lunch were killed immediately when the hot bubbling molasses poured over them (Mason, 1965).

Visualizing the disaster is almost unfathomable. Imagine a heavy sludge, 15 feet high in places, moving at around 35 miles per hour, sucking up people and knock- ing over structures along its way. When the casualties had been tallied several days later, 21 people were dead, 150 had been injured, and 20 horses owned by the city had been killed (Potter, 2011). Some of the victims had been crushed to death in the fallen buildings, while others literally drowned in the molasses.

The Tank

The industrial need for molasses at the time may surprise some. Today, we think of it as an ingredient used in baking cookies and other sweets. During World War I, molasses was used as a standard sweetener for cooking, but also in fermenta- tion to make ethanol that could be transformed into a special type of liquor used

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in military munitions (Lyons, 2009). Of course, molasses could also be used in making alcohol for consumption, an especially noteworthy topic given the state of Prohibition talks at that time.

At the center of the disaster was failure of the molasses storage tank, built only three years earlier in 1915. Why it had failed was unclear. During the subsequent trial, USIA blamed Italian anarchists for bombing the tank. Indeed, the explanation was plausible, because anarchists were known to be active in Boston at the time (Lyons, 2009; Mason, 1965). However, the real problem was later deemed to be a structural flaw in the tank that likely occurred when it had been originally constructed, what safety experts call “inadequate design” (Thyer, Jagger, Atherton, & Ash, 2009).

The tank had been built using large curved steel plates fastened together with rivets. The structure was housed on a concrete slab only 200 feet from the adjacent harbor. Ships from Cuba brought the molasses to the port, where it was stored temporarily in the large holding tank before being shipped by train to its next destination (Lyons, 2009). When the tank had been completed in December 1915, it should have been tested with water. However, the full capacity test never occurred because a shipment of molas- ses was soon to arrive. In fact, the only test conducted was with only 6 inches of water, at which time the company pronounced it safe for use. The tank was never inspected by an architect or engineer, neither of which was required by law (Puleo, 2001).

From the beginning of its use, the tank sprung numerous leaks. Stephen Puleo (2003) described in his book on the disaster, Dark Tide, how the company responded to existing leaks in the tank by painting the tank brown so that molasses seepage would not be detected—an example of a cover-up, literally. Even the locals knew about the leaks:

From the beginning leaks had appeared. Streaks of molasses ran down the sides of the tank, and people living nearby filled up cans for home use. Children would scrape the leaks onto sticks to make molasses suckers. Neighbors and workmen had also reported ominous rumbling noises inside the structure. (Lyons, 2009, p. 41)

When the tank finally ruptured, the rivets holding the metal plates together shot out quickly, and according to the local patrolman in the area, resembled the sound of a machine gun (Puleo, 2001).

The day of the accident was warm for a January winter in Boston. It is speculated that the warmer temperatures might have been a factor in the eventual demise of the tank. Moreover, that same morning, a half a million gallons of warmer molas- ses had been pumped into the tank and mixed with the cooler molasses that was already there. The resulting mixture can initiate fermentation process that produces gas (Potter, 2011). This chemical reaction exerted greater pressure on the walls of a tank that had already been poorly built.

The Legal Process

The resulting litigation turned out to be a marathon affair lasting six years. A total of 119 lawsuits were filed against USIA. The company continued to allege sabotage. Indeed, 40 other explosions had taken place in the Boston area between January 1, 1918, and July 1, 1919, and police had discovered placards nearby that advocated

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Chapter 11. Emerging Trends in Crisis Management 307

the annihilation of U.S. leaders, including Woodrow Wilson, and signed by “The American Anarchists” (Puleo, 2001). The company also noted that the tank had been filled to full capacity previously and had not suffered an incident.

Plaintiffs demonstrated that the construction of the tank was inadequate from the beginning, however. A Massachusetts Institute of Technology professor, C. M. Spofford, testified that the metal plates of the tank were too thin and did not contain enough riv- ets. Spofford calculated that the actual stress on the sides of the tank before it failed was double what it should have been. He concluded, “The tank was improperly designed and its failure was due entirely to structural weakness” (Puleo, 2001, p. 63).

Six years after the flood, and after 45,000 pages of testimony and some 3,000 witnesses, Judge Colonel Ogden wrote a 51-page report fixing blame on USIA. He rejected the anarchist theory as well (Puleo, 2001). Settlements included $25,000 to the city of Boston, $42,000 to the Boston Elevated Railway Company, and $6,000 to the family of each victim (Lyons, 2009).

Government Regulations

Regulations often follow crises such as this one, particularly when the public’s safety is at risk. The building of the molasses tank was wrought with failures in safety testing and engineering. Overseeing the project for USIA was its treasurer, A. P. Jell, who enlisted the Hammond Iron Works Company to build the tank. For Hammond, it was to be the largest tank it had constructed. For Jell, it was a project he had no experience in overseeing. He had no engineering background and did not consult with other experts on appropriate safety requirements for such an undertaking. He even rushed construction because of an upcoming shipment of molasses due in a matter of days (Puleo, 2001). This time constraint also explains the inadequate 6-inch water capacity test described earlier.

After the accident, things changed dramatically. New Boston city regulations required plans for construction projects to be approved by an engineer or architect. The plans then had to be filed with the city’s building department. This practice soon spread across the country (Lyons, 2009).

And to This Day . . .

Today, a youth baseball field and recreational park has been built where the tank once sat. A small plaque at the park describes the events that occurred that fateful day. Today, locals claim that on a hot summer day, the faint smell of molasses can still be detected (Lyons, 2009).

Closing Book Case Discussion Questions

1. What examples of cost cutting do you see in this case?

2. Why do you think it was so easy to build the tank with so little oversight from inspectors?

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3. A large number of people were put at risk because of the location of the tank. What practices exist today that would protect large groups from simi- lar types of storage tanks? To answer this question, think of the location of buildings, production equipment, and so on.

Closing Book Case Sources

Lyons, C. (2009). A sticky tragedy. History Today, 59 (1), 40–42. Mason, J. (1965, January). The molasses disaster of January 15, 1919. Yankee, 52–53, 109–111. Park, E. (1983). Without warning, molasses in January surged over Boston. Smithsonian,

14 (8), 213–230. Potter, S. (2011). January 15, 1919: Boston Molasses Flood. Weatherwise, 64 (1), 10–11. Puleo, S. (2001). Death by molasses. American History, 35 (6), 60–66. Puleo, S. (2003). Dark tide: The great Boston molasses flood of 1919. Boston: Beacon. Thyer, A., Jagger, S., Atherton, W., & Ash, J. (2009). A review of catastrophic failures of bulk

liquid storage tanks. Loss Prevention Bulletin, Issue 205, 3–11.

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