Crisis Management: from BP to NFL to ISIS to GMJohn M. Holcomb

Ethics Boot Camp

October 10, 2014

Sentencing GuidelinesMitigating Factors Lack of Involvement in the Offense by Any

Policy-Influencing Personnel Taking Appropriate Steps to Prevent the

Commission of Crimes Taking Appropriate Steps to Detect Crimes that

Have Been Committed Self-Reporting of Offenses to Authorities Cooperating Fully with the Government’s

Investigation

Mitigating Factors Cont. Accepting Responsibility Taking Swift, Voluntary Remedial Action Disciplining Individuals Responsible for the

Offense Responding to the Occurrence of an Offense

by Taking Steps to Prevent Further Offenses

Impact of Sentencing Guidelines Sentencing and Culpability Charging Guidelines of Government

Agencies Federal and State Tradeoffs Legal and Public Relations Strategies Converging Legal and Crisis Management

Trends

Steps in Crisis Management ModelSteps in Crisis Management Model Investigating the Facts Portraying the Problem Assessing Blame or Responsibility Responding to Critics Adopting New Policies Implementing New Practices/Procedures Political Tactics Cost in Money and Credibility

Crisis Management and Responses to Public ControversyFirm Finding

FactsProblem Portrayal

AssessBlame

Response to Critics

Policy Changes

New Procedures

Political Tactics

Costs in $ Credibility

J& J Tylenol

Internal Tests

Serious Problem

Blame Others

Collaborate Unilateral Change

None Ads and Self-reg

Low/Low

Abbot Labs Infant Formula

Internal and External Tests

Serious Problem

Accept Limited Blame

Collaborate Unilateral Change

Code and Decision Structure

Negotiate Self-regulate

Low/Low

Nestle Infant Formula

Inactive No Problem

Blame Others

Confront, then Collaborate

Industry-wide Change

Code and Decision Structure

Later Negotiate

Med/Med

Hooker ChemicalLove Canal

Inactive No Problem

Blame Others

Self-defense

No Change

Decision Structure

Ads and Litigation

High/High

Firestone 500 Recall

Suppress No Problem

Blame Others

Confront No Change

Product Testing

Lobbying High/High

A.H. Robbins IUD

Suppress No Problem

No Blame Confront No Change

None Litigation High/High

Crisis Management and Responses to Public ControversyFirm Finding

FactsProblem Portrayal

AssessBlame

Response to Critics

Policy Changes

New Procedures

Political Tactics

Costs in $ Credibility

Exxon Valdez

Delay Not Serious

Blame Captain

Self-defense

No change

None Litigation Med/High

Union Carbide in Bhopal

Delay Serious Problem

Blamed Indian Managers sabotage

Self-defense; try the case in India

Slow change

Slow change

Litigation and Avoid

Med/High

BP Diligent but spoke too soon

Under-Estimated Extent

Shared Blame with other firms

Self-defense and Collaborate

Clean up and Safety Measures

Change Leaders, Board Internal Report

Testify Pay VictimsAds on cleanup

High/High

News Corp

Inactive No gemeric Problem

Blame rogue reporters police

Self-defense

Investigate but weak board

Fired editors

Testify and Litigate

Med/Med

Tyco Suppress Minor problem

CEO blamed accountants

Self-defense

Massive Change in leaders board mgmt

Cultural change values governance

Strategic changes

High for old mgmt Low for new mgmt

Goldman Sachs

Inactive No Problem

Benefits for SHs

Self-defense

Changed Bonuses

None Testifu Settle Lawsuit

Med/Med

Crisis Management and Responses to Public Controversy

Firm Finding Facts

Problem Portrayal

AssessBlame

Response to Critics

Policy Changes

New Procedures

Political Tactics

Costs in $ Credibility

NFL Inactive Isolated Players Mea Culpa

6-game rule

Defend NFL

?

ISIS CIA ActiveW.H. Not

Jayvee Terrorists andAdvisers

Al Quaeda Is Gone; Fox News

Return to Iraq; No Derad Program

Air Support Coalition

Long-term Campaign

?

GM Inactive and Suppress

Limited Apology Limited Agree-ment

Internal Investiga-tion;Safety Culture; Aid Victims

Fire Culprits;Global Safety Director; Board Monitor

Litigate on property; Defend New GM; Victim Compen-sation Fund

High/High

Lessons from Crisis Management Cases Where you start is where you finish

Conscientious initial response predicts later positive steps and outcomes

Resistant initial response predicts later negative steps and outcomes

Mid-course corrections are rare indeed Require long lapse of time Require major changes in management Nestle is the only aberrant mixed case

Learning behavior is unusual From one’s own mistakes From mistakes of others

Pre-Crisis Stage John Browne era – eliminated rivals Beyond Petroleum Brand; Caspian Sea CSR Growth over quality control Hayward era to emphasize safety, but questionable

culture Texas City refinery explosion Pipeline corrosion Thunder Horse platform problems Safety problems at Magnus platform, North Sea

Ascertaining the Facts Underestimated flow rate

Government also or chiefly responsible Effect on aggressiveness of response?

Internal investigation launched by BP Multiple efforts to probe the causes

Portraying the Problem Acknowledged “worst ever” oil disaster “Just want my life back” comment showed hubris

and inability to empathize with those who were suffering

Less impact on coast and wildlife than Exxon Valdez, especially on the fish stock

Major impact areas: oyster beds, marshlands, coral reefs, seabed and possibly plankton

Oil has dissipated – 75%; was Hayward right?

Allocating Responsibility Took responsibility for cleanup of Gulf and “all legitimate

claims”; not liable for gross negligence Internal investigation set up legal case but does not address

legal issues; no mea culpa but PR document Halliburton responsible for cement problems, not acting on

warning about gas flow problems Transocean and rig maintenance problems

Discusses eight factors and BP takes responsibility for half of one; reaction after bottom kill indicated no well design problem; two executives in trouble

Causation is still murky and yet to be determined

Investigative Reports and Allocating Responsibility Presidential 0il Spill Commission Report: criticized all three

companies, claiming shared responsibility, with special focus on Halliburton for unstable cement mixture; BP accepted report, while Transocean criticized it and awarded bonuses for “best year in safety performance in company’s history”

Coast Guard Report: highly critical of Transocean for safety management system failure and poor safety culture

National Academy of Engineering: failures by all parties, focus on lack of discipline and training, compared to nuclear and chemical industries

Did BP cut corners and sacrifice safety? Markey says “yes,” while presidential commission found no evidence

Transocean Internal Investigation Put primary responsibility on BP

Faulty well design Failed to check cement Chose process to close well that created

unnecessary risk, unapproved by Interior Department

BP Response: Advocacy document and cherry-picked facts to support its litigation strategy

Responding to Critics More collaborative than confrontational Three BP and two Transocean officials refused to testify Pushed by Congress and tension with Administration

Nationalistic impulses BP rarely if ever pushed back

Hayward was inept, unknowledgeable, and weary before Congress; understood the anger; blamed media and rivals for hysteria; board fired him

No battle with NGOs, despite tepid boycott No engagement with investor groups and their proposals but no

avoidance of their complaints US media harshly critical of BP; British media of Obama

Responding to Critics Did not join refiners in opposing climate change law in CA by

supporting Prop 23 Hypocrisy in posing as green company invited more criticism

and scrutiny External programs in CSR (Pipeline to Caspian Sea) conflicted

with internal problems, so overall CR profile is weak Debate over value of disclosure and apology Criticism from Gulf state politicians Potential conflict between legal and PR advice mitigated by

changes in sentencing and charging guidelines

Adopting New Policies Selling $30 million in assets Forging closer ties with Russia; Fiasco over Rosneft deal and

conflict between Russian government and oligarchs More emphasis on deepwater drilling, less on refining Moving more into emerging markets Remediation and cleanup efforts praised Voluntary aid to Gulf states for tourism; relocation of sea turtles $500 million scientific research fund facing state politics Committed to changing culture; “heard it before” Danger of Spanish company drilling off of Cuba may benefit

American companies – extending knowhow and equipment

Instituting New Procedures Ousted head of exploration and production Established global safety division Centralizing control under Dudley Review of employee assessments and rewards Review of supervision of outside contractors Splitting exploration and production division into 3 units:

exploration, development, production Shut down operations in Alaska and North Sea Scrutinizing board committees on safety/environment and

audit – membership and charter

Political Tactics Restoration payments contingent on continuing ability to drill

in the Gulf – political bargaining Tripled amount spent on advertising – criticized but

insignificant amount compares to $9 billion paid out thus far; best ads have been of employees cleaning up the Gulf area

Use of Brunswick crisis communications firm; retained political consultants on both sides of the aisle; increased PAC donations

Reilly lauded BP for defining the problem as systemic industry failure, while Transocean sees it as a BP problem

Litigation and Penalties $20 billion fund for property and human damages Possible $18 billion fine, if there is gross negligence ($4,300 per

barrel vs. $1,000) Settlements with contractor Weatherford and partner Moex

Offshore; first wave and indicates lack of gross negligence 300 civil lawsuits pending – wrongful death and economic damages Center for Biological Diversity has lawsuit of $19 billion for

damages under Clean Water Act Civil lawsuit by DOJ under Clean Water Act; possible criminal

charges for manslaughter BP has sued Cameron and Transocean for $40 billion

Costs in Money and Credibility Possible ultimate liabilities of $80-100 billion Litany of future investigations Provoked costly drilling moratorium Faces tougher regulations in the future Reputation is stained Branded stations lost sales and customers Stock cut in half, rebounded now down 1/3 Public credibility is low but has recently doubled

Industry Risk Management Newer risks from deep-water drilling Industry’s Chernobyl; Gulf is Silicon Valley New industry initiative to build equipment to contain and

cap well blowouts; National Center for Offshore Safety to improve self-regulation

Reilly: “…the spill is a game changer. The industry has never been more alert to safety.”

Leaders are pushing laggards Largest companies will benefit as small companies lose to

increased costs

Minerals Management Service Collaborator or partner with industry; adopted industry standards;

part of re-inventing government Capture theory at work Built-in conflict of interest – promoter and regulator of drilling Encouragement of more drilling from Watt through Babbitt (like

Levitt) and Norton. Categorical exclusions from environmental reviews if “no

significant effect on human environment” (1970 NEPA) Royalty-in-kind program and Lakewood sex & drugs scandal Similar problems at Mine Safety Agency and Nuclear Regulatory

Commission

Reforms in MMS Bureau of Ocean Energy Management,

Regulation, and Enforcement Split functions in agency New conflict of interest controls Appointed Michael Bromwich as director Same staff but hiring new people as well