Contributors

Profile in Damage Control

Two recent corporate crises yield lessons in how to save face.
 

By Peter Morrissey
 
 
Reputation loss and rescue (and ultimate redemption) brings to mind that wonderful saying: Success has a thousand parents, but failure is an orphan. Few leaders like to admit failure. So when reputational loss points to a possibly catastrophic public scandal, CEOs do not want their names associated with any unfolding disaster.
 
 
Sadly, oftentimes the easy answer or quick fix is finding a fall guy—someone to take the blame and shield the CEO from the consequences of the crisis. In the age of transparency, these sacrificial lambs are, thankfully, less frequent, particularly as boards have become more careful about rubber stamping or answering to their CEOs’ every whim. These days, boards are more apt to hold the CEO accountable. The specter of activist shareholder lawsuits is a deep concern for boards these days.
 

Recently two leading CEOs with gilded reputations skirted serious public peril. Berkshire Hathaway’s Warren Buffett and Southwest Airlines’ Gary Kelly both waded into quagmires of public controversy. Buffett’s gaffe involved the imprudent decision making of one of his high-profile fund managers (and possible successor), David Sokol, prompting accusations of unethical behavior. Kelly’s near-crisis involved a reputation free fall around safety problems with the airline’s Boeing jets, which grounded much of the Southwest fleet. For both of these executives, this was a moment of truth. In Buffett’s case, he uncharacteristically stumbled at first (though he regained footing as the crisis unfolded), while Kelly’s error was more of a misstep.
 
 
Buffett has enjoyed the reputation of a corporate paragon, so when he is the one to make mistakes and put his enterprise’s reputation at risk, Wall Street takes notice. Known for his acerbic wit and folksy wisdom, Buffett had critics turning the tables on him. How could the fabled “Sage of Omaha” have shown such poor judgment and allowed a subordinate to engage in such obviously inappropriate behavior?
 
 
Buffett claimed he should have paid more attention when Sokol told him of his personal and private investment in a company that Berkshire was about to make a major play in. Buffett combined his judgment error with a very poor choice of words, stressing that nothing Sokol did was “unlawful.” But fair-minded business executives and investors aim their standard far above legality, towards higher-minded ethics. Executives must avoid wrongdoing, and be equally guarded about the perception of wrongdoing.
 
 
Metrics and Intuitions
Many CEOs come out of sales and marketing backgrounds, where measurable performance provides success metrics. They are paid to control variables and overcome obstacles placed in their way. The better executives realize there is a mix, maybe even a balance, of satisfying a customer’s wants and needs. Some executives understand that human compassion and empathy, including understanding how others will view your behavior in the light of day, should play a role in how decisions get made. As a rule, assume both your deeds and misdeeds might end up on the front page of the morning paper or on a blog. The bottom line is to do right and do no harm.
 
 
Great CEOs have almost a sixth sense for sizing people up and assessing their ability to succeed. They have a nose for trouble and know how to avoid the big mistakes. Almost always, they couple their instincts with contingency plans to manage problems and minimize damage when adverse events occur. Rest assured: smart executives know that it is not a question of whether or not organizations they lead will experience a problem or crisis; it is a question of being ready when it happens.
 
 
Crisis management is the process of planning for risk. Reputation management is the science and art of advancing and protecting the most valuable asset of the organization: its reputational legacy and future.
 
 
Good executives delegate, when appropriate, to competent, ethical people, and they know that if they trust incompetents, they threaten their fortunes and those of the enterprise they lead. An entirely risk-free environment can never be possible, so the better a corporate leader’s management of risk (and its highly escalated version, the full-blown crisis), the more successful his or her career trajectory. Those who aim high will remain on that road unless a crisis wipes them out.
 
 
Buffetted by Events That Go South(west)
Master of the universe types like Buffet exude confidence because they act decisively in their decision making. Their track records for correct judgment begets respect and trust. So when they falter, people generally want to wait and see before preemptively judging.
Buffet has won the admiration of a cadre of loyalists. His company has always disdained speculators and short-term investors, and it avoids stock splits to keep share prices extraordinarily high. At the time of their annual shareholders meeting this past April, shares of Berkshire Hathaway were priced at $122,852.00 per share. The Berkshire Hathaway investor regards Buffett with well-deserved high esteem; his shareholder meetings become more cult gatherings than typical shareholder agendas. This year was no exception.
 
 
In Buffett’s most recent biography, The Snowball, author Alice Schroeder chronicles a guiding principle of Buffett investment philosophy: never invest outside your circle of competence. The philosophy suggests investors should have great familiarity and knowledge of the companies and management they invest in. Buffet needs to take his own philosophy to heart on reputation issues. The Internet Age demands a wealth of expertise within the communications field for a CEO, far more demanding than for a CEO even just five years ago. (As a reminder, Facebook didn’t exist seven years ago).
As Berkshire’s vice chairman acknowledged: “We underestimated our communications needs given our position in the world.”
 
 
The ubiquitous and relentless nature of social media places a huge burden on customer-facing companies like Southwest Airlines. The no-frills economy icon of the skies prides itself on offering the lowest cost fares to travelers. Its motto, УYou are now free to move about the country,Ф typifies founder Herb Kelleher’s ethos and character. This brilliant communicator was steadfast in his corporate strategy: do everything for the passenger to make travel accessible and fun but above all, keep fares low. So doing, his reputation strategy aligned with business strategy.
 
 
This is why current Southwest CEO Gary Kelly needed to be particularly guarded when responding to the recent safety crisis. Directly following the crisis, he used the word УoverburdensomeФ to describe the potential for more inspections, a word easy to misinterpret in this situation. Airline safety must be considered an absolute necessity for the public. No amount of fun advertising and lighthearted banter by flight attendants can quell flyers’ fears should they perceive Kelly to be cutting safety costs to keep fares low. Ironically both Southwest’s maintenance record and age of its fleet parallels those of all other major airlines. They do not skimp on safety.
 
 
After an internal and thorough examination by Southwest and Boeing at the behest of the FAA, the safety issue that resulted from the fuselage peeling back in flight turned out to be an isolated incident, the blame placed on worn-out rivets. However, the speed with which a company must act to avoid a reputational crash can be intimidating for a CEO unfamiliar with extremely volatile situations. More recent reports have indicated that the blame lay in an underlying manufacturing flaw, which more or less vindicates Southwest but means the company needs to put an extra emphasis on inspections from here on out.
Airlines live in a culture of risk management, safety protocols, and redundant systems, so it is no surprise that tragedies can be averted and operations resumed in a matter of hours. The scheduling logistics of transporting millions of passengers each day, as well as tracking equipment, personnel, and precious cargo (human and freight) speaks to a reliance on minute-to-minute planning, coupled with long-range plans to assure customer confidence.
 
 
Will passengers fly on unsafe airlines? Take, for instance, parts of the developing world, where customers routinely fly in aircraft and under conditions that would make U.S. domestic travelers eager to take the train. Overall, airlines still have an excellent safety track record, as do the major aircraft manufacturers. Statistics show that your one-year chances of dying in a commercial plane crash are roughly one in 500,000; chances of dying in a car crash are one in 6,500.
 
 
Humans do seem more forgiving of financial scandals than safety issues. Witness the roaring return of investors to the stock market after a meltdown not seen since the Great Depression. Even the mega-billion Ponzi scams of Bernard Madoff have faded in a short period of time. On the other hand, humans have much more difficulty stomaching the crash or forced landing of any airplane versus risk that is spread over a long period of time.
 
 
This is why we fail to see the perils of sun-induced skin cancer: the beaches are full of sun worshippers. Yet the same beachgoers would think twice about going into the water if a shark were spotted. Skin cancer is invisible and a long-term threat, while a shark is perceived as an imminent, albeit rare, peril. Excellent CEOs realize that both cases are reason for concern. They will be prepared for the worst and act quickly when crisis strikes, and they need only look to reputation-sensitized peer CEOs for guidance of what to do—and what to avoid.
 

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