Preparing for a Corporate Crisis Before Significant Risks Materialize

Recent corporate failures to properly manage crisis situations have stressed the need for boards to better oversee corporate efforts to plan for and respond to a crisis. A recent article in Practical Law The Journal explains that once a significant risk materializes, the board and management should take steps to be prepared to identify the problem, make a decision and resolve the issue. The authors outline five steps, along with an effective board culture, that can help ensure management is well-positioned to respond when a crisis occurs.

Step 1: Evaluate internal controls, risk management and corporate governance

The first step involves a periodic examination of internal controls, risk management processes and corporate governance practices. Together, these three components create a strong foundation for crisis management. One way of evaluating this foundation is through reviewing corporate policies and controls to ensure that they address the types of behaviors that could lead to significant risks.

Step 2: Identify common causes of corporate crisis

As noted in the article, the nature of a crisis involves uncertainty and the likelihood of a particular crisis occurring varies by company-specific factors. With these factors taken into account, it is necessary for the board and management to be familiar with the most common causes of corporate crisis for their organization. Some of these causes may include: product failures, systemic ethical issues, the loss of a key executive, and allegations of fraud.

Step 3: Appoint an internal and external crisis response team

Both an internal and external crisis response team should be formed that include individuals with a range of expertise to quickly determine a plan of action in real time. Internal response teams should be comprised of: senior executive officers, representatives from the appropriate key operational departments, and heads of compliance, internal audit, human resources, corporate communications and public relations (PR), and sales and marketing. This composition should be adjusted based on the team’s needs and the full board may need to become involved.

For an external team, it is advantageous to have established relationships with outside providers of legal, forensic, PR and communications advice. Having these experts get to know the company and its key members in advance will help when a quick response is needed.

Step 4: Implement a communications plan

A communications plan includes management recognizing the board wants to be warned early about a possible crisis. The articled noted that a workable and well-understood crisis communications plan should be developed. The primary focus should be making sure the appropriate people can be called together promptly and ensure the company maintains confidentiality until it has decided to speak on the matter.

Other specifics related to the communications plan include:

1. Call for early communications to the board and crisis response team.
2. Identify a spokesperson for internal and external communications.
3. Include monitoring of social media and develop strategies to use this media effectively.
4. Consider whether it would be beneficial to have an attorney involved in coordinating the efforts of other advisors.

1. Companies with operations and markets in non-US jurisdictions should make sure that their efforts are sensitive to how different cultures may react so they can be appropriately managed.

Step 5: Develop a crisis response

This step includes procedures to assess, investigate and mitigate the crisis. Once the crisis response team has made an initial assessment of the situation, they will determine who should lead in the company’s response. The CEO and key members of senior management are usually best positioned to lead. However, if the issue relates to senior management’s integrity the independent directors may need to oversee the crisis response or a special board committee may be needed to investigate allegations of wrongful conduct. In addition, the level of board involvement depends on the nature and scope of the problem.

Strategies for an effective board culture

The article emphasized the relation of an effective board culture to successfully managing a crisis situation. The ideal board culture is usually able to achieve consensus, respects independent viewpoints and protects confidentiality.

Some notable strategies for encouraging an effective board culture are:

1. Agree on the role of the board and management, including expectations on information the board needs and the board’s involvement in decision-making.
2. Emphasize the value and the limits of “constructive tension” in the board/management relationship.
3. Agree on valued behaviors.
4. Remind directors of confidentiality obligations.

1. Periodically evaluate board culture.