FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. CHAPTER 10 The Underlying Role of Ethics F in Crisis Management I The Internal Landscape The External Landscape N D L E Landscape Survey Strategic Planning Y Chapter 4: A Strategic Chapter , 6: Approach to Crisis OrganizaManagement Chapter 2: The Crisis Management Landscape Chapter 3: Sources of Organizational Crises Chapter 5: Forming the Crisis Management Team and Writing the Plan tional Strategy and Crises S A Crisis R A Crisis Management Chapter 7: Crisis Management: Taking Action When Disaster Hits Chapter 8: Crisis Communications Organizational Learning Chapter 9: The Importance of Organizational Learning Chapter 10: The Underlying Role of Ethics in Crisis Management 5 3 Opening Case: Hawks Nest 1 9 In southern West Virginia, there is an engineering feat that few people know about B except for the locals and the tourists who happen to stop by the small roadside park U about 3 miles long, that caroverlooking the project. It is an underground tunnel, 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 255 256 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE 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 downward 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 engineering 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 explosivesFhad been detonated. Although engineers were supplied with respirators, those doing I the manual labor were not. When silica rock was encountered, the resulting fine dust that the explosion had created was inhaled N by the workers as they removed debris from the tunnel shaft. As a result, many of D these laborers developed silicosis, a debilitating lung disease that eventually causes death. This disease is avoidable if respirators are worn. L Rinehart and Dennis also used another cost-cutting measure: dry drilling. Wet E drilling should have been used to minimize dust levels. The downside is that wet drilling slows the extraction process,Yunlike 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 S records did not exist at the time (Cherniak, 1986). The estimates vary depending A on the source of information. Rinehart and Dennis submitted a figure of 65 total deaths, whereas Union Carbide, the R counted 109 fatalities. In his account ultimate user of the Hawks Nest tunnel, A Cherniak estimates a total of 764 deaths. of the Hawks Nest incident, Martin 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 5 conservative as the source of information moves closer to the tunnel contractor (Crandall & Crandall, 2002). 3 Although details about the Hawks 1 Nest Tunnel incident are not widely known, a number of management scholars have taken an interest in studying the event 9 worker safety. It is a case involving excellent because of the apparent disregard for productivity (the tunnel was built inBonly 18 months), a racial element (many of the workers were poor blacks), and a disregard for worker safety (requiring workU 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 serious 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 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. 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 ethical 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 F deaths at Hawks Nest? I 2. Why would a once-reputable firm suchNas Rinehart and Dennis fail to take the measures necessary to protect its workers? D 3. Both Hawks Nest and the Upper Big Branch L mine were underground work locations. Does this have any significance in the hiding of safety violations? E If so, how? Y 4. Why would a modern organization like Massey Energy repeat the legacy of Hawks Nest by compromising worker ,safety? S A Cherniak, M. (1986). The Hawk’s Nest incident: America’s worst industrial disaster. New York: R Vail-Ballou. Crandall, W. R., & Crandall, R. E. (2002). Revisiting the Hawks Nest Tunnel incident: Lessons A learned from an American tragedy. Journal of Appalachian Studies, 8(2), 261–283. Opening Case References 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 13,52012, from http://www.witnessathawksnest.com/nyden.html. 3 B. H. Metheney remembers Hawk’s Orr, D., & Dragan, J. (1981). A dirty, messy place to work: Nest tunnel. Goldenseal, 1(7), 34–41. 1 later. Goldenseal, 1(7), 31–33. Rowh, M. (1981). The Hawks Nest tragedy: Fifty years Skidmore, H. (1941). Hawk’s Nest. New York: Doubleday, 9 Doran and Co. B U 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 258 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. 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 preventable, 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. F Church, Penn State, and Massey Energy are In an age when Enron, the Catholic more commonly known scandal-ridden I organizations, why focus here on a human tragedy that occurred more than half a century ago? The Hawks Nest Tunnel inciN dent clearly illustrates the fact that some crises have human roots that can be traced D back to unethical or irresponsible behavior by key decision makers. In addition, such behaviors are not confined toLany specific time period in history. Humaninduced crises have always occurred and will continue to occur, an inescapable E reality. However, some organizations do a better job than others at avoiding these Y ethical behavior among their members. This types of crises because they emphasize 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 busiS stages of the crisis management framework ness ethics. We then examine the four and their relationship to crises thatAare caused by ethical breaches. The chapter concludes with a note on the relationship of trust with a crisis. R A What Is Business Ethics? 5 Business ethics examines issues of right 3 and wrong behavior in the business environment (Carroll & Buchholtz, 2012). Some business practices can be legal, but 1 are not necessarily ethical. Put differently, a business may be acting within the law, but not necessarily doing the “right 9 thing.” Such behavior from a callous executive might reveal statements such as, “Well, B we didn’t break any laws,” or “Our job is to maximize profits, period.” Such behavior can also get a company in trouble. U 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 connected interested in the organization. The goal is to balance the needs of the stakeholders 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 maximization for the owners of the firm. With the shareholder model, stakeholders are not FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. 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 distribute 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 Fgone to the owners went to some point to remember is that cash that could have other stakeholder instead. In terms of crisis management and long-term viability, I it is important for firms to recognize the needs of multiple stakeholders (Alpaslan, N Green, & Mitroff, 2009). D concepts of business ethics and A popular framework for looking at the two CSR is shown in Table 10.1. In this framework,L proposed by Carroll and Buchholtz (2012), CSR is made up of our four parts: economic, legal, ethical, and philanE thropic responsibilities. Above all, businesses must meet their economic responsiYthe confines of the law. bility by being profitable while operating within , Table 10.1 The Components of Corporate Social Responsibility Component of CSR Key Thought to Understanding Economic responsibility Be profitable. S A Manifestations RMaximize sales revenues. AReduce operating expenses. Increase profits. Maximize shareholder wealth. Legal responsibility Obey the law. Ethical responsibility Avoid questionable practices. 5Abide by all legal regulations. 3Operate within industry standards. 1Maintain all contract and warranty obligations. Go beyond just obeying the law; abide by the 9spirit of the law as well. BAvoid practices that may appear to be even if they are legal. Ususpicious, 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. 260 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. 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 contexts. 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 created 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 F if individual lenders had simply refused to entire industry could have been avoided issue loans with terms that were likely I to create a substantial repayment hardship down the road for borrowers. To their credit, several lenders refused to issue such N profitable loans on ethical grounds, a high road not taken by most in the industry D (Parnell & Dent, 2009). Finally, it can be argued that companies L have a philanthropic responsibility: the obligation to be good corporate citizens. Some seek to fulfill this responsibility by E contributing time and money to the communities in which they operate. Many Y to school systems as well as colleges and businesses make financial contributions 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, S tied in with business ethics. Considering legal, and ethical—are also the most closely organizational crises, it is clear thatA many are comprised of one or more of these components. In Table 10.2 we provide examples based on the assumption that R business ethics crises are motivated by a desire to gain financially at the expense of another stakeholder. For example, atAthe 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 with5how well the firm is performing financially. But doing so without regard to morality 3 can result in breaking the law (the legal component) or taking part in questionable ethical practices (the ethical compo1 nent), both of which can result in organizational crises. 9 B Business Ethics and the Crisis Management Framework U 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. FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. Chapter 10. The Underlying Role of Ethics in Crisis Management Table 10.2 261 Ethical Crises Components The Basis for an Ethical Crisis Ethical Crisis Component Examples of Crises 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) F • Qwest Communications International (2005) • Bernie I Madoff (2009) Company knowingly sells a defective product. Examples: N • A. H. Robins Dalkon Shield (1984) • Dow D Corning silicone breast implants (1992) Company L falsely advertises its product. Example: • Beech-Nut apple juice (1982) E violates safety standards in the workplace. Company Examples: Y • Rinehart and Dennis (1930s) , • Warner-Lambert Company (1976) • Film Recovery Services, Inc. (1985) • British Petroleum Texas City explosion (2005) SPetroleum Deepwater Horizon explosion (2010) • British • Massey A Energy (2010). Ethical: These cases involve behavior on the part of company employees that is questionable but does not necessarily violate the law. Company R sells a product that is legal but not necessarily beneficial to society. Examples: • NestléAInfant Formula (1970s) • PowerMaster Beer (1991) • The tobacco industry (ongoing) 5 • Ashleymadison.com (ongoing) Company 3 outsources production to suppliers that impose harsh conditions on their employees (e.g., sweatshops). 1 Examples: • Discount 9 retail chains (ongoing) • Clothing manufacturing companies (ongoing) B • Appliance manufacturing companies (ongoing) Economic: The basic motive is a desire to gain financially, often at the expense of another stakeholder. U 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). 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 262 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE 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 continue 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, F a decision to change suppliers became an 1988, p. 124). What should have been ethical misconduct crisis. Beech-Nut I president Neils Hoyvald, and John Lavery, vice president for operations, were the main parties who instigated the cover-up. N When the crisis was over, both men were found guilty of violating federal food and D crisis that never should have happened cost drug laws. Hartley (1993) estimates the Beech-Nut $25 million in fines, legalLcosts, and lost sales. Table 10.3 depicts the crisis management framework in relation to business ethics E issues. The next sections develop the four areas of the crisis management process. Y , Landscape Survey: Uncovering the Ethical Boulders S A The landscape survey looks for clues in the organization’s internal and external R presence of an unethical event brewing. environments that may indicate the Potential crisis indicators include theA 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 5 These indicators are discussed next. organization in the global environment. 3 1 The Company Founder, CEO, and the Board of Directors 9 The ethical environment of the B organization is an indicator of the potential for a future crisis. The founder of the company holds a considerable amount of U 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 necessary. 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 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. Chapter 10. The Underlying Role of Ethics in Crisis Management Table 10.3 The Internal Landscape The External Landscape 263 Crisis Management Framework in Relation to Business Ethics Strategic Landscape Survey Planning Crisis Management Organizational Learning 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 management of internal stakeholders o Owners o Employees ■ The management of external stakeholders Customers Suppliers Government entities Local community The media ■ ■ ■ ■ The degree of industry vulnerability The vulnerability of the organization in the global environment ■ ■ ■ ■ The enthusiasm for crisis management planning and training The ethical culture of the F organization I N D L E TheY existence of government , regulations The existence of industry S standards A R A ■ ■ o o o o o ■ ■ ■ The evaluation of the ethical management process The commitment to organizational learning The benefits of industry renewal The inevitability of new government regulations The anticipation of new stakeholder outlooks 5 3 1 receiving extraordinary amounts of compensation because they felt they deserved 9 seemed to focus on short-term it. Finally, all of these companies had leaders who gains by increasing stock prices without regard Bto the long-term sustainability of the company. The link between CEO compensation and stock price is an underlyU 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 compensation 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 longterm as well as short-term performance results. Thousands of companies have now adopted this approach in the United States and abroad (Parnell & Jusoh, 2008). 264 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE 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 mandates (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 possess 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 F The arrangement was made without stanexecutives to the tune of $238 million. dards or supervision and allowed Ebbers I to compensate whomever he wanted and in whatever amount he wished (Breeden, 2003). Ultimately, these schemes, along N with others, culminated in a crisis that resulted in the largest accounting fraud case D in the United States. Crisis cases like WorldCom illustrate L why boards have to be more than just a rubber stamp for the CEO. In response, some boards are taking a more aggresE sive approach to holding the CEO accountable for ethical behavior. Case in point: Y lost his job after it was revealed he was Boeing’s former CEO, Harry Stonecipher, having an affair with another Boeing, executive (Benjamin, Lim, & Streisand, 2005). The relationship violated company policy. S The Safety Policies of the Organization A The organization’s safety policies,Ror the lack of them, have a direct link to the ethical climate of the organization. A 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 and5emotional harm. However, as every manager and top executive knows, safety costs3money and can detract from the bottom line in the short run. In the long run, though, these expenditures can save the company 1 millions and maybe even the company itself. 9 In looking back at industrial accidents, organizational researchers have never reached a conclusion that indicatedBthat too much money was spent on safety (Crandall & Crandall, 2002). In fact, executives who have experienced a safety issue U 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 correcting 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 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. Chapter 10. The Underlying Role of Ethics in Crisis Management 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 providing 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 F Economic motives are often linked to unethical I and illegal behavior on the part of top management. The reason for this behavior is easy to see. Management comN petence is measured by key performance indicators such as sales, profits, and marD of the company’s stock. Boards ket share, all of which can ultimately drive the price of directors typically reward the CEO when Lstock valuations increase, because this represents an increase in wealth for the shareholders. At first, this scenario of E a win-win situation, but as many rewards for stock valuation increases sounds like Ythat ultimately are not in the best recent business crises indicate, abuses can occur interest of the corporation or its stakeholders. Two , such abuses are hiding debt and questionable cost-cutting measures. S A Hiding debt creates the illusion that the firm is performing better than it actuR and confidence. The result is ally is, thereby encouraging a false sense of optimism that stock prices rise in the short term, and shareholder values increase. The CEO A Hiding Debt 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 stake5 which the company resides. In the holders, such as employees or the community in short run, this unethical strategy can produce3financial benefits for the CEO and the shareholders. In the long run, however, it is a prescription for a major crisis. 1 Enron remains the poster child for this abuse when the company spiraled down9 became known. Enron’s debt was ward after its elaborate schemes for hiding debt hidden through an accounting strategy knownBas “off-balance sheet” partnerships called special purpose entities (SPEs). These partnerships were allowable under U 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 265 266 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE $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 responsible 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 F Questionable cost cutting is theI other abuse that can arise from unethical motives. Such cost cutting is the profit motive at work and will cause some managN ers to do just about anything. Trimming costs delivers dollars to the bottom line, D safety has resulted in many examples of but doing so without regard for worker industrial tragedies. In 1976, when Warner-Lambert was introducing a new line of L chewing gum, it took shortcuts in the manufacturing area by allowing high levels E of dust near the machinery. The company could have installed a dust collection Y dust levels significantly. The cost was seen system, a move that would have reduced 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 S and necessary business activity, it was the major factor in the many deaths that resultedAfrom building the Hawks Nest Tunnel. The use of dry drilling to expedite the project time was discussed earlier. Shortening the projR the bottom line. The decision not to provide ect time reduces expenses and increases tunnel workers with respirators is especially A 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 5 for—and protecting worker safety. Perhaps making—doing what is just and fair the most famous abuse of worker safety 3 in the United States was the 1911 Triangle Shirtwaist Company fire that occurred on the 10th floor of a factory in New York 1 City. The fire spread rapidly due to the large amounts of linen and other com9 forty-six employees died, most of them bustible materials close by. One hundred immigrant women who were either B burned in the blaze or jumped to their deaths. Sadly, the fire escape routes for these employees had been locked by management U in order to prevent theft (Greer, 2001; Vernon, 1998). Some may argue that revisiting 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 flammable 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 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. Chapter 10. The Underlying Role of Ethics in Crisis Management 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 control’ 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 F to 20 years in prison after pleadclaimants. Plant owner Emmet Roe was sentenced ing guilty to manslaughter (Jefferson, 1993). Eventually, Imperial went bankrupt. I As these examples illustrate, unchecked greed comes in various forms and can hurt N other stakeholders in the process. D L The Disconnect Between Organizational Mission and Existence E Y 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 S a situation that can lead to ethiseem to lose touch with their missions over time, cal breaches. A Schwartz (1990) noted that an organization can exist to do work (its misRobservation is not just a play on sion), or it can do work in order to exist. This A area of managerial ethics. For words but has tremendous implications in the example, Barth (2010) notes that the Catholic Church operated in this mode early in its crises concerning priests who were sexually abusing children. The 5 its structure than with protectchurch seemed more interested in protecting ing the children who were victims. Rather than 3 removing the predatory priests altogether, the church chose merely to transfer 1 many of them to other parishes. Whether intended or not, the Catholic Church was communicating that the 9 the people they were appointed careers of the priests were more important than to serve. A disconnect between the organization’s B mission and the reason for its existence had occurred. U 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 problem 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 267 268 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE 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 management view themselves as independent contractors, free to do whatever they wish for their own self-interest. The Degree of Industry Vulnerability F I Some industries seem to be more crisis prone from an ethical perspective. Nand baseball have had a history of steroid For example, professional wrestling use. Professional cycling, particularly D with events like the Tour de France, has faced charges of performance-enhancing drugs among participants. The coal L mining industry has a long history of sacrificing miner safety. Indeed, the United Mine Workers of America E (UMWA) has a history of being one of the most aggressive unions in existence,Ydue 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 S rationality” (Snyder, Hall, Robertson, Jasinski, & Miller, 2006), the challenge is to determine whether an industry is more A vulnerable to a crisis because of a higher degree of unethical occurrences. The link R unethical behaviors has not been as widely between industry-specific factors and addressed, although some attentionAhas 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 5 1976). More recently, Boeing has been (Securities and Exchange Commission, plagued by a number of ethical problems, perpetuated by what has been called 3 a “culture of silence” by Boeing general counsel Douglas Bain. The culture stems 1 from a lack of speaking up on ethical issues, a problem that has plagued the com9 (Holmes, 2006). pany for a considerable amount of time B U 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. FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. Chapter 10. The Underlying Role of Ethics in Crisis Management 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 countries 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, F the act does allow some cash payments, called “grease payments”—smaller amounts of cash used to encourage I foreign officials to do what they are supposed to do anyway (Carrol & Buchholtz, N payment used to entice a foreign 2012). A “bribe,” on the other hand, is a large cash official or agent to do something not normally D done in the course of business, such as buying from a particular vendor. L As companies expand globally, the temptation to use illegal cash payments increases. Wal-Mart recently found this out E in its expansion efforts in Mexico. An April 22, 2012, New York Times article broke Y the case involving bribe payments 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 development in the Mexican market. The formerSexecutive, Sergio Cicero Zapata, had worked for Wal-Mart until 2004 in the company’s real estate development A department (Barstow, Xanic, & McKinley, 2012). Two retirement systems, the California State Teachers Retirement System R (CalSTRS) and the New York City Pension system, have sued Wal-Mart for mishandling the bribery allegations and A covering up the details of the investigations (“NYC pension funds,” 2012). 5 The Possibility That a Defective Product Will Emerge From a Foreign Country3 1 Two problems result when a defective product emerges from another country. 9 Mattel found this out in 2007 First, the product itself can pose a danger. Toymaker when it had to recall more than 22 million toysB manufactured in China due to high levels of lead and other toxins (Barton, 2008). U 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 269 270 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE 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 F Claiborne, and Disney are large, high-profile companies that have been linked with sweatshops in the past. I Sweatshops are the ultimate “guilt by association” crisis. Although some progN ress has been made in recent years to improve working conditions in developing D anytime soon. Although a company can countries, the issue will not go away “require” its subcontractors to abideLby certain working condition standards, the enforcement of these standards can be difficult. Typically, independent monitors E in plants that are supposed to be comare sent to investigate working conditions Y this system is not foolproof, as inspectors pliant with certain standards. However, 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 strategySwas meant to communicate to the inspector that everything was fine at the plantA (Frank, 2008). Despite inspection monitoring, even companies with good ethical reputations R clothing from the retail chain The Gap was can encounter problems. In 2007, some traced back to sweatshops in India. A In this example, children as young as 10 years of age worked 16 hours a day to produce the garments (Hansen & Harkin, 2008). 5 Strategic Planning: 3 Confronting the Ethical Boulders 1 9 The strategic planning process should generate initiatives to improve the ethical cliB mate of the organization. Improving this climate can reduce the company’s vulnerU efforts should be directed to generating ability to an ethics-related crisis. Specific enthusiasm for crisis management and training, focusing on the prevention of ethical 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 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. Chapter 10. The Underlying Role of Ethics in Crisis Management plan (CMP) and the subsequent training that accompanies it will only draw negative perceptions from employees, suppliers, customers, government agencies, and the general public when a crisis does occur. Nobody thinks favorably of an organization 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 training must also be present. For this reason, the organization should seek a crisis management 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 saying that top management should always support the firm’s crisis management efforts. F I The Ethical Culture of the Organization N The best approach to dealing with an ethicalDcrisis is to prevent it from happenL seeks to address events in the ing in the first place. An ethical rationality approach life of the organization from a morally drivenE response perspective (Snyder et al., 2006). However, to a great extent the organizational culture dictates how ethical or Y (Heineman, 2007; Vallario, 2007). unethical decision making will be in the company For this reason, a cultural change in the organization , is also necessary to improve ethical decision making. Changing the culture of an organization requires unseating the deep thought patterns that have prevailed in previous years, particularly if those patterns of behavior are unethical. Even S Enron had a code of ethics, but the culture of the company overshadowed the significance of that code. Likewise, the A failed accounting firm Arthur Andersen produced an ethics video series once used R in U.S. business schools (Fombrun & Foss, 2004). Changing the culture of an organization is a 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 stan5 dards in any business decision. All cultures look to upper-level management for cues to right and wrong behavior in the organization3 (Trevino, Hartman, & Brown, 2000). Table 10.4 overviews the best practices companies1take to change their ethical cultures. 9 B The Existence of Government Regulations U 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 regulations 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 271 272 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE 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. F Providing an ethics hotline Employees I have a person or department within their organization to whom they can report ethical N A hotline can also offer guidance on violations. specific Dethical issues an employee may be facing. Requiring that top Executives L in top positions in the company—the management articulate and CEO, president, and vice presidents—need to set the ethical example realizeEthat lower-level managers get their cues on ethicalYmatters 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. S Unrealistic goals encourage unethical decision making because managers may feel they must A cut corners to attain the goal. Disciplining for ethical violations WhenR an ethical violation is discovered, the company works quickly to correct the situation A and punish the person responsible. Scheduling regular ethics audits As in a financial audit, the company periodically checks5itself in a systematic manner to see if it is following proper ethical guidelines in its business 3 processes. Appointing of chief ethics officers Ethics1officers who serve in top management are being9 used in some larger companies. Such officers may report directly to the CEO and the board of B Their charge is to promote the ethical directors. standards U 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 domestically (Salkin, 1997). Although the company thought its deed would go unnoticed, a FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. Chapter 10. The Underlying Role of Ethics in Crisis Management 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 F levels to a minimum (Cherniak, required practice because this procedure kept dust 1986; Tyler, 1975). Testimony before the U.S.I Congress revealed that employees were posted to watch for incoming mine inspectors (Comstock, 1973). When the N arriving inspectors were “announced,” wet drilling would begin until the inspectors D to expedite extraction. had left the area. Dry drilling would then resume L E The Existence of Industry Standards Y , for their members to follow. The Industry standards are often set by associations 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 S (Vernon, 1998). Such efforts have association as the minimally acceptable standard also been referred to as self-policing (Becker, A 2006) or self-regulation (Hemphill, 2006). Certain professions—including physicians, R attorneys, college and university professors, engineers, pharmacists, and accountants—also have standards for their A members. Guidelines for ethical conduct can be proposed by industry associations. In 2001, an industry group of 14 Wall Street firms 5 established ethical conduct standards governing compensation and stock ownership for analysts. This move was 3 Goldman Sachs, Merrill Lynch, prompted by some of the industry leaders, including and Morgan Stanley Dean Witter, to address emerging ethical problems (Carroll & 1 Buchholtz, 2003). In another example, Financial 9 Executives International (FEI) requires all of its members to review and sign a code of ethics. They also recomB copy to the company board of mend that the financial executive deliver the signed directors. FEI has become a model for companies U seeking to comply with SarbanesOxley 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 “ethical sourcing” or “compliance monitoring” link on their company websites, suggesting that they monitor the actions of their foreign suppliers (Frank, 2008). However, compliance can be a game, as one sweatshop inspector noted: 273 274 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE The simplest way to play it (the game) is by placing an order with a cheap supplier 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 factories, 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. F I Crisis Management: Further N Considerations During an Ethical D Crisis L A crisis should be managed in an ethical manner. “Decision-makers who underE stand the needs of a wide range of stakeholders as part of their strategic decisionmaking will make more ethical decisions Y 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 rationality involves the careful management of the organization’s internal and external stakeholders throughout the crisis. S A The Management of InternalRStakeholders A 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,5straightforward manner. Employees are often forgotten in the ordeal. It is important 3 they receive truthful and timely information updates as the crisis progresses. 1 As for the owners, it should be acknowledged that the crisis may manifest itself in the form of financial loss. If the 9 shareholders are geographically dispersed, the impact of the loss may not be felt until B quarterly reports are distributed months after the crisis commences. Likewise, if the company is incorporated with many U 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 communicate 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 supplement 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 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. Chapter 10. The Underlying Role of Ethics in Crisis Management 275 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 F organization’s website can be an untrue (Coombs, 2007; Gross, 1990). Again, the excellent vehicle for updated information on the I latest developments of the crisis. Setting up a link on the website that directly addresses the crisis is a good practice. N Management should also take advantage of Twitter, a social media tool. With D to its followers on an update to Twitter, the company can send a quick message the crisis. The messages can be linked back to L the company’s website, where more detailed information on the crisis can be accessed. In addition, Twitter hashtags can E tweets on a topic related to the be created to help readers sort through the previous Y crisis (Deveney, 2011). , Organizational Learning: S Lessons From the Ethical Crisis A R Recovering from an ethical crisis requires a commitment to pursue better behavior in the future. But not all individuals involved A 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 5 incident to begin with, and to continue with aboveboard behavior in the future. 3 1 9 The Evaluation of the Ethical Management Process B Organizations guilty of moral lapses are usually caught in the process. Unlike a U 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 276 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE 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 notF the firm is at fault. Other stakeholders will be more rational and will see the crisis from I a more realistic perspective. In their minds, the organization may not have experienced an unfortunate negative event. Either way, N company management needs to communicate that it is doing everything it can to learn from each crisis and to improveD at making ethical decisions in the marketplace. Of course, management should not L only communicate this message—the message should be sincere. Again, the external stakeholders are trying to rationalize this quesE tion in their minds: “Can we trust the company?” Y , The Commitment to Organizational Learning S of organizational learning after a crisis. Chapter 9 focused on the process Crises involving ethical breaches should A not be repeated. Once an ethical crisis has been resolved, the organization must commit itself to a learning process that R seeks to avoid repeating the mistake. Unfortunately, crisis management history A to a “defense-and-attack” mode (Nathan, teaches us that some companies resort 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 5 that was surgically inserted into the uterus. When recipients of the Shield became 3 the victims and questioning their sexual sick, the company resorted to attacking practices and partners (Barton, 2001; 1 Hartley, 1993). This is no way to fight a crisis, and A. H. Robins paid dearly in the end by enduring an endless onslaught 9 of consumer lawsuits. B It is also not appropriate for a company to attack its suppliers publically as the cause of the problem. While the problem U 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 supplier 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 getting rid of the executives and managers who caused the problem in the first place. New controls may need to be implemented as well. FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. Chapter 10. The Underlying Role of Ethics in Crisis Management 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 manufacturers in the United States. The settlement required the companies to pay billions of F to alleviate the burden on the dollars to the state governments each year, ostensibly state health care systems (Thorne et al., 2003). I In terms of industry renewal, there has been aN decline in tobacco advertising aimed at youth and teenagers, a problem that existed during the Joe Camel advertising days D 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). L Unfortunately, the character was recognized by minors as well. One study found that E among children between the ages of 3 and 6, more than half could associate the Joe Y The Joe Camel campaign lasted Camel character with a cigarette (Shapiro, 1993). 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 S beginning a period of industrial renewal in the tobacco industry. The catalyst for industry renewal in the tobacco A industry was ultimately a push from state governments. However, some industries have attempted to change their R ethical problems before the government has had a chance to intervene. Marketing A 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 5 company’s drugs (Hemphill, 2006). The intent was to influence the prescription 3 means to achieve this goal was of process, which in itself was not unethical, but the growing concern. In response, the American Medical Association (AMA) adopted 1 ethical guidelines in 1990 on gift-giving practices. The initial responses were 9 positive, but, as Hemphill (2006) noted, a reappraisal of pharmaceutical marketing B codes of conduct needs to be performed. U The Inevitability of New Government Regulations After a major crisis, the government may impose new regulations. This is especially 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 mandates (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. 277 278 The general public is not too concerned about potential crises. Likewise, the company is not proactive in diffusing any potential crises. Public Apathy The media focuses on a crisis event and brings it to the attention of the general public. Media Attention The Progression From Public Apathy to Government Regulation Imposition of Government Regulations The government will wait for an appropriate period of time in hope that the company or industry will self-regulate. Government regulations will follow if self-regulation does not occur. Public Resentment and Outcry The general public reacts to the crisis by asserting that “something must be done” to correct the situation and keep it from reoccurring. The government responds with the creation of the U.S. Department of Homeland Security and the Transportation Safety Administration (TSA). Airline ticket sales drop dramatically after the attacks. All airlines experience financial shocks, and some eventually go into bankruptcy. The Sarbanes-Oxley Act Thousands of Enron employees (2002) is passed. lose their jobs and their retirement savings. Public outrage occurs over a number of practices, including the reporting of off-balance sheet entities. The attacks on the World Trade Center and the Pentagon are known immediately throughout the world. Facilitated by the Internet, news unfolds in real time and with an abundance of visual images. Enron becomes a household name when officials announce a restatement of earnings in October 2001. A month later, the company goes bankrupt. Although terrorist threats at airline targets were recognized by the government, passengers, and airlines, few anticipated that a jet airliner would be used as a terrorist weapon. Few people had heard of Enron since its founding in 1985, and those who had were not familiar with its business model. Example: September 11, 2001, Terrorist Attacks Enron Scandal Source: Adapted from Hartley (1993), p. 26. Silicosis legislation is passed in 46 states.1 Public sympathy is slow at first, but eventually builds momentum to the point that lawsuits and government investigations ensue. 5 3 1 9 B U In the late 1930s, media attention highlights the abuses of workers who are now dying of silicosis. S A R A The Great Depression is at its height and most people just want to work. F I N D L E Y , Example: The Hawks Nest Crisis General Description Table 10.5 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. Chapter 10. The Underlying Role of Ethics in Crisis Management 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 F of human life often launches a company into immortality. Unfortunately, this is a stakeholder memory that is hard to erase. For many I people from the Baby Boomer generation, just mentioning the company Union N Carbide immediately brings to mind the Bhopal, India, gas leak disaster that killed thousands in 1983. Indeed, a D many references to this disaster. Google search using “Union Carbide” produces The name and incident association is strong.LLikewise, the Hawks Nest Tunnel contractor Rinehart and Dennis will not be remembered for its previous successful E engineering projects; instead, its name will forever be associated with the needless Y while building the tunnel. loss of hundreds of workers who died from silicosis 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. Sassociation, while others claim the Some critics have assumed the firm was guilty by company was not involved in promoting unsafe Aworking conditions for the tunnel workers (Deitz, 1990; Jennings, 1997). Nonetheless, name recognition has a strong R emotional component; it is associated with good products and services, but it can A 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 5 many people: 3 ■ ■ The September 11 terrorist attacks forced air travelers to accept new security measures. They have also created 1 the mind-set that the ethical thing for companies to pursue is the safety and 9 welfare of their customers. This viewpoint was implied in the past but today B is expected from companies in safeguarding their people. U 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 manufacturing back to the home country. 279 280 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. 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 production 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 government 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. F I Bertrand and Lajtha (2002) have concluded that all crises can be interpreted as N signs of a loss of trust. If this statement is true, then the ethical repercussions are D matter the crisis, some stakeholders will feel enormous. What this means is that no a loss of trust in the organization. L Consider these examples when the party obviously at fault is not included in the E back onto the organization. The counblame equation, and yet blame is deflected Y are often raised by the media or can be seen tering questions that follow each event on blogs when similar events occur. , The Problem of Loss of Trust ■ ■ A recently fired employee walks into his former place of work and kills his supervisor along with several other employees: Why was the employee S allowed back on the premises? What did the company do to make this A employee so agitated? An employee is killed on his R factory job because he did not follow standard procedures in performing a work task, thus leading to the fatal accident: A Why did the company hire this person in the first place? How many similar accidents have occurred at this workplace? Why did the company not enforce its own procedures? 5 Responses like these are common 3 when a crisis occurs. In an attempt to make sense out of what has happened, many 1 people will cognitively distort the situation and assign an ethical cause to the crisis; in their minds, the cause is often the organization. Bertrand and Lajtha’s9comment about the loss of trust is based on a perception. Nonetheless, perceptions B can influence behavior more than reality. Hence, ethical decision making mustU 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 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. 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. 1. 2. F I Questions for Discussion N Provide an example of an ethical problem D that has occurred either where you currently work or have worked in the past. L Using the crisis management framework E (Table 10.3), conduct a landscape survey and determine the current status of potential ethical issues in your Y present organization and in the industry in which your company operates. , 3. Identify a well-known crisis event that involved an organization that violated an ethical standard but did not actually break the law. What defense did the organization provide for its behavior? S What could the organization have done differently? 3. 4. A How can the ethical culture of an organization be improved? R Why is the example provided by top management so important in promotA ing the ethical culture of the organization? 5. What examples of major crises illustrate 5 how government intervention can help prevent a similar crisis in the future? Consider Table 10.5 as a starting 3 point in your discussion. 1 9 B U 6. Why is a crisis also a symbol of a loss of trust in the organization? 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 onepage 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.)? 282 FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. 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 middlemen 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 F Sanlu management was unaware of the milk for use in its baby formula. Initially, melamine presence in the product. However, some Sanlu staff eventually discovered I the melamine but continued to produce and distribute their baby milk formula, N even months afterward (DeLaurentis, 2009). The case is reminiscent of Beech-Nut’s D chapter, of fake apple juice concentrate that 1979 discovery, discussed earlier in the it had unknowingly purchased from Lone of its suppliers (Hartley, 1993). Rather than abandoning the supplier, Beech-Nut executives continued to use the supplier E covertly and eventually found itself in the midst of a major crisis. The fallout from the Beech-NutYapple 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. S feeding their baby milk produced by the The parents told doctors they had been Sanlu Group. Within two months,A 14 infants with similar problems had been admitted to the hospital. Other cases were reported in provinces of the Ningxia Hui R Hubei, Shanxi, Jiangsu, Shandong, Anhui, Autonomous region, Shandong, Jiangxi, and Hunan. All of the affected infants Ahad 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 5 Health Organization (WHO) reported much wider geographic area. The World more than 54,000 children in China 3 had sought medical treatment, with four fatalities reported (Schlein, 2010). In other countries, reports of the melamine 1 scandal began to surface. Bans on the Chinese-made milk products were reported 9 in Japan, Malaysia, Bangladesh, Tanzania, and Gabon. The 27-nation European Union also put a ban on all baby food Bcontaining Chinese milk (Long et al., 2010). The Sanlu Group moved slowly in its response to the crisis. In fact, even before U 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, FOR THE USE OF SAVANT LEARNING STUDENTS AND FACULTY ONLY. NOT FOR DISTRIBUTION, SALE, OR REPRINTING. ANY AND ALL UNAUTHORIZED USE IS STRICTLY PROHIBITED. Copyright © 2014 by SAGE Publications, Inc. Chapter 10. The Underlying Role of Ethics in Crisis Management 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 F Zhang Zhenling, Sanlu’s vice much criticism from Chinese parents and the public. president, delivered an apology letter on behalfI of the company at a news briefing on September 15. The apology expressed regret and included a declaration to recall N all the infant milk powder produced prior to August 6, as well as an optional recall D concerns about sick infants. The for milk produced after that date if consumers had late apology and the dismissal of Sanlu president L Tian Wenhua did did not satisfy the public sufficiently, and many citizens lost confidence in the Sanlu brand (“Four E officials sacked,” 2008). Within four months of the scandal going public, the Sanlu Y Group declared bankruptcy. , Mini-Case Questions 1. S The Sanlu case illustrates how a supplier A can be the cause of a crisis for the affected organization. However, blaming the supplier instead of taking R responsibility is not an acceptable strategy in the eyes of the general public. A Why do you think this is the case? 2. This case also illustrates the problem a company like Fonterra can face 5 other countries. Identify other when it partners with companies in examples of a partner company being 3 drawn into a crisis as a result of the actions of another company. 1 3. From a cultural perspective, it is important for students to know what hap9 pened to some of the executives involved in the scandal, because penalties B extreme by American standards. for the Sanlu Group crisis were rather Conduct an Internet search and find out U what happened to the executives and managers involved in this scandal. 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