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Causes of organizational crises are so predictable

01 Jun, 2020 Issues and crises

This article was originally published in 2015 and has been completely updated in 2020.

 

More than two thirds of organizational crises are predictable – because they are largely created by management’s own actions or inactions. Over the past decade, this consistent fact has been revealed by the Institute for Crisis Management’s crisis monitoring. Mismanagement is the biggest cause of crises, accounting for around 25-30% of cases of smoldering issues that have erupted into full-blown crises.

These crises comprised professional malpractice, misappropriation of resources, misconduct, negligence, collusion and unethical or questionable practices that adversely affected the organization. Well-known examples include Boeing aircraft production practices, Wells Fargo banking practices, European auto manufacturers who cheated on US diesel emissions tests, and Elizabeth Holmes of Theranos, who committed major financial fraud in raising investment funds for her newly launched company in 2018.

Other most common causes of corporate crises identified in the latest ICM media monitoring in 2018 include discrimination (14%), cyber crime (13%), labor disputes (9%), sexual harassment (9%), natural disasters and catastrophes (8%), white collar crime (5%), and whistleblowing (5%).

In view of the smoldering nature of most crises, your organization has the opportunity – and time – to review your vulnerabilities and develop strategies to address the priority situations that would cause the most damage. Vulnerability to crises obviously varies according to the sector. For instance, the financial sector is the most prone to cyber attacks. Generally the most crisis-prone industries are banking and financial services, technology, automotive, transportation, pharmaceuticals, food, health care, manufacturing and government agencies.

It is important to monitor your internal and external operating environment to gain intelligence on what your organization is facing, and to learn from the experiences of your peer organizations. Then you can do the groundwork to reduce the odds of issues developing into your future crises.

How problems become issues, which can become crises

Many situations start as problems. You can solve problems by making decisions and taking action. To solve is to identify the core difficulty, and to find the answer or solution. You know there is a definite answer.

On the other hand, issues need to be resolved.  To resolve is to analyze the various components of a matter, then decide on a course of action. Simple solutions or a ‘right answer’ are seldom available. This means using your judgment to take action from a range of alternatives, all of which will have different combinations of risks and benefits. To resolve issues you need to define and clarify the issue; to set a clear and agreed objective; and to develop and implement effective strategies and tactics. Just be aware that some managers describe every challenge they face as an ‘issue,’ so be prepared to do your own assessment of each situation.

A stakeholder is an individual or group who can affect or is affected by an organization, strategy or project. No organization can operate successfully without the direct or indirect support of its stakeholders. A stakeholder can be internal or external, in a senior or junior role. A stakeholder has a vested interest – ‘a stake’ – in what happens in your organization, and so they have something at risk, and therefore something to gain or lose as a result of corporate activity. When there is a gap between stakeholder expectations and corporate practice and policy as expressed by management and in corporate communication, an issue is created. Issue management is the process used to close that gap to align the organization more closely with stakeholder expectations, according to the Issue Management Council.

Issue management deals with potential risks that arise over a period of time to your organization’s strategic, commercial and reputational interests. A ‘trigger’ event can be ignite an issue into becoming a crisis if these risks are not monitored and addressed systematically. Issue management has the same overall goal as crisis management – to protect your organization’s ‘license to operate’ – but you usually have more time and flexibility on what you can do. Issues can usually be tackled in the normal course of business.

Strategic issue management is a multi-functional discipline that deals with the common ground between the organization and its key stakeholders. The principles of issue management apply just as much to small business and non-profit organizations as well as government agencies and activist groups. These principles essentially deal with legitimacy and power, according to Professor Robert Heath, an expert in this field. Issue management may be perceived as less pressing than crisis management, but an unresolved issue can escalate into a crisis. Why manage a predictable crisis tomorrow if you can resolve the issue today?

A business crisis is any issue, problem or disruption triggering negative stakeholder responses that can impact on your organization’s reputation, strategic business objectives and viability. Although reputation is a ‘soft’ concept, marketplace realities can mean a reputation is the most important asset of an organization, especially with big brands. There are many cases of public companies losing millions, even billions, of dollars in market value due to loss of reputation resulting from an organizational crisis. Just look at the cases of Facebook, Apple and Google as recent examples. My article, “Social media is causing reputation crises to hit twice as hard,” discusses this in more detail. Crisis management is about retaining the support of your stakeholders during tough circumstances.

Develop strong relationships with your key stakeholders

One of the most important things you can do minimize the odds of a crisis striking and the subsequent impact is to thoroughly review your relationships with your key stakeholders. Investing in the time and resources to establish sound, long-term relationships with these stakeholders will pay off. These are the decision-makers and influencers who have the most impact on the future of your organization.

Stakeholder relationship management should be a priority task. Stakeholders can be assessed and prioritized according to their impact on your organization. No organization has enough resources to engage in a full dialogue with every stakeholder, so you need to allocate resources in priority order. Once you have established a priority list, you need to maintain consistent contact with those people for a positive ongoing relationship. The nature and industry of your organization will be the deciding factor for much of this relationship activity. Top management needs to decide on who takes responsibility for maintaining these relationships and supporting the role. If not, you will find your organization is ill-prepared to minimize the possibility of issues developing into crises.

Typical stakeholder groups

  • Adversarial groups
  • Bankers
  • Business leaders
  • Community leaders
  • Consumer action groups
  • Contractors
  • Creditors
  • Customers/clients
  • Directors
  • Employees at all levels and locations
  • External advisers/consultants
  • Financial markets
  • Government regulators and utilities
  • Insurance companies
  • Shareholders
  • Law enforcement agencies
  • Neighboring businesses and residents
  • News media
  • NGOS – relevant
  • Politicians – relevant
  • Social media audiences/participants/followers
  • Suppliers
  • Unions

Employees are your most important stakeholder group, so don’t take them for granted or you will regret this during crises. Notice that these stakeholders are invariably much more important in the long run than social media audiences for organizations whose main business is not based on brands.

How vulnerable are you to a crisis?

How well can your organization handle a crisis? Read my article, “How vulnerable to a crisis are you?” to find out how to conduct a vulnerability analysis for your organization.

About Kim Harrison – author, editor and content curator

Kim Harrison, Founder and Principal of Cutting Edge PR, loves sharing actionable ideas and information about professional communication and business management. He has wide experience as a corporate affairs manager, consultant, author, lecturer, and CEO of a non-profit organization. Kim is a Fellow and former national board member of the Public Relations Institute of Australia, and he ran his State’s professional development program for 7 years, helping many practitioners to strengthen their communication skills. People from 115 countries benefit from the practical knowledge shared in his monthly newsletter and in his books available from cuttingedgepr.com.

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