How to manage a corporate crisis

October 6, 2014

How should companies manage a crisis? Tesco is the latest large corporate to go through the wringer after it revealed last month that it had overstated its half-year profit estimate by 250 million pounds. The Financial Conduct Authority has started a probe and speculation is swirling that the UK retailer may need a rescue rights issue.

Tesco’s travails offer a case study about what to do (and what not to do) when disaster strikes. Two other big UK corporate crises – the ones that afflicted Barclays following the Libor interest-rate scandal in 2012 and BP after its Macondo oil rig blew up in 2010 – back up these lessons.

The main one is to take things seriously and apologise. Tesco is doing better on this score than either BP or Barclays did. The UK retailer immediately suspended four senior executives and called in an independent firm of accountants to investigate. A month earlier, after an earlier profit warning, it cut its dividend by 75 percent.

One of BP’s mistakes post-Macondo was to try to hang onto its dividend. As crude spewed into the Gulf of Mexico and U.S. politicians including President Barack Obama lambasted the company, this became politically and financially impossible. But by then, BP had lost credibility with investors and the public.

Both BP and Barclays also tried to keep their chief executives for too long. They mistakenly thought they could ride the storm. Eventually, both Tony Hayward, the BP boss, and Bob Diamond, his Barclays counterpart, had to quit. But in the process the reputation of the rest of the board was tarnished.

In Barclays’ case, the chairman, Marcus Agius, bizarrely tried to take the heat off his chief executive by resigning himself. He was put firmly back into his box by Mervyn King, then Bank of England governor, and Diamond quit instead. Agius himself left soon after.

With Tesco, there is no question of Dave Lewis, the chief executive, having to quit as he only joined last month and so bears no responsibility for the profit misstatement. However, the position of his chairman, Richard Broadbent, who has been there for three years, is not secure. He may yet have to leave despite saying he wants to be part of the solution.

One of the criticisms of Broadbent is that he hasn’t communicated well. In particular, he said “things are always unnoticed until they are noticed.” This sophistry made it look like he was making light of the problem or, at least, trying to avoid responsibility for it.

But this was not half as bad as some of Hayward’s gaffes post-Macondo. The BP boss said the spill was “relatively tiny” compared to the “very big ocean.” In a moment of exasperation, he also said he wanted “my life back.” That didn’t go down well after 11 workers had lost their lives. Hayward also attended a sailing regatta shortly after the disaster. In a crisis, the top team needs to focus 24/7 on solving the problem.

Carl-Henric Svanberg, the BP chairman, also made gaffes including describing the people of Louisiana, where the oil spill reached land, as “small people.” But he managed to cling onto his position, in part because he had only been chairman for three months and so couldn’t be blamed for its past failings.

But how a company fares in a crisis is not just a function of how it behaves when the balloon goes up. Disasters typically reveal long-standing weaknesses in governance, culture and business models. The leadership’s ability to survive often depends on whether it has reserves of goodwill with key stakeholders.

Here Tesco is in a weak position. It engaged in a long period of aggressive international expansion and diversification into financial services. Not only were many of these ventures poorly thought out; the group milked its core UK business to fund them at a time when it was facing heightened competition from discount retailers.

Part of the case against Broadbent is that he took too long to remove the last chief executive, Philip Clarke, and that he didn’t do enough to ensure there was adequate talent both on the board and in the business. Astonishingly, no director has retail experience, suggesting the board was ill-equipped to understand what was going wrong. The company was also operating without a finance director for five months this year. Tesco has now moved to remedy these weaknesses with the appointment of the former Ikea boss as a non-executive director and the accelerated arrival of the former Marks & Spencer finance director as its chief financial officer.

The governance weaknesses were, if anything, even greater at Barclays. Diamond had been allowed to amass a huge amount of power even before he became chief executive. Agius wasn’t an effective counterweight.

A low reserve of goodwill was also a big reason why Barclays was so badly hit by the Libor scandal. Shareholders were furious that Diamond had just pocketed a big bonus despite himself admitting the bank’s results were unacceptable. Politicians were unhappy at Barclays’ aggressive tax-avoidance schemes for clients. And its main regulator thought it was often pushing the envelope on what was acceptable.

Tesco isn’t in as bad a situation. But last year’s revelation that it kept four corporate jets didn’t go down well with shareholders given that its performance was already flagging. The news, reported by the Financial Times at the weekend, that the retailer has recently taken delivery of a new Gulfstream jet worth $50 million has rubbed salt into the wound. At least, it is now committed to selling the entire fleet.

Crisis management is an important skill. But the bigger lesson from Tesco, BP and Barclays is the importance of having good governance before the crisis hits.

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