Articles

Unpredictable But Not Unmanageable: Ensuring that a Corporate Crisis Does Not End in Corporate Ruin

December 4, 2013

Panelists:
Jim Barron
, Managing Director, Sard Verbinnen & Co
Eric Laptook, General Counsel, Itochu International Inc.
Kentaro Tsuboi, Senior Consultant, Freshfields Bruckhaus Deringer US LLP
Timothy Wilkins, Partner, Freshfields Bruckhaus Deringer US LLP

On December 4, 2013, a distinguished panel of attorneys and specialists in crisis management gathered at Japan Society to share their insights on how to pilot the (hypothetical) U.S. subsidiary of a Japanese company (also hypothetical) through a major corporate crisis.

The Crisis
Timothy Wilkins of Freshfields began. "Good morning everybody. I have some good news for you. You have all just been promoted to become the CEO of Tanaka, Inc., a global trading company headquartered in Tokyo."

"Among Tanaka's worldwide assets is an oil rig in the Gulf of Mexico. It's 3 AM in Tokyo, and you—as the CEO—have just had a phone call from the plant manager, who tells you that there's been an explosion on the rig, and an oil spill, and fatalities. And he's got to go. He's hanging up the phone."

A Flood of Questions

Mr. Wilkins continued his narrative:

● Press contacts start calling. How do you as CEO respond?

● Police and public safety officers arrive at the rig. They take photographs, ask for documents and question employees. Do you tell management that it's okay to cooperate with them at the site?

● Investors call. 'The stock is trading wildly. Why isn't the company saying anything?' Do you make an announcement? What do you say?

● Analysts call; you get a call from a family member of someone who died at the rig; UN officials call you, concerned about the environmental impact; customers contact you, worried that you won't be able to fill their orders.

● U.S. government officials call because their representatives in Congress are pressing them to break off business ties with Tanaka.

● Your insurers call: they might not cover your consequential losses.

● Your lenders call: they might have to pull your funding if this is a material adverse change under the loan documents.

● Employees and unions in other countries want to talk about safety at your facilities in their respective regions.

"Now we’ve just discovered that there’s an internal email... warning about risks involved in a cost-cutting program that you, the CEO, very cleverly thought was going to help bring more profits to your business, and that cost-cutting could have led to the accident."

"Now there are investigations. There’s a dawn raid. The government officials are pounding at the door saying, 'We’re going to come in and start seizing all the documents.' Do you cooperate? Do you let them in?"

The Crisis Management Team
"Fortunately you have a panel of experts sitting up here today who can assist you in what is going to be some pretty bad news and a pretty tough day for you," Mr. Wilkins declared.

"If I’m sitting in New York as the general counsel, the first thing I’m going to do is take a deep breath, and then I am calling my CEO" in Tokyo, said Eric Laptook, general counsel at Itochu's American subsidiary, Itochu International.

Next, "we’re going to assemble our crisis management team as quickly as possible to sit down and try and understand what we know about this situation."

On the team are the U.S. company's CFO, CAO (chief administrative officer), chief legal officer and chief risk officer, plus the heads of regulatory affairs and corporate planning (or investor relations if the Japanese parent is listed in the U.S.).

"There should be a lot of contact between that crisis team and the CEO" even if he or she isn't a standing member of that team. As U.S. chief legal officer, Mr. Laptook said, he "would certainly want to be... very close to the top of leading this... As the general counsel, I want to be fashioning the statement, the position, and having as much input as possible."

Early On: Fact-Finding, Litigation Hold, and Hiring Legal and PR Counsel

First and ongoing, the crisis management team spearheads fact-finding, Mr. Laptook said.

As general counsel, he issues a litigation hold across the company, "to make sure there are no documents that are destroyed, whether electronic or hardcopy." Even moving email from an inbox to a delete box is forbidden, in case there's an automatic sweep in the system that regularly destroys deleted items.

As general counsel, Mr. Laptook also retains outside counsel. He has on hand a short list of major firms, like Freshfields, with the ability to handle many different areas of the law and to serve the company in multiple jurisdictions, so he's able to do this at once.

The crisis team hires an outside public relations firm with extensive resources and experience in helping companies in crisis situations.

Communication

Certain communications-related things can and should be done in advance, said Jim Barron of PR firm Sard Verbinnen & Co: Make "a list of all the right people [to get] in the room very quickly so that you can establish the facts," and "understand what your communication channels will be and who you'll need to communicate to rapidly."

As CEO of a company with oil-drilling operations, you can be aware that a disaster like this "might happen, but you can’t necessarily foresee when it will happen. But you can have some things like prepared statements or holding statements so that in the initial phase of communication there isn’t a complete vacuum of information."

Quoting Winston Churchill, Mr. Barron said, "A lie is halfway around the world before the truth has got its pants on."

He added, "The big challenge.... is to communicate as much as you can within the facts that you have, but not get ahead of where you are, because you don’t want to say something that you then have to retract. An initial statement might be something like, 'We’re aware of the situation. We’re working to get to the facts. We’ll provide more information as those facts become available.'"

Thus "you don't want the local folks immediately commenting" to the media or posting things on social media. It's best to "have an understanding of that in advance of the crisis. But certainly at a crisis you need to make it clear that all media inquiries need to come to the press office, or investor inquiries to the investor relations office."

What about the official investigation? "We always cooperate" Mr. Laptook said. "And certainly in a public statement we would say we’re cooperating with the authorities to the extent that they’re involved. I think that’s very important to get that message out."

Reputation, and U.S. Views on Apologies
There've been fatalities at the rig, and "right now Tanaka, Inc. is looking like a pretty bad actor. What type of information are you getting out to just sort of keep the reputation appropriately out there?" Mr. Wilkins asked.

"The time to educate is in advance of a crisis," Mr. Barron replied. "You can educate people about your firm, about the things that you do, the safety measures that you take. And if you do that properly, that will protect you in a crisis situation."

Kentaro Tsuboi, a senior consultant at Freshfields, spoke on the importance of apologies in Japan. An apology by management in Japan is "very important," lest the company be seen as arrogant and insincere. Yet there's a way of apologizing without "necessarily admitting to gross negligence or responsibility."

"I certainly would hope that the wording of the apology, if there is one, is passed by me," Mr. Laptook said. "You can apologize without admitting guilt," which is "kind of the bottom line."

"It's perhaps a little early for an apology" at this point, he added. "What needs to be done at this point very early in this crisis is there needs to be reach out to the families.... I’m certainly going to advocate strongly that until we know exactly what happened and why, we should hold off on the apology."

In the recent accident on the Metro North railroad, "we've heard expressions like 'deeply regret the loss of life,'" Mr. Wilkins noted. "I don't think in the United States you would expect more than that," agreed Mr. Laptook. "There's not the same cultural undercurrent that you have in Japan for an apology."

Lender's Questions

Lenders, shareholders and regulators will ask a lot of the same questions, Mr. Tsuboi said:

● Which specific legal entity is facing the crisis? Is it the Tanaka Corporation itself, or the U.S. subsidiary of Tanaka Corporation, or possibly a special-purpose vehicle established to raise financing for the project?

● Which entity is the borrower? Is there a guarantor? If the borrower is the parent in Japan, liquidity in the short run may not suffer. In the longer run, solvency may be an issue, given the potential for "hundreds of lawsuits involving hundreds of billions of dollars."

● If the event represents a material adverse change, should a lender declare the borrower in default? The answer may differ if default under this loan agreement triggers default clauses under other agreements with other lenders.

● If the loan is still disbursing, should the lender extend additional credit, or stop that disbursement?

● Have financial covenants been breached? "If that incident is going to mean that the operation will be suspended for some time," the borrower may be in violation of a debt coverage ratio covenant.

● Does the lender risk being held liable for contamination cleanup under the Superfund Act? Does the lender have day-to-day control of the company, calling into play concepts of lender liability?

● Have major contracts with suppliers and customers been breached? If so, that may be a default under the loan agreement.

How Big a Crisis?

The "how big?" question is important from the very start, Mr. Barron said. "How much do I need to communicate? Do I need to communicate to all my customers? Do I need to communicate with all my employees? Or do I just need to make sure that if a manager is asked a question can they answer it? If a customer-facing person is asked a question by a customer, can they answer it? ... You don't want to over-communicate and turn a small crisis into a major PR problem."

Many crises are "so fluid that it’s more important to get the right team together than it is to have a crisis-communications plan that’s this thick."

Mr. Laptook quoted an earlier remark by Mr. Barron: "Your most important crisis preparation document is the list of phone numbers of the people on the team, and it's one page."

More on Apologies
"Let’s just suppose Mr. Sanchez and Mr. Sato were killed on this rig," Mr. Wilkins said. "Mr. Sanchez is an American national and Mr. Sato is a Japanese national, and I see on YouTube an apology to Mr. Sato’s family, but not to Mr. Sanchez’s family."

"I wouldn't advise that they only apologize to the Japanese family," Mr. Barron said.

"But we said earlier that that might be the right thing in a Japanese company," Mr. Wilkins objected.

"I think it’s appropriate to apologize in Japan for any loss of life as it is appropriate in America to say, 'Our sympathies and our thoughts and prayers go out to the families of the victims.' I don’t think that people are necessarily looking for apologies in the U.S. They’re looking for what happened, what are you doing about it, how are you going to look after the victims’ families," Mr. Barron responded.

Investigations and Lawsuits

Our Tanaka hypothetical "implicates every kind of legal proceeding you can possibly imagine," Mr. Laptook said, from regulatory investigations on environmental issues, criminal investigations by the U.S. attorney, and suits brought by the plaintiffs' bar.

The attorney-client privilege will protect some documents from disclosure, though "guarding that privilege is really difficult," he said. You'd think communications within the company's own legal department should be privileged, but that doesn't always prove to be so. The email from the CEO to the CFO about safety issues in the cost-cutting program is not privileged.

"It’s vitally important that you understand your company’s system architecture so that you know where information is, where documents are, how to get them," he added. "Remember, what killed Arthur Andersen was shredding documents. It wasn’t that they did anything wrong."

If you find that there have been some failures on the company's part, how do you handle that? Won't you be sued if you talk about it publicly?

"You’re probably going to get sued anyway, whether you say it or not. I think at the end of the day you can’t hide from the facts," Mr. Laptook said. "If you have bad facts, you’ve got to deal with bad facts."

Nemawashi

Allowing time for the process of consensus building, or nemawashi, means that "the company can take full responsibility with all the people on board" who "may have a voice in the matter," Mr. Tsuboi said. "In a way that’s also the way to diffuse responsibility as well. That's the reality."

Mr. Wilkins commented, "I'm just concerned about the timing, the speed, the communication" vis-à-vis "Japanese headquarters, and what's going on on the ground."

To minimize the risk of different decision-making processes and speeds, Mr. Tsuboi commented, setting up and documenting policies and procedures before any crisis arises is indeed helpful.

The CEO needs to come to the site at the appropriate time, Mr. Barron said. You need to first get "a real clear handle on the facts." But "to show that you care and that you’re in control of a situation, you can’t sit in an office in London."

And an in-person visit by members of the crisis management team is "part of the fact-finding," Mr. Laptook said. "You have to be there."

The Post-Crisis Period

Mr. Tsuboi discussed a range of post-crisis follow-up activities, including:

● Policies and procedures imposed by regulators or law enforcement
● Obligations under settlements
● Internal discipline processes
● Disclosure obligations
● Possible debarment from government contractor work
● Claiming under business interruption insurance and third-party liability insurance
● Training and mock scenarios
● Rehabilitating the company's image

Keeping up with these obligations requires careful attention. Checklists and templates for disclosures and notifications can be helpful.

What if it turns out that it was a third-party contractor whose blunders caused the failure? "You have to be very careful about pointing the finger of blame at somebody else if you’re the face of the crisis," Mr. Barron said. "My experience is that you’re better taking—not blame, but responsibility for sorting things out, rather than pointing at others who might actually be responsible for it."

An outside PR firm "can help you reach out to the media, sometimes on the record and sometimes not on the record," he added. "You may not want on the record to be" pointing the finger of blame at a third party, "but you may want to make sure the media understands who is to blame. So, as an outside agency, we have good relationships with the kinds of reporters who cover this story, whereas the internal folks might not be dealing with those reporters on a day-to-day basis."

"Your strategy in that situation might be that you don’t blame that person, but you file your lawsuit and let word trickle out that way," Mr. Laptook noted.

—Katherine Hyde

Topics:  Business

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