As crisis moments go, the announcement by Home Capital Group Inc. (TSX:HCG) last Feb. 10 that it had received an enforcement notice from the Ontario Securities Commission calling out its 2014 and 2015 continuous disclosure practices couldn’t have seemed much more innocuous.
The incidents in question had taken place at least two years earlier, and Home Capital had already come clean about its problems. In July 2015, it announced it had reviewed its mortgage originations practice and terminated a number of brokers for filing false loan information—and its shares took an 18.9% hit on that release.
Of course, as we now know, rather than being old news, last February’s Friday news dump marked the beginning of a collapse that for a time looked like a death spiral. Over the next three months, the OSC went on to issue formal allegations of misleading disclosure against the company and CEO Martin Reid, founder and chairman Gerald Soloway and CFO Robert Morton; Home Capital’s market value fell 80%; Reid was fired; Soloway retired and the company scrambled to secure a $2-billion line of credit from Berkshire Hathaway to protect liquidity. Short-sellers and doomsayers were not only predicting the end for Home Capital, but for Canada’s entire overheated residential real estate market.
It was also about that time that Alan Hibben was invited to join the Home Capital board. Hibben, a former investment banker and chair of Hudbay Minerals Inc. (TSX:HBM), has endured a few crises. He was announced as a new director on May 5.
“It’s basically all hands on deck,” when an existential crisis hits a company, Hibben says. In Home Capital’s case, he and the rest of the refreshed board and revamped senior management managed to right the ship. Landing a major lifeline from Warren Buffett (the credit line, plus a proposed $400-million equity stake, later held to $153 million), and settling the OSC charges and a related class action for $30 million were the key turning points. And now, through mid-September, while its share price is languishing in the $13 range, order appears restored.
It’s too early to label this particular display of crisis management one for the business school textbooks. But it does exemplify how the nature of crises and the board’s role in addressing them is evolving in the current era. “The best boards now are talking about crisis management as part of risk management,” says governance expert Richard Leblanc, a professor at York University in Toronto.
To delve deeper into this topic and understand how directors can and should be adapting to these changes, Listed sought the views and experiences of senior board members like Hibben and other governance and crisis management experts.
The consensus take? Crisis management is becoming increasingly complex due to three key factors.
The first is speed. Thanks to the proliferation and instantaneous communication fostered through social media, “a company’s brand can be put in play in a manner of a couple of minutes,” says Leblanc. He notes we now live in a culture where “everybody has a camera,” and a crisis is only a click away. Hibben adds that Home Capital’s crisis was heightened and exacerbated by short-sellers who used social media with impunity to attack the company.
The second factor is the increase in the types of risk that companies face. Traditional risks, such as financial or disclosure risk, workplace deaths, labour disruptions and environmental spills, remain and easily threaten a company’s existence. However, experts note, that list is expanding quickly. Traditional risks are now being joined by new, more esoteric risks that used to be confined to a smattering of companies or industries.
Terrorism, cybersecurity attacks, active shooter in the workplace, environmental catastrophes (such as the Houston floods or 2011 Japanese tsunami), rogue employees, faults in the supply chain and fake news stories are becoming standard fare when it comes to crisis trigger points. “There are more things that can happen than in the past,” observes Robert Patzelt, former president and CEO of New Millennium Iron Corp. (TSX:NML).
The third factor is that corporate obligations are shifting and the definition of what’s in the best corporate interest extends beyond that of merely shareholders, which were the traditional chief concern of a board. Now boards must consider a wide range of stakeholders, from employees to government, regulators, interest groups and the general public, which adds additional risks and new dimensions, making crisis management even more complex.
“It’s a new zeitgeist,” says Maryse Bertrand, a lawyer and corporate director who was general counsel and vice-president of legal services at the Canadian Broadcasting Corp. when the Jian Ghomeshi affair exploded. She also worked on the $52-billion BCE privatization deal in 2008, when bondholders sued at the Supreme Court of Canada to stop the deal. While that ruling—which held that when considering what’s in the best interests of the corporation, directors may need to look beyond shareholders and consider the interests of other stakeholders—is most often cited for its impact on takeovers, Bertrand, who sits on the boards of National Bank of Canada (TSX:NA) and Metro Inc. (TSX:MRU), says that it also affects how boards think about crises and crisis management.
She says we are entering an era of “increased social responsibility. There’s more of a focus on a business licence to operate. Social licence to operate is not just about maximizing profit, it’s about making sure that you are leaving the environment in an acceptable way, that you are treating the communities in which you operate in an acceptable way and that you have regards to a whole variety of stakeholders that weren’t necessarily top of mind before.”
Consequently, the crises companies face today often revolve less around purely operational issues, and cut more to ethical issues and how companies manage their crisis, which goes to the core of the brand and what a company stands for. Moreover, corporate crises today are just as likely to be self-inflicted through rogue employees and bad management as they are by nefarious third parties, such as cyber hackers or shareholder activists.
Take the Ghomeshi affair, which involved both harassment allegations against a high-profile employee and charges of corporate mismanagement. Bertrand says what made that crisis particularly challenging to manage wasn’t so much the amount of news coverage, but the “self-coverage” by Canada’s public broadcaster. “Very few companies are in the business of investigating their own organizations.”
She noted that the CBC’s value of journalistic freedom clashed with management’s need to conduct an investigation that afforded employees a semblance of privacy. “That added a level of complexity.”
So what is a board’s role when a company is in crisis? How far should directors go and what do they need to do? Here are eight tips from the frontlines.
1. Check your skill set
Your board’s ability to manage a crisis begins long before the crisis emerges. It starts with the board’s skill-set matrix. How well-rounded is your board? Does it have the necessary skills to deal with emerging new risks, such as cybersecurity and social media? Hibben notes that social media was particularly challenging for Home Capital. It was a Wild West of rumour and innuendo, making it hard for the company, as a securities registrant, to respond to. “The ability to counteract, be proactive and respond to social media…is a new and emerging skill,” he says. “You like to have that on your board.”
The same can be said for the need to add technology skills in an era when privacy and cybersecurity concerns dominate the corporate landscape and regulatory agenda.
2. Prepare, and then prepare some more
Experts say that most crises can be predicted in advance, depending on the nature of your company’s industry. Leblanc says, “What a board wants to know is that the preparation has been done ahead of time. Once a crisis happens you don’t want to be scrambling.” To this end, he says boards need to prod management on what they think are the three or four worst crises that could hit their company and explain what the plan is if one arises.
Bertrand adds that roles have to be defined in advance “so you are not scrambling in the middle of a crisis trying to figure out who does what.” That means ensuring that management has a well-stocked list of experts on retainer to call on when a crisis hits, including outside legal counsel, public relations advisers and other experts, depending on the type of crisis. The last thing a board needs to deal with is an ill-prepared management team.
Trudy Curran, a director at Dominion Diamond Corp., which was recently the subject of a successful takeover bid, stresses that having a crisis plan or playbook is critical during a crisis. It should have all the appropriate contact information for the crisis management team, including things like contact numbers for key personnel, stakeholders and professional services firms. A crisis is not the time to be looking those things up.
As well, she says, having background information about directors and their strengths and skills is helpful as they may be called on to work the phones and leverage their connections.
“In any crisis, the most important thing is preparation,” agrees Wendy King, vice-president, legal risk and governance and corporate secretary at Capstone Mining Corp (TSX:CS). “Where a lot of companies need to involve their board more is in the planning for a crisis. You want to anticipate events that could happen,” says King, a former director at Via Rail.
She says Capstone has terms of reference that outline the board’s role in risk oversight. “The board’s role is to make sure the process is being followed.”
Hibben agrees that preparation is critical, but warns “there is no single playbook for a crisis.” Each event is different.
Patzelt adds that without a plan you will “take more damage,” and will be seen as “inept.” However, “relying on a plan is not enough. A board member cannot just say we have a plan and sit back. No plan survives meeting the enemy—and here the enemy is chaos. Plans are necessary but naturally imperfect.
“A board has to be informed and fully engaged” and boards “have to be far more proactive,” he says. A crisis “cannot be fully delegated to management.”
3. Test the waters
The only way to really know if a company is prepared for a crisis is to experience one. That’s why more and more organizations are conducting mock fire drills and simulations to test their performance in a crisis. This should include the board, notes King. “Boards need to be involved in that preparation.”
She has been involved in a number of “table top” exercises that mimic a plausible crisis that could hit her company. She finds it works best when “you don’t tell everyone involved it’s a mock crisis. Catching them flatfooted is better.”
It’s a practice that Leblanc applauds. “Great boards now are hiring mock social media teams to attack the company in a mock exercise to determine, ‘If we had these scenarios, how would we respond?’” he says. “Because once it happens, it’s too late.”
In this vein, King says her company recently hired an organization to come in and plant “phishing e-mails,” one of the preferred methods of entry by hackers. It allowed the company to see how many people in the organization opened the e-mails and clicked on the inappropriate links. That, in turn, spawned further educational programs.
However, be careful what you simulate, she warns. For example, she advises against doing a mock drill around a fatality. “They tend to be incredibly emotional.”
4. Scrutinize the CEO
Before a crisis happens, a board really needs to understand if a CEO is media savvy and up to the challenge, or will he or she fold like a cheap accordion when the spotlight hits. “Boards are starting to ask, ‘Is our CEO media savvy?’” says Leblanc. If not, then it might be necessary to replace the CEO, he notes, or ensure that the person is properly media trained to avoid knee-jerk reactions or a deer-in-the-headlights moment.
John Larsen, a crisis management expert at public relations firm Edelman, notes that sometimes even an accomplished CEO can be problematic. His firm maintains a “trust barometer” that measures the public’s attitude towards four institutions—government, business, media and nongovernmental organizations. The 2017 report found that the public’s trust of all four institutions is in decline and that CEOs are viewed sceptically. What this means, Larsen cautions, is that they “may not necessarily be seen as the most credible on a particular matter,” which can impact how your board should manage its crisis.
5. A strong chair is a must
While the CEO is normally the one in the spotlight in a crisis, the focus can quickly change to the board chairman or another director depending on the situation, so be ready to step up. For example, when Desmond Hague, CEO of privately held sports and entertainment caterer Centreplate was filmed kicking a dog in an elevator in 2014, the company first issued a nondescript statement that it was a “personal matter” involving its CEO, adding that the company “did not condone the mistreatment of animals.” That resulted in a public backlash and the board then placed Hague on probation, and he agreed to donate $100,000 and volunteer 1,000 hours at an animal organization. The uproar continued until Hague resigned, at which point chairman Joe O’Donnell apologized for the “distress that this situation has caused so many.” It was a classic case of a board misreading the public sentiment and violating the first rule of crisis management—make the story go away. Rather than a one-day resignation story, Centreplate’s board turned it into an 11-day all out assault on its brand.
It might also be the case that a crisis is purely confined to the board and the response falls outside of management. For example, take the recent resignation of Uber director David Bonderman, who stepped aside after making remarks that were seen as offensive to women at a time when the board was investigating sexual harassment at the ride-share company. That was purely a board matter. It can also come up in other ways, such as a financial scandal involving a director and things like criminal charges or a night on the town gone awry.
Leblanc says one way for boards to deal with rogue directors is to implement a code of conduct backed up with a pre-signed letter of resignation that can be trotted out when necessary. It’s like a morals clause for athletes, he explains.
6. Communicate, communicate, communicate
Leblanc notes that when a crisis hits, there is a “natural tendency” to adopt a “hunkering down mentality.” However, that is the “opposite of what you want to do.”
Hibben agrees, explaining that during a crisis it’s imperative that the company “communicate, communicate, communicate.” That was one of the takeaways from a presentation that Michael McCain made when he was invited to speak to the Home Capital board during its crisis. McCain, CEO of Maple Leaf Foods Inc. (TSX:MFI), managed his company’s Listeria crisis in 2008, in which 23 people died. In that case, McCain quickly called a press conference, took accountability, apologized for the “terrible tragedy” and operated in a transparent fashion in what many experts cite as a textbook example of how to manage a crisis.
Hibben says his board took McCain’s advice on communication “to heart,” noting that opening lines of communication with everyone from the public to employees, regulators, business partners and shareholders is critical during a crisis.
7. Build a narrative
Hibben says the story a company tells also makes or breaks a crisis: “People will pick you apart if it looks like your narrative is faltering.” In his company’s case, Home Capital was able to persuade the investing public that the business model was sound and the company was simply undergoing a crisis of confidence. That was a problem that could be solved, he says, adding, “We just needed somebody other than ourselves to say so.” That’s where the Buffett investment helped settle the roiling waters.
Curran adds that “you need to understand how to get your facts out,” especially in an era of instantaneous communications. Saying nothing is not an option. Experts say your lack of comment allows others to fill the void. “Boards have to understand what the risk of the social license being hijacked is,” says Curran. That’s where social media can also be an ally, allowing an organization to communicate directly and instantaneously to a vast audience without the traditional media filters.
8. Know when to lean in
Director Deborah Rosati, a veteran of the Sears Canada board and who recently joined the board of cannabis company MedReleaf Corp. (TSX:LEAF), says “the buck definitely does stop at the board,” and if a company fails to properly manage a crisis, it becomes the board’s headache. There will be times, she says, when the board needs information and needs to “lean in a little deeper on the day-to-day business.” It’s all about acting in the best interests of the company, she notes.
As Bertrand points out, crisis management is changing with the times, and boards must adapt. “The real change in the nature of crises that people have to face comes from this new idea that corporations have responsibilities to more than just their shareholders. It’s creating a new opportunity for crises.”
In the end, she says, directors will be judged on their performance. She says Maple Leaf Foods and the Tylenol scare show that “people will forgive, but they may not forget. They will forgive you for having made a mistake if you address it properly.”
Photography by Roger LeMoyne (Maryse Bertrand); Mark Blinch/Reuters (Alan Hibben); Kevin Lamarque/Reuters (Warren Buffett)