Learning From One Another About Crisis Management
Highlights From Martindale-Hubbell's Counsel To Counsel Forum

Taking part in a shared learning experience, a representative group of general counsel and high level corporate counsel gathered in Philadelphia on February 13 to share experiences about managing crises. Twenty-five lawyers participated in a frank off-the-record discussion of how companies dealt with real life disasters.

The session, the first U.S. stop in Martindale- Hubbell's Counsel To Counsel series for 2002, provides insights that are helpful to all corporate counsel. The discussion was enriched by partners from Forum co-hosts Dechert and Patton Boggs, who had broad experience handling crises, including the Clinton White house during the Monica Lewinsky scandal, the Florida recount on behalf of George W. Bush and representing an Enron executive before the Congressional hearings.

This report on the program begins with the general discussion without identifying the remarks of the particular participants or the real life situations that they described. It concludes by asking outside counsel participants for their impressions and conclusions after listening to the discussion.

General Discussion

It was agreed that readiness and preparation are the key to crisis management. This became clear as participants whose companies had dealt with a crisis described how the crisis was handled.

Training for a crisis was an essential ingredient in coping. Some companies carefully planned their responses to crisis situations affecting their personnel or physical facilities. They had formal emergency management programs and periodic drills involving mock situations - hostage taking and explosions were examples.

The involvement of local community resources in these drills was stressed - police, fire departments and local medical facilities. Also important is involvement of the local media. Some companies retained crisis management consultants.

The participants agreed that good communication was a key to effective crisis management. There must be an effective way of reaching other members of the disaster response team. Management decision makers must be accessible. Employees, customers and others must be kept informed.

One participant particularly stressed the importance of having a redundant communications system available. He pointed out that, because it had such a system, his company was able to continue to operate throughout the September 11 crisis at times when regular telephone service was interrupted. He also mentioned that the WTC disaster pointed out the need to locate computer backup systems remote from the scene of the disaster. One financial institution had suffered because its backup was in a nearby building which also had to be evacuated.

The perception was that formal emergency response programs were more effective with physical disasters than in cases involving financial irregularities or other nonphysical events. It was more difficult to plan for such situations because the scenarios were so varied. The appropriate responses had to be adapted to the particular fact circumstances.

The role of compliance programs was stressed. They heighten the alertness of employees to possible violations of law or company policy. They let employees know how to respond if they detect a developing crisis and to whom to communicate their concerns. A participant mentioned that his company was able to uncover the theft of a valuable trade secret and take early and effective action because it was reported by an alert employee. A number of participants mentioned that they found prepackaged compliance programs to be both inexpensive and very effective.

The role of inside and outside public relations experts was discussed at some length. Also discussed was the need for early, full and frank disclosure to the public and, in a major crisis, for the CEO or other high level executives to come forward to reassure the public. The PR people tend to emphasize preserving the company's public image, whereas the lawyers stress the liability aspects. These different perspectives frequently give rise to tensions between PR and legal.

The participants discussed the extent to which the CEO should take public responsibility. Everyone agreed that the CEO should never be exposed to Dateline type programs. On the one hand, the CEO's early acceptance of full responsibility in the media may lead to a favorable public reaction with a positive effect on the stock price. On the other, this approach may also make the defense of the ensuing litigation more difficult. These pros and cons have to be weighed at the highest management level and a decision made.

It was agreed that maintaining good relationships with the media is essential. A good PR person who can accomplish corporate disclosure objectives and still maintain good press relationships is worth his or her weight in gold. It was generally agreed that a "no comment" posture is almost always counterproductive. However, this may not be the case where an investigation of the circumstances is underway and the results are not yet known.

A PR person can play a vital role in shaping public attitudes about the company's role in a crisis. However, a caution was expressed about communicating confidences to PR. A key point was that including a non-lawyer in a discussion about crisis response can, under certain circumstances, jeopardize the "privilege." If a non-lawyer is present there is a risk of "waiving the privilege." A recent New York District Court decision held that the privilege was not applicable where the function of PR was to create "spin."

It was stressed that in many crisis situations, the most important consideration is maintaining the trust and confidence of employees. Otherwise, key employees may walk. Others may make damaging statements to the press. Their morale on the job may suffer with a consequent loss of productivity.

Where a company is in financial straits, the most damaging thing that can occur are any actions that can be viewed as unfairness - such as reducing rank and file compensation while increasing senior management's bonuses. One of the most effective ways of eliminating misunderstandings with employees is effective use of the company's website.

Companies that are in shaky financial circumstances should prepare for the possibility of bankruptcy well before the filing is made. For example, it was suggested that bonuses and other incentives needed to keep employees from jumping ship should be put in place as soon as possible. If put in place after the filing, such payments are less likely to be approved.

At the conclusion of the session the participants were asked two questions: "What keeps you up at night?" and "What do you think will be the next crisis on the scale of Enron?" The major concerns of the participants included:
o Soaring costs of litigation resulting from proliferation of class actions and overlapping law suits.
o Decline in the integrity of the justice system resulting from significant campaign contributions by lawyers in judicial elections.
o Unavailability of insurance against terrorist attacks.
o Effect of negative news concerning the integrity of accounting procedures.
o The loss of good people as a result of downsizing.
o Failure of the economy to recover.
o Terrorist attacks on overseas facilities.
o Violations of the Foreign Corrupt Practices Act or trading with countries subject to U.S. trade restrictions.
o Small legal staff may be unable to cope with proliferating issues.
As to whether it would be possible to identify where the next corporate scandal of the magnitude of Enron would occur, there seemed to be a consensus that it would involve circumstances that no one had anticipated. Situations were mentioned like the savings and loan scandal, the Michael Milken situation and most recently the Twin Towers tragedy - each of which came as a surprise at the time.

Comments of Outside Counsel

Outside counsel from the firms that co-hosted the Forum summed up their impressions as follows:
"This seminar on crisis management was by far the most educational and enjoy-able one that I have ever participated in. I would recommend it highly to fellow pro- fessionals who are involved at all levels in managing high profile legal corporate crises." Lanny J. Davis

Mr. Davis is former Special Counsel to President Clinton and a partner at the Washington DC law firm of Patton Boggs. He is the leader of the firm's legal crisis management group.

"When a company is in the crucible of a crisis, corporate counsel play many important roles. Counsel have to understand that when a crisis strikes, they will not be driving the bus - but counsel have to make sure they stay in the bus and point out the potholes along the way. There may be a tension between managing the company's reputation and protecting it from civil liability and government investigations. Good reputation management may help reduce legal exposure. On the other hand, corporate counsel must be vigilant not to cede their judgment to public relations experts." David M. Howard

Mr. Howard, a litigation partner in Dechert's Philadelphia office, chairs its criminal investigations and civil fraud group and is a member of the financial services and securities litigation group.

"As we saw throughout the presentations by corporate counsel, the control of information is one of the key elements of a successful crisis management program. Timely and open communication within the organization allows the crisis team to get ahead of the story and set the tone for public perception of the event. However, the desire to get the story out quickly must be tempered by the need to have all of the facts; public retractions and corrections can destroy credibility with the media and in any subsequent litigation." Gil C. Tily

Mr. Tily is a partner in Dechert's Philadelphia office in the corporate finance, mergers and acquisitions, private equity, and venture capital groups.

Benjamin L. Ginsberg, a partner at Patton Boggs, also participated in the Forum. Mr. Ginsberg joined the firm in 1993 after serving for eight years as counsel to the Republican National Committee, the National Republican Senatorial Committee, and the National Republican Congressional Committee. Because he was traveling at the time this article was prepared, his comment will appear in our April issue.