News Column

Company Crisis: CEO Under Fire

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No company is immune from crisis, as Enron, WorldCom, Ford, Firestone, and United Airlines demonstrate. While a small business may not have as much to lose as a corporate giant, its employees and management team take a company crisis just as seriously and personally. How should CEOs and other top executives react to a crisis? If they're like most managers, they tend to work harder, hide the bad news, and circle the wagons to protect the company from outsiders. Not a good strategy, according to the experts. "People think when they're going through a crisis they need to batten down the hatches and put up walls, and that everybody is the enemy," says Kaleil Isaza Tuzman, the Colombian-born CEO of Recognition Group, a New York firm that helps small and mid-size companies reorganize. The problem with that strategy, Mr. Tuzman says, is that it insulates you from sources of help and erodes the confidence of insiders who know there's a problem and need to know the plan for solving it. "The most important thing to do when you're in trouble is to get very candid very quickly," says Mr. Tuzman. "You're acknowledging what everyone already knows that you are in trouble. If you aren't honest, it undermines your credibility." VOICE OF EXPERIENCE Mr. Tuzman knows first-hand about crisis management. Before starting his turnaround firm, he owned GovWorks, a dot-com company that went into bankruptcy. He eventually sold it to First Data Corp. at a rock-bottom price. Mr. Tuzman says he learned a lot from the experience because he made plenty of mistakes errors that he now helps clients avoid. Since then, he and others at Recognition Group have acted as interim CEO or CFO for companies in need of reorganization or, in some cases, liquidation. One of the first pieces of advice Mr. Tuzman gives a CEO facing a crisis is to maintain balance in his life. CEOs often respond to a crisis by working harder, thereby neglecting exercise, sleep, and their families. They don't share their troubles with their spouses, he says, and forget to turn to faith and to their friends for support. Instead, he believes, CEOs should disclose as much about the problem as possible and advises clients to "say it first, say it truthfully, and say it completely." People under pressure tend to clam up and put a rosy face on everything rather than reveal the depth of the bad situation. Leaders are particularly reluctant to admit they're in trouble and often suffer from denial, which Mr. Tuzman describes as the primary cause of restructuring failures. He even advises clients to tell employees that the company will have to close unless it meets certain goals. "Then if you do work it out [employees will] stick with you because you were straight with them," he says. "I think you will be surprised by the resilience of people if you're straight with them." OUTSIDERS LOOKING IN The exhortation for honest communication goes for supplier relationships, too, says Sam Chavez, CEO of Professional Business Systems (PBS) in Albuquerque. PBS is an audio-visual system integrator that sells and installs systems, mostly in New Mexico. Like many other companies, PBS suffered from after-effects of the September 11, 2001, terrorist attacks as well as problems with an e-commerce initiative and a Dallas-area company that was notoriously late in making payments. PBS had formed a purchasing consortium with the company to qualify for supplier discounts, but suffered when its partner took three to five months to pay. That made PBS late in paying its suppliers and added to the company's accounting, personnel, and shipping and handling costs. "By all means, be forthcoming with information," Mr. Chavez says. "To a couple of major suppliers, we even provided our financial information, so they could see what was happening. Once they saw that, they had a couple of choices either work with us or make it so difficult for us that we would have to file for bankruptcy."

LESSONS FROM SEPTEMBER 11 The terrorist attacks in fall 2001 should serve as a reminder to CEOs that businesses don't exist only on paper. They're physical operations, and real-world disasters caused by fire, flood, sabotage, or terrorism could occur at any time. Here are some lessons taken from the devastating events of September 11.
•Don't underestimate the possible dimensions of disaster. Many risk management executives figured their companies might lose power for a while or that their offices would have to be evacuated, but they did not plan on losing everything. Morgan Stanley has estimated its IT losses from September 11 at $150 million, American Express at $140 million.
•Unlike weather-related disasters, fire and terrorist attacks occur without advance notice. In such situations, don't stop to back up files or try to save physical assets simply get out with your employees as quickly as possible.
•After a disaster, rely on multiple sources of help, including insurance, federal disaster relief programs, IT consultants, and psychologists. Source: "Contingency Planning and Disaster Recovery: A Small Business Guide," by Donna Childs and Stefan Dietrich (J.W. Wiley, $45).
PBS eventually dismantled its unprofitable e-commerce initiative and terminated its agreement with the Dallas-area company, which it then put on a collect-on-delivery basis. Mr. Chavez also began making his own collection calls, hired a law firm to prepare a lawsuit, and applied for and received a $200,000 Small Business Administration disaster assistance loan. (The Dallas-area company eventually paid, but not before PBS spent $10,000 to $15,000 in legal fees and other expenses.) Mr. Chavez also invested more of his own money into the firm. "Our recovery strategy was, 'Let's focus on what we do best, pull in our horns, and work the market where we've been the most successful.' And that's generally the state of New Mexico," Mr. Chavez says. Mr. Chavez says the problem with the non-paying customer occurred because the company didn't perform due diligence that would have exposed the company as a potential risk. Another factor that caused the company problems, he says, was too many "yes men" who were afraid to contradict him. "If I wanted to do something … I had a bunch of people who would just kind of nod their heads and agree," he says. And, in the words of Mr. Chavez, their accounting "stunk." "I can't emphasize good accounting enough," he says. "I had a lot of information that was just erroneous. Your gut feeling will take you just so far, and after that you're in a lot of trouble." THE ULTIMATE LOSS Carlos Vargas, CEO of APS International, a printing company that caters to the legal industry, faced a far different crisis last year when his brother, Erick Vargas, the company's previous CEO, died of cancer. Mr. Vargas suddenly found himself catapulted into a leadership position that he had always counted on his brother to fill. At the same time, the U.S. economy had begun to soften. He responded to the crisis by becoming involved in a legal marketing association, where he became familiar with the marketing directors of some of the nation's biggest law firms. He also began e-mailing clients to introduce himself and explain his new role in the company. His efforts resulted in contracts with several mid-size to large firms, which have allowed the company to survive. That went a long way toward winning the confidence of APS International's employees, who at first had a hard time accepting him as CEO. He also hired a consultant to identify employees who were not team players. "We had to identify who was willing and who was not willing, and the people who were not willing I had to replace," he says. "Now we have a fine team on board." LESSONS FROM THE FIRE Ian Mitroff, author of Managing Crises Before They Happen (Amacom, $24.95), says not all crises can be prevented, but companies that actively plan for them experience fewer crises and make more money than those that do not. "Proactive organizations that prepared for more crises than they experienced had a 6 percent return on assets," Mr. Mitroff says, "whereas reactive companies that experienced more than they were prepared for had an average of 2 percent returns." Furthermore, proactive companies experienced an average of 22 crises per year, compared with 33 for reactive companies. Mr. Mitroff maintains that those numbers show why it's important to make crisis planning a priority. On the negative side, Mr. Mitroff believes one of the worst mistakes a company in the heat of a crisis can make is to lie and assume the truth will never emerge. Another self-made trap occurs when managers try to defend themselves with statistics that don't connect with people emotionally. They also try to blame others, a tactic that works only if the data are hard and convincing. Mr. Tuzman says it's important to understand your fiduciary responsibilities if you're facing an insolvency by educating yourself on your responsibilities to employees, creditors, and shareholders. Finally, Mr. Tuzman says that CEOs should remember that it's OK to change their minds or back away from a mistake. "The true mark of courage is admitting you were wrong," he says. "Very few people have the ability to do that unless they've been through the wringer before."

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