ICM CRISIS REPORT
News Coverage of 1999
Business Crisis Events
August 2000

©2000 The Institute for Crisis Management
Vol. 8 no.1

Overview
Litigation! Litigation! Litigation! to paraphrase an old marketing theme.

Nearly one-third of all 1999 crisis events fell within the "class action lawsuit" category as tracked by ICM. Class action suits accounted for approximately 2.2% of the crises in 1990 slowly climbing to 7% in 1997. The explosion in legal action against organizations began in 1998 when action almost doubled from the previous year. Class action lawsuits soared 122% in 1999

Business Crisis Concentrations: 1999

Not surprising, given the basis for many lawsuits, is the rise in defects and recalls of products manufactured and services provided. Recalls amounted to 14% of all business crises in 1999 doubling since 1998.

Nor is it surprising to find consumer action against companies on the increase, considering increases in class action lawsuits and defects/recalls.

Fastest Growing Crisis Categories: 1998-1999

Other types of crises tracked by ICM and lumped in the "other category" include: environmental damages, discrimination, executive dismissal, financial damages, hostile takeovers, sexual harassment, whistle blowing and workplace violence.

Mismanagement, white collar crime and labor disputes, the "big three" for most of the 1990s, all decreased during 1999. However, each accounted for nearly 10% of all organizational crises during the year and for the decade.

Workplace violence, natural disasters, environmental damages and casualty accidents, which grab the public's attention, each accounted for fewer than 5% of all crises in 1999. These categories, which people typically think of when business crisis is mentioned, have been on the steady decline during the decade. The decrease may result from increased attention to these types of crises by government agencies and politicians forcing organizations to correct dangerous conditions and/or to improve their abilities to manage a crisis once it occurs.

Generally, the number of business crises remained relatively flat reflecting a modest 2.6 percent drop.

These findings are based on ICM's analysis of 5,891 business crisis news stories in 1999 reported in more than 1,500 newspapers, business magazines, wire services and newsletters. The stories are recorded in 16 categories of crises. The database contains more than 67,000 stories representing business crises since 1990.

Most Crisis-Prone Industries

Medical/surgical manufacturers and solid waste disposal companies are newcomers to the annual listing of the top-ten most crisis prone industries. All the other industries have appeared on the infamous list sometime during the decade. Commercial banks and holding companies, security and commodity brokers and life insurance companies-the three most crisis-prone industries for the decade--appear on the 1999 list. Auto makers, however, disappeared from the top-ten list, a rare occurrence during the 90s.

Medical and surgical manufacturers lead the 1999 list of most crisis-prone because of defects and subsequent recalls of products. Cholestech, Beckman Coulter, Sims, Deltech Products, Roche Diagnostic, Olympic Medical Corporation, Kendall, Alphatec, and Medikmark, to list only a sample, all were hit by recalls of their products. In some cases, the recalls lead to class action suits by companies and individuals. ADAC was hit with a securities fraud class action lawsuit.

The Justice Department's case against Microsoft blurred some other troubles in the software manufacturing industry.Class action lawsuits were brought against several companies. Some were for product failures frequently associated with Y2K bugs -- Spyglass, for example. Other suits--Vantive, Verity, Network Associates, BMC Software -- concerned securities violations including misrepresentation, false financial reports and insider trading. Software pirates remain a growing problem for the industry.

Class action lawsuits and product defects and recalls brought the drug and pharmaceutical industry on to the list. Winlab Corporation and Cell Pathways were accused of stock fraud. Zila was accused of "misleading investors."Zila was also accused of overcharging consumers, a charge which has since spread to the entire industry.

Merck, Fisons PLC and TestPack recalled faulty products from the marketplace. American Home Products settled its fen-phen lawsuits for $4 billion. Warner-Lambert was sued for the wrongful death of the wife of Ismael Valenzuela a winning Kentucky Derby jockey.

The telecommunications industry also faced class action lawsuits: AT&T for overcharging its mobile phone users and (with Lucent) for selling equipment with a Y2K defect; USN Communica-tion by its stockholders. Mergers and take-overs continued to affect the industry. AT&T announced its intention to take-over MediaOne. SBC continued its merger with Ameritech. Qwest was involved in a merger with US West, a deal involving Global Crossing and Frontier companies as well. Hurricane Floyd led to losses by Bell Atlantic. Qwest was also charged with forging customers signatures authorizing provider changes.

Computer manufacturers continued on the list of crisis-prone industries. Class action suits against Compaq by shareholders and accusations of faulty laptops lead to considerable upheaval in that company. Age-bias was charged against Bull HN Information Systems. IBM settled a suit for $15 million brought against it by retirees. Hewlett-Packard executives were found guilty of fraud.

Solid waste disposal companies joined the list of crisis-prone industries. A Waste Management executive was charged with mail and tax fraud. The company also faced a class action suit by stockholders for misleading investors with "aggressive projections." Mercury Waste Solutions and Exsorbet Industries were charged with stock price-fixing. Cities and towns across the nation accused companies of either dumping toxic waste illegally or not properly cleaning up toxic sites properly. The Bureau of Labor Statistics added to the industry's woes by reporting it as among the most deadly occupations in the US.

In the commercial banking industry, BankOne saw its stock price cut in half during the last months of the year because of major problems in its credit card unit. Key executives were removed from the unit and new managers found positions with the bank as a result of the stock decline. But other crises struck the industry as well. The ACLU lead a customer protest of surveillance practices. Bergen Commercial Bank was sued for age discrimination by a 25 year old who claimed he was deemed too young for an executive position! The BCCI was fined $1.6 billion for fraud as the problems of that bank continued.

Employees and former employees of BCCI found changing jobs difficult because the reputation of the bank tainted their resumes. The Bank of New York was investigated for laundering money garnered from illegal Russian activities.

Security and commodity brokers remain one of the most crisis-prone industries. The activities which generate trouble for the industry have remained relatively constant throughout the decade. Merrill Lynch faced class action suits for financial misstatement. NYSE disciplined 14 individuals for rules violations. Charles Schwab was sued for gender bias by by a former female employee. Hopper Soliday was accused of taking kickbacks. Meridian Investment paid $85,000 in fines for using false data in its newspaper advertising. Boston Investment Group was accused of a Ponzi scam in which investors lost more than $7 million. The SEC charged 13 people for illegally touting stocks on-line. The suicide of a day-trader revealed the risks of that activity. And a double homicide case exposed swindling in the trading of penny-stocks.

Insurance continued as one of the most crisis-prone industries in the 90s. Prudential paid a $2 billion settlement of a long-standing class action suit. Prudential also was charged with sexual harassment. American General faced charges of deceptive advertising. State Farm Mutual Automobile Insurance was found guilty of consumer fraud for using cheap after-market replacement parts. Two employees of Winston Hill Assurance were accursed of bilking policy holders of more than $50 million. Hurricane Floyd forced substantial losses for the industry. Ernest & Young was sued by Jackson National Life Insurance for a "botched audit" which lead to serious financial losses for Jackson.

Following one of the safest years in US aviation history (no crashes of scheduled airliners in 1998), the scheduled airlines returned to the list of crisis-prone industries. But crashes were not the major problems; labor disputes were. The pilots of American Airlines even caught the attention of the US president for their "sick-out" which canceled 1,170 flights disrupting air travel for several days. TWA confronted a strike; America West faced labor unrest from its flight attendants. Alaska Airlines experienced a work slow-down by its mechanics. In other crises, America West was charged with misrepresentation and insider trading. US Airways was charged by the labor department of maintaining a "class-ceiling" for females and minority employees.

Notice that few of the crises resulted from the feared Y2K bug. ICM believes the lack of problems can be attributed to management taking the threat of computer failures seriously and initiating corrective action. Systems and hardware were replaced. Back-up plans and personnel to carrying them out were in place just in case the computers crashed at the stroke of midnight.

Crisis-Prone Organizations

Most members of the top-ten list of crisis-prone organizations are newcomers. Only Boeing, Columbia/HCA and Microsoft have appeared before during the 90s.

A brief accounting of the companies' troubles will explain why each made the top-ten list this year.

Waste Management was accused of misrepresentation and insider selling in a score of class action lawsuits. One executive faced criminal charges of mail and tax fraud also.

Boeing made headlines when rudders where blamed for handling problems and crashes of its 737s, the most frequently used plane used worldwide by scheduled airlines. The company encountered a dispute with its machinists. It was also accused of racial discrimination. And, 34 jets were delivered late to customers because of faulty cockpit drip shields.

Compaq Computer confronted class action lawsuits from stockholders claiming false financial reports which mislead investors on the health of the company. Its earnings during the year were disappointing and it encountered problems integrating Digital Equipment Corporation into the organization. Amid the turmoil, the CEO was ousted and the CFO resigned.

Kaiser Aluminum also experienced labor difficulties in a strike by the United Steel Workers and a lock-out. An explosion caused by a power system failure and a fine for "degloving" also disrupted business operations. During the fourth quarter of the year, Kaiser reported a $39.2 million loss.

Newport News Shipbuilding made headlines because of its work with the Department of Defense particularly the Navy. The DoD opposed the takeover of NNS by Litton Industries. A strike temporarily stopped work on several projects. Employees took their protest directly to Congress, demonstrating at the Capitol Building in Washington D.C. Complaints by workers spurred federal and state investigations of the safety procedures at the yards.

Synthes USA experienced a rash of recalls of defective (or alleged defective) medical devices: sterile drill bits, midfacial system, titanium humeral nails, screwdriver blades, wire tensioner, rod clamp and anatomical locking plate system.

McKesson faced at least two class action lawsuits. It was charged with securities fraud by the federal government. An audit of the company revealed "significant improprieties." The Chairman was dismissed.

Columbia/HCA continued to experience loss of earnings. It remains a target of the Department of Justice in Medicare fraud suits.

Stewart Enterprises, which provides funeral services and crematories as part of its business, came under fire in class action suits claiming false financial reports and insider trading.

Miscrosoft continued to feel the heat from the federal government's decade-long pursuit of the company. At least 19 states joined the Feds in anti-trust actions. One solution proposed advocated the break-up of the company. But other problems kept Microsoft on the top-ten list: a class action suit for predatory and anti-competitive conduct, a glitch in Windows 2000, virus threatening the NT servers and a suit by high-tech temporary workers alleging "mistreatment."

CHS Electronics was battered by class action suits alleging false financial reports, securities fraud, overstating revenue and earnings. Stockholders led the action.

Causes of Organizational Crises

Management. The people most responsible for guiding the business continue as the primary cause of organizational crises in 1999. Throughout the decade, three-quarters of all crises within the ICM database have resulted from inappropriate action or inaction by top management.

Employees account for a little more than 13% while "other" causes accounted for 11% of all business crises. A quick reading of the sections on crisis-prone industries and on individual companies reveals that most of the problems which became crises could have been controlled had someone within the organization known and/or taken action. Unfortunately, the greatest single obstacle to effective crisis preparation is management denial that one will occur!

Nature of Business Crises

ICM describes as "smoldering crises" most events which lead to public scrutiny and media coverage. Sexual harassment, gender/age/racial discrimination and white collar crime exemplify "smoldering" crises. Something isn't proper. Someone knows. No one tells or no one does anything about it

The crisis "smolders" like an ember until something or someone ignites the flame by disclosing the activity, frequently to people outside the organization. Once outside, management loses "control" and the story will be investigated and told by others. The organization is forced into a defensive stance.

Sources of Information in a Crisis News Story

ICM tracks eight sources of information most quoted in business crisis news stories. Elected and regulatory officials of federal, state and local governments were the most quoted source

Government spokespersons account for more than 56% of all attributions in printed news stories about organizational crises! Members of the judicial branch of government including police were quoted in almost as many stories as were other government officials. In other words, some government "official" will tell your crisis story if you don't!

Union leaders and employees are quoted as primary sources in nearly 20% of news stories.

The official spokesperson for the organization served as the primary source of information in slightly more than six percent of the stories during the year. Of the 16 crisis categories tracked by ICM, only in those caused by executive dismissal is the business spokesperson the primary source of information.

Crisis Outlook and Conclusions

1. No new crises appear. In analyzing business news coverage for 1999 and for the decade, no new type of crisis appeared. Even the feared Y2K bug was only another form of business disruption caused by failure in an operating system.

2. Class action lawsuits will continue to increase. No evidence appears suggesting that people who view themselves as "victims" will diminish their desire for vengeance and restitution from the offending business entity.

3. Personnel matters--sexual harassment, discrimination, labor disputes, executive dismissals--will continue to grow as a major source of organizational crises. People who feel wronged will seek correction and compensation. An economic downtown leading to the loss of jobs will stimulate lawsuits filed by those whose jobs are adversely affected.

4. White collar crime will stimulate increased government intervention in the affairs of organizations.

5. Natural disasters and casualty accidents will remain a small portion of organizational crises. Pressure from government and protest groups have encouraged organizations to improve safety and environmental operations. However, the easy corrections may have been already made so these categories of crises may remain at the current levels for the near future.

6. Government officials, whether elected, appointed or members of the judicial branch, will remain the primary sources of crisis information for the press. The press will use officials because they are easily accessible, somewhat knowledgeable, are perceived as credible with no direct interest in the crisis and willing to speak in order to reach their constituencies.

ICM Services

Published by the Institute for Crisis Management, which is a research-based consulting firm providing crisis management and communication services for businesses, government agencies and non-profit organizations worldwide. The crisis services ICM provides include:

Vulnerability Studies to help organizations locate and correct potential sources of business disruptions and embarrassment.

Crisis Consulting to assist management to minimize likely public reaction caused by sudden or smoldering crises.

Crisis Communication Plans to provide organizations with response plans which help them notify key people quickly, shape the nature of the crisis story and initiate the telling of the story within 60 minutes.

Communication Audits to help organizations locate weaknesses in their internal and external communication systems.

Crisis Certification Course to prepare organizational personnel to anticipate and respond to sudden and smoldering crises facing their organizations.

Media Training to prepare organizational spokespersons to be interviewed by the media and/or to give public presentations to target audiences.

Database Research from the ICM Crisis Database to define and graphically illustrate crisis trends in specific industries for management presentations and proposals.