Session No. 26

# Course Title: Business and Industry Crisis Management, Disaster Recovery, and Organizational Continuity

# Session 26: Crises of Skewed Management Values

## Time: 2 hr

Objectives:

1.  Discuss the category of "crises of skewed management values," in the
    context of the cases (Sears, Exxon, Jack in the Box, and Calvin
    Klein) presented in chapter 8 of Lerbinger's text.

2.  Research the CERES report of an assigned corporation for the purpose
    of comparing and contrasting the reports through small-group
    discussion, oral reporting, and class discussion.

3.  Discuss the strategies for managing crises of skewed management
    values.

4.  Complete objective 26.2 (Research the CERES report of an assigned
    corporation) by comparing and contrasting the reports through
    small-group discussion, oral reporting, and class discussion.

**Scope:**

This session starts with a discussion of the case studies of "crises of
skewed management values" included in chapter 8 of Lerbinger's text.
Supplemental information on each case study is provided. In preparation
for the second hour of the session, each small group is assigned a
particular corporation that has listed its annual environmental report
on the CERES Web site, and the individual members of the group are to
research the CERES report and the corporation. No written assignment is
included, but the students should be prepared to discuss their
individual research during small-group work and in a class discussion.
Strategies for managing "crises of skewed management values" are then
discussed. overheads/student handouts of Mitroff and Pauchant's onion
model and 31 rationalizations that shape organizational culture are
provided. Corporate culture is stressed as a primary determinant of
crisis preparedness and will be further stressed in discussions of
corporate ethics in a subsequent session. The session concludes with the
small-group work, oral reports, and general class discussion of the
corporate CERES reports and completion of the modified experiential
learning cycle for objectives 26.1--26.4.

**Readings:**

*Student Reading:*

*About CERES* \[on-line\]. CERES Web site. Boston, MA: Coalition for
Environmentally Responsible Economics. \[Cited on May 20, 1999.\] At
<http://ceres.org/about/index.html>.

*Global Reporting Initiative* \[on-line\]. CERES Web site. Boston, MA:
Coalition for Environmentally Responsible Economics. \[Cited on May 24,
1999.\] At <http://www.ceres.org/reporting/globalreporting.html>.

Lerbinger, Otto. 1997. *The Crisis Manager -- Facing Risk and
Responsibility*. Mahwah, NJ: Lawrence Erlbaum Associates. Chapter 8,
pages 186--216.

*Instructor Reading:*

*About CERES* \[on-line\]. CERES Web site. Boston, MA: Coalition for
Environmentally Responsible Economics. \[Cited on May 20, 1999.\] At
<http://ceres.org/about/index.html>.

Carlson, Margaret. 1995. "Where Calvin Crossed the Line." *Time*. Vol.
146, No. 11. Page 64.

*Global Reporting Initiative* \[on-line\]. CERES Web site. Boston, MA:
Coalition for Environmentally Responsible Economics. \[Cited on May 24,
1999.\] At <http://www.ceres.org/reporting/globalreporting.html>.

Donlan, Thomas G. 1998. "Editorial Commentary: Felling a Giant."
*Barron's.* Vol. 78, No. 25. Page 59.

Ferry, Richard M. 1999. "Boardrooms Yesterday, Today and Tomorrow."
*Chief Executive.* No. 142. March 1999. Pages 44--47.

Hunt, Christopher B., and Auster, Ellen R. 1990. "Proactive
Environmental management: Avoiding the Toxic Trap." *Sloan Management
Review*. Vol. 31, winter 1990. Pages 7--18.

Leo, John. 1995. "Decadence, the Corporate Way." *U.S. News and World
Report.* Vol. 119, No. 9. Page 31.

Lerbinger, Otto. 1997. *The Crisis Manager -- Facing Risk and
Responsibility*. Mahwah, NJ: Lawrence Erlbaum Associates. Chapter 8,
pages 186--216.

Marx, Thomas G. 1992. "Corporate Social Performance Reporting." *Public
Relations Quarterly* \[on-line\]. Vol. 37, No. 4. Start page 38.
Rhinebeck, NY. Electronic version pages 1 and 2 of 6.

Pauchant, Thierry C., and Mitroff, Ian I. 1992. *Transforming the
Crisis-Prone Organization.* San Francisco: Jossey-Bass Publishers. Pages
48--52, 81--103.

**General Requirements:**

Complete the modified experiential learning cycle for objectives
26.1--26.4 at the conclusion of the session.

**Objective 26.1 Discuss the category of "crises of skewed management
values," in the context of the cases (Sears, Exxon, Jack in the Box, and
Calvin Klein) presented in chapter 8 of Lerbinger's text.**

**Requirements:**

Present the material by means of lecture and discussion as required.
Additional information for each case study discussion is provided.

The following questions are provided to stimulate discussion:

"Classical business creed" and Albert Dunlap: What is your reaction to
Dunlap's truths and tactics? Are massive employee layoffs, plant
closings, and discontinuance of product lines justified in order to
ensure the survival of a corporation?

> *Exxon Valdez*: Did Exxon deserved to be vilified and punished to the
> extent it was when it was essentially following industry standards
> that were passively condoned by the state and federal government?
>
> Jack in the Box: Do you agree with Lerbinger's characterization of the
> Jack in the Box crisis as a crisis of skewed management values?
>
> Calvin Klein: Do you think that Calvin Klein actually faced a crisis?
> Do you think that corporations and advertising agencies need to fully
> consider the impact of their advertising -- in terms of both its
> effect on the public and the public's reaction to it -- before
> embarking on campaigns that are technically legal, but potentially
> offensive and harmful to segments of the general public? What is the
> role of state and federal governments in monitoring and regulating
> public advertisements? Should government regulation of advertising be
> expanded?

Complete the modified experiential learning cycle for this objective at
the conclusion of the session.

Remarks:

I.  **Classical business creed.**

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A.  Lerbinger defines **"crises of skewed management values"** as crises
    caused when managers favor short-term economic gain and neglect
    broader social values and stakeholders other than investors.

B.  Lerbinger further defines the **"classical business creed"** as an
    almost total focus on the interests of stockholders, with the
    interests of other stakeholders -- such as customers, employees, and
    the community -- viewed as relatively unimportant. He provides
    Albert J. Dunlap (Chainsaw Al), former chairman of the board and CEO
    of Scott Paper Co., as an example.

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1.  Dunlap is primarily portrayed as a **villain** by Lerbinger, but the
    June 1998 *Barron's* editorial commentary "Felling a Giant," by
    Thomas Donlan, provides a more balanced commentary on Dunlap.

2.  **Dunlap** was ousted as CEO of Sunbeam in June 1998, following
    stints at Crown-Zellerbach, Lily-Tulip, and Scott Paper.

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a.  His **legacy** at each company was "closing plants, firing workers
    by the thousands and executives by the hundreds, and abandoning
    product lines by the dozens" (p. 59).

b.  He prided himself in doing what was necessary to bring companies
    back to life and was not afraid to take dramatic actions to support
    the interests of what he envisioned as of primary importance --
    **shareholders.**

c.  Interestingly, his **dismissal** from Sunbeam was predicated on
    accounting manipulations and irregularities that caused significant
    harm to Sunbeam's shareholders (Sunbeam stock prices fell from \$53
    to \$11.25 between March and June 1998 in the midst of discoveries
    of irregularities).

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C.  Donlan characterizes Dunlap as **"mean-spirited,"** in the
    wishful-thinking world of the nineties and also as an "S.O.B. in a
    land that needed more of them" (p. 59).

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1.  Donlan contends that CEOs must be devoted to the interests of
    shareholders and "must avoid **wishful thinking,** especially the
    kind that preserves unproductive jobs at the expense of workers
    whose jobs are still necessary" (emphasis added).

2.  Dolan attributes several **truths** to Dunlap that contributed to
    his (Dunlap's) success (at least from a shareholder's perspective):

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a.  "The problems all start at the top, with **senior people** going
    through the motions and the board accepting the status quo. They
    hire consultants and draw up plan after plan -- but somebody's got
    to execute, somebody's got to manage."

b.  "You can **build on tradition,** but you sure as hell can't live on
    it."

c.  "(If executives say,) Oh, we tried that before and we're really
    doing great -- it's as good as it can be. The minute they tell you
    that, **don't waste another day with them."** (The emphasis in the
    quotes above has been added.)

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3.  Donlan also claims that the rise in stock prices at both Scott and
    Sunbeam (prior to March 1998) resulted from the drastic
    **restructuring** that assured corporate survival. Without the
    restructuring and the resulting firings and business shifts, both
    companies would have collapsed and even more jobs would have been
    lost.

4.  Donlan applauds the Sunbeam board of directors for **firing Dunlap**
    for his indiscretions, but he also recognizes that Dunlap did what
    he thought was necessary to support shareholders.

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D.  **Ask the students,** What is your reaction to Dunlap's truths and
    tactics? Are massive employee layoffs, plant closings, and
    discontinuance of product lines justified in order to ensure the
    survival of a corporation?

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II. **The managerial creed.**

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A.  Lerbinger defines the **"managerial creed"** as management focused
    on acting in a trusteeship fashion for all stakeholders. The
    "managerial creed" balances the interests of all publics
    (stakeholders) affected by an organization's behavior.

B.  We have discussed some cases that provide examples of the
    **balance** encouraged by Lerbinger -- Tylenol and Schwan's ice
    cream -- and will briefly discuss the balance demonstrated by
    General Motors later in this session.

C.  Lerbinger provides several case discussions of strict adherence to
    the **"business creed"** that resulted in crises of skewed
    management values.

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III. **Sears.**

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A.  In 1991, **Sears** Roebuck chairman Edward A. Brennan reduced costs
    by \$600 million, began renovating the company's 868 lackluster
    stores, and pushed new low prices. The overall thrust of the shakeup
    was to make every employee focus on profit.[^1]

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1.  In an attempt to increase retail operations profits, Sears
    instituted an employee **incentive plan** for automobile services.

2.  The plan **increased profits,** but with it came proven allegations
    of conducting unnecessary work in violation of the customers' trust.

3.  As customer **complaints** mounted and state agencies began
    inquiries, Sears's public image suffered damage and market share
    dropped.

4.  At the corporate level, management could claim that their intention
    was to be more aggressive but not to encourage the fraud that
    occurred at the operational level. Accordingly, Sears initially
    responded by **denying allegations** of wrongdoing and shifting
    blame to the individual employee level.

5.  Management soon realized that this tactic was further acerbating the
    situation and **shifted its tactics** to accepting responsibility,
    making some level of financial restitution, and taking corrective
    measures.

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B.  As **fallout of this crisis,** Sears abandoned much of its
    automobile service such as tune-ups and oil changes to focus on its
    core automotive products and services such as batteries, tires,
    brake service, and shocks. Within a year, Sears laid off 10,000 auto
    service personnel.

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IV. ***Exxon Valdez.***

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A.  We have discussed the *Exxon Valdez* disaster in the context of
    **crisis communication and its long-term impact** on the oil
    industry in previous sessions.

B.  In chapter 8, Lerbinger discusses the disaster in the context of
    what he calls Exxon's **"pipeline vision."**

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1.  **Cost-cutting** measures during the 1980s within Exxon (and the
    entire oil industry) resulted in cutbacks in vessel crew sizes and
    training.

2.  Oil carriers were constructed and maintained to **minimal
    standards** even though technology was available for safer and more
    reliable construction and maintenance.

3.  Exxon, other oil shipping companies, and state and federal
    governments, after several years of relatively few and small oil
    spills, decreased their **level of preparedness** for responding to
    major oil spills in order to cut costs.

4.  For Exxon and the entire oil industry, the Prince William Sound
    spill was a **major environmental disaster and corporate crisis.**

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a.  Over **1,500 miles of shoreline was polluted,** uncountable wildlife
    were killed, and thousands of citizens were economically affected.

b.  For Exxon, its **public image** was severely damaged and direct
    costs from clean up topped \$2 billion while litigation costs may
    eventually top \$10 billion.

c.  Losses and impact on the **entire oil industry** included the
    revocation of oil depletion allowance tax breaks for five years, the
    indefinite moratorium on off-shore leasing for oil drilling in
    Bristol Bay, Alaska, a one-year moratorium on all off-shore leasing
    in the U.S. and the passage of the Oil Pollution Act of 1990.[^2]

d.  The tank vessel *Exxon Valdez*, following over \$16 million in
    repairs, was renamed the *Sea River Mediterranean*, and to this day
    is still **banned (by U.S. law) from entering United States
    territorial waters.** This act of punishing an inanimate object
    reflects the public's sentiment towards Exxon in the aftermath of
    the disaster and crisis.

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C.  Added to the list of causes of the *Exxon Valdez* disaster discussed
    by Lerbinger are a series of **"basic causes,"** attributable to
    multiple sources, that occurred over a period of time. They all
    reflect a lack of attention and concern for the possibility of and
    impact of a major oil spill in Prince William Sound.[^3]

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1.  **Oil industry** action/inaction:

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a.  Alyeska (eight-oil-company consortium) had **disbanded** a full-time
    oil spill response team.

b.  A **certified response barge** (for off-loading oil from a tanker)
    was not available.

c.  Oil tanker operations were treated as **routine events** with no
    special precautions taken for escorts.

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2.  **State of Alaska** action/inaction:

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a.  Accepted **reduced vessel pilot coverage** for tankers transiting
    Prince William Sound.

b.  Approved **inadequate contingency plans.**

c.  Approved **reduced levels of response readiness.**

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3.  **Federal** action/inaction:

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a.  Reduced the Coast Guard Vessel Traffic System (VTS) **radar
    coverage.**

b.  Reduced **VTS watch standing** requirements from two persons to one.

c.  Reduced the **National Strike Force** (Coast Guard oil and hazardous
    material response teams) from three to one (Pacific and Gulf Teams
    consolidated in North Carolina with the Atlantic Team).

d.  Did not develop a **realistic inventory** of response equipment or a
    response mobilization plan.

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D.  Obviously, the causes and the blame for the *Exxon Valdez* disaster
    are spread amongst multiple organizations. **Ask the students,** Did
    Exxon deserve to be vilified and punished to the extent it was when
    it was essentially following industry standards that were passively
    condoned by the state and federal government?

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V.  **Jack in the Box.**

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A.  Lerbinger attributes the Jack in the Box crisis to **negligence** in
    adhering to state cooking temperature regulations. Interestingly,
    Jack in the Box was adhering to federal cooking standards, where
    were slightly lower than the Washington State standards.[^4]

B.  For public relations and legal reasons Jack in the Box did not
    absolutely accept responsibility for the E. Coli poisoning
    incidents, as discussed previously in session 23. Jack in the Box
    management was attempting to **balance** the divergent needs of its
    multiple stakeholders, one of which was its stockholding public.

C.  From the perspective of the course author, Lerbinger's
    characterization of the Jack in the Box crisis as caused by
    negligence is overstated.

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1.  Sellnow and Ulmer's article "Ambiguous Argument as Advocacy in
    Organizational Crisis Communication" acknowledges a **degree of
    negligence** but also reports Jack in the Box's assertion that it
    had not been properly informed of the changes in the state
    standards.[^5]

2.  Jack in the Box **immediately implemented corrective actions and
    image restoration actions** as discussed in session 23, but stopped
    short of accepting total responsibility for the poisonings.
    Possibly, its failure to accept responsibility influenced
    Lerbinger's judgement of Jack in the Box.

3.  The thought that cooking hamburgers at 140 degrees instead of the
    state required 155 degrees was **motivated by short-term economic
    gain** at the expense of broader social values stretches the
    imagination of at least the course author.

4.  **Ask the students,** Do you agree with Lerbinger's characterization
    of the Jack in the Box crisis as a crisis of skewed management
    values?

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VI. **Calvin Klein.**

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A.  The last paragraph of Lerbinger's description of the Calvin Klein
    case asks the question, **"Was this a crisis?"**

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1.  This is a good question. Some will argue that the public image of
    Calvin Klein was already so poor that it was not further damaged. In
    fact, by withdrawing the ads and making the statement that the
    intended message was misinterpreted, Calvin Klein received **media
    exposure and publicity** far in excess of that expected for a \$6
    million ad campaign (Carlson p. 64).

2.  As a result of the media exposure, the **sale** of Calvin Klein
    jeans **skyrocketed.** The 1995 *Time* article, "Where Calvin
    Crossed the Line," states "Watch your jeans, which most teens
    wouldn't have been caught dead in a few months ago, become a
    black-market subversive overnight" (Carlson p. 64).

3.  Lerbinger, and the relatively mainstream periodicals *Time* and
    *U.S. News and World Report,* contend that Calvin Klein may have
    **purposely generated the "crisis"** in order to stimulate jean
    sales, with the belief that the potentially damaging controversy of
    the content and impact of the ads on its public image would soon
    pass.

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B.  Despite the short-term economic gains, the *Time* article contends
    that Calvin Klein must have **missed the message** of recent debates
    concerning such issues as offensive "gangsta rap" and child
    pornography on the Internet and will experience lasting damage.

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1.  The *Time* article characterizes Calvin Klein as **"creepy,"** a
    characterization shared by the *U.S. News and World Report* article
    "Decadence, the Corporate Way" (Leo).

2.  Both articles recognize the reality that by employing advertising
    that can be linked to **child pornography** in any way, Calvin Klein
    made a strategic error.

3.  As stated in the *Time* article, "Even the liberal baby boomers, who
    thought drive-by sex and drugs were fine for them but want limits
    for their offspring, believe there's such a thing **as going too far
    when kids are involved.** If a conservative is a liberal who's been
    mugged, a First Amendment revisionist is a civil libertarian with
    children." (emphasis added; Carlson p. 64.)

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C.  The *U.S. News and World Report* article extends the Calvin Klein
    advertising controversy to **other corporations** and ad agencies
    who use self-obsession, narcissism, and contempt for all rules as
    advertising themes.

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1.  These ads are viewed as **subversive** and contributing to a "social
    meltdown" (Leo p. 31).

2.  **Targeted** for criticism in the article are the Nike "Just do it,"
    Burger King "Sometimes you gotta break the rules," and Neiman Marcus
    "Relax, no rules here" ad campaigns.

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D.  **Ask the students,** Do you think that Calvin Klein actually faced
    a crisis? Do you think that corporations and advertising agencies
    need to fully consider the impact of their advertising -- in terms
    of both its effect on the public and the public's reaction to it --
    before embarking on campaigns that are technically legal but
    potentially offensive and harmful to segments of the general public?
    What is the role of state and federal governments in monitoring and
    regulating public advertisements? Should government regulation of
    advertising be expanded?

**Supplemental Considerations:**

None.

**Objective 26.2 Research the CERES report of an assigned corporation
for the purpose of comparing and contrasting the reports through
small-group discussion, oral reporting, and class discussion.**

**Requirements:**

Assign each small group a particular corporation upon which to conduct
research.

A student handout explaining the assignment is included.

Conduct the modified experiential learning cycle for this objective at
the conclusion of the session.

**Remarks:**

I.  **Assign** each small group a particular corporation upon which to
    conduct research.

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A.  The recommended corporations are linked through the Coalition for
    Environmentally Responsible Economies (CERES) **Web site** at
    <http://www.ceres.org/reporting/corporatereports.html> (cited
    11/15/99.)

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1.  **CERES** will be covered in the next objective.

2.  Currently the following corporations have included their reports on
    the **CERES Web site:** General Motors, Bank America, Polaroid,
    Arizona Public Service Company, Sunoco, and Green Mountain Power
    Corporation.

3.  Access to the reports **changes** (reports are updated each fall) so
    availability should be checked prior to specific corporations being
    assigned.

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B.  Although there is no written assignment, each student should
    **research** his/her assigned corporation and be prepared to discuss
    the following points in his/her small group and a general class
    discussion:

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1.  Overall **corporate philosophy** or mission regarding health, the
    environment, and safety.

2.  **Health, environment, and safety policies.**

3.  Statement of **commitment to shareholders.**

4.  Statement of **commitment to stakeholders.**

5.  An **appraisal** of the usefulness of the report to stockholders and
    stakeholders.

6.  Your **opinion** on whether the report has substantive content and
    is of value as a management tool or is merely a public relations
    document.

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II. Class **small-group work and class discussion.**

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A.  In the **second half of this session,** each small group will
    develop and the group reporter will present a short oral report
    (three to five minutes) covering the above points.

B.  A class discussion **comparing and contrasting** the reports will
    follow the oral presentations.

**Supplemental Considerations:**

The CERES reports are updated annually and will change over time.
Research need not be limited to the CERES reports; each of the listed
corporations has its own Web site that can be used as a source of
additional information. These sites are:

[http://www.gm.com](http://www.gm.com/) (cited 5/24/99)

[http://](http://www.catholichealthcarewest.org/)www.polaroid.com (cited
11/14/99)

<http://www.bankamerica.com/> (cited 5/24/99)

<http://www.sunocoinc.com/> (cited 5/24/99)

> <http://www.gmpvt.com/> (cited 5/24/99)
>
> http://www.apsc.com/ (cited 5/24/99)

**Objective 26.3 Discuss the strategies for managing crises of skewed
management values.**

**Requirements:**

Present the material by means of lecture and discussion as necessary.

Overheads/student handouts are provided for use if desired.

The following questions are provided to stimulate discussion:

> Can you think of any examples in which the risk associated with public
> sentiment, expectations, and perception have necessitated changes in
> the risk management and crisis management strategies of businesses?
>
> Mitroff and Pauchant's corporate rationalizations -- Which of these
> rationalizations helped shape the corporate culture of Exxon at the
> time of the *Exxon Valdez* disaster and response?
>
> Are the goals of social performance reflecting the responsibility to
> all stakeholders necessarily contradictory to the strategic goals of
> organizational survival and profitability?

Just how much of the financial costs for improved social programs should
be passed along in increased prices for consumers? Should there be some
standard of reasonable profit level that determines exactly how much
goods or services should cost? If Exxon had determined the cost of
instituting multiple controls to both prevent and control the
consequences of a major oil spill in Prince William Sound and informed
the general public that their share of these costs was \$0.01 per gallon
of gasoline, how do you think the population in the Prince William Sound
area and the general population would have reacted? If the public
refused to pay their share for the controls, would Exxon be obligated to
implement the controls and pay the entire cost?

Complete the modified experiential learning cycle for this objective at
the conclusion of the session.

**Remarks:**

I.  **General** considerations.

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A.  As was the case with "crises of malevolence" in the previous session
    and "crises of deception and management misconduct" in following
    sessions, crisis management efforts should focus primarily on
    **prevention.**

B.  The **four crisis management strategies** described by Lerbinger
    -- (1) Reevaluate risk analysis premises, (2) revise corporate
    culture, (3) broaden corporate governance, and (4) institute a
    system of social accountancy -- address interventions to mitigate
    basic causes of such preventable crises.

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II. Reevaluating **risk analysis** premises.

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A.  Risk assessment, BAIA, and risk management are the **foundation** of
    crisis management and organizational continuity.

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1.  All three functions are **dynamic** and require periodic revisiting
    if the organization is to remain crisis-prepared.

2.  Vulnerabilities and impact, especially those associated with public
    sentiment, **change over time** and must be considered in the
    current context. Risk management controls considered appropriate at
    one point in time may no longer be adequate for changing risks.

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B.  **Ask the students,** Can you think of any examples where the risk
    associated with public sentiment, expectations, and perception has
    necessitated changes in the risk management and crisis management
    strategies of businesses?

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1.  An excellent example is the ***Exxon Valdez* disaster and crisis.**
    Exxon, the entire oil industry, the government, and the public in
    general had been lulled into a sense of false security due to a
    relatively oil spill-free period in the 1980s.

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a.  Controls were relaxed, and as a result, basic and immediate causes
    were not mitigated and none of the responsible response
    organizations were **adequately prepared.**

b.  Indicative of the public's outrage after this preventable disaster
    are the requirements imposed by the **Oil Pollution Act of 1990.**
    Any oil company that fails to recognize that it must increase its
    controls to prevent and respond to oil spills in light of new
    regulations and public expectations is gambling with its very
    survival.

c.  Lerbinger mentions that Exxon and Aleyeska did not consider the
    **"worst scenario"** in its contingency plans. For the *Exxon
    Valdez*, the "worst scenario" would have been spilling all the cargo
    instead of the 20% actually spilled. Even "worse scenario" planning
    would have had little impact since plans did not reflect the reality
    of response capabilities and were not adequately validated through
    exercises.

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2.  At the time of this writing (spring 1999 in the aftermath of the
    rash of school shootings culminating in the Littleton, Colorado,
    tragedy), **violence and access to guns** are emotional topics
    receiving attention at all levels of government. A business that is
    publicly associated with pro-gun organizations (such as the National
    Rifle Association) or sells guns (such as Kmart) would be prudent in
    reviewing its vulnerability to damaged public image and adjusting
    its strategies accordingly.

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III. Revising **corporate culture.**

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A.  **General** considerations.

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1.  Corporate culture is a **central concept** in the writings
    (*Transforming the Crisis-Prone Organization* (1992) and *We're so
    Big and Powerful Nothing Bad can Happen to Us* (1990)) of Ian
    Mitroff and Thierry Pauchant, who are widely recognized for their
    investigation and research on corporate crises.

2.  Mitroff and Pauchant **define corporate culture** as "the set of
    rarely articulated, largely unconscious, taken-for-granted beliefs,
    values, norms, and fundamental assumptions the organization makes
    about itself, the nature of its people in general, and its
    environment."[^6]

3.  From this definition comes the importance of corporate culture as
    the largely **unwritten rules** that govern the individual and
    collective behavior of an organization in its internal and external
    interactions.

4.  In the context of this course, corporate culture is a **primary
    determinant of an organization's commitment to and planning for
    crisis management** **and organizational continuity.**

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B.  The **"onion model of crisis management"** (overhead 26-1) as
    presented by Mitroff and Pauchant represents the various layers (or
    stages) of crisis preparedness (Pauchant and Mitroff 1992 p. 49).

> 1\. The **layers.**

a.  The outer level -- (4) **organizational strategies** -- represents
    the plans, mechanisms, and procedures for crisis management. For the
    *Exxon Valdez* disaster, plans, mechanisms, and procedures were in
    place on paper but not in actuality.

b.  The next level -- (3) **organizational structure** -- represents the
    dedicated infrastructure necessary for developing and revising
    organizational strategies and putting them into practice. For Exxon,
    the organizational strategies were compliance-driven but were not
    supported by structure. The oil spill response plans did not reflect
    reality and were not adequately exercised and tested.

c.  The next level -- (2) **organizational culture** -- is the
    underlying set of beliefs and philosophy that shapes the outer
    layers which are the visible indicators of crisis preparedness.
    Mitroff and Pauchant identify a list of 31 different
    rationalizations (overhead 26-2) that, in different combinations and
    degrees of belief, shape the organizational culture with respect to
    crisis management.

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(1) These **31 rationalizations** are grouped in four loosely defined
    categories: (1) properties of the organization, (2) properties of
    the environment, (3) properties of the crisis themselves, and (4)
    properties of prior crisis management efforts.

(2) **Ask the students,** Which of these rationalizations helped shape
    the corporate culture of Exxon at the time of the *Exxon Valdez*
    disaster and response?

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d.  The inner level -- (1) **character of the individuals** **working
    for organization --** represents the individual defense mechanisms
    or mental models of the internal and external environment that
    influence the corporate culture.

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2.  **Rearranging the layers** of the onion model.

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a.  One can argue that the model should be changed to place culture as
    the **innermost layer,** essentially arguing that organizational
    culture shapes the character of the individuals in the organization
    rather than the individuals shaping the culture.

b.  This is somewhat of a **"what came first, the chicken or the egg?"**
    argument. Individuals may be able to change corporate culture, but
    it is no easy task. Corporate cultures are formed over long periods
    of time and can be quite resistant to change.

c.  The **essential point** in the context of crisis management and
    organizational continuity is that efforts must be devoted to
    changing the culture to dispel faulty rationalizations and
    dysfunctional individual defense mechanisms.

d.  As was the case with Exxon, concentrating on the outer layer and
    developing strategies and plans that are not supported by
    infrastructure, and more importantly **individual and
    organizational** **commitment,** will not result in
    crisis-preparedness.

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C.  **Realigning business ideology.**

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1.  Lerbinger proposes a **"double bottom line,"** one financial and the
    other social, as an essential element of a corporate culture that
    values and provides a balance between financial and social
    performance (p. 199).

2.  The necessity of this **balance** is not argued; however, the
    separation between financial and social performance is not as
    distinct as portrayed.

3.  **Ask the students,** Are the goals of social performance reflecting
    the responsibility to all stakeholders necessarily contradictory to
    the strategic goals of organizational survival and profitability?

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a.  In the short term, the goals may well appear to be contradictory as
    current profit is reduced to support longer-term goals. However, in
    the long-term **(strategic)** view, the strength and profitability
    of an organization should be improved by attention to the social as
    well as the financial environment.

b.  A **proactive crisis manager** must be able to tie current
    expenditures to long-term survival and profits to obtain top-level
    support and reshape the corporate culture.

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D.  **Valuing the environment** as part of corporate culture.

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1.  **The "Coalition for Environmentally Responsible Economies (CERES)**
    Principles" (Lerbinger page 200) are an expression of the movement
    to incorporate environmental values into corporate cultures.

2.  CERES **origins.**

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a.  Although the *Exxon Valdez* disaster (March 24, 1989) was the
    precipitating event for the development of the CERES Principles, the
    **roots of these principles** go back to the environmental movement
    of the 1960s (*The Silent Spring* of Rachel Carson), the Sullivan
    Principle of 1977, which used investor resolutions to convince
    businesses to sever ties with South Africa, and the creation of
    environmental investor funds in the mid-1980s.[^7]

b.  The **mission** of CERES, as stated at the first meeting in April
    1989, was to "coordinate an investment response to the environmental
    crisis from the public sector," and the founding goals were "to
    guide the allocation of capital, influence corporate behavior, and
    create public support for environmentally sound policies."[^8]

c.  In September 1989, CERES announced the "Principles" (originally
    named the "Valdez Principles"), which reflected the **consensus** of
    numerous environmental groups. Absent from the original principles
    was the input of and review by businesses. The lack of participation
    in the development of the Principles has contributed to their lack
    of widespread acceptance in the private sector.

d.  In December 1989, **corporate America** was provided the opportunity
    to "weigh in," with 15 corporations attending a CERES-sponsored
    review meeting and another 60 providing their input.[^9]

e.  By 1993, 54 companies had **endorsed** the CERES Principles.

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3.  **CERES today.**

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a.  According to the CERES Internet site (*About CERES*), **CERES
    today** is:

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(1) A coalition of **54 investor,** environmental, religious, labor, and
    social justice groups.

(2) The institutional home of the **CERES Principles.**

(3) A network of over **50 corporate endorsers** of the CERES
    Principles, representing a multitude of industries and nine Fortune
    500 firms.

(4) A **forum** for multistakeholder dialogue and an advocate of
    corporate environmental responsibility.

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b.  The **lack of progress** in receiving corporate endorsement of the
    CERES Principles over the past six years might be viewed as a
    failure, but "CERES's influence in the business environment can not
    be disputed. Coupled with the efforts of other programs such as the
    Business Council for Sustainable Development and the World Industry
    Council for the Environment, the changing landscape of corporate
    environmentalism bears CERES's mark."[^10]

c.  The efforts of CERES do not end with the CERES Principles. The March
    10, 1999, *Chemical Week* reports that CERES has proposed guidelines
    for reporting on environmental performance and sustainability,
    developed by the **Global Reporting Initiative,** a coalition of
    environmentalists, academics, and business and consumer groups.[^11]

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E.  Incorporating **environmental management** into corporate culture.

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1.  Hunt and Auster's 1990 *Sloan Management Review* article "Proactive
    Environmental Management: Avoiding the Toxic Trap" lays out a series
    of five **developmental stages** of corporate environmental
    management programs.

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a.  At one end is the **"beginner"** stage with no protection against
    environmental risk. At the other, the **"proactivist"** with a fully
    integrated and resourced program that actively manages environmental
    matters on a daily basis.

b.  Between are the **progressively developed stages** of "fire
    fighter," "concerned citizen," and "pragmatist."

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2.  Important to the **consideration of corporate culture are the**
    "seven keys to protecting your company" that are included in the
    "proactivist stage" (pp. 12--15):

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a.  Obtaining **top-level** support and commitment.

b.  Establishing **corporate policies** that integrate environmental
    issues.

c.  Establishing **interfaces** between corporate and business-unit
    staffs that reflect the corporate culture and develop trust
    throughout the organization.

d.  Developing a high degree of **employee awareness and training** that
    supports an environmentally conscious culture throughout the
    organization.

e.  Implementing a strong **auditing program** to assess progress and
    compliance.

f.  Establishing a strong **legal base** for the environmental program
    through general counsel involvement and reporting.

g.  Establishing **ownership** of environmental programs at all levels
    of the organization.

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3.  All of these "seven keys" support the establishment of environmental
    awareness and concern as part of the **organization's culture.**

4.  The article concludes with the important assessment of environmental
    management as a **strategic consideration.**

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a.  The **competitive nature** of the marketplace necessarily causes
    businesses to place a priority on those programs that support their
    competitive advantage.

b.  Environmental management generally has a negative effect on the
    bottom line in the short term, but managers must look to the
    **longer term** to recognize the benefits.

c.  If neglected for short-term economic goals, environmental problems
    can seriously **jeopardize profits and public image** for years.

d.  "While investment in proactive environmental management requires
    time, effort, and money, the rewards go beyond short-term financial
    statements. **Proactive environmental management** means
    responsively addressing business, moral, and social obligations to
    protect both a company and the environment." (emphasis added; p.
    18.)

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IV. Improving **corporate governance.**

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A.  **General** considerations.

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1.  The **board of directors** provides direction and control to a
    corporation and is the highest decision-making authority.

2.  While boards of directors are predominantly **chaired by the CEO,**
    their focus and composition have undergone significant changes in
    the past quarter century.

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B.  **Changes** in corporate governance (noted by Ferry in "Boardrooms
    Yesterday, Today and Tomorrow").

> 1\. Board **composition.**

a.  Corporate boards of directors of the early 1970s were dominated by
    **insiders,** including corporate officers, consultants, and other
    members who were beholden to the company they directed and did
    little more than rubber stamp the CEO's decisions and actions.

> b\. In 1973, 57% of boards were comprised of 10--15 members, with
> almost all including 4--6 executives who worked for the corporation
> and 2--3 who, although outsiders in name (consultants, suppliers of
> services, or customers), would be **classified as insiders** today.

c.  Since 1973, and particularly in the 1990s, the number of inside
    directors has **dropped.** Today in the United States, the average
    board is dominated by outside directors who hold 9 of 11 seats, and
    these outside directors are almost universally barred from doing
    consulting, legal, or other business with the company.

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2.  **Independent committees.**

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a.  As the composition of the boards changed, independent auditing,
    compensation, and nominating **committees also emerged.**

b.  Audit committees are now **100% composed of outsiders,** and, today,
    74% of all boards have a nominating committee composed of entirely
    outside directors.

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3.  **Diversity.**

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a.  The traditional board of directors of the 1970s was comprised of
    white males. In 1973, one or more **females** sat on 11% of the
    boards and one or more ethnic **minority members** sat on 9% of the
    boards.

b.  In 1998, the percentage of boards with representation of one or more
    **females** had risen to 72% and the percentage of boards with
    representation of **ethnic minorities,** to 55%.

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4.  **Evaluating performance**.

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a.  A situation almost unheard of 25 years ago, 72% of boards now have a
    formal **evaluation process** for the CEO.

b.  58% of boards have a committee of outside directors who **review and
    report on overall corporate governance** and the operations of the
    board of directors.

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C.  What this **means** now and in the future.

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1.  Clearly, outside directors are **gaining power and greater
    responsibility** for corporate strategic decisions.

2.  No longer can the **CEO act independently** and force her/his will
    on the board, expecting blind acceptance.

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a.  **Albert Dunlap** (mentioned earlier in the session) learned this
    the hard way. When confronted by the Sunbeam board concerning
    accounting inconsistencies, Dunlap stated "I'm much too rich and
    much too powerful to take this s\_\_t from you."[^12] Within days,
    Dunlap was dismissed.

b.  Although not directly related to the social issues surrounding
    Dunlap's tenure as Sunbeam's CEO, the decision and ability of the
    board to fire Dunlap indicates a shift in the corporate **governance
    power structure.**

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3.  Areas these outside directors are **"most involved** in today
    include long-term strategy, management succession, CEO evaluation
    and compensation, crisis management, and issues that focus on
    shareholder interests" (emphasis added; Ferry p. 3).

4.  Lerbinger (pages 208 and 209) comments on the growth of **"public
    policy"** board committees who are, at least in name, concerned with
    public and social matters which consider not only stockholder, but
    stakeholder (outsider) issues and concerns as well.

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V.  Engaging in **social accounting.**

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A.  **General** considerations.

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1.  Lerbinger (pages 203 and 204) explains social accounting and the
    accompanying idea of a social audit as means of supporting the
    **"managerial creed"** by providing a measure of social benefits and
    social costs created by a organization in the course of their
    operations.

2.  Numbers and degrees of accounting, audits, and reporting in the late
    1990s are **underwhelming** at best according to Lerbinger's
    writings.

> B. **Background** (based on Marx's article "Corporate Social
> Performance Reporting," pp. 1 and 2).

1.  John and Lewis Gilbert are credited with being the **pioneers** of
    shareholder activism in the 1930s. The Gilberts attended thousands
    of corporate annual meetings and raised questions about economic and
    social matters.

2.  Within the general public, corporate responsiveness to a broadening
    range of social issues **grew rapidly** in the late 1960s.

3.  In the early 1970s, corporate meetings were marked by increasing
    numbers of **shareholders resolutions** covering topics such as
    nuclear power and weapons, involvement with South Africa,
    affirmative action, and environmental concerns.

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a.  These resolutions were championed by a **diverse group** of
    supporters including individual activists, academics, labor unions,
    pension funds, and numerous religious groups.

b.  The supporters pressured corporations to **audit their social
    activities and report** the results to the public.

c.  "A number" of major corporations actually began reporting on their
    **social philosophies and programs** in their annual reports,
    advertising, and special corporate publications.

d.  In general, the reporting of the 1970s was **characterized** as "by
    no means universal, nor is it comprehensive, nor is it always
    credible, nor is it always interpretable even though it may be
    believed" (p. 2).

e.  A **1974 survey** of 750 companies received 284 responses, of which
    76% reported internal efforts to assess their social activities.
    Less than half of those claiming to accomplish social assessments
    actually reported the results to the public.

f.  Marx's article states that although these reports were important
    communications tools in the public affairs arena, "little is known
    about them today, or **what has transpired** since the early 1970s"
    (emphasis added; p. 1).

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4.  In 1991 and 1992, Marx **initiated another study** of corporate
    social reporting, surveying over 250 Fortune 500 companies.

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a.  Marx received 139 responses that led to the **general conclusion**
    that the vast majority of the companies responding had never
    published a comprehensive report of the major social issues
    affecting them.

b.  **The predominant reason for not publishing a report** was that the
    social issues were discussed in other corporate publications and
    reports. Marx's investigation of these "other" publications and
    reports indicate that coverage of social issues ranged from a few
    paragraphs to a ten-page discussion of environmental issues.

c.  Marx reports that, in his survey of corporations, he found the
    **General Motors Public Interest Report** to be a unique public
    affairs document.

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(1) This **comprehensive report** has been published annually since 1971
    and was given the name "Public Interest Report" in 1976.

(2) the Public Interest Report, which had a **70,000-copy distribution**
    in 1991, is a valuable source document for General Motors
    executives. Marx states that the CEO of General Motors always
    carries two documents -- the annual stockholder's report and the
    Public Interest Report.

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5.  Social accounting today.

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a.  General Motors currently publishes an **Environmental Health and
    Safety Annual Report,** which is available through the General
    Motors Web site -- [http://www.gm.com](http://www.gm.com/), and
    specifically at
    [http://www.gm.com/about/info/-world/98Enviro/index.html](http://www.gm.com/about/info/world/98Enviro/index.html)
    -- that generally follows the CERES reporting protocol.

b.  The CERES Web site includes **links to the environmental reports**
    of several large corporations. The homework and following
    small-group work, presentations, and discussions will contrast some
    of these reports.

c.  Additionally, CERES is spearheading the **Global Reporting
    Initiative (GRI)** started in 1997 (mentioned earlier in the
    session) with a core mission of establishing, through a global,
    voluntary, and multi-stakeholder process, the foundation for
    standardized (or uniform) corporate sustainability reporting
    worldwide (Global Reporting Initiative Web page). The standardized
    reporting will include three tools:

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(1) **Core metrics** applicable to all business enterprises.

(2) **Sector-specific metrics** customized to specific types of
    enterprises.

(3) **A uniform format** for reporting these metrics and information
    integral to a company's sustainability.

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d.  CERES reports on the same Web page, "Each year witnesses a **growing
    number of companies** voluntarily disclosing environmental
    information, both as stand-alone corporate environmental reports
    (CERs) and as special environmental sections within corporate annual
    reports" (emphasis added). It cautions, however, against the dubious
    quality of the reports and the value for intercorporation
    comparisons and benchmarking -- hence the necessity of a
    standardized GRI.

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6.  The **price** of social accounting.

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a.  Social accounting and adherence to the "managerial creed" comes with
    a **financial cost** that is not necessarily the burden solely of
    corporations.

b.  Corporations have the **strategic goal of profitability** and must
    pass along some reasonable portion of the cost of doing business to
    the customer and the general public.

c.  Lerbinger makes the **essential point** (page 206) that "All
    stakeholders, including the general public, must be willing to
    accept one of the basic tenets of social accountancy, namely, a
    willingness to recognize and pay for the full social costs in the
    price of goods and services offered in the marketplace."

d.  **Ask the students,** Just how much of the financial costs for
    improved social programs should be passed along in increased prices
    for consumers? Should there be some standard of reasonable profit
    level that determines exactly how much goods or services should
    cost? If Exxon had determined the cost of instituting multiple
    controls to both prevent and control the consequences of a major oil
    spill in Prince William Sound and informed the general public that
    its share of these costs was \$0.01 per gallon of gasoline, how do
    you think the population in the Prince William Sound area and the
    general population would have reacted? If the public refused to pay
    its share for the controls, would Exxon be obligated to implement
    the controls and pay the entire cost?

**Supplemental** **Considerations:**

None.

**Objective 26.4 Complete objective 26.2 (Research the CERES report of
an assigned corporation) by comparing and contrasting the reports
through small-group discussion, oral reporting, and class discussion.**

**Requirements:**

Rotate within group assignments.

Give the small groups approximately 20--25 minutes to discuss their
individual research and to develop a short (three to five minutes) oral
report.

Have the group reporters deliver their reports.

Compare and contrast the reports through class discussion.

Complete the modified experiential learning cycle for objectives
26.1--26.4 at the conclusion of this session.

**Remarks:**

I.  **Group work.**

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A.  **Goal:** Summarize the content of the assigned corporate report
    through small-group discussion.

B.  Rotate within group assignments.

C.  Prepare and deliver (through the group reporter) a short (three to
    five minutes) **oral report** of the group's work covering the
    following major points:

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1.  Overall **corporate philosophy** or mission regarding health, the
    environment, and safety.

2.  **Health, environment, and safety** policies.

3.  Statement of commitment to **shareholders.**

4.  Statement of commitment to **stakeholders.**

5.  An **appraisal** of the usefulness of the report to stockholders and
    stakeholders.

6.  Your **opinion** on whether the report has substantive content and
    is of value as a management tool or is merely a public relations
    document.

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II. Following the oral reports, **compare and contrast** the corporate
    reports through class discussion.

III. Complete the **modified experiential learning cycle** for
     objectives 26.1 through 26.5 at the conclusion of the class
     discussion.

**Supplemental Considerations:**

None.

[^1]: "Sears Tests Commission Strategies." *Discount Store News.* Vol.
    33, No. 6. Page 2.

[^2]: Harrald, John R. 1997. Notes from the Prince William Sound Risk
    Assessment Project Report.

[^3]: Harrald.

[^4]: Sellnow, T. L., and Ulmer, R.R. 1995. "Ambiguous Argument as
    Advocacy in Organizational Crisis Communication." *Argumentation and
    Advocacy* \[on-line\]. Vol. 31, No. 3. Start page 138. River Falls,
    WI: American Forensic Association. Electronic version page 5 of 9.

[^5]: Sellnow and Ulmer page 5.

[^6]: Mitroff, Ian I., and Pauchant, Thierry C. 1990. *We're so Big and
    Powerful Nothing Bad Can Happen to Us.* New York: Carol Publishing.
    Page 82.

[^7]: Hoffman, Andrew. 1996. "A Strategic Response to Investor
    Activism." *Sloan Management Review* \[on-line\]. Vol. 37, No. 2.
    Start page 51. Cambridge, MA. Electronic version Pages 2 and 3 of
    12.

[^8]: Hoffman page 3 of 12.

[^9]: Hoffman page 4 of 12.

[^10]: Hoffman page 9 of 12.

[^11]: Sissel, Kara. 1999. "CERES Progress Standards." *Chemical Week.*
    Vol. 161, No. 9. Page 36.

[^12]: Laing, Jonathan. 1998. "And Take this Chainsaw with You."
    *Barron's*. Vol. 78, No. 25. Page 14.