When S * * * Happens

I recently asked a ballroom full of directors from various companies a question that only two could answer affirmatively. This was not a question about corporate social responsibility related to the environment. Nor a question about corporate governance or oversight. And it was not a question about Sarbanes-Oxley (barf, barf).

Give up? It was this: "How many of your boards have a crisis-response plan?" I’m embarrassed to say that even in our post-dot-com, post-9/11, post-Enron, post-tsunami, post-Hurricane Katrina, cover-your-%#* era, it’s apparent that we still haven’t learned our crisis lessons.

Peter Drucker, in one of his nuggets of wisdom, said it better than I can: The primary task of a company’s leaders is "to make sure of the institution’s capacity for survival—to make sure of its structural strength and soundness, of its capacity to survive a blow, to adapt to sudden change, and to avail itself of new opportunities."

Death, Taxes, and Crises

As the old saying goes, "Nothing is certain but death and taxes." But to that we should add "and crises." So many potential sources of crisis exist that business leaders, especially corporate directors, must accept the cold fact that experiencing a crisis is inevitable.

• Financial Issues—These include the draining of assets (cash, securities, receivables, inventory); hidden or surprising liabilities; loan covenant defaults; loss of a significant revenue source; unplanned material expense; a shortage of raw materials; lower-than-planned income resulting in operating losses; liquidity and capital problems.

• Operational Issues—Examples are a sudden growth in sales that causes an inability to meet customer demand in a timely way; losing key salespeople or major customers; racking up excessive overtime, work in process, inventory, or scrap; product recalls; or unforeseen environmental problems.

• Managerial Issues—Among these are the resignation, death, or termination of key executives; and the inability of management to correct financial or operational problems.

• Disasters—Remember 9/11 and Katrina? Storms, earthquakes, hurricanes, terrorist attacks, and other disastrous events can threaten a business in an instant.

• Third-Party Issues—To name a few, takeover attempts and proxy fights by shareholder-advocacy groups; federal or state government interventions in a business (e.g., actions by the Securities and Exchange Commission or Department of Commerce. And remember Allina?).

• Reputation Issues—These could come from the dramatic failure of products or services; unethical behavior by management; or violations of law or social norms. All can materially damage a company’s reputation when publicized.

Predictable Surprises

If the risks are so numerous, why are so many companies caught off guard? It’s true that some crises are unpredictable, but most aren’t. Most are actually "predictable surprises."

Local, state, and federal government agencies knew, for example, that a major hurricane would be big trouble for New Orleans, as did anyone who ever visited the below-sea-level city. Various agencies also were aware well before September 11, 2001, that militant Islamic groups were plotting an attack against the United States using airplanes. And anyone who worked in the airline industry or was a passenger on a plane probably realized how easy it was to sneak simple items on board that could be used as weapons.