Reputational Crises Profiled - Part 1

Copyright (c) 2010 Peg Jackson

The discussion of each crisis will briefly summarize:

* The nature of the crisis.

* The quality of the response. * What were the results?

* What were some of the underlying issues that triggered the crisis?

* What can your organization learn from these reputational crises?

The organizations chosen as examples vary widely in terms of size, mission and industry. What they all have in common is the reputational aspects of the crises they encountered and the memorable characteristics of their responses. Clearly some organizations think faster on their feet than others. The quality of some of their responses was better than others, but all of these profiles will provide the reader with a sense that none of the organizations ever really imagined the nature of the crisis that they ultimately faced. The reputational crises profiled relate to:

* Arthur Andersen

The accounting firm imploded following a federal indictment for obstruction of justice in the Enron prosecution.

* Dominos Pizza

The employees of a Dominos franchise made a crude video using the companys product and posted it on the internet.

* ACORN

This grassroots social service organization lost funding from the federal government, foundations and the Bank of America following the release of videos showing their employees counseling a couple posing as a pimp and prostitute on how to establish a brothel.

* American Red Cross

This century-old nonprofit has had enough reputational crises to script a soap-opera. In the interest of space and time, the discussion will be limited to their Liberty Fund scandal.

* Virginia Polytechnic Institute and State University Virginia Tech

This academic institution made the headlines in 2007 for the horrific massacre of 32 students and faculty at the hands of a deranged student.

The profiles of these organizations are as varied as the nature of the reputational crises covered in this discussion. Some of the organizations such as Dominos and Virginia Tech were successful at maintaining their reputation. Others, such as Arthur Andersen, could not withstand the blow. Still others, such as ACORN, remain mired in their reputational crisis with no resolution at present. The intent of the discussion is to present some important themes to the reader on the nature of reputational risk, the danger of denial, and the lasting effects of reputational damage.

Arthur Andersen

* The nature of the crisis.

The accounting firm Arthur Andersen was convicted in federal court of obstruction of justice in the Enron collapse. Among the factors that appeared to be crucial in the jury deliberations was the disclosure that an Andersen attorney instructed that her name be removed from a file memo that disagreed with Enrons characterization of a $1 billion loss as non-recurring.

Said prosecutor Andrew Weissman:

This is a perfect example of Arthur Andersen sanitizing the record so the SEC would have less information, Thomas, 2002.

* The quality of the response.

The firm appeared to address this crisis in the same reactive manner that they addressed previous crisis situations in which they were prosecuted for auditing misdeeds.

* What were the results?

Although the company threatened to appeal the obstruction of justice conviction, the firm closed its doors within three months of the verdict. Clients withdrew their business and employees left the firm.

* What were some of the underlying issues that triggered the crisis?

Over the previous 50 years the firm changed its corporate values from putting reputation over profit to values that fostered aggressive auditing practices and became mired in multiple instances of litigation in which the firm paid multi million dollar settlements to plaintiff shareholders.

* What can your organization learn from this reputational crisis?

The organizational culture changed dramatically over the firms 89 year history. The shift in organizational culture went from one that reinforced accounting industry standards and values to one that aggressively pursued profits, seemingly at all costs. While an aggressive pursuit of profits might be consistent with industry standards in some fields, this approach, particularly when it involves breaking the law, is inconsistent with accounting industry values.

The lesson for private, nonprofit and academic organizations is that dramatic shifts in organizational values that do not embrace parallel compliance practices will damage the organization.

In other words, if your organization chooses to change its corporate values, leaders must ensure that the new values are within the boundaries of the laws and regulations that apply to your organization.

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