In the heat of corporate crisis: Mind over matter Deloitte Review Issue 17

Behavioral science now provides some answers to why individuals and organizations can fail to recognize the road to a crisis, and suggests techniques to counteract the cognitive impediments that can make a bad situation worse.

DR_DUP1207_spot1

On May 4, 2000, the National Park Service set a controlled burn fire in New Mexico’s Bandalier National Monument. The deliberate burning was meant to prevent fire hazards waiting to happen in the arid mesa country, lined with Ponderosa pines, a ready tinderbox. But by the next day, the prescribed blaze meant to forestall a wildfire became one itself when it breached a designated fire line.

Over the next week, high winds whipped the burn into an inferno, spreading out of control into the Santa Fe National Forest nearby and toward the towns of Los Alamos and White Rock, where 18,000 residents were evacuated. Finally, the thousand firefighters deployed to quell the flames contained what became known as the Cerro Grande Fire nearly three weeks after it began. By then, it had destroyed 48,000 acres and 235 homes and caused over $1 billion in damages.1

A Deloitte Series on Behavioral Economics and Management

The behavioral sciences examine how psychological, social, environmental, and emotional factors—as well as economic incentives—affect the decisions individuals or groups make. This article is part of a series that explores how better understanding and more creative uses of the principles of behavioral science principles can lead to better decisions in the workplace and in everyday life, as well as promote the more people-centric design of programs, products, and services. For more information visit http://dupress.com/behavioral-insights/.

Corporate fires

While corporate crises seem a far cry from the Cerro Grande fire, there are some disconcerting parallels. Like the fire personnel and residents near Bandalier, companies often need to react quickly in the face of unanticipated challenges—whether industrial accidents, financial misdeeds, cyberattacks, or any number of disasters which seem to occur more frequently today than ever before. But companies often cannot detect as easily the point at which business-as-usual turns into a crisis when no prescribed fire line exists to delineate a controlled burn from an uncontrolled one. Instead, they may treat the first signs of smoke with complacency, which soon degenerates into panic as the fire catches. Flummoxed by stress responses and human behavioral factors, the company loses precious time frozen in confusion and indecision, as the situation escalates to threaten the corporation’s reputation, business, and sometimes, its very survival.

 

Deloitte Review, issue 17
See the full issue

Join the conversation
#DeloitteReview

 

A level-headed manager in a well-run firm would seem a good candidate to navigate effectively through such crises. However, human emotional responses to extreme stress are deeply ingrained and difficult to overcome, and organizational dynamics often exacerbate irrational decision-making. In a crisis, unthinking reactions tend to kick in at the very moment when strategic reasoning is needed most.

Behavioral science now provides some answers to why individuals and organizations often fail to recognize their dilemmas and suggests techniques to undo the mental impediments that blind them. Knowing this, corporate leaders can help their companies overcome what may be the biggest, under-acknowledged hurdle to their rescue and recovery. By understanding common emotional pitfalls hindering crisis management, the reasons for them, and related organizational dynamics, business leaders are better equipped to put in place processes to guard against the traps and to meet the test of crisis with greater fortitude.

Common pitfalls in crises

Crises have the upper hand simply because they tend to come as a surprise to those who aren’t especially trained to take them on. Some, like 9/11, hit like a thunderbolt and are immediately identified as a disaster. Others sneak up, looking like a routine matter at first, and then flare into catastrophe, like an accounting anomaly that unravels a whole corporation. In either case, the threat is likely of a scale or type that business leaders have never before encountered personally.2 For most, a major crisis is a once-in-a-career event. As a consequence, it’s easy to fall back on routine procedures, only worsening the outcome, or to improvise the wrong solutions in fear and panic instead of following effective practices (see sidebar). Many times, corporate executives misread the scenario in a way that dangerously delays a successful response.

For most, a major crisis is a once-in-a-career event. As a consequence, it’s easy to fall back on routine procedures, only worsening the outcome, or to improvise the wrong solutions in fear and panic instead of following effective practices. Many times, corporate executives misread the scenario in a way that dangerously delays a successful response.

We see examples of this in reactions to actual corporate crises:

  • Problem? What problem? When a letter from federal regulators arrived at their office, the US CEO and general counsel of a leading multinational bank kept it a secret, choosing not to inform headquarters or even their own staff. The regulators had ordered the bank to respond in less than two months with a plan to return to regulatory compliance or exit a US business key to the parent company’s bottom line. The bank had been in discussion regularly with regulators, making tactical fixes that were not deemed to be satisfactory. The increasing number and severity of issues cited should have been a hint of mounting problems. Instead, the US bank’s two leaders decided to view the latest letter as another routine communication. As the deadline neared, the feeling of unease grew, and broader communication became mandatory. Within days of the deadline, the CEO flew into full crisis mode, pleading with regulators for more time and finally engaging corporate headquarters. Trouble that might have been managed at an earlier stage had grown into a potential threat to the entire company, impacting the board, senior management, and clients.
  • This could never happen to us. A major consumer products company, headquartered outside the United States, started hearing a trickle of complaints from US customers. Known for its high-quality products, the company dismissed the reports as routine. Top management thought the issue could be easily handled by the US subsidiary, per usual procedures. But news of serious injuries and even death from the products continued to build. Still unconvinced they were in an emergency scenario, headquarters executives began to learn more about the snowball effect of past US-based corporate crises, including front page stories, congressional hearings, and government investigations. When US trial lawyers took to social media to solicit victims for class action lawsuits, the executives started realizing they were following the same score. By then, the crisis was in full swing, requiring high-profile product recalls, CEO testimony in Congress, and cooperation with a US criminal investigation. The company’s reputation took a big hit as the crisis occupied the limelight for a year before another major corporate disaster took its place.

Crisis management: Effective practices

Once a company recognizes it is in crisis, the challenge is to quickly take command of a situation that is spinning out of control. The following are some essential steps in crisis management:

Organize. Convene a crisis management organization immediately. Designate a leadership team, including a top leader adept at strategic analysis and action in fast-changing environments, and a deputy, skilled at inclusive team management. Choose members with diverse experiences from across corporate functions and with crisis management experience, if possible, to coordinate, communicate, assess, and analyze information. Include those closest to the issue on the ground who can report on local conditions and who can take immediate action, if needed.

Empower members to share their views to facilitate information flow, critical to ongoing assessments as the crisis evolves.

Diagnose. Devise an initial strategic plan of action as soon as possible, preferably within the first couple of weeks of the crisis, based on an analysis of the information available at the time. As the company’s situation rapidly deteriorates, crisis managers don’t have the luxury of gathering all necessary data before determining a plan. To start regaining the confidence of stakeholders, resist decision paralysis, take action, and correct course later, as needed.

Reassess the landscape at regular intervals through the lens of an objective outsider to test whether the crisis is responding to steps taken in the crisis management plan. If not, reassess the assumptions underlying the plan, and correct accordingly.

Communicate. Issue a public statement within the first few minutes or hours of the crisis to reassure external stakeholders and employees that the company is taking responsibility and necessary actions, as warranted. Announce the outlines of the initial strategy plan. Communicate frequently on a regular basis with key stakeholders, such as the press, regulators, lawmakers, investors, creditors, employees, and others, to gain control of the message and to fight inaccurate claims. Updating constituents about the company’s crisis-response actions builds public confidence.

Though information sharing is important, resist the pressure to give out yet-to-be-verified information and to make premature promises the company can’t keep.

Investigate. Within the first couple of months of the crisis, determine the root causes and also the effectiveness of the current response to help formulate a longer-term solution with inputs from wide-ranging sources, including sidelined employees, suppliers, and others. Extract, synthesize, and analyze information from silos within the corporation. Actionable intelligence comes from connecting the dots.

Digging for the truth amid competing versions, often from those with vested interests, is an art. Success depends on obtaining and sorting through information from diverse sources from high and low.

Solve for the long term. The root-cause investigation may uncover deep, systemic cracks in a company’s foundations, requiring a rebuilding of corporate strategy, governance, and/or culture. Resist the urge to stop at fixing just symptoms but not the cause. Though fixing the cause may require taking on entrenched interests, more lasting solutions help make the company less crisis-prone in the future. Fundamental changes come about only when companies look beyond workaday concerns and rebuild based on core values.

Overcoming opposition to reform is difficult. But reforms are more likely to be accepted if they adhere to core values and are carried out according to a fair process. If managed well, in the end, a crisis can turn into an opportunity to recommit to core values and to reinvigorate a company’s reputation and business.

Why are we prone to mistakes?

As the instances above show, dismissing bad news is a common response at the outset of crisis when it’s unclear whether new developments are business as usual or life-threatening. Clinging to the view that all is normal protects one against the painful realization that the terrain is shifting in dangerous and unpredictable ways, but staving off reality just cedes more ground to the fast-gathering crisis.

In the thick of a dilemma, it’s not always obvious that one needs to be on guard against the first reflexive response. When a plane stalls, for instance, new pilots instinctively pull back the control stick to point the plane up. But that move will hasten a crash, because the ascending plane starts to lose speed. Pointing the plane down is actually the way out, because losing altitude increases speed, causing the plane to lift.3

Likewise, in a corporate emergency, the initial impulse to dismiss a threat is a mistake. Waking up to the dimensions of the problem and taking deliberate actions to counteract it is the right way to go. But that’s difficult when the automatic response to ignore or deny is just one of many mental errors humans are susceptible to, even in the best of times.

In daily life, the brain tends to fall back on fast, nearly automatic mental processing, instead of its slower, more powerful and deliberate mode of analytical thinking—both to conserve energy and reaction time. This “fast thinking” involves mental shortcuts that lead to errors in judgment.

Behavioral psychologists explain why people are prone to making such mistakes. Unfortunately, it comes down to how humans are wired.

In daily life, the brain tends to fall back on fast, nearly automatic mental processing, instead of its slower, more powerful and deliberate mode of analytical thinking—both to conserve energy and reaction time. This “fast thinking” involves mental shortcuts that lead to errors in judgment.4 Everyday examples include “confirmation bias,” where people embrace information supporting their views and reject the rest, or the halo effect, where people attribute glowing qualities to those they like, whether deserving or not.5 Humans constantly make mistakes in judgment by drawing quick conclusions based on a small, incomplete set of information. The phenomenon is also described as “narrow framing,” akin to seeing only what is inside a spotlight.6

In crisis, stress and time pressures can heighten susceptibility to losing sight of the big picture. In one flight catastrophe in the 1970s, for example, the pilot was so focused on managing malfunctioning landing gear that he failed to grasp advisories from his crew about the dwindling fuel supply. The plane ultimately crashed not because of the faulty gear, but because the plane ran out of fuel. Focusing too narrowly on a single issue during a crisis—and failing to monitor the gravity of other issues—can skew reality and lead to wrong decisions.

DR_DUP1207_spot2Corporate enablers

Unfortunately, when individuals readily fall prey to mental errors, organizations, as collections of individuals, can be even more susceptible. It’s not surprising that group dynamics within organizations amplify these errors, making it even harder to detect and to react lucidly to warnings of crisis.

According to psychologists, companies, in particular, are subject to certain mental errors that lead them to cling to the familiar and resist change even when change can save them from disaster. Moreover, due to group dynamics individuals may be afraid to speak up, leading to wrong decisions. And of course, fragmented bureaucratic structures of organizations can make it hard to catch warning signs before a problematic situation turns into a full-blown crisis.

Here’s what can happen:

  • Misplaced optimism and overconfidence. Mental mistakes that especially afflict corporations include optimism and overconfidence in the future, leading companies to underestimate current threats.7 Similarly, “loss aversion” and a preference for the status quo cause companies to cling to business as usual instead of changing to survive.8 The fast-evolving technology industry offers many examples. The Eastman Kodak Company, once king of the film photography business, for instance, discounted the threat of digital technology, failed to ride that wave, and filed for bankruptcy in 2012.9Today, it has emerged from bankruptcy and is retooling as an innovator in digital printing and other technologies to serve many different industries.10
  • Cascade of errors. Companies also suffer from group dynamics that amplify mental errors.11 In theory, groups should act as a positive force when it comes to crisis, enabling companies to arrive at the right analysis through the collective wisdom of diverse members. But in reality, members within groups often stifle their own views in favor of the majority’s, right or wrong. The phenomenon should be familiar to anyone who has attended meetings, where the first speaker, say, the boss, states a view. The next speaker, who is unsure of his own views, agrees, and then the third person goes along, even though she has some evidence to the contrary.12Collective denial was at work when President Kennedy’s advisors voted unanimously to invade Cuba at the Bay of Pigs to overthrow Fidel Castro. Many had private doubts but suppressed them for fear of appearing weak. The consequences were disastrous when the Cuban army killed or captured almost all US soldiers on the mission.13
  • Broken puzzle. Bureaucracies also make warning signals difficult to detect when fragmentation among different units allows each to disavow responsibility to detect and act upon the signals.14 As organizations grow bigger and more complex with more specialization between units, these dangers are on the rise.15 The legal department of a company could be seeing a rise in lawsuits claiming harm from defects in their products, for example. Immersed in the task of protecting the company on the legal front, that department may neglect to surface the information to the manufacturing units. The company then misses an opportunity to examine potential manufacturing shortcomings to help head off a larger crisis in the making.

A possible cure, snapping to?

If group dynamics and complex bureaucracies compound mental errors, then corporations would appear to be starting with a serious disadvantage in responding to a crisis. How can they overcome these impediments to recognize danger more quickly, analyze the scenario accurately, and put into action a sound crisis response plan? Behavioral economists suggest building in processes to induce clear-headed thinking by stripping off mental blinders. Serving as “tripwires” to jolt people out of denial into recognition,16 the following techniques help broaden the narrow frame to include a bigger vista.

  • Looking in from outside. When stuck in decision paralysis, ask what an outsider would conclude. In 1985, Intel, the dominant producer of memory chips, was rapidly losing market share to Japanese competitors but couldn’t bring itself to pull the plug on its core business in favor of its new microprocessor line. After months of fruitless discussion, Intel President Andy Grove asked CEO Gordon Moore what a new CEO would decide. Moore said a new CEO would get out of memory chips. Intel followed suit and subsequently prospered as a leader in microprocessors.17 The lesson: When loss aversion or other biases raise uncertainty about a decision, size up the situation from an outsider’s perspective for a more dispassionate analysis.
  • Giving permission. To spot trouble sooner, sanction workers to surface concerns, even those concerns backed only by intuition. Stanford University’s Lucile Packard Children’s Hospital instituted a successful Rapid Response Team (RRT) system to intervene at the first signs of precipitous, end-of-life declines among patients. The most important of six triggers, listed ahead of objective measures like declining blood pressure, encouraged nurses to sound the alarm if they had any worries even if they could not put a finger on the reason.18 As a result, the hospital’s mortality rate declined. The lesson: By trusting employees to sound even half-articulated concerns arising from their experience, companies may be able to catch and head off crises earlier.
  • Searching for anomalies. Even after failing at first to detect warning signals, it is possible to catch a mistake later by reassessing whether what seemed a routine situation is improving under a “routine” response. In the 1998–1999 Malaysian encephalitis outbreak, health officials noted that the symptoms were similar to those of mosquito-borne Japanese encephalitis. They fogged for mosquitoes, but the contagion continued. Finally, astute observers figured out that the victims were mostly Chinese pig farm workers, and almost never members of the non-pork eating Muslim population. Health officials discovered the disease was a new virus carried by pigs and then contained the outbreak with better-targeted measures.19The lesson: If a scenario is not playing out under the initial assumptions and action plan, readjust the analysis and response using the outsider view referenced above.
  • Speaking softly (without the big stick). To surface more accurate analysis from group discussions, refrain from stating management’s views at the outset. Repeat statements that don’t get attention and ask clarifying questions about them.20 In addition, use devil’s advocacy to give dissenting positions more weight. During the Cuban missile crisis, President Kennedy appointed his brother, Attorney General Robert F. Kennedy, to argue against the prevailing view, which helped break up the consensus that may have led to war.21 President Franklin Delano Roosevelt went further by expressing agreement with each of his advisors individually to inspire each to develop his argument fully.22 The lesson: To capture the best collective wisdom of group decision-making, allow minority views to thrive.

Crisis mode: Moving from confusion to clarity

Amid the chaos of crisis, even seasoned business leaders may be at a loss for the right response, confronting perils of a scope they have never encountered before. Fear, denial, and decision paralysis can easily take over in the face of big unknowns. All that is natural given the way humans are wired. But if there ever was a need to break through the limits of emotional, error-prone thinking, crises are that time, where taking sober, strategic action can mean the difference between survival and demise. By understanding the forces at play at these pivotal moments, corporate executives can put themselves on alert and snap out of emotional traps. With these tools, they can lay the essential groundwork for effective crisis management, providing their companies with a pathway to reverse fortune.

Indeed, the ability to turn panic and denial into a rational crisis response is essential to ensure a company survives a major crisis—all the more so in an integrated global economy where threats can emerge from any corner. A company’s response at these moments can define its future. Johnson & Johnson emerged from the often-cited Tylenol product-tampering case with its reputation significantly enhanced, whereas Enron combusted in the wake of its accounting debacle. In the best-case scenario, crises can provide companies with a new alchemy; that is, the ability to turn leaden failure into golden success. But this transformation can occur only if corporate leaders and workers overcome denial, proactively take responsibility, fix immediate problems, and put in place longer-term reforms based on core values.