Crises Management

Mgt 455-Spring, 2010

Galbraith

2 missing after Greek ship hits rocks and sinksNavy divers searching for 45-year-old Frenchman and his teenage daughtermsnbc (4/8/07)

"The crew members were more scared than we were," said Lizbeth Mata, 15, a native of the Dominican Republic who was vacationing with her parents and brother. Mata said some crew members left before the passengers: "They were yelling and screaming — didn't know what to do."

Crises Management v. Risk Management Crisis management is a relatively new field of management.

Typically, proactive crisis management activities include forecasting potential crises or critical incidents, and planning how to deal with them. Crisis management in the face of a current, real crisis includes identifying the real nature of a current crisis, intervening to minimize damage and recovering from the crisis. Crisis management often includes strong focus on public relations to recover any damage to public image and assure stakeholders that recovery is underway.

Risk management often focuses on matters of insurance and mitigation of accidents; also includes protection against forgery, theft, etc.

Eleven Types of Crises Public Perception (Tylenol)

1982 cyanide injected, people died

Sudden Market Shift (Alfa Romeo Spyder) 1966-1993, Mazda Miata

Product Failure (New Coke) 1985, big flop old formula

reintroduced Top Management

Succession (Occidental) Cash (Douglas Aircraft)

Eleven Types of Crises Industrial Relations

(Eastern) Hostile Takeover (CBS)

1979 overthrow of Shah Deregulation (Braniff) Technical (Union Carbide)

Bhopal, 1984, 20,000 deaths Disaster (MGM and Hilton)

87 people (1980) v. 8 deaths (1981)

Adverse Political Events (Iran)

Definition of Political Risk

Possibility of an unexpected politically motivated event affecting the outcome of an investment

Instability vs. risk

Classified based on- actor responsible- nature of effect- breadth (micro vs.

macro)

Types of Political Risk

Cause

Result Government Others

Property Loss Confiscation Destruction

Income Loss Discrimination Disruption

de la Torre & Neckar (1988), p. 223

May, 2009 – Chavez takes control of over 60 oil field service companies in Venezuela

Most were foreign firms 30,000 employees

Main Types of Political Risks - Expropriation

“Forced divestment of equity ownership of a foreign direct investor”

Peaked in the mid-70s; almost nil now Mostly Africa till 1980, then Latin America Declined since:

-Key sectors already nationalized-Economic need = > privatization-Regulate rather than expropriate

Many hosts have joined MIGA (Multilateral Investment Guarantee Agency)

Some controversy over future:- is free enterprise here to stay, or will there be a backlash when privatization,

etc. fails to provide widespread benefits?

Main Types of Political Risks – Terrorism

Terrorist acts infrequent, but spectacular- L. America #1 esp. kidnappings- U.S. – owned corps. Esp. targets, U.S. public institutions- China, India, Turkey, Israel, etc.

-9/11, Iraq, Afghanistan, Africa, Yemen Little research-seems to be primarily

groups denied a voice in legitimate channels

International and Domestic terrorism - Symbolism particularly important (MacDonalds, etc., Tylenol)

Main Types of Political Risks

15

Selective Intervention Most risks are less dramatic changes in the rules of the game. Some areas of government policy affect foreign-owned companies

more than most domestic onesRestrictions on Cross-Border Transfer of Resources Tariffs and Non-tariff barriers (NTBs) inhibit sourcing, exporting Foreign exchange (FX) controls limit repatriation Capital controls Labor regulationsTaxation Concerns Restrictions on transfer pricing Unitary taxation policies Withholding taxes Availability of tax holidays and other incentives

Main Types of Political Risks

16

Investment Restrictions Sectoral restrictions Requirements for JVs, local ownership Transparency of licensing procedures Requirements for disclosure of technology Requirements for forced divestiture

Operating Restrictions limits on expansion, ownership of land, etc. Discriminatory access to labour, inputs Restrictions on local market access Performance requirements (e.g. employment & export levels, etc.) Unequal access to government procurement

Typical Direct Investments Foreign rules are different for

different kinds of foreign investments Foreign Direct Investment (FDI) –

Investment in a local companies shares Foreign Institutional Investment (FII) –

Investment in a local “publicly traded” company

Foreign Venture Capital Investment (FVCI) – Investment in a Venture Capital Fund

Example – Foreign Direct Investment (India Sectors – Open door policy)

Sectors – No Approval Required

Sectors – Prior government approval required

No Allowed

Information TechnologyFinancial Services (1)InsuranceReal Estate (1)ManufacturingHotels and tourismPharmaceuticals

Print MediaSingle brand retailing (51%)Courier and transportationCigars and CigarettesBroadcastingAtomic Minerals (74%)

AgricultureAtomic EnergyMulti-brand retailingLottery

1. Guidelines must be followed

Examples of “repatriation rules” - India Technical Royalty Ceilings

5% on domestic sales 8% on export sales Lump sum, $2m (USD) Hotel sector as separate

ceilings

Brand Royalty Ceilings 1% on domestic sales 2% on export sales

Consultancy Fee Ceiling, $1m (USD) per project

Dividend payments (preferred method of repatriation of dollars) Allowed but taxed Ceiling on dividend

(16.995%) Buy-back of sharesUse an international accounting house

Main Types of Political Risks

20

Non-Neutrality of the Legal Environment Judges or other arbiters insulated from political

pressure International and regional conventions International conventions re compensation Guarantees of national treatment

Regulations with Differential Effects on Foreigners Some may be much harder for foreign companies to

comply with

Main Types of Political Risks (Cross-fire Problems)

21

Activities may lead to international or home country sanctions or consumer boycotts against the country or firms that deal there

- human rights abuses (e.g. imprisonment, torture or murder of political opponents; use of prison labor; persecution of minority groups; not abiding by election results)- conflicts with neighboring countries- lack of concern for the environment, endangered species, etc.- disregard for international agreements (e.g. re nuclear non-proliferation)- the misuse of social issues as means of protectionism

What kind of cross-fire problems have occurred recently?

The Managed Crises

PRE-CRISESa) Evidenceb) Acknowledgmentc) Resolve

CRISESa) Honestyb) Assessmentc) Direction

POST-CRISESa) Rebuildingb) Recoveryc) Reform

Four Keys to Proper Crises Management

PRE-ESTABLISHED TEAMSa) Powerb) Knowledge and Trainingc) Outside Expertised) Formal Paradigm Challenges

CRISES AUDITSa) Susceptibility Auditsb) Capability Audits

CONTINGENCY PLANSa) Probability v. Impact Tylenol1 v. Tylenol2

Hilton v. MGM

RULES OF BEHAVIORa) Maintain Ethical Stanceb) Don’t Fight Pressc) Work with Public Opiniond) Designate Communicators

Video Case: Food Lion

What would you do?