Oftentimes, the way a corporation responds to a crisis ultimately leads to a binary outcome: the company stumbles and fails to survive or, alternatively, it responds effectively and thrives.  In this article, we summarize corporate crises experienced by ten companies (one from each of the GICS), and outline how these companies learned from their experiences to develop resilient businesses capable of generating sustainable growth.

Causes of Corporate Crises

Various causes of corporate crises have been categorized.[1]  Among them:

  • Product failure – Seven people died from tainted Tylenol capsules marketed by a unit of Johnson & Johnson.
  • Social responsibility gap – Nike was accused of questionable working conditions in factories manufacturing its products outside the U.S.
  • Executive misbehavior – Both the former CEO and the former CFO of Tyco International received lengthy jail sentences because of their criminal activities.
  • Poor business results – IBM lost $16 billion between 1991 and 1993.

In addition, corporate crises can occur because of the death of a symbol of the company (e.g., Dave Thomas of Wendy’s) or misbehavior by and / or controversy about a corporate spokesperson (e.g., Tiger Woods).  However, it’s arguable that, for most companies involved, these types of crises are “exogenous events” that soon pass over.

Crises from a Corporate Sustainability Perspective

The ten corporate crises that we summarize below can also be analyzed from the perspective of corporate sustainability:

  • Environmental issues: In response to the “climate change crisis,” Neste Oil set its strategic sights on becoming the world’s leading producer of renewable diesel.  Similarly, NextEra Energy moved to slash its emissions of greenhouse gases.
  • Social issues: Nike experienced product boycotts after being criticized for poor labor practices.  PepsiCo’s leading snack franchise was increasingly vulnerable as a focus on “eating healthy” got underway in the U.S. around the start of the millennium.  Amidst harsh working conditions in its Australian mines, Rio Tinto has faced acute labor shortages.
  • Governance issues:  IBM floundered in the early 1990s because of a strategic emphasis on its mainframes business and lack of attention to the PC sector.  The prompt response by the management of Johnson & Johnson to the Tylenol poisonings brought the crisis to an end in a relatively short period of time.  Royal Bank of Canada not only survived the financial crisis of 2007-2008, but expanded its businesses as competitors failed.  Tyco’s poor corporate governance facilitated criminal behavior by senior executives.  Vodafone’s management was compelled by the TMT bubble of the 1990s to expand at a breakneck pace.

As the focus on sustainability continues to grow, it’s likely that corporate crises will increasingly involve ESG issues.  Moreover, it has also been pointed out[2] that:

Globalization has brought with it a host of new challenges…U.S. corporations that might have been described as CSR (Corporate Social Responsibility) supermen in the U.S. have found it more difficult to capture the accolades in their overseas manufacturing operations.

While most crises are idiosyncratic in nature, in some instances there are commonalities, both in terms of the precipitating factors and the responses of the companies involved.  It’s for this reason that analyzing successful responses to prior crises can be enlightening for managements and investors.  All ten of the companies we focus on learned from their experiences how to develop resilient businesses capable of generating sustainable growth.

Information Technology: IBM

  • Crisis: Between 1991 and 1993, the company lost $16 billion because of a strategic emphasis on its mainframes business and lack of attention to the PC sector.
  • Response: Under Lou Gerstner, IBM was transformed from a (commoditized) hardware manufacturer to a focused IT services provider.
  • Outcome: By 2000, IBM Global Services is world’s largest IT consulting & Web services org., providing 38% of IBM’s revs, compared with 16% less than 10 years before.

Health Care: JNJ

  • Crisis: In 1982, 7 people died after taking Tylenol capsules deliberately laced with cyanide.
  • Response: Management withdrew all Tylenol from the market within a week.
  • Outcome: Most Tylenol market share was regained within a year thanks to a range of industry-leading initiatives, including tamper-resistant packaging.

Energy: Neste Oil

  • Crisis: A 2003 EU directive called for 5.75% of traffic fuels to be bio-based by 2010.
  • Resposnse: In 2006, Neste Oil set its strategic sights on becoming the world’s leading producer of renewable diesel.
  • Outcome: Neste’s biofuels business, the world’s largest, turned profitable in early 2013 for the first time since its launch in 2008.

Consumer Discretionary: Nike

  • Crisis: In a 1998 speech, Phil Knight, CEO and founder, admitted that “the Nike product has become synonymous with slave wages, forced overtime, and arbitrary abuse.”
  • Response: Nike raised the minimum age of workers; significantly increased monitoring; and adopted U.S. OSHA clean air standards in all factories.
  • Outcome: In 2013, Nike ranked as Fortune’s “World’s Most Admired” apparel company, and was listed at #22 in Corporate Responsibility magazine’s “Best Corporate Citizens.”

Consumer Staples: Pepsico

  • Crisis: PepsiCo’s leading snack franchise was increasingly vulnerable as a focus on “eating healthy” got underway in the U.S. around the start of the millennium.
  • Response: The company broadened its product line substantially with the acquisition and development of “good-for-you” products, including Quaker Oats, Naked Juice and Tropicana orange juice.
  • Outcome: “Good-for-you” brands totaled $10 billion in 2009, representing 18% of total revenues, with a target of $30 billion in revenues by 2020.

Materials: Rio Tinto

  • Crisis: Amidst harsh working conditions in its Australian mines, Rio Tinto has faced acute labor shortages.
  • Response: Experimentation with robots and remote controlled mines.
  • Outcome: Rio Tinto plans to increase its fleet of automated dump trucks to 150 by 2015 and eventually automate all aspects of a mine.

Financials: Royal Bank of Canada

  • Crisis: The financial crisis of 2007 2008 is considered by many economists to have been the worst crisis since the Great Depression of the 1930s.
  • Response: Relatively unscathed by the crisis, RBC began an expansion into global financial markets: Capital Markets staff increased by 26% since 2008.
  • Outcomes: Dealogic ranked RBC as 10th largest global investment bank by revenues in 2013, up from #15 in 2007.

Industrials: Tyco Industrials

  • Crisis: In 2002, an accounting crisis was followed by a stock price crash and a liquidity crisis.
  • Response: New CEO Ed Breen gutted the board of directors and the leadership team (with almost 300 managers leaving), and also slashed debt levels.
  • Outcomes: In fiscal 2003, cash flow rose to over $5 billion from just $800 million in fiscal 2002, while the stock price doubled from its 2002 low.

Telecom Services: Vodafone Group

  • Crisis: The TMT bubble of the 1990s compelled telecoms to expand at a breakneck pace.
  • Response: Vodafone acquired Airtouch in the U.S. for $66 billion in 1999, and Germany’s Mannesmann for $203 billion in 2000.
  • Outcomes: Airtouch brought with it an extremely valuable 45% stake in Verizon Wireless.  Vodafone sold Mannesmann’s Orange unit at the peak of the bubble for $46 billion in 2000.

While this note is simply a quick snapshot of the past, we argue that there is predictive value in more fully and systematically considering all the environmental, social and governance (ESG) factors that both precipitated these crises, and in considering how these factors were addressed subsequently.  We argue that this kind of analysis can provide a roadmap for corporate excellence which we argue is “the relentless pursuit of material progress towards a more regenerative and inclusive economy.”  While we are well aware that these structural issues, both exogenous and endogenous take time to play out, we also argue that great corporate governance and resilience demands a framework for the systematic study of the past and the future.

Michael Geraghty is the Global Markets Strategist at Cornerstone Capital and formerly the founder of Informed Investor, LLC a consultancy specializing in thought leadership that produces bespoke research reports for institutional investors.  Michael has over three decades of experience in the financial services industry.  He has worked as an investment strategist at a number of leading firms.
Michael Shavel, CFA is a Research & Business Analyst at Cornerstone Capital Inc. and a former Research Analyst on AllianceBernstein’s Global Growth & Thematic team.

[1] Corporate brand reputation and brand crisis management, Stephen A. Greyser, Harvard Business School, 2009