When disaster strikes we all wish we'd had prior warning as those involved in the libor, horse meat and phone hackings scandals will testify. But such events are nothing new. PM looks at the five biggest HR crises of all time and asks the experts for their verdict on what should HR have done
Nick Leeson, the original "rogue trader", caused the London's oldest merchant bank to collapse when he lost it 827 million. By doubling as both the floor manager for Barings trading on the Singapore International Money Exchange and head of settlement operations normally held by two people, he was allowed to settle his own trades.
The bank initially stopped bonuses for all staff to try to rescue it, but it was too late. It was declared insolvent in February 1995.
An investigation led by the Chancellor of the Exchequer called it: "a failure of management and other internal controls of the most basic kind." Leeson has since blamed lack of diversity for banking problems today, saying: "It was certainly more diverse back then than it is now. The people that are being looked at today are coming from a far smaller gene pool. You are unlikely to be recruited unless you have a first degree." Richard Elsen, chairman of crisis management consultancy, Field says: "Leeson was allowed to police himself. The Barings collapse vividly illustrated the need for organisations to plan for catastrophic scenarios, which then can be managed-out by effective prevention systems and detective controls."
WorldCom, formerly the US's second largest long-distance phone company had been using fraudulent accounting to hide its declining financial health, to inflate its assets to $11bn with $3.8 billion of fraudulent accounts. It caused the introduction of Sarbanes-Oxley Act of business regulation.
Since rebranding as Verizon, HR transformed its department, introducing community programmes, and a new code of conduct based on moral behavior.
The WorldCom scandal highlights the importance of establishing sound governance structures in organisations, says Spencer Fox, managing director of The Reputation Institute. Our own studies at Reputation Institute find that good governance is a critical element of building great reputations. In particular, WorldCom highlights the need for major corporations to have in place the channels that allow potentially damaging behaviour (whether at the top or the bottom of the organisation) to be reported in a way that ensures issues are followed up. The role for HR leaders here would be to support "whistle blowers" to ensure they are both encouraged to come forward, and supported once they have.
Lehman Brothers' overuse of leveraging (borrowing funds to invest) particularly in housing related assets causing its eventual 2008 bankruptcy the largest in US history, with it holding more than $600 billion in assets.
In August 2008, Lehman announced it would release 6% of its work force, (1,500 people), ahead of its third-quarter-reporting deadline. On 9 September it shares plunged 45%, and a week later it filed for bankruptcy. When Nomura Holdings acquired its operations 8,000 staff were kept with the intent to remove the aggressive Lehman culture grown from its former CEO and trader Richard Fuld.
The jury's still out. Nomura staff were offered a choice between its existing pay scheme (moderate, but job security) or a Lehman-style performance based system, and 45% chose the latter. When the last of the guaranteed bonuses were paid out in March 2010, 12 top former-Lehman bankers resigned within a month. Soon Young Choi, research fellow at the Korea Capital Market Institute writes: "The biggest issue has been conflict arising from the divergent corporate cultures of the two firms. Nomura tried to mesh two very different cultures."
News International's ongoing controversy involving improper means to secure information most notably hacking the phone of Milly Dowler. It initially dismissed the activities as those of a single rogue reporter, but has since admitted a cover-up;with several top executives resigning, including CEO Rebecca Brooks.
HR were accused of fostering a "whatever it takes" culture by allowing bullying and reckless behaviour. In 2011 a new management structure was unveiled a week before the News of The World announced it would close, with HRD Daniel Cloke being replaced by Derrick Crowley.
It is unclear how much the culture has genuinely changed, and whether too hard a line is now being taken. News International was taken to court in 2011 by former Sun features editor Matt Nixson for wrongful dismissal. He claimed he'd been summoned to Crowley where a so-called "clean-up team" had sacked him immediately without notice or right to appeal. Nixson reached a settlement in October last year. Richard Elsen, chairman of crisis management consultancy Field, says: "News International has been severely hampered by the fact that it repeatedly denied wrongdoing, up to the point it was forced to come clean a classic case of incredibly poor corporate governance, indicative of the culture of the organisation. Transparency and openness at the beginning, coupled with decisive early action might have tempered the fallout somewhat."
Oil storage buoy Brent Spar (operated by Shell), had a fractious fight in 1995 with Greenpeace over its plans to dispose of it in deep Atlantic waters (which had been approved by the UK government). After huge negative press, including petrol stations being targeted, Shell was forced to abandon its plans, costing it 60-100million in lost sales and reputation.
Shell's top management admitted it concentrated on factual detail rather than polished presentation of its arguments. In 1996 it began a consultation process involving 7,500 members of the general public in ten countries and 1, 300 opinion leaders in 25 countries. In 1998, Shell published its landmark report Profits and principles does there have to be a choice?, summarising how the company intends to integrate social responsibility into its business strategy.
Speaking to PM in 2010, Hugh Mitchell, then its chief HR and corporate officer, Shell, said Brent Spar "gave us a whole lot of learning around how you manage public opinion, authorities."
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