Tarunkumar Patel
MGMT 407-10 Executive Leadership
Course Paper
Topic: Crisis Management
Instructor: Mr. Cleamon Moorer
Introduction:
I decide to work on a topic of Crisis Management. It is the process of preparing for and responding to an unpredictable negative event to prevent it from escalating into an even bigger problem, or worse, exploding into a full-blown, widespread, life-threatening disaster. Crisis management involves the execution of well-coordinated actions to control the damage and preserve or restore public confidence in the system under crisis. Crises are no longer an aberrant, rare, random or peripheral feature of today’s society. They are built into very fabric and fiber of modern societies. While not all crises can be foreseen, let alone prevented, all of them can be managed far more effectively if we understand and practice the best of what is humanly possible. Crisis management is no longer only for those assigned to the task; it is for each and every person. Every experience of a disaster has shown how ordinary people have to rise to the challenges of a crisis. Crisis management efforts should be directed towards helping the organization recover and rise from the embers of the crisis and ensure continuity.
The field of crisis management deals with human-caused crisis and natural disasters. It’s hard for human to stop natural disasters to happen but definitely with the advancement of technology we can now take some pre steps to cause a big loss. While human-caused crisis are not inevitable. They do not need to happen and so the people are extremely critical of those organizations or governments that are responsible for their occurrence. A well organized system with can help organizations to control crisis.
Sub Topics:
( I ) Global financial crisis from 2008 to present.
The 2008–2012 global financial crises, also known as the Global Financial Crisis (GFC), late-2000s financial crisis or the Great Recession is considered by many economists to be the worst financial crisis. “The immediate cause or trigger of the crisis was the bursting of the United States housing bubble which peaked in approximately 2005–2006 and then the first indications of a serious crisis appeared in January 2008. On 15 January, news of a sharp drop in the profits of the Citigroup banking led to a sharp fall on the New York Stock Exchange. On 21 January a spectacular fall in share prices occurred in all major world markets, followed by a series of collapses. A number of American and European banks declared massive losses in their 2007 end of the year results. Later months of the year witnessed the bankruptcy of Lehman Brothers, a 158-year old investment bank, the takeover of the stock-broking firm and investment bank Merrill Lynch, and the move by Goldman Sacks and Morgan Stanley to seek banking status in order to receive protection from bankruptcy. During the same weeks, the remaining four investment banks on the Wall Street all went under in one way or another. To stop further collapse and to ward off total economic catastrophe, the US government made its most dramatic interventions in financial markets since the 1930s. Only the infusion of hundreds of billions of dollars into the US banking system, coinciding with equally colossal interventions in Europe, staved off an entire crash of the world’s financial markets” (Elliott).
Following are some of the moves, which contribute to global financial crisis
“1. Repeal of Glass-Steagall: The 1999 repeal of the Glass-Steagall Act helped create the conditions in which banks invested monies from checking and savings accounts into creative financial instruments such as mortgage-backed securities and credit default swaps, investment gambles that led many of the banks to ruin and rocked the financial markets in 2008”(Marlin).
2. “Off-the-Books Bank Accounting: Holding assets off the balance sheet generally allows companies to avoid disclosing “toxic” or money-losing assets to investors in order to make the company appear more valuable than it is”(Weissman).
“3. CFTC Blocked from Regulating Derivatives: Financial derivatives are unregulated. By all accounts this has been a disaster. Warren Buffett warned they represent "weapons of mass financial destruction". They have amplified the financial crisis. The Commodity Futures Trading Commission (CFTC) sought to exert regulatory control over financial derivatives during the Clinton era, but failed to get the authority. The non-regulation of financial derivatives was again assured in 2000, with the Commodities Futures Modernization Act” (Marlin).
4. “Excessive Capital Leveraging Was Encouraged: In 1975, the Securities and Exchange Commission (SEC) promulgated a rule requiring investment banks to maintain a debt-to-net-capital ratio of less than 15 to 1. In 2004, however, the SEC succumbed to a push from the big investment banks, led by Goldman Sachs, and authorized investment banks to develop net capital requirements based on their own risk assessment models. With this new freedom, investment banks pushed ratios to as high as 40 to 1Meanwhile global bank regulators allow commercial banks rely on their own internal risk-assessment models” (Marlin).
5. No Predatory Lending Enforcement: Banking regulators retained authority to crack down on predatory lending abuses, but they sat on their hands. Under the doctrine of "assignee liability," anyone profiting from predatory lending practices should be held financially accountable. With some limited exceptions, however, assignee liability does not apply to mortgage loans.
6. Bank Merger Mania: “Megabanks achieved too-big-to-fail status. While this should have meant they be treated as public utilities requiring heightened regulation and risk control, other deregulatory maneuvers enabled them to combine size, explicit and implicit federal guarantees, and reckless high-risk investments”( Marlin).
7. Credit Rating Agency Failure: Wall Street packaged mortgage loans into pools of securitized assets and then sliced them into tranches. The resultant financial instruments were attractive to many buyers because they promised high returns. But pension funds and other investors could only enter the game if the securities were highly rated. The credit rating agencies enabled these investors to enter the game, by attaching high ratings to securities that actually were high risk. The Credit Rating Agencies Reform Act of 2006 gave the SEC insufficient oversight authority. The SEC must give an approval rating to credit ratings agencies if they are adhering to their own standards -- even if the SEC knows those standards to be flawed.
Above mentioned are the reasons why global financial crisis occurs and made a huge damage to world economy now following are some of the steps required to bring economy back on the track.
1. Getting a grip on housing: “The most constructive single step on the road to higher economic growth is to get housing back on track. Housing is important not only because of its stand-alone economic benefits but because it spurs consumer spending and helps to lift the property and sales tax base of state and local governments.” (Fosler)
Housing activity remains at only about one third of what have been historically reasonable levels of housing activity. Home prices are still under pressure. Reported inventories of unsold houses are extremely high and even higher in actuality given the number of houses that are held off the market because of adverse conditions. Probably the most striking single statistic is homeowners’ equity as a percentage of household real estate. The mortgage binge helped to take homeowners’ equity from 60 percent of the total value of household real estate holdings where it had been since the late 1980s to the early 2000s to less than 40 percent today. This burden is not felt only by those who are directly involved but it suppresses the willingness to make new housing investments and/or commitments for big-ticket items like cars or furniture.
Something that is this comprehensive, although it may be structured differently, needs to be done today.
2. Restoring manufacturing in America: “A second practical approach to improving economic growth would be to increase the share of manufacturing activity in the U.S. economy. If we look back to the 1990s, manufacturing was about 17 percent of the economy, compared to about 12 percent today. After all, manufacturing is pulling more than its weight as a job creator at the moment. There are lots of approaches here These include public/private partnerships to expand domestic supply chains, increases in education and training of engineering, machining, and modern manufacturing skills especially at the junior college level, and support for U.S. manufacturers to identify and penetrate international markets” (Fosler)
3. Budget balancing: We have to think through how government can support a growth objective like the one laid out above while at the same time substantially restructuring important entitlements like Medicare, Medicaid and Social Security, and the federal tax system through tax reform. What is needed is a wholesale rewrite of the government’s role in these important entitlement programs in a way that clarifies government and individual responsibilities and leverages U.S. innovation and competitiveness to create greater private opportunities to meet these important social needs. The health care delivery system could be larger, more flexible, more cost competitive and offer many more and higher wage employment opportunities than it does now.
4. Eliminating Personal Debt: Eliminating each of our personal debts will free more money to buy more products. Yes, while paying off debt, the economy will suffer. But once it's done and everyone is spending again, our economy will boom.

( II ) Corporate crisis of company “Mattel”
A corporate crisis often results when an organization is accused publicly of violating the social norms of corporate behavior, thereby engendering public hostility. Although lawsuits, prosecutions and governmental hearings often result, they are the tip of the iceberg. The more perilous risk is erosion of public trust, leading to lost customers.
“In the past, corporate crises fell into two broad categories: incompetent acts and intentional acts. Organizations facing a crisis typically had a window of opportunity to react and minimize any damage to their reputations because the major media delivered news to the public twice a day, in the morning and the evening. Regardless of the truth of any public accusation, how an organization reacts to it can make all the difference” (Dalagan).
Consider toy manufacturer Mattel's response to a recent crisis and how it affected the outcome. Mattel founded in 1945 is world’s largest toy making company producing over 800 millions toys annually” (Group D2). “In the summer of 2007, a French retailer informed California-based Mattel that an independent testing company had found high levels of lead in some of its toys. Mattel conducted an internal investigation, which confirmed the French finding and traced the problem back to a supplier in China. Rather than wait for the Consumer. Product Safety Commission to determine whether it was required to recall its toys, Mattel voluntarily recalled 1.5 million units, nearly a million of which had been sold or shipped to U.S. retailers. Although the recall was broader than necessary, Mattel decided to be cautious and also announced that it would review its own practices to ensure product safety.” (Trustee) The company then flew a delegation to China to meet with manufacturers and suppliers to require them to sign a new safety contract. In announcing the recall, Mattel explained the source of the problem and identified the supplier. “CEO Robert A. Eckert told customers: We realize that parents trust us with what is most precious to them.... Our goal is to correct this problem, improve other systems and maintain the trust of families that have allowed us to be part of their lives by acting responsibly and quickly to address their concerns." Although the company initially suffered some consumer backlash, Mattel's reputation and the value of its stock suffered no lasting damage. This case shows how even the perception of potential responsibility requires organizations to handle any crisis situation. (Trustee) Following are some steps to manage crisis effectively for any corporate.
1. Establish a crisis-management team: Every organization must ensure that the right leaders are in place and aligned to manage a crisis successfully. “The crisis-management team should be small and, at minimum, include a senior executive and representatives from the legal, public affairs and public relations departments. The team should have a designated leader who ensures decisions are made and should be overseen by the CEO and the hoard, who have final approval over the organization's response.” (Trustee)
2. Define the crisis by quickly communicating accurate, critical information: “Reporters, bloggers and other activists often are first on the scene during a crisis. However, the sooner an organization takes charge of communication, the better it can minimize the damage. Although social media present new challenges, an organization must make every effort to be the main source of information during a crisis. This may require a response before all facts are available, but it is important for organizations to establish credibility and concern for those affected.” (Baron)
3. Apologize publicly if the organization has done something wrong: If a crisis results from an organization's acting intentionally or incompetently, it should apologize for doing so. Organizations may hesitate to apologize because of the potential impact on future litigation and should keep this in mind as they craft their response; it was also the first to comply with the Food and Drug Administration's new anti-tampering regulations, which drew praise for the company in the aftermath of the crisis. (Baron)
4. Make sure that the cause of the crisis has been mitigated: Organizations must take steps to avoid additional harm. For example, Mattel immediately asked the public to send all their toys back to store so that organizations reputation will not be harmed more. (Trustee)
5. Identify the right representative for the job: “While many companies successfully have used a spokesman or spokeswoman from senior management during a crisis, they are not always the best choice. Hearing from top management shows the public that the organization is engaged fully in addressing the issue.” (Mitroff)

Conclusion & Limitations:
“Many crises can be prevented and others significantly mitigated if boards and leaders ensure that a well-designed crisis-management plan is in effect” (Jindal). Even after crises occur, a plan that is executed effectively can position a hospital to minimize damage and lay a foundation to regain and maintain the public trust, a responsibility at the heart of effective stewardship and governance.” The most successful way to manage a crisis is to prevent it in the first place. The best crisis-management plans identify and resolve problems before they get out of control.
Effective leadership can definitely help to prevent crisis. In case of global financial crisis which start in 2007 there could be some steps if taken by new president Barak Obama could have taken some wise decision and help economy be better. For example Obama hasn’t change my of its team compare to previous president Mr. George W. Bush. Obama recruit same people who were in earlier team and they haven’t done anything special to bring back economy on right track. As we mentioned earlier that chose a right team is very important to for the effective crisis management which Mr. Obama definitely fail to do.
There are also some limitation when we are talking about crisis management as definitely we can take all necessary steps to bring back economy on track but we are not sure that how economy going to respond to it. For example government gave lots of stimulant package to bring economy back on line but they haven’t responded in the way economist think. So it need some further study how economy works to the actions we take. While in corporate crisis organizations can develop crisis management team but there is no guarantee that how employees will work with full ethics and dignity. So we have to develop a team with no loop holes in it and it’s a great challenge to organizations as well as whole system.
References
Baron, David P. "Mattel: Crisis Management or Management Crisis." Harvard Business Review. Stanford Graduate School of Business, 29 July 2008. Web. 17 Apr. 2012. <http://hbr.org/product/mattel-crisis-management-or-management-crisis/an/P59-PDF-ENG>.
Dalagan, Cesar. "Crisis Communication." HubPages. Hub Pages. Web. 23 Apr. 2012. <http://cesardalagan.hubpages.com/hub/Criisis-Communication>.
Elliott, Larry. "Global Financial Crisis: Five Key Stages 2007-2011." The Guardian. Guardian News and Media, 07 Aug. 2011. Web. 22 Apr. 2012.
Fosler, Gail. "The GailFosler Group." Getting Back on Track -. 17 Aug. 2011. Web. 22 Apr. 2012. <http://www.gailfosler.com/featured/getting-back-on-track>.
Group D2. "Crisis Management Mattel Inc." Upload & Share PowerPoint Presentations and Documents. Mattel Inc. Web. 23 Apr. 2012. <http://www.slideshare.net/ruchi070186/crisis-management-mattel-inc>.
Jindal, Bobby, Peter Schweizer, and Curt Anderson. Leadership and Crisis. Washington, D.C.: Regnery Pub., 2010. Print
Marlin, John Tepper. "How the Financial Crisis Happened." The Huffington Post. TheHuffingtonPost.com, 05 Feb. 2009. Web. 23 Apr. 2012. <http://www.huffingtonpost.com/john-tepper-marlin/how-the-financial-crisis_b_172964.html>.
Mitroff, Ian I. Why Some Companies Emerge Stronger and Better from a Crisis: 7 Essential Lessons for Surviving Disaster. New York: American Management Association, 2005. Print
Trustee Workbook 3." Skokie Public Library. Trustee, July-Aug. 2011. Web. 22 Apr. 2012. <http://encore.skokielibrary.info:50080/ebsco-web/ehost/pdfviewer/pdfviewer?sid=8e44a32f-1642-4d08-87f1-fa03fb3cb833%40sessionmgr112&vid=2&hid=113>.
Weissman, Robert. "CityEconomist." : How the Financial System Was Taken Down. City Economist, 08 Mar. 2009. Web. 21 Apr. 2012. <http://cityeconomist.blogspot.com/2009/03/how-financial-system-was-taken-down.html>.