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Pitt Gives Advice on Handling Corporate Crises

Former SEC Chairman Harvey Pitt, now the CEO of Kalorama Partners, recently discussed approaches that companies should take when faced with a crisis. In the closing address at Compliance Week's conference on governance, risk and compliance, Pitt advised that companies which take the initiative have the best chances of surviving a crisis. He recommended that companies prepare in advance by identifying potential crises and by developing responses to them. Kalorama Partners specializes in risk assessment and business solutions.

If there is not a prompt response, the problem can get even worse, according to Pitt. He urged companies to have a crisis management plan, including appropriate responses. Avoid the "Al Haig problem" by knowing who is in charge and who has the authority to declare a crisis and to make decisions, he said. Pitt said a well prepared company will have a standing crisis management team, including legal counsel, in order to be able to respond immediately and effectively.

Companies should have a budget for the internal crisis management team to secure external resources. Pitt advised that both internal and external expertise will be needed. The analysis of the crisis must be independent, he said. It should be conducted by someone with absolutely no connection to the company. No one likes to admit they may be implicated in a crisis, he explained, which is why the analysis should be handled externally. The external source should have the flexibility to explore unexpected avenues, he added.

The authorization of an internal investigation reflects a company's good intentions, according to Pitt, but if the company tries to narrow the focus, it may result in the need for a second inquiry. The internal investigation must be conducted in a way that permits the company to share information with the government, in Pitt's view. Many companies believe they should not write anything down, but Pitt asked how the company can prove that it conducted a due diligence investigation if it has no written record of its actions.

Attorney/client privilege is grossly overrated, according to Pitt. Companies have to be able to share the fruits of their investigation with the government, he explained, and should plan on doing so from the outset. He emphasized the importance of a document retention policy and compliance with the new e-discovery rules.

Once a company is reasonably able to anticipate an investigation or litigation, it must preserve all relevant information. It is not enough to send a memo that says "stop shredding," he warned, since many will view that as a trigger to shred. He pointed to Arthur Andersen's Pyrrhic victory in which it won Supreme Court vindication but the company was destroyed.

Pitt provided a number of guidelines for companies to follow. First, believe that others can and will sniff out your problems. Problems are inevitable, so finding them first is critical. Pitt said it is amazing how many companies cannot predict what their crisis may be.

Pitt cited a remark by Bill Gates' that success is a very poor teacher. Avoid becoming a victim of your own success, he said. There are dangers in becoming complacent. Pitt urged companies to treat success as transient, at best. Hope for the best, but expect the worst, he counseled.

Pitt recommended that management "play nicely with others," and especially outside directors. If the outside directors are seen as necessary evils, that may become a self-fulfilling prophecy, he said.

Pitt also cited the "Holiday Inn rule" --no surprises. Tell the board sooner rather than later about any problems. Good boards will be able to provide valuable advice on how to proceed, he said. On the other hand, there is no easy fix.

Ignoring warning signals can be fatal, he said. If an employee raises the specter of misconduct by a senior official, it is irrelevant whether the employee is disgruntled. If you circle the wagons, Pitt said the complainer will find other venues for the complaint.

Pitt emphasized the importance of effective compliance policies and procedures that can be understood by all. Being smart is good, he added, but being too smart is not good if it means trying to circumvent that which is lawful and appropriate. If you're smart enough to obtain good advice, he said be smart enough to follow it. It may not always be what was desired, but that may reflect a problem with expectations.

Finally, Pitt recommended that companies stay away from litigators when they are in the middle of a crisis. Litigators want to win the case, he explained, but you want to save the company.

Jacquelyn Lumb