Tag Archives: crisis

What Every Director Needs to Know

We often get called into corporate calamities where “heavy water” is starting to overwhelm the bilge pump of the corporate yacht. Especially in situations like today, where the markets are stuck in bear market territory, where the oil markets have collapsed, where the coronavirus rampages through the U.S. and where gross uncertainty exists regarding our transportation system and supply chain. We have lived through the financial crisis, regulatory messes and, most importantly, situations where organizations have simply lost the faith of the customers and investors.

Often, directors and officer who have to figure out what to do to “save the ship” must at the very same time try to figure out if they have enough directors and officers (“D&O”) liability insurance to weather the storm and protect them from plaintiffs’ lawyers circling the sinking ship.

Nautical allusions aside, figuring out if your D&O insurance is good enough when you are about to enter stormy seas is not ideal. First, there may be no time to tinker with the D&O coverage. Second, and more importantly, if there is a problem with your coverage, or there is not enough of it, many carriers are reluctant to modify policy wording (to potentially “enhance” coverage), or they add limits of liability when a company is having financial difficulty because the carrier is worried about its potential exposure to directors and officers claims (whether they might be lawsuits or regulatory investigations). To many less-forward thinking carriers, doubling down (in some respect, even if it serves to protect their insureds) sometimes makes no sense.

Finally, despite years of heavy claim activity and many large frauds, bankruptcies and regulatory investigations, we often still see the same problems with policies and towers of insurance. Why? We honestly cannot say. Sometimes corporations and their boards do not focus enough on D&O insurance issues because they are frankly too busy with other issues. Sometimes D&O insurance decisions are based not on “substance” issues but on cost issues, which is generally not the right answer for many reasons. Much of the literature dealing with D&O insurance tends not to be broadly disseminated to the folks who need the information most, like corporate directors and officers. Instead, decisions are often left to risk managers and brokers who do not have much experience dealing with D&O issues at troubled companies.

Our goal in this piece is to place front and center the most important issues relating to such issues. This will allow directors and officers to understand what they need to know and what to ask when questioning management on D&O coverage. These are not the only issues that should be addressed when considering the scope and breadth of D&O coverage, but certainly are ones that should be at the top of any director’s and officer’s list. Truth be told, this advice should hold true for all companies and boards, not just troubled ones. The best time to fix D&O issues is when the sailing is smooth, not when the corporate yacht is about to sink.

Will Your Carrier Hang Tough With You When Things Go Bad?

D&O insurance is frequently purchased in a “stack” or a “tower” of insurance, led by a primary carrier and multiple excess carriers. The excess policies are usually written in “follow form” nature. This means, in most cases, they follow the terms and conditions of the primary carrier. For larger companies, there is both a traditional Side A, B and C tower (covering the entity and individuals) and a Side A tower, covering the directors and officers for non-indemnifiable loss.

Because neither insurance policy forms nor D&O carriers are fungible commodities, it is very important to understand who is the company’s primary D&O carrier, what coverage the carrier offers and whether the carrier “pays claims.” In many ways, the primary D&O carrier is like a critical vendor or business partner that the company cannot do without. The primary D&O carrier can sometimes be the most important business partner (and friend) a company and a director or officer can have. The hope is that, when the seas are rough, like in an insolvency or restructuring scenario, the primary carrier will be there to respond to claims and ultimately protect the personal assets of the directors and officers involved – even in times where indemnification or advancement is unavailable or refused by the corporation.

 A few points to consider:

1. What is the carrier’s claims handling and claims paying reputation? Is it business-friendly and coverage-friendly, or is the carrier known to try to find “outs” to coverage? Does the carrier have a free-standing claims department, or does it farm out claims to hyper-aggressive coverage counsel? And, if the company has multiple offices overseas, how does the D&O carrier handle cross-border claims or investigations? Through a bit of investigation, one can often learn from others (such as defense counsel or experienced D&O brokers) information that might indicate which way a carrier leans on these important questions. Obviously, the best carrier is one that will hang with the directors and officers even in the worst of times, and will not “run and hide” behind coverage defenses so it does not have to pay.

2. What is the carrier’s underwriting response to questions and potential modifications? What is the carrier’s responsiveness to requests to enhance coverage for the insureds? These questions relate to the prior question. Directors, officers, and companies want a business partner in their primary carrier, not a “silent partner.” Many of the better carriers often will consider (and implement) policy changes even days or weeks before a bankruptcy filing to clarify policy language for the potential benefit of the insureds. Those are the types of carriers that a director or officer wants on his or her side.

3. Do you have enough coverage? This can be the most worrisome aspect to any director or officer caught up in a corporate storm. Unfortunately, this is also an area that is confusing because there are often no clear or “right” answers as to what limits should be purchased.

The most important thing a director or officer can do in this regard is ask many questions of management. For a public company with $2 billion of annual revenue, $30 million of D&O insurance likely does not make sense. Similarly, for companies with substantial debt and perhaps not a lot of cash on hand, a low D&O limit also would not make sense. Very often, an experienced D&O broker can provide benchmarking, showing what D&O insurance is purchased by similarly situated companies. Thus, a company can look to a competitor in its space, or at its size, to determine what type and level of D&O insurance comparable companies have purchased. Finally, many larger companies with public debt or equity exposure can perform “mock” damages analyses to understand what a potential securities claim against them might look like from the perspective of damages and defense costs. The variable here is that the cost of a simultaneous regulatory or criminal investigation, as discussed below, can vastly skew those amounts.

Can a company increase the limits of its D&O coverage midterm, or even after bad news surfaces? This is a common question. The answer is that it depends on the facts and the circumstances of the particular situation. Sometimes the circumstances a company faces are not so dire, and carriers will cooperate with the company’s desire to protect its directors and officers by agreeing to increase the limits of its tower (for a price, of course). Other times, the situation may be so severe that a request to increase limits will be politely declined. The later polite declination proves our point. Directors and officers should ask questions up front regarding coverage amounts. They should not wait until the corporate ship starts to heel over to request higher amounts. By then it might be too late.

See also: What Effective Leaders Do in Tough Times  

Coverage for Regulatory and Criminal Investigations

Troubled companies often encounter a regulatory or criminal investigation (SEC/DOJ) at the same time they are facing civil litigation. This is the potential “double whammy” of defense costs, which often can run into the millions of dollars. Thus, directors and officers need to know what sort of coverage their D&O insurance provides for such investigations because, to the extent such investigation constitutes covered loss under the D&O policy, every dollar spent on investigations will generally reduce the overall limits available to ultimately settle the underlying litigation.

The rules of the road are well established in this area. Directors and officers are generally covered under the company’s directors and officers insurance for formal regulatory and criminal investigations and inquiries as well as “a formal criminal, administrative, or regulatory investigation against an Insured Person when such Insured Person receives a Wells Notice or target letter in connection with such investigations.” 

Corporations are generally not covered for their involvement in such situations, unless individual directors or officers are also simultaneously named in the investigation (these rules of the road are often different in the private equity space, which is beyond the scope of this article). Specialized policies in the D&O marketplace exist to cover regulatory and criminal investigations in those situations where only the company is named, though those policies are reported to be expensive. All other things being equal, a director or officer should ensure that he or she is covered for regulatory and criminal investigations and inquiries. These can be very expensive to litigate and defend, and the last thing the company and its board needs at the time is a loose cannon on deck.

Why Does the Insured Versus Insured Clause (and Its Carve-outs) Really Matter?

The insured versus insured clause has been included in D&O policies for a long time. It finds its genesis in a carrier’s need to guard against collusive lawsuits brought by one insured (say, for instance, the company) against another insured (like a director or officer), solely designed to get to the proceeds of the company’s D&O policy.

Indeed, carriers may have valid reasons for not wanting to cover these types of lawsuits. But there are other types of potential “insured versus insured” lawsuits that should be covered (and thus “carved out” of the insured versus insured exclusion) because they generally would not be collusive (and normally are just as hotly contested as suits brought by traditional third parties). Here is a list of certain types of lawsuits that we believe should be explicitly covered under the D&O policy (i.e., carved out) to protect the interests of the directors and officers.

1. Shareholder derivative actions

2. Suits that generally arise in bankruptcy when bankruptcy-formed constituencies, such as creditors’ committees, bondholder committees or equity committees, bring an action derivatively on behalf of a bankrupt company for alleged breaches of fiduciary duty by the company’s directors and officers.

3. Similarly, suits by trustees, liquidators and receivers against directors and officers. As we have seen from high-profile suits involving companies like Tribune, Extended Stay and BearingPoint, bankruptcy-formed constituencies and trustees have become much more aggressive and litigious over the years, and the threat of such suits simply cannot be ignored.

4. Whistleblower suits brought under the provisions of either Sarbanes-Oxley or Dodd-Frank.

What is Non-Rescindable Side A Coverage?

There are two general coverage sides to a D&O policy (leaving for another day the concept of outside director coverage). Coverage “Side A” is for non-indemnifiable loss, meaning loss for which a company cannot indemnify or is financially unable to indemnify. Under this side, the directors and officers are the insureds. Coverage “Side B,” on the other hand, is for indemnifiable loss. Under Coverage C, the company is insured for securities claims.

Side A covers a range of different scenarios. For example, under Delaware law (where many corporations are incorporated), a company cannot indemnify its directors and officers for the settlement of a shareholder derivative action. And in bankruptcy, a company often will be unable to advance defense costs and to indemnify its directors and officers for claims. Indemnification claims by directors and officers against the company may be treated as unsecured claims that get pennies on the dollar, or may even be subordinated in certain circumstances.

As several of the noteworthy “financial fraud”-related bankruptcies have taught us, having “non-rescindable” Side A coverage is very important. “Non-rescindable” Side A coverage means what it says. Even in cases where a carrier may challenge as false statements made by a potentially complicit CEO or CFO in the company’s insurance application for D&O coverage (attaching to such application, for example, financial statements that later need to be restated), non-rescindable Side A coverage generally cannot be rescinded for any reason, which should allow the directors and officers to sleep better at night. Directors and officers should know that non-rescindable Side A coverage is generally standard in today’s D&O marketplace, and thus primary policies that do not have such coverage should be immediately updated.

What is Side A Excess Difference in Conditions Coverage (and Why Is It So Important)?

As noted above, having non-rescindable Side A D&O coverage is critically important. Having “Side A Excess Difference in Conditions” D&O coverage can be even more important. Why? This coverage reacts in two different, wonderful ways to protect directors and senior management.

First, it acts as “excess” Side A D&O insurance, meaning, in English, that it sits above the company’s traditional tower of insurance and will pay Side A non-indemnifiable claims when the traditional tower is exhausted by either traditional indemnifiable claims or non-indemnifiable claims. For example, a company may have $50 million in traditional D&O coverage and $25 million of Side A excess difference on conditions coverage, where $45 million of that insurance has already been exhausted by the settlement of a simultaneously commenced securities class action and SEC investigation. In such a case, the directors and officers would still have $30 million of Side A insurance to deal with, for example, the settlement of shareholder derivative action.

Second, most Side A excess difference in conditions D&O insurance has something called a “drop down” feature, meaning that if, for example, an underlying excess carrier refused to pay its limit of insurance for some coverage-related reason, the Side A excess difference in condition carrier might have the contractual obligation to “drop down” and fill that layer. Thus, it is a critically important feature that potentially will help fill potential gaps in coverage. Also, note that most Side A excess difference in conditions policies have very few exclusions (e.g., most do not have an insured versus insured exclusion), so they can be particularly helpful to directors and officers.

See also: COVID-19: Moral Imperative for the Insurance Industry  

Does My Corporation Have Enough Side A Coverage?

In the olden days of D&O (meaning 10 years ago), it was pretty rare to have a large Side A tower of insurance. Companies may have had a large primary tower of insurance, but Side A towers over $100 million were a rarity.

Since the settlement of several large financial crisis cases, we have seen a steady rise in the settlement values of shareholder derivative actions. However, in the last three years alone, the value of these cases has skyrocketed in nine-figure territory on a regular basis. Why? Reasons vary from severity, to regulatory fines and penalties, to the opioid crisis to enormous cybersecurity breaches. One of the major factors in all tends to be a really bad event that caused both a stock-price plunge, along with a large fine or penalty. The resulting litigation is called event-driven.

Event-driven litigation puts pressure on the primary tower of insurance, which quickly gets exhausted, and puts an equal amount of pressure on the Side A tower, which will need to respond to the shareholder derivative action. We would strongly recommend that companies entering troubled water re-evaluate their Side A coverage before the bad event happens. Afterward, it may be way too late.

What is the Priority of Payments Clause, and Why Is It Important?

A priority of payments clause specifies how a carrier should handle competing claims on a policy’s proceeds. For example, most such clauses (some carriers call them “order of payments” clauses) specify that Side A claims get paid first, and then traditional Side B company reimbursement and indemnity claims get paid. Obviously, this approach is tremendously important to directors and officers who may need to defend themselves in securities class actions or bankruptcy-related or inspired litigation.

Some priority of payments clauses give the right to the company or a company officer (like a CEO or CFO) to “withhold” or “delay” payments made under Side B of a D&O policy until those payments are properly designated by the appropriate party. This type of discretion is potentially not a good thing. Why? Giving such potential discretion to the company or a company officer to withhold or direct payments under Side B of a D&O policy might be creatively viewed by some as giving the debtor in bankruptcy “a say” or “control” over the proceeds of the D&O policy. That situation could be used by a creditor or other bankruptcy constituency to control or delay payments to the directors and officers under Side A of the policy, again potentially leaving them without resources to pay their counsel. Varriers are very able to make policy reimbursement calls in bankruptcy settings, and the order of payments under a D&O policy should be left to them, not others.  

Making a Better D&O “Mousetrap”

Admittedly, some of the above items are a bit difficult to understand conceptually for the non-insurance professional, and, admittedly, directors and officers often have more pressing issues to deal with when trying to help their companies navigate through troubled waters. But, as we have seen time and time again in our practice, very often D&O insurance becomes the lifeline for directors and officers when companies face trouble.

How can a director or officer stay on top of these issues in the most efficient manner possible? Here are a few suggestions:

  1. Ask the right questions to the right people, like the company’s risk manager, CFO or general counsel, as to what is covered and what is not, and ask about the above limits of liability issues to make sure you are comfortable that at least these points are properly covered. Again, common sense often prevails here, and, if a director or officer does not like the answers he or she is getting, then corrective action should be demanded before it is too late to act.
  2. Make D&O insurance issues a board topic at least twice a year so that board members can stay abreast of coverage developments, options and modifications.
  3. Make sure management sends out the company’s D&O program and tower of insurance at least once a year for a “tune-up.” In this area, coverage options often change, and better coverage can often be obtained so long as the right diagnosis is made by qualified persons such as an experienced D&O broker or, sometimes, experienced outside counsel.

The Brewing Crisis Over Jobs

Everyone has heard the old anecdote about the frog in a pot of water. If the temperature is raised slowly, the frog won’t react, eventually allowing itself to get boiled. That’s where we’re heading as a country when it comes to technological advances and the threat they pose to millions of jobs.

Seemingly every day, there are new stories in the media about artificial intelligence, data and robotics — and the jobs they threaten in retail, transportation, carrier transport and even the legal profession. Yet no one is jumping out of the pot.

Let’s be clear: This is not science fiction. In just recent days, there have been articles on Amazon’s automation ambitions, described by the New York Times as “putting traditional retail jobs in jeopardy,” and on the legal profession bracing for technology taking over some tasks once handled by lawyers.

As reported in Recode, a new study by the research firm PwC found that nearly four out of 10 jobs in the U.S. could be “vulnerable to replacement by robots in the next 15 years.” Many of those will be truckers, among the most common jobs in states across the country.

See also: Why Trump’s Travel Ban Hurts Innovation  

Yet when President Trump hosted truck drivers at the White House recently, he dedicated his remarks to the threat of healthcare without uttering a word about the advanced driverless semi fleets that will soon replace them. His Treasury Secretary Steven Mnuchin shockingly said in an interview last week that we’re “50 to 100 years” away from artificial intelligence threatening jobs.

It’s easy for sensationalist headlines about AI to dominate, like those about Elon Musk’s warning that it poses an existential threat. Yet the attention of people such as Musk, Bill Gates and Stephen Hawking should be a signal to Trump and Mnuchin that AI and related robotics and automation are moving at a far faster clip than they are acknowledging. It should be on the administration’s radar screen, and officials should be jumping out of the boiling water.

Solutions won’t come easy. Already some experts suggest a universal basic income will be necessary to offset the job losses. We also have to help our workforce make the transition. Educational institutions such as Miami-Dade College and Harvard University have introduced advanced programming courses that take students from zero to six programming languages on a fast track. More needs to be done. This should be the most innovative decade in human history, and it has to be if we’re going to avoid a Mad Max dystopia in favor of a Star Trek future.

Of course, there are those who say similar warnings were raised as technology revolutionized agriculture and other industries along the way. They might argue that then, as now, those advances led to more jobs. We would all welcome that and the potential these changes will represent for improving lives.

See also: Can Trump Make ‘the Cyber’ Secure?  

Technological advances could greatly reduce the cost of living, make housing more affordable and solve some of the biggest challenges whether in energy or long-term care, an issue painfully familiar to so many families. It may also help improve quality of life in the long term, as men and women gain greater flexibility to spend time with loved ones rather than dedicating 40 or more hours a week to working and so many others commuting.

In the near term, however, the job losses that are possible could inflict tremendous economic pain. We are far from where we need to be. That will continue to be the case until policymakers, educators and innovators come together to address the reality before us. We won’t solve this overnight, but we can’t afford to wait until it’s too late.

This was written by Vivek Wadhwa and Jeff Greene.

How to Spot and Avoid Your Next Crisis

Q: Can I identify my organization’s next crisis? If so, how?

A: Jim Satterfield– Undoubtedly, yes. Knowing what the next crisis might be is a way to think about planning and information. There are warning signs and indicators when we discuss human behavior. Understanding behaviors of concern and identifying them earlier in the process is imperative. It provides an idea of the frequency and severity of a situation.

If we can see those indicators, if we can identify those behaviors, then we can intervene before they become a problem. Sometimes, they are business or financial indicators; sometimes, it’s just human behavior.

On 9/11, I was EVP and chief operating officer of a public technology firm with employees in the States and around the world. When the first plane hit the first tower, we thought it could have been an accident. When the second plane hit the second tower, clearly not an accident. We called a meeting in our boardroom and, while sitting around the table, decided it was a day unlike any that we’ve ever seen.

Our management team decided it would be better to let everybody go home. I turned to our HR director and said, “Could you send a global email out to everybody in the company telling them they could just go home”? She went back to her desk, and she typed this message: “If you want to live, leave.”

The intended message was to be: “If you want to leave, leave.” Those are two entirely different messages. “If you want to live, leave.” “If you want to leave, leave.”

Thinking about your messages when you’re not under stress is very, very critical, and planning makes a difference.

Q: I already have a detailed and updated copy of our organization’s crisis plan. Do I need to have a digital copy, as well?

A: Jim Satterfield– Unless you’re planning to add a psychic on your crisis management team, it’s not going to do you any good to have an outdated or out-of-reach plan. Keeping your plans current and available is crucial. If you can’t get access to the right information at the right time, it’s not going to do you any good. “Oh, the plan’s back in the office, and I’m at home.”

Speed is quality. Getting the right answers to the right people at the right time becomes a critical element in every crisis.

Q: What should my organization’s key messages be to each stakeholder group for vulnerabilities and threats?

A: Jim Satterfield– What we’re going to say internally will be different than what we’ll say externally. Think about who your stakeholders are. If you’re in a business that’s heavily regulated, you have regulators as a stakeholder group. You have employees and investors, as well. If a school, you have parents, students and possibly church affiliation. You have various elements to be dealt with, and that makes a difference in approach.

Q: What resource can help with quick decision-making?

A: Jim Satterfield– What you do is list in one column things that could happen, things that could damage:

  • The facility
  • The employees
  • The data
  • The brand
  • The reputation

Across two more columns, we indicate what would qualify as a minor event and what is considered a crisis. You then include descriptive terms and circulate it to the entire company.

Immediately, when something comes up, refer to the matrix. If an employee is injured, but did not receive emergency treatment, it remains a minor event. If the employee had to have some medical attention, it rises to the next level. If an employee dies, that’s crisis. It’s at the highest level that management would want to be involved, so creating an event activation matrix is the fastest way to get that quick response with everyone on the same page at the same time.

Q: What are common mistakes people have made during a crisis?

A: Jim Satterfield– These are the five failures that we see over and over and over again in a disaster or crisis:

  • Failure to control critical supply chains
  • Failure to train employees for both work and home
  • Failure to identify and monitor all threats and risks
  • Failure to conduct exercises and update plan
  • Failure to develop crisis communications plans
  • About 70% of employees don’t know what they’re supposed to do in a disaster or a crisis. In addition, 95% don’t have a disaster plan at home. If something happens in your area, and you think your family is at risk, family wins. That’s why people don’t show up in a crisis, because they’re concerned about their family.

    We work on these failures through our Predict/Plan/Perform process. First, identify groups. Then conduct exercises and establish how you’re going to monitor and communicate. When you think about your individual plans, think about them in light of these groups. You need to build preparation in from all of these groups that could ultimately be a problem within the organization.

    Q: Are school students classified under workplace violence?

    A: Jim Satterfield– Yes, because it’s a workplace. The school is a workplace, yes.

    Q: Prevention is rare in organizations that have small staffs. Have you found organizations are willing to assign staff to conduct social media monitoring on their time?

    A: Jim Satterfield– They can, or you can use an outside service that will do it for you. This route is much more cost-effective. Why? Because that’s the specialist’s full-time job.

    Whatever your full-time job is, you’re good at that job. If you only do something every now and then, you’re not going to be as good, and you may miss an important signal or piece of information.

    We are finding organizations — both large and small — are conducting monitoring as a preventative measure, and we conduct such intelligence gathering for a number of clients.

    Managing The Victim Dimension Of Large-Scale Disasters, Part 4

    This is the fourth and final article in a multi-part series on “victim management” in the wake of large-scale disasters and crises. Previous articles in the series can be found here: Part 1, Part 2, and Part 3.

    The Vocabulary Of Victimization
    As any seasoned investigator will tell you, if appropriately questioned and listened to, the language people use in adverse circumstances can be diagnostic of their situation. In the case of victims, there is specific vocabulary that crops up constantly that validates the fact that they truly are victims of the circumstances as they claim to be. The language victims use to illustrate their circumstances frequently includes the following terms:

    • Anger: betrayal, disbelief, dread, anxiousness, anxiety.
    • Frustration: powerlessness, helplessness, fearfulness.
    • Inadequacy: self-blame, agonizing, lonely, luckless, worrying.
    • Betrayal: trust no one, no one to trust, irritable, anxious.

    Victim Behavior Is Predictable: Key Indicators
    Victims’ behaviors are driven by extraordinarily powerful emotions. Being a victim is, in my judgment, the most highly emotionalized state a human being can achieve. To the observer, many of these individuals seem to be so caught up in their circumstances that they are acting irrationally. Most critical incident response experts recoil at this characterization. But those in corporations and organizations who are creating victims tend to look at victims’ behavior this way. In the minds of the perpetrator, the victim is behaving this way intentionally to gain power and compensation.

    This is one of the extraordinary realities of being a victim — their behavior comes across as an irrational state. Perhaps the single most important reason victims are created is because those trying to help them are approaching them rationally when the victims themselves are emotionally energized and intellectually confused.

    In fact, the behavior of victims is often quite puzzling. For example, friendly gestures are often interpreted as threats. The interests of someone trying to help may be perceived as intrusive or as a betrayal. Well-meant advice, even sensible advice, is often perceived as insulting or controlling. There is a pattern of victim behaviors beyond those that are clearly recognizable that need to be understood as a part of dealing with those who are victimized and for preventing additional injured, threatened individuals from becoming victims.

    The Three Simultaneous States Of Victimization
    Victims become intellectually deaf. When people are victimized, the first thing that happens is our inner voice begins shouting, interpreting what happened, how stupid we were, and how careless we probably had to be to get into this kind of jam. Our outer voice (the one everyone else can hear) is telling others about what we are suffering, what is happening to us, and warning others about avoiding what happened to us. This is what often makes dealing with victims so difficult. Victims instantly become self-absorbed and self-focused on the problems and afflictions that being a victim causes. They hear little. Their inner voice continuously rehearses their problems and circumstances. They use their outer voice to complain, whine, and warn. They notice little, and they are primarily stimulated by additional negative information about their circumstances or similar ideas and by people trying to help them.

    Victims are emotionally engaged 24-7. Put yourself in their place. If you are an adult, you have experienced being victimized by something or someone. Once it happened to you, you were consumed by it, at least for a time. It is this 24-7 focus that gives victims their power. Their relentless suffering and communication about it can overcome even the most empathetic organizational efforts, for a while.

    Everything is a question. When the victims’ inner voice and outer voice are working at the same time, these individuals are incapable of taking in new information. So they ask questions. Victims generally, and repeatedly, ask the same questions, like “Who’s responsible?” “Why did this happen to me?” “Why couldn’t this have been prevented?” “Why didn’t someone head off this problem before it happened?” “Who is going to pay all my bills while I suffer these problems?” “Why didn’t you warn me if you knew this could happen?”

    Despite the responder’s most humane efforts to respond, until victims can focus on their own recovery, they tend to ask the same questions repeatedly. Responders and helpers must learn to answer these questions repeatedly until the victim can absorb the answer.

    Victim-Creating Perpetrator Behaviors Are Also Predictable
    Victim-creating behaviors cause most litigation. They are identifiable and preventable. Here are seven victim-causing perpetrator behaviors I refer to as “Profiles in Jell-O” (a pun on the title of President John F. Kennedy’s book Profiles in Courage):

    1. Denial: Refusal to accept that something bad has happened and that there may be victims or others directly affected who require prompt public acknowledgment. There is denial that the crisis is serious; denial that the media or public has any real stake or interest in whatever the problem happens to be; denial that the situation should take anyone’s time in the organization except those in top management specifically tasked to deal with it; denial that the problem is of any particular consequence to the organization provided no one talks about it except those directly involved. “Let’s not overreact.” “Let’s keep it to ourselves.” “We don’t need to tell the people in public affairs and public relations just yet. They’ll just blab it all over.” “If we don’t talk, no one will know.”
    2. Victim confusion: Irritable reaction to reporters, employees, angry neighbors, whistle-blowers, and victims’ families when they call asking for help, information, explanation, or apology. “Hey! We’re victims too.” Symptoms include time-wasting explanations of how “we’ve been such good corporate citizens,” how “we’ve contributed to the opera [the Little League, the shelter program].” “We don’t deserve to be treated this badly.” “Mistakes can happen, even to the best of companies.” “We’re only human.” When these behaviors don’t pass the community, media, or victim straight-face test or are criticized or laughed at, a stream of defensive threats follows: “If the government enforces new regulations, they will destroy our competitiveness.” “If we have to close this plant, it’s their fault.” “It’s the only decision we can make.” “If this decision stands, many more will suffer needlessly.” “If we didn’t do this, someone else would.” “We didn’t tell them because we wanted to spare them the additional fear and agony.”
    3. Testosterosis: Looking for ways to hit back, to “slap some sense” into “them” rather than deal with problems and emotional circumstances. Managers may refuse to give in or to respect those who have a difference of opinion or a legitimate issue. Another testosterosis indicator is the use of military terminology — tactics, strategy, enemy, beachhead, attack, retreat, and truce — all of which trigger a more insensitive, macho internal environment. This command-and-control mentality sets the stage for predictable errors, omissions, and mistakes and creates resistance to what is truly needed.
    4. Arrogance: Reluctance to apologize, express concern or empathy, or take appropriate responsibility. “If we do that, we’ll be liable.” “We’ll look weak.” “We’ll set bad precedents.” “There’ll be copycats.” “We’ll legitimize bad actions or people.” “We can’t give them what they don’t deserve.” Arrogance is contempt for adversaries, sometimes even for victims, and almost always for the news media. It is the opposite of empathy.
    5. Blame shifting, search for the guilty: Attempts to identify traitors, turncoats, troublemakers, those who push back, and the unconvinceables to shift the blame back to the perpetrators. “They simply weren’t hurt enough to warrant the demands they’re making.” “The allegations are outrageous, not provable, and self-serving.” “Obviously, these people have their own agenda, and we have become the victim of it.”
    6. Fear of exposure: Fear that arises when those who should have been communicating recognize that a tremendous gap has been created in their credibility and in their ability to be trusted and that it will be nearly impossible to explain their way back again for having been silent, or only minimally communicative, for such a long period of time. This fear is reflected in angry, callous responses to bad news coverage, employee animosity, and humiliating, embarrassing, and damaging questions by the media and victims, such as “What did you know, and when did you know it?” “What have you done, and when did you do it?” Angry, callous responses create even more victims or harden the attitudes of existing victims. And attack plaintiff attorneys line up.
    7. Management by whining around: The organizational tendency to talk only about its own pain, expense, and inconvenience when the decision is made to make some accommodation and move toward settlement. Whining makes victims, employees, neighbors, and the government angrier and the media more aggressively negative, creating even more plaintiffs and accusations. Whining is never an effective strategic tool or strategy.

    Serious Victim-Creating Management Errors
    Silence is the most toxic strategy. It empowers and energizes victims. Where there’s trouble, lawyers routinely keep their clients from talking, and managers and leaders would rather avoid conveying negative news. The result is a toxic silence where there should be robust conversations and engagement. The most predictable casualty of silence during these major adverse events will usually be the chief executive of the perpetrating organization, and perhaps others. Silence creates gaps in the unfolding sequence of events. These silences are simply not acceptable, and they turn out to be impossible to explain with a straight face once they have occurred. Silence negatively magnifies every mistake and corrective action.

    Failure to engage creates victims. Managers often believe and say that if they answer the questions of “these people” or comment on “their issues,” they give victims power and recognition they may not deserve and will hurt the organization in the long run. This is devastatingly stupid thinking. Victims come packed with the power to change the course of an organization and even reorganize and replace its top management. A single victim, driven by the negative or nonresponse of perpetrators and callous organizations, and probably ignored by the very people who should be communicating, can have the power, the determination, and the commitment to make important changes in organizations, political structures, communities of interest, and sometimes even a culture. Perpetrators can decrease the power of victims through simple, sensible, positive, constructive, and prompt response to victims’ needs.

    Stalling, delaying, and acting timidly create victims. Speed beats smart every time. Waiting to act until an appropriate level of factual information is available is a foolish decision. The longer an organization waits to do something that needs to be done, the more likely it is that whatever it does will be insufficient, unfocused, off-point, outside the target zone, and defensive. Excuses will have to be made for the resulting delay. The metric of my experience is that as a crisis persists, responders spend 50% of their energy and 25% of their resources fixing the bad decisions made yesterday. Having said that, the most worrisome decisions and poorest strategies are those that require waiting to do something until more is known. One of the most significant ways to reduce the production of victims is to do meaningful things immediately. It is essential to your credibility and to the level of public and victim trust, even if mistaken and likely to be changed. Action beats inaction every time. Faster is smarter.

    What Victims Need
    Victims have four powerful needs: validation, visibility, vindication, and extreme empathy/apology. If these four needs are provided promptly — preferably by the perpetrator — victims will more easily move through their state of victimization and be less likely to call or respond to attorneys or the media, or even to call attention to themselves. The reality is that if the perpetrator fails to meet their needs or does so only partially, victims will find ways to provide for their own needs, often at the perpetrator’s reputational expense.

    Victims require validation that they are indeed victims. This recognition is best rendered by the perpetrator. If not, public groups, government, or the news media will do it. Victims will seek it. “I’m not crazy, this really did happen, and someone else is responsible.” Victims rarely sue because they are angry, because their life has been changed dramatically, or because lots of plaintiff attorneys are chasing them around. Generally, victims sue because their situation is not acknowledged and their feelings are ignored, belittled, or trivialized. If they are prevented from publicly discussing what happened to them in meaningful ways, and no one is taking prompt constructive action to prevent similarly situated individuals, animals, or living systems from suffering the same fate, victims will be looking to take more aggressive action.

    Visibility involves a platform from which victims can describe their pain and warn others. Preferably, again, the platform should come from the perpetrator or a credible independent organization that can help victims explain what happened for the purpose of both talking it out and convincing others to avoid similar risks or take appropriate preventive action. Some victimization lasts a lifetime. In the case of major disasters, invariably there will be monuments, remembrance sites, even living memorials that victims, survivors, and responders visit, talk about, and rely on. These are permanent visible symbols that recognize, redescribe, and remind the world of the suffering and sacrifice that took place. Name any major disaster dating back hundreds of years, and there is a memorial someplace, perhaps a place of worship, a graveyard, even some extraordinary monuments. And even to this day you’ll find tourists, relatives, survivors, and responders at these places, visiting and coping.

    Vindication occurs when victims take credit for any actions the perpetrator takes to ensure that whatever happened to them will never be allowed to happen to others. Victims will describe these remedial actions and decisions as proof that they had an impact and that their suffering will now benefit others because of these new decisions, actions, and practices. Let it happen; let them take credit. It’s part of their rehabilitation and part of the restoration of the perpetrator’s reputation.

    Victims need extreme empathy/apology. Apology is the atomic energy of empathy. If you want to stop bad news almost dead in its tracks, apologize. If you want to generally stop litigation and move to settlement, apologize. If you want to dramatically decrease the newsworthiness of almost any adverse situation, apologize. If you want to demonstrate that you truly care about the victims or the victimization you caused, apologize. While the lawyers may strongly advise against any form of apology because, under law, an apology is an admission, there is a growing body of evidence and data to demonstrate that apologies, promptly and sincerely delivered, virtually eliminate the potential for litigation. This means that while the lawyer’s advice needs to be listened to, if the victim refuses to sue, it may be time to find a lawyer to negotiate an effective settlement rather than pursuing a futile effort to deny what the victim needs most — acknowledgment through settlement.

    Apology Strategies Remain Controversial
    Perhaps the most dramatic ongoing example of the power of apology is happening in the U.S. health care industry. Forced by their insurance carriers, these institutions have learned the power of apology or of extreme empathy. Evidence grows every single day that apologies eliminate the desire to litigate. Thirty-four U.S. states have “I’m Sorry” laws in place to protect physicians and health care workers who apologize during malpractice litigation. Such apologies are inadmissible as evidence in setting damages. The exact statute terms do vary state by state. Even more states have similar laws in place that make voluntary apologies at automobile accidents inadmissible as evidence for setting liability and damage awards. For more helpful information on the power of apologies, here are some important references:

    • A pioneering article published in Annals of Internal Medicine in December 1999 outlined a litigation risk reduction strategy instituted by the Veterans Administration (Kraman and Hamm 1999). In this strategy, when mistakes, errors, and adverse outcomes have occurred, apologies are offered, and the patient is then kept in the information loop and constantly updated.
    • The National Law Journal (nlj.com) publishes articles on this issue a couple of times every year, following hospitals in Michigan, Texas, and other locations who are studying the impact of apologies on the reduction of litigation, risk, and liability.
    • Sorryworks.net is a website that chronicles the successes and failures of the use of apology throughout the health care industry.
    • Advice on how to apologize is available at theperfectapology.com, or simply search for “apology” at your favorite search engine.
    • CrisisCare.com is an organization specializing in victim response that provides assistance to companies and organizations worldwide.

    Fake And Phony Apologies Turn Out To Be Humiliating, Embarrassing Failures
    If an organization wants to make matters worse, the easiest way, since victims, employees, customers, regulators, and public policymakers are all expecting a sincere apology, is to fake one or to deny that one is even needed. There is probably a one-credit course in management school on apology avoidance strategies. Such a course would teach four lame but often used strategies. Strategy 1 is self-forgiveness:

    • It’s an industry problem; we’re not the only ones.
    • This isn’t the first time this has happened, and it won’t be the last.
    • Let’s not blow this out of proportion.
    • We couldn’t have known.
    • It’s not systemic.
    • Don’t our good deeds count for something?

    Strategy 2 is self-talk (excuses we use that only we believe, but others doubt immediately):

    • It’s an isolated incident.
    • It couldn’t have been done by our people.
    • Not very many were involved.
    • If we don’t do it, someone else will.
    • Let’s not get ahead of ourselves.

    Strategy 3 is self-delusion:

    • It’s not our fault.
    • It’s not our problem.
    • We can’t be responsible for everything.
    • It won’t happen again.
    • It was only one death, in one place, at one time. Why is everyone so angry?
    • Life can’t exist without risk.

    Finally, Strategy 4 is lying:

    • I don’t know.
    • We’ve never done that.
    • It hasn’t happened before.
    • It can’t happen to you.
    • We won’t give up without a fight.
    • We are not crooks.
    • We did not have sex with that woman.

    Apology avoidance is ingrained in management and very difficult to combat. However, when the situation arises, you should share these avoidance strategies with top executives and their advisers to inoculate them against using them. Let me warn you, though: The urge for avoidance is so strong that top managers will begin thinking up new strategies and excuses, beyond your most recent list, immediately. As you hear new avoidance language, build another list and circulate it immediately.

    The Seven Major Lessons In This Series

    1. The news will be bad from the beginning. This bad news will ripen badly for a time regardless of how aggressive, constructive, credible, and truthful your actions, decisions, and behaviors are.
    2. It is the number-one task of disaster management to end the production of victims at the earliest possible time. Speed beats smart every time.
    3. Managing the victim dimension is more crucial than even the most creative, constructive, and effective engineering strategy for recovery.
    4. Even the most brilliant, comprehensive, effective response, if communicated poorly, with hesitation and timidity, arrogance, or annoyance, will be characterized forever as a poorly executed, timid, clumsy, arrogant response.
    5. Silence is toxic, even while searching for or exploring appropriate response options. Your brightest idea and potential success advantage will be lost, even derided, if you hesitate to speak and act promptly. Gaps in communication are always interpreted to mean that you are hiding or covering up, and those questions or assumptions tend to last forever.
    6. Perpetrators can decrease the power of victims through simple, sensible, positive, constructive, and prompt response to victim needs.
    7. Apology is the atomic energy of empathy. Failing to apologize promptly or, worse, faking or feigning apology will create even more victims, critics, damage, and embarrassing questions.

    This series first appeared as an article in Leadership and Management in Engineering, a publication of the American Society of Civil Engineers.

    Material in this series was adapted with permission from the book Lukaszewski on Crisis Communication: What Your CEO Needs to Know About Reputation Risks and Crisis Management (c2013).

    Kraman, S. S., and Hamm, G. (1999). “Risk management: Extreme honesty may be the best policy.” Ann. Internal Medi., 131, 963–967.

    Lukaszewski, J. E. (2005). Executive action: Crisis communication plan components and models, Vol. 3, Crisis Communication Management Readiness, Public Relations Society of America, New York.

    Lukaszewski, J. E., Lukaszewski on Crisis Communication: What Your CEO Needs to Know About Reputation Risks and Crisis Management (c2013), Rothstein Associates, Inc., Brookfield, CT.

    VandePol, R., and Beyer, C. E. (2009). “Crisis management: The critical human element.” CFMA Build. Profits, 27(5), 1–8.

    Managing The Victim Dimension Of Large-Scale Disasters, Part 3

    This is the third article in a multi-part series on “victim management” in the wake of large-scale disasters and crises. Additional articles in the series can be found here: Part 1, Part 2, and Part 4.

    Crises And Disasters Create Many Kinds Of Victims
    Almost every postmortem on crisis communication failure and management decision-making deficiencies identifies the failure to promptly address victims as the emotionally negative energizing force that causes trust to break down. Bad news of any consequence is about victims and victimization, or the potential for both.

    When the emotionality of victimization meets the rational decision-making regimentation of management, there will almost always be casualties in top management. In every recent high-profile disaster and crisis, one expected casualty among the responders is the person on whose watch the bungled disaster response occurred.

    Some Cannot Be Victims
    Unless they are directly attacked or obviously adversely affected, corporations and large organizations, like government agencies, are almost never, from a public perspective, considered victims. Yes, Tylenol was a victim of a product tampering murderer in 1982 in Chicago and in 1986 in Westchester County, New York. Yes, the airlines whose planes were hijacked and flown into the World Trade Center in 2001 were victims. The syringe tampering incidents in 1993 made Pepsi, an icon American brand, a victim for 7 days. The government building bombed in Oklahoma City in 1996 was also a victim. Yes, there are circumstances — although very few in number — where one could genuinely consider a large organization and its leadership to be victims.

    Generally speaking, however, it is more likely that large organizations that cause or fumble the response to a disaster will be immediately viewed as perpetrators, or at least as having culpability in the creation of victims. In these situations, it is equally true, but perhaps not as intuitively apparent, that some employees are victims in every scenario. If the response of the organization is to stumble, mumble, fumble, and bumble, any opportunity for the perpetrator to be perceived as a victim is lost.

    While civil engineers may actually be on the periphery of the victim response, they are trusted advisers to those who do or direct the responding. Understanding the victim dimension helps advisers keep those at the center of the response focused on what needs to be done and on reducing the production of future victims. Management advisers, like attorneys and other professionals, need to recognize the crucial and important realities of the victim dimension and be prepared to coach management for victim response readiness and for the important humane behaviors required as disasters unfold.

    Who Can Be a Victim?
    There are three kinds of victims: people, animals, and living systems. Living systems are things like estuaries, deserts, jungles, rain forests, river valleys, and someone's own backyard. The fact is, you can blow something up, burn something down, or otherwise destroy something, but so long as no one is injured or killed, no animals are injured or killed, and no one's living system is harmed, the situation may be bad news, but it is not a crisis. Instead, it could be a disaster or simply a bad day or problem for someone's schedule, budget, reputation, or career. All crises are problems, but very few problems are crises.

    Causes Of Victimization
    In the list of causes of victimization in the table below, it's a little surprising to note that the vast majority of causes of victimization are communications related. Only three items on this list are physical in nature: abuse, assault, and bullying. And most bullying is verbal in nature. Keep in mind that all of the areas come into play as a disaster (or crisis) unfolds over a period of time. In order to effectively reduce the production of victims, all early response thinking and action must take into account what causes victimization in the first place and end the production of victims as early as possible. In 2011, the British Petroleum oil leak, which occurred more than 5,000 feet below the surface of the Gulf of Mexico, took more than 100 days to stop. That's more than 100 days of victim production.

    Causes of Victimization
    Abuse Commission Dismissiveness Negligence
    Arrogance Confrontation Disparagement Omission
    Assault Contention Embarrassment Sarcasm
    Bullying Deception Fear Shame
    Callousness Discrediting Lies Surprise

    What Does It Mean To Be A Victim?
    Victimhood is a self-designated state. Whether there are wounds, bullet holes, or any other visible or invisible damage, human beings have the capacity to choose to feel victimized. They can also choose to be victimized on behalf of other people, animals, or living systems.

    I've worked with victims in many parts of the world, and all seem to have very similar behaviors. Most of those injured, whatever the cause, tend to get up off the ground, dust themselves off, and try to figure out how to get home, get the kids home from school, get dinner made, and get back to work or their regular lives the following day. In the context of this article, victims are those who act on their victimization. They locate an attorney, call a local news channel, or find or initiate a support group process to help them almost before they get up off the ground or once they get to a place of safety. Those who are truly victims, those acting on their victimization, are generally extremely small in number. It is a self-designated state.

    One response I often hear is, “Wait a minute, Jim. Someone gets their leg crushed by some flying debris; they have a head injury and have difficulty remembering where they are and who they are. These are not victims?” The answer is, in this discussion, victims are those who act on their victimization, hire a lawyer, go to the media, begin or join an advocacy group, or take some action other than getting medical help in support of their injuries or other necessary help to correct their situation. Even in mass casualty situations, victimization is an individual circumstance. It's the trial lawyers who work to get these people into groups for the purpose of legal action, media response, or other kinds of attention. Even that's quite difficult to accomplish. Most victims desire simply to get on with it and get their life back on track.

    Victimhood is self-sustaining. Being a victim is a self-perpetuating state. That is, it is up to the individual to choose how long he or she will remain in a situation or state of mind that makes him or her feel victimized. Insurance companies are usually the ones who drive trying to limit the length of time a person can be a victim. It's done by setting arbitrary standards; for example, a broken arm might be worth $500 and a day off work. The problem is that being a victim is much more complicated. For example, if the arm got broken by a coworker twisting it until it snapped, and the victim hid in her office for 4 1/2 hours out of fear before she sought help with her injury, this broken arm is likely to be much more than a $500 day off work. The circumstances of victimization are crucially important. Despite the pressure of insurance companies, corporate legal staffs, and outside counsel hired to contain and more promptly end the victim experience, victims get to be victims as long they feel victimized.

    Victimhood is self-terminating. Victimhood ends or abates when the victims, largely by themselves, begin to come to terms with or let go of what is affecting them and get on with the rest of their lives. No matter how damaging an event, only a small number of individuals continue to act on their feelings and emotions of being victimized. Some may begin their recovery by blaming others for their feelings of helplessness, demoralization, frustration, or betrayal. Most injured or wounded just suck it up and deal with it.

    Victims suffer alone. Even though there may be mass casualty circumstances in which many are injured or wounded at the same time, each person suffers alone. Even the phrase “mass casualties” is a serious, sometimes devastating mischaracterization. Every person suffers differently, experiences pain differently, and needs to be treated individually. Bob VandePol, president of Crisis Care Network of Grandville, Michigan, and a global expert on critical incident response, said recently that current trauma research strongly emphasizes that “how people make sense of what happened to them and their experience of posttrauma symptoms is a strong predictor of their outcomes” (personal communication, March 14, 2012; see also “Crisis management: The critical human element” by Robert VandePol and Calvin E. Beyer in the September-October 2009 edition of CFMA Building Profits Magazine.

    Too often, the victimization, the sense of frustration, and the sense of helplessness and being misunderstood persist because the perpetrators, the media, the bloviators and commentators, and sometimes society lump individual circumstances together into joint suffering too quickly. This is very frustrating to victims. Each victim suffers by himself or herself.

    This series first appeared as an article in Leadership and Management in Engineering, a publication of the American Society of Civil Engineers.