Banks: Prepare for Crisis Management
By Douglas V. Austin
Is your board of directors prepared in case the bottom falls out? Are you organized to rebut adverse publicity such as regulatory pronouncements of administrative orders, indictments for embezzlement, fraud by senior officers or, even worse, criminal activity of your president and/or one of your fellow board members?
If you are, and if you have an organized response for these types of adverse situations that may arise, then feel free to move on and read something else besides this commentary. On the other hand, if you have no plans whatsoever – read on, read on!
The most important information in this commentary is not that you may need a crisis management task force at your financial institution. It is not a matter of if a problem arises in the future, but when. Being able to react quickly, efficiently and in an organized manner may result in defusing an unpleasant situation quickly, or at least in mitigating the overall adverse publicity received by your organization.
If you are not organized and not cognizant that a crisis will arise at your institution, then your first reaction will be to panic. Banks and thrifts are tested in the marketplace by adverse circumstances. Those institutions with crisis management task forces in place can react in a manner that will mitigate the adverse circumstances facing the organization.
Although I maintain that a crisis will hit sometime in the future, I certainly don’t know when that crisis will hit, or what it will be. If it were possible to predict the future, then I would buy some particularly opportunistic stocks and retire to a condominium in Naples, Fla.
What you must do is organize the directors and management of your financial institutions so that when a crisis hits, you will know how to react. What’s the first thing to do?
• Gather a crisis management task force of officers of the board and of the financial institution, as well as selected senior staff members who have the required expertise. The crisis management task force should not be too large, i.e. no more than five to seven individuals. The chairman of the board should be the leader in name only, to lessen the rare circumstance when the chairman of the board is the target of the crisis.
In such circumstances, if the president/CEO is a separate individual from that of the chairman, then the president/CEO should be in charge. As an example, there might be three board members – the chairman, the chairman of the audit committee and one other outside director – supplemented by two management personnel members, i.e. the president/CEO and the second ranking executive.
This structure permits one or two more individuals to serve on the crisis management team, such as the vice president of marketing or whoever handles the publicity, public relations and shareholder relations, as well as any other management or staff personnel. For instance, the chief financial officer might be needed to analyze the financial impact of the crisis.
The crisis management task force should be constituted upon the qualitative and quantitative attributes of the directors and officers. It should be reconstituted every year and as directors retire or as management moves on.
• The second step is to remember that this is a crisis management task force. It doesn’t meet on a regular basis other than to organize its responsibilities and to determine channels of communications and control parameters. This organization can be structured over the period of several meetings and then analyzed and re-evaluated annually to make sure that the right people are in place to handle the situation if and when the crisis hits.
In spite of the fact that some members of the task force will be outside directors, some will be senior officers and some may be junior officers of the financial institution, the task force should be organized on a formal basis to assure there are clear channels of responsibility and communication and that the reporting of each individual is to the immediate supervisor and finally to the chairman of the task force. There should be no loose cannons running around trying to fix the problem and interfering with the overall response.
• The third step is to make sure that you know where the task force is at all times and that you maintain a list of names, addresses, telephone numbers, fax numbers and e-mail addresses. The task force should be immediately accessible, which means you must have communications accessibility for phone conference calls or video conferencing at any time.
If your bank does not have a modern speakerphone in the boardroom, get one. Use it for committee board meetings and crisis management circumstances. If you need video conferencing because your financial institution is located over half a state or parts of several states, then purchase video conferencing materials and make it available to task force members in case of crisis. In order to have a full team of responsible individuals, you might assign backup alternative members to your task force in case some members are on vacation or incapable of performing their duties because of sickness or disability.
• The fourth attribute of the crisis management task force is that it must be able to respond immediately. “Immediately” means within hours, not days or weeks. However, being able to respond quickly does not mean that your task force has to make decisions quickly. It must analyze the situation based upon the most information available and then make rational, prudent business decisions based upon the circumstances of the crisis.
The most important aspect of the crisis management task force is its delegated power to make decisions on behalf of the board of directors and the management of the financial institution. Since it may be impossible to get the board of directors together in order to make a formal decision, the board must delegate to the crisis management task force the ability to make interim decisions which can be ratified by the full board at a later date. Moreover, the entire management may not be available, since they may be the target of the crisis (i.e. charges of embezzlement or fraud against the president or senior lending officer, or embezzlement by the CFO of millions of dollars of bank funds, or complaints filed by women employees charging sexual harassment against male officers of the bank, etc.).
Task Force Empowerment
The crisis management task force must have the ability to make interim decisions that can be ratified at a later date, that have the full force and effect of legal decisions on behalf of the organization. This cannot be an advisory task force, but must have all of the powers necessary to make the decisions required to mitigate the circumstances facing your financial institution.
I have not yet mentioned outside advisers that can be utilized by the task force. As part of your planning for the crisis management task force, you should have available (i.e. on retainer) people who have specialization that can assist you in case of crisis. Such individuals might be those who specialize in banking or labor law or who are outside certified public accountants, loan review experts, consumer compliance experts, investment bankers and public relations specialists.
If your financial institution is Securities and Exchange Commission-registered, SEC-reporting, and what we charitably call a publicly traded financial institution, the cadre of outside experts that must be available to your crisis management task force will be far greater than if you are a small community bank located in a rural community. However, the task force must decide exactly who should be on retainer and available for immediate inclusion within the task force constituency, based upon what the crisis might be.
These individuals should be available for immediate call; their telephone numbers, addresses, fax numbers and e-mail addresses and their availability to communicate either in person, by phone or video conferencing must on the same short-term basis as task force members. These individuals will be retained for other regular business at your financial institution, so this may be a part of their assignment that may or may not ever come into effect, but they should know that they are expected to be a part of your crisis management task force if the occasion arises.
One of the most important elements of the task force’s responsibility will be to react publicly with honesty, fully disclosed and with an appropriate response. Depending on what the crisis is, the response should be based upon the problem facing the financial institution and the advice received from the outside advisers as to how to react.
The worst thing you can do is not to answer publicly what’s happening and to assume the position of an ostrich. If you start to look like an ostrich, you are going to end up like a dead duck. The one reaction that is not appropriate is to ignore the crisis and stall the answer. That’s the purpose of the crisis management task force – to protect the financial institution from adverse publicity and to mitigate circumstances as best as possible.
Finally, I cannot emphasize too greatly the need for flexibility on the task force. The task force must be able to react to crisis circumstances and to understand the totality of the crisis and react to it in an organized, responsive, objective manner. Unpleasant decisions may result in the suspension of an officer or a director, the removal of an employee, or even the shutting down of an office or functional division of the institution. Decisions will be significant, and often difficult.
However, the purpose of the crisis management task force is to meet the adversity straight on and to mitigate and blunt its impact upon the financial institution so as to protect the investment of the shareholders, the jobs of the employees and, especially, the reputation and good will of the institution itself. Whatever decisions are reached will be reached in a more prudent, efficient and productive manner if you have your task force ready to roll versus reacting in a panic mode when crisis is foisted upon you.
As I stated at the beginning of this commentary, it’s not whether you’ll have a crisis in the future, but when such a crisis will hit. You must be ready.
Douglas V. Austin is chairman and CEO of Austin Financial Services Inc., based in Toledo, Ohio.