Governance for the New Generation of Crisis Management

Torys Quarterly: Sector Influences

Several crisis incidents from the last couple of years, such as the #MeToo movement and Weinstein-style harassment claims, privacy class actions arising from data intrusions of high profile companies such as Facebook, and a management-upending data breach at Target, illustrate a common theme—the ever-changing nature of the organizational crisis and the rising pressure for companies to respond swiftly.

These crises have the potential to affect so many dimensions of business - its bottom line, reputation, morale, productivity and the strategic direction and prospects of a company. Directors owe personal duties to diligently oversee management and to act in the best interests of the company. In discharging those duties, directors have an active role to play in crisis management. Increasingly, activist shareholders are looking to hold boards accountable for lost share value caused by a failure to respond appropriately when a crisis arises (the most notorious recent example being the Delaware Court’s approval of a US$90 million dollar settlement against Rupert Murdoch and other directors at 21st Century Fox for damages allegedly caused by the directors’ failure to address longstanding issues of sexual misconduct of the company’s leadership).

How can executives and corporate boards get ahead of potential crises to minimize conditions that could give rise to them? What can executives and boards do to be prepared to respond swiftly if needed? If a crisis is discovered, what are the next steps? And what happens once a crisis is over?

Pre-Crisis Measures

Executives and the board can and should play an active role managing the risks with potential to be a crisis. Here are our suggestions to reduce these risks.

Set the tone from the top. Corporate leaders need to inform themselves about what the company’s culture is like “on the ground,” and ensure that diversity, inclusiveness, privacy and cybersecurity are all valued. Boards should make sure that there are channels of communication between management and employees so employees at all levels feel empowered to filter ideas and information up. Management should regularly update the board with respect to initiatives relating to inclusion, anti-harassment, cybersecurity and privacy. Boards must also be prepared to act swiftly if there are signs that management is failing to report and address issues, whether isolated or systemic.

Policies are paramount. Have robust whistleblower, privacy, social media usage, anti-corruption, use of technology, occupational health and safety, harassment and discrimination policies. Ensure everyone is aware of these policies. The policies should be explicit as to what conduct is inappropriate and won’t be tolerated. The policies should be easily available to employees, and reviewed and updated annually. All employees should know how to make a complaint under the policies, and to whom.

Ensure complaints are actually being addressed. Complaints need to be taken seriously and addressed promptly. Directors may be liable for failing to identify systemic enforcement issues, or failing to address known ones. The board should ask management hard questions if a trend appears. Consider the circumstances under which the company will conduct an internal investigation and when it would be appropriate to retain an external investigator.

Train employees and managers regularly. Training should be meaningful, robust and routine. Anyone with responsibility for conducting investigations under the policies should receive directed training.

Have a crisis management plan in place. Have a crisis management plan that addresses (i) the definition of a crisis and trigger events; (ii) the formation and composition of a crisis management team (including back up decision makers); (iii) the identification of outside advisers (legal, forensic, public relations); (iv) what should be done to investigate/evaluate the crisis and who will do what; (v) governance and public disclosure requirements; (vi) a crisis communications plan to stakeholders; (vii) business continuity planning; (viii) an identification of stakeholder and audience lists. The crisis management plan should be flexible, not prescriptive.

Prepare playbooks for different types of crises. These should include: a cybersecurity incident response plan (which should include the company's position on ransom and establish, in advance, a communications protocol to use in the event the company network is unavailable and/or breached); a privacy breach protocol; a pandemic response plan; an emergency notification and evacuation plan; a disaster recovery plan; a facilities response plan; a brand/reputation response plan; and a death and succession response plan. Have a disaster recovery plan in place to restore from back-up key IT systems.

Consider third-party experts. Third-party experts can assist internal teams in developing crisis management plans, policies and training. Engaging third-party experts in advance also allows for a quicker response to a developing crisis. These experts could eventually form part of the external crisis management team.

Apply appropriate diligence in dealmaking. When looking at material acquisition opportunities or other strategic partnerships, apply appropriate diligence to the counterparty’s culture by seeking out information regarding their policies, governance practices, history of complaints and data breaches. Understand what data exists, its value, and who has control. Where possible, conduct interviews with senior and mid-level management. Consider including a “#MeToo” representation in transaction agreements to the effect that no managers, directors or executives have been accused of harassment.

Distribute risk. In contracts with third parties, such as vendors, include contractual indemnities that will allow the company to recover its crisis response costs, or limitations of liability to minimize the company’s exposure. Arbitration clauses should also be included in order to limit class actions. Review the company’s insurance policies to ensure that cyber coverage and hardware theft are included.

Once a Crisis Occurs

Even with appropriate deterrent measures in place, no company can be entirely protected from a crisis. Responding quickly and effectively, however, can minimize the damage a crisis can cause. The following steps should be taken as soon as a crisis occurs.

Seek legal advice. Counsel can provide assistance with a range of legal and business issues stemming from a crisis. To manage the risk of civil and regulatory liability for both the company and directors personally, legal advisers should be consulted regarding the company’s disclosure obligations under applicable securities law or stock exchange rules. Legal advice may also be needed to determine whether notification is required under other applicable law, such as under PIPEDA. Counsel should also be called upon to advise on board governance, reporting to regulators and the appropriate investigative process. If the crisis could lead to litigation, the company is legally obligated to preserve relevant documents. Counsel should be consulted to understand these obligations and can assist with putting a document hold protocol in place.

Retain outside advisers. In addition to retaining legal advisers, depending on the nature of the crisis, it may be appropriate to retain other third-party advisers such as a public relations team, forensic team, and investigators.

Maintain privilege. To protect the confidentiality of crisis management records, counsel should be involved in all meetings and communications. If an investigation will be conducted, consider whether the communications, working papers and conclusions are sufficiently related to the objective of obtaining legal advice for the company or directors such that they can be protected from disclosure by solicitor-client privilege. If litigation is expected or threatened, consider whether documents created to prepare for those claims or respond to the crisis can be protected under litigation privilege. Before sharing information with third parties such as regulators or industry peers, consider whether a statutory or common interest privilege can permit limited disclosure without waiving other legal protections.

Consider messaging. Independent of the legal requirements, public communication of the crisis may be necessary for business reasons and can minimize future litigation risk. For example, in 2014, Home Depot’s in-store payment card system was hacked using custom-built malware. Home Depot promptly issued press releases, notified customers by email, apologized and provided credit monitoring and identity theft insurance. In approving the settlement of the class action that followed the breach, the Ontario court noted “responsible, prompt, generous and exemplary” response of the Home Depot to criminal acts, and indicated that the class action members’ likelihood of success in terms of proving liability or consequent damages was “in the range of negligible to remote.”

Keep records. Even if it is decided that disclosure of the crisis is not necessary, detailed internal records should be kept about the incident or the breach, including the reasons why the company concluded that disclosure or notification was not required. Counsel should be consulted during the record-keeping process.

Consider HR measures. Depending on the nature of the crisis, there may be a need to inform all employees, whether through a town hall or other forms of communications. There may also be a need to provide employees with counseling or other forms of support. If the crisis involves allegations of employee misconduct, consideration should be given to (i) the need for an investigation; (ii) the need to put the respondent on an administrative leave, with pay pending the outcome of the investigation; (iii) other interim measures such as separation of the parties and (iv) steps to ensure procedural fairness to the parties.

Once a Crisis is Over

Hold a post-crisis assessment. The board and management should meet to debrief and go over any learnings from the crisis, including (i) why the crisis occurred and what changes should be made to prevent a similar issue from arising in the future and (ii) how effective the board and management were in dealing with the crisis, including whether any updates need to be made to the crisis management plan.

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