Executive Times

Volume 7, Issue 10

October, 2005

ã 2005 Hopkins and Company, LLC

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Unthinkable

The natural disasters wreaked by Hurricanes Katrina and Rita in recent weeks got us thinking about how executives deal with crisis. In medical terminology, the crisis is that critical point after which the patient either deteriorates (usually dies) or improves (usually thrives). For some executives, crisis represents that critical point where the executive’s actions help the organization become stronger, or where the executive and the organization face disappointment and failure. As you read this issue, reflect on your preparation for the unthinkable crises that you and your organization could face. Assess your capabilities to responding quickly to mitigate the risk that the crisis will lead to failure. When you reach the point of crisis, are you prepared to lead toward vitality or will you bungle toward infirmity?

Fifteen new books are rated in this issue, beginning on page 5. Nine books are recommended with three stars; four are mildly recommended with two-star ratings, and two books have a one-star recommendation. Visit our 2005 bookshelf at http://www.hopkinsandcompany.com/2005books.html and see the rating table explained as well as explore links to all books we’re reading or considering this year. If there’s something missing from the bookshelf that you think we should be considering, or if there’s a book lingering on the Shelf of Possibility that you think we should read and review, let us know by sending a message to books@hopkinsandcompany.com.

Swamped

While public officials seemed overwhelmed by the successive hurricane challenges in recent weeks, certain corporate executives responded quickly and effectively. The cover story of the October 3 issue of Fortune (http://www.fortune.com/fortune/articles/0,15114,1105649,00.html) is “… not about who did what wrong. It is about how we cope with the realities of risk, uncertainty and crisis.” Inside, there are plenty of specific examples of corporate mobilization and advice for executives from those executives who’ve been tested by crisis. Here are a few specific ideas: “Howard Schultz Chairman, Starbucks

Learning from one crisis at a time. The rules of crisis management have changed. … During Katrina we followed a script that we used in 2001 after the earthquake hit Seattle. Back then our main office was at the epicenter, and we lost the use of our building for over a year. We learned from that and purchased a notification system. We told the vendor, ‘You have to create a way for us to do text messaging.’ The voice part collapses too easily. The night before Katrina hit, 2,300 phone calls went out. We had a voicemail system that told our people to call or text message us and tell us what their needs were. Our first priority was to ensure that every one of our partners was accounted for and understood what resources were available. We didn't lose anyone. … Gary Loveman CEO, Harrah's Entertainment Making life easier for your employees. We have 8,000 people affected by this, and many of them are homeless. We had a few fatalities. We haven't located all our people yet. The one thing I've been very pleased with is our decision to tell all our employees that they'd be paid for at least 90 days. That message went out before the storm. Whatever certainty you can provide during a period in their lives when everything is uncertain, is a tremendous help. … Bob Nardelli CEO, Home Depot

Preparing for the next big one. After each catastrophic event we do a postmortem, and we become more experienced and prepared. From Florida's four hurricanes last year we learned a lot about what merchandise was in short supply and how everything unfolds. So this year we pre-staged extra supplies and generators to run the stores in the Katrina strike zone. … But we have new lessons to learn. In some cases, I couldn't get gasoline for my associates to drive to the stores, so some had to stay in their cars overnight. Now, for the next hurricane, we'll know to have portable gas. Scott Ford CEO, Alltel

Getting everybody taken care of. When the levees broke, you had a humanitarian crisis. Not a storm. … Just getting everybody taken care of was the first thing. The rest of the stuff is frankly just money. We were initially missing 35 employees; after the first night we were missing 22; then 11. We worked that down to two and then one. We used the network infrastructure to trace her phone. Now, her last call had been that water was rising fast, and she didn't think she was going to be able get out. She was sending a text message to one of her friends in Atlanta. We were able to call that person and get the details of where she was. The Army was able to work with us and get her out.” Seven other executives present additional specific ideas at http://www.fortune.com/fortune/articles/0,15114,1105976,00.html.

How prepared are you and your organization to deal with a crisis? Will you be capable of contacting and caring for all of your employees? How do you incorporate lessons from others in your plans? How do you test the effectiveness of your plan? Have you assessed your vulnerabilities in a realistic way? Are you more likely to respond to crisis with the sluggishness of some public officials, or with the efficient execution of certain corporate executives?

Recklessness

Property claims adjustors are swarming over the Gulf Coast and deciding how much of a property’s damage was due to wind damage, which is normally covered by a hazard insurance policy, and how much was due to water damage, which is normally excluded, but might be covered by a separate flood insurance policy. Homeowners are in for surprises, and insurance companies are in for litigation and political heat. On September 7 longtime Mississippi insurance commissioner George Dale advised (http://www.doi.state.ms.us/bulletins/20056bull.pdf) companies that where there might be differences on whether the damage was done by wind or water, “I expect and believe that where there is any doubt, that doubt will be resolved in favor of finding coverage on behalf of the insured. In instances where the insurance company believes the damage was caused by water, I expect the insurance company to be able to prove to this office and the insured that the damage was caused by water and not by wind.” In the meantime, mold is growing, and that’s often covered by the hazard policy. The implications for insurance companies of paying claims that their policies do not technically cover are tremendous. It shouldn’t come as a surprise that an elected official wants to get consumers a good deal. Flood damage has been excluded from homeowners policies for decades for good reasons. According to Charles Wheelan on 9/23, in his new The Naked Economist column on Yahoo Finance (http://finance.yahoo.com/columnist/article/economist/980), “Government should not subsidize reckless behavior. Flood insurance, which is available only through the federal government, does just that. Government provides flood insurance because the private sector will not (other than policies that offer coverage above and beyond what the government offers). Flood risk -- unlike fire -- is not randomly distributed. Insurance companies cannot offset the costs of providing insurance to flood-prone properties by selling policies to safer risks. People who live on high ground don't buy flood insurance. The market is not likely to be profitable. At first glance, government is making things better by stepping in to fill that insurance void. But it also means that more properties get built in harm's way -- things that would not have been built without an implicit government subsidy. And that makes the damage from a disaster like Katrina worse. As does using government money to rebuild properties in areas particularly prone to natural disaster. After the Mississippi floods of 1993, FEMA (which administers the flood insurance program) literally paid some flood-ravaged towns to pick up and move to higher ground. The entire town of Valmeyer, Illinois, is now a mile and a half east of its former location -- and 400 feet higher. It doesn't flood anymore. Shouldn't we think about that as we look to spend billions of public dollars rebuilding New Orleans?”

Are you subject to political or regulator pressure to act beyond your expected and documented commitments? What’s your position on the subsidization of reckless behavior? How do you mitigate the risks from pressure on you and your organization from those who want you to do what you think is wrong?

Scenarios

One of the best practices used by effective executives to prepare for crisis involves scenario planning. We had the opportunity to learn at least one lesson from The 9/11 Commission Report: there is often a failure to imagine what could happen. The report noted, “… scenarios were slow to work their way into the thinking of aviation security experts. … It is therefore critical to find a way of routinizing, even bureaucratizing, the exercise of imagination.” We read in the Financial Times on 9/15 (http://news.ft.com/cms/s/b20ef12e-25eb-11da-a4a7-00000e2511c8,dwp_uuid=358e659a-2068-11da-b59e-00000e2511c8,ft_acl=,s01=1.html) that those executives who most often assess risks may not be best at coming up with alternate scenarios. “One of the challenges in implementing scenario thinking effectively is to maintain the new risk management mindset throughout the process. It is sometimes tempting to demand that scenario thinking processes offer the type of outputs that traditional risk management approaches offer, such as predictions, hedging strategies and insurance plans. But scenario thinking has a more ambitious goal: it enables a more complete view of the risks and opportunities a company faces and offers a framework for engaging those findings into the strategic planning process.

The new mindset for risk managers requires rituals and approaches that are deeply embedded in the scenario thinking process: a capacity for learning, an appreciation of uncertainty and ambiguity, an understanding of the value of strategic conversation and a willingness to explore uncharted territory. Increasingly, executives are appreciating that the changing nature of risk requires approaches that may initially be uncomfortable, but over time turn out to be more effective in embracing the unknown.” In the Fortune Oct 3 issue (http://www.fortune.com/fortune/valuedriven/0,15704,1105672,00.html), Geoff Colvin offers 5 ways managers can use scenario planning to prepare for disasters: turbocharge your imagination; build scenarios; think in probabilities; use the power of markets and create a culture that insists on facing reality. Executives looking for ways to improve skills at using scenarios should find these methods helpful. Another fine article on the power of imagination is in the September 19 issue of Forbes, “The Taming of the Screw” (http://www.forbes.com/business/forbes/2005/0919/066.html) about a product development director at Illinois Tool Works who reinvented the screw, despite internal critics who doubted what he did could be done.

Have you and your organization devised a range of scenarios from the likely to the improbable that could evolve? How have you tapped into the imagination of those who report to you? How good are you at imagining the unthinkable? How often do you update the scenarios of what could happen?

Follow-up

Here are selected updates on stories covered in prior issues of Executive Times:

Ø We last commented on Dennis Kozlowski, former CEO of Tyco, in the November 2003 issue of Executive Times when we provided a link to a video that the jury was shown in his trial. All media outlets reported in September that Kozlowski and former CFO Mark Swartz were found guilty on 22 counts, sentenced to 8 1/3 years to 25 years in prison and ordered to pay $240 million in fines and restitution. While the verdict will be appealed, some commentators have noted that unlike other white collar convictions for federal crimes, this state action and the sentence may deliver Kozlowski to a state maximum security prison, like the famous one in Attica, New York, which doesn’t have the same amenities as some of the minimum security federal penitentiaries.

Ø We rarely call attention to Microsoft in issues of Executive Times, mostly because its ubiquity makes additional coverage unnecessary. When we read a spate of stories in recent weeks about reorganizations at the company, and cover stories about reinventing Microsoft (Business Week, 9/26) (http://www.businessweek.com/magazine/content/05_39/b3952001.htm), and “Microsoft’s Midlife Crisis” (Forbes, 10/3) (http://www.forbes.com/business/forbes/2005/1003/088.html) we remembered including in our August 2002 issue a quote of advice offered to CEO Steve Ballmer to stop telling employees what to do and start showing them. Maybe that advice is now being followed.

Legacy

Openness

An elusive quality for some executives is the ability to remain open to new information, and then change direction based on a new set of facts. Perhaps because of his training in mechanical engineering, former Hewlett-Packard CEO Lewis E. Platt was always gathering data, testing, and moving in the direction the facts indicated, whether it was the same path as yesterday or not. Lew spent 33 years working at H-P, and was known for his openness, humor and energy. He followed founder David Packard as CEO, and continued to grow the company aggressively. When he reviewed the state of the various businesses of H-P, he spun off the company’s medical instruments business based on the metrics, despite his affinity for that segment which was where he began his career. His low-key management style allowed employees at all levels of the company to feel comfortable in sharing their thoughts and feelings with him. When faced with the fact that the company needed fresh ideas, he helped the H-P Board select Carly Fiorina as CEO who brought massive new ideas to the company. After she proposed a merger with Compaq, and because he disagreed, he switched from support of Carly to opposition. While lead director at Boeing, Lew ordered an investigation of CEO Harry Stonecipher, whom he helped select, following an anonymous tip concerning a code of conduct violation. When the facts came in, Lew was quick to lead the Board in firing Stonecipher. Lew died in California on September 8 at age 64. Many executives can learn from his calmness in examining facts, and following a direction based on evidence.

Latest Books Read and Reviewed:

(Note: readers of the web version of Executive Times can click on the book covers to order copies directly from amazon.com. When you order through these links, Hopkins & Company receives a small payment from amazon.com. Click on the title to read the review or visit our 2005 bookshelf at http://www.hopkinsandcompany.com/2005books.html).

Title (Link to Review)	Author	Rating	Review Summary	Purchase
No God But God	Aslan, Reza	•••	Primer. Well-written introduction to the history of Islam, its evolution, and its place in the modern world.
Wedding of the Waters	Bernstein, Peter L.	•••	Wealth. In-depth description of the politicians, financiers, and engineers who created significant wealth for 19^th century Americans through the building of the Erie Canal, the waterway to the West that increased trade.
Sharing Good Times	Carter, Jimmy	••	Travelog. Interesting stories, often sweet, but little insight from this memoir that often reads like a travelog.
Escaping Salem: The Other Witch Hunt of 1692	Godbeer, Richard	••	Demonizing. Using court records, author builds a narrative of what happened in a Stamford Connecticut trial of two women accused of being witches in 1692.
Cast of Shadows	Guilfoile, Kevin	•••	Vengeance. First-rate debut novel will entertain most readers with a suspenseful tale of cloning, unintended consequences, a parallel online gaming world, and a person who wants to avenge the death of a loved one.
True North	Henderson, Bruce	••	Controversy. Was it Admiral Peary or Dr. Frederick Cook who reached the North Pole first at the beginning of the 20^th century? Character analysis and human behavior will resonate for many readers.
The Last Season: A Team In Search of Its Soul	Jackson, Phil	•••	Unmanageable. Somewhat detached, day-by-day, play-by-play perspective on the 2003-4 Lakers season, which was to have been Jackson’s finale and harsh words about the unmanageable Kobe Bryant. Even more interesting now that Jackson’s rehired.
Thomas Paine and the Promise of America	Kaye, Harvey J.	•••	Aspirations. Despite recent quotes from Paine used by those who disagree with his politics, readers of this work will realize that much of what was radical about freedom and equality in the 18^th century remains radical today, and the promise of America remains attainable.
Coach: Lessons From the Game of Life	Lewis, Michael	•••	Parenting. Short book with big message about how coaches and others can draw the best from ordinary people, especially kids, when parents will allow hard work and strict discipline from others.
Being Dead Is No Excuse	Metcalfe, Gayden and Charlotte Hays	•••	Recipe. Loaded with laughs about Southern funeral customs, especially the reception, and mouths will water reading some of the recipes for appropriate and expected funeral reception food.
Hard Sell: The Evolution of a Viagra Salesman	Reidy, Jamie	•	Slacker. Few readers need Reidy’s prescription: how to con your employer, not do your job and quit when on the brink of achieving success. Take a pass.
Sweet and Vicious	Schickler, David	•••	Trying. All the interesting and memorable characters are trying hard to do something that leads to humor, and fine reading entertainment, especially for those looking to escape in a wacky story.
Milk	Steinke, Darcey	••	Dreamy. Poetic weaving together of the stories of three characters, each of whom is searching for nourishment through the ways they try to integrate sexuality and spirituality.
The Traveler	Twelve Hawks, John	•••	Gridless. First novel of trilogy by an author whose identity is unknown even to agent and editor (living “off the grid”); a story of good and evil, free will and determinism that’s well-written.
Chain of Command	Weinberger, Caspar W. and Peter Schweizer	•	Resistible. Plenty of suspense, but plodding and predictable plot with preposterous elements that distract from what should have been better novel by former Secretary of Defense.

ã 2005 Hopkins and Company, LLC. Executive Times is published monthly by Hopkins and Company, LLC at the company’s office at 723 North Kenilworth Avenue, Oak Park, Illinois 60302. Subscription rate for first class mail delivery of the print version is $60.00 per year (12 issues). Web version subscriptions are $30.00 per year. Single issues: $10.00 print; $5.00 web. To subscribe, sign up at www.hopkinsandcompany.com/subscribe.html, send an e-mail to executivetimes@hopkinsandcompany.com, call (708) 466-4650, or fax to (708) 386-8687. For permission to photocopy or e-mail Executive Times, call (708) 466-4650 or e-mail to reprints@hopkinsandcompany.com. We will send sample copies if requested. The company’s website at http://www.hopkinsandcompany.com/archives.html contains the archives of back issues beginning in the month after the issue date.

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