Why gradualism fails in crisis response

Wells Fargo is the latest example of a company using gradualism to fix a crisis and ultimately paying a greater cost.

((Image via Wikimedia Commons, by Coolcaesar at the English language Wikipedia, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=15833975)
((Image via Wikimedia Commons, by Coolcaesar at the English language Wikipedia, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=15833975)

When the Wells Fargo board clawed back $41 million from former CEO John Stumpf’s compensation, they took an approach some observers call "gradualism" – taking as little action as possible until there’s pressure for more.

But the response proved ineffective, and after a couple of painful weeks, he "stepped down."

For a while, it looked like clawbacks might become the new normal for crisis response.  But gradualism failed for Wells Fargo, and in the end only Sumpf’s head on a platter satisfied the hungry beast of public opinion.

When responding to a crisis, companies need to satisfy a wide range of audiences – regulators, legislators, shareholders, customers, employees, even the general public. It’s a tough job, but research shows that companies that do it well minimize the impact of the crisis on the organization’s reputation, its stock price, and the bottom line.

The basic rules of crisis response are simple: say you’re sorry, fix it, and don’t do it again. To fix it, and ensure no recurrence, corporate boards often face the ultimate question: should they fire the CEO? Many have faced the axe. United’s Jeff Smisek and Priceline’s Darren Huston are recent examples.

But boards are often reluctant to take this extreme step, and in fairness the response should be measured by the degree of the problem. Firing a top-performing executive can potentially magnify, rather than minimize, the impact of a crisis.

CEO clawbacks seem to offer an interesting alternative. They offer the chance to demonstrate the company’s willingness to accept responsibility – and consequences – at the highest level. But they also raise the question, "if he’s guilty, why isn’t he gone?" Clawbacks also remind the public of the CEO’s stratospheric compensation, and may actually evoke a more negative response than doing nothing.

Clearly, the Wells Fargo claw back didn’t satisfy everyone.  At a Senate Banking Committee hearing last month, Sen. Elizabeth Warren (D-MA) said, "You should resign." At a House Financial Services Committee hearing, Rep. Michael Capuano (D-MA) asked, "Why shouldn’t you be in jail? What’s the difference between you and a bank robber?"

So why did the Wells Fargo board feel they needed to go beyond "gradualism in Stumpf’s case?" It seems the paper trail killed him. The New York Times reported that employee whistle blowers were not only ignored, they were, in some cases fired.

In the future, boards and their crisis counselors should be wary of "gradualism." When the evidence points to involvement, or even benign neglect, on behalf of the boss, it looks like the claw back tool causes more harm than good.

Louis Capozzi is the former chairman of MSLGroup and an adjunct professor at Baruch College.

Have you registered with us yet?

Register now to enjoy more articles and free email bulletins

Register
Already registered?
Sign in

Would you like to post a comment?

Please Sign in or register.