A CROSS-CULTURAL STUDY OF CORPORATE RESPONSE AND THEIR IMPACT IN TIMES OF CRISIS by SHU-HUI SOPHY CHENG DISSERTATION Submitted to the

Graduate School of Wayne State University, Detroit, Michigan in partial fulfillment of the requirements for the degree of

DOCTOR OF PHILOSOPHY 2009 MAJOR: COMMUNICATION Approved by:

Advisor

Date

3344308

2009

3344308

 COPYRIGHT BY SHU-HUI SOPHY CHENG 2009 All Rights Reserved

ACKNOWLEDGMENTS This journey has been full of uncertainties but turned out to be joyful and fruitful. After postponing my enrollment for three years, I was eventually able to start my PhD study in the fall of 2006 at Wayne State University. However, one week before my flight, I was diagnosed with thyroid cancer. At that time, I felt frustrated and pondered whether I would ever have a chance to complete my PhD. After discussion with my doctor, I chose to take the risk of postponing the surgery to start my academic program as scheduled. During the first winter break, I returned to Taiwan for surgery. Fortunately, the surgery went well and the cancer has not seriously affected my study and life. All in all, I thank God. Here, I wish to acknowledge the people without whom I may never have completed this educational journey. I first wish to thank my advisor, Dr. Matthew Seeger. I could never have finished this project without his guidance, patience and support during this seemingly endless process. It has been a true privilege to work with him. In addition, I thank members of my dissertation committee, Dr. Donyale Griffin, Dr. Julie Novak, and Dr. Attila Yaprak whose time and feedback to my research are so greatly appreciated. I thank all my friends and colleagues for their encouragement and help. My thanks also go to Hin and Ann for helping me edit the drafts. I would also like to thank the Graduate School and the Department of Communication of Wayne State University for helping fund part of this research. Finally, I want to thank my family and especially my parents, Wei-yuan Cheng and Yu-yen Hsieh, who raised me to be hard working. I appreciate them more than they will

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ever know. I would also like to thank my sisters, Shu-chuan and Meng-ju, and brother, Ching-sheng, for their support. I dedicate this dissertation to my family and also in memory of my little sister, Shu-ping, who died too young to complete her dream.

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TABLE OF CONTENTS ACKNOWLEDGMENTS.ii LIST OF TABLES v LIST OF FIGURES..vi CHAPTERS CHAPTER 1 Introduction.1 CHAPTER 2 Literature Review8 CHAPTER 3 Method...36 CHAPTER 4 Case of Martha Stewart..49 CHAPTER 5 Case of BenQ81 CHAPTER 6 Case of HIH.115 CHAPTER 7 Similarities and Cultural Differences in Crisis Communication...146 CHAPTER 8 Conclusion......173 REFERENCES.207 ABSTRACT...229 AUTOBIOGRAPHICAL STATEMENT..231

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LIST OF TABLES Table 1 Benoits Image Restoration Strategies..14 Table 2 Coombss Crisis Response Strategies..20 Table 3 Characteristics of High and Low Context Cultures..24 Table 4 Hofstedes and Trompenaars and Hampden-Turners Dimensions.28 Table 5 Key Events in Stewart Case...54 Table 6 Martha Stewarts Crisis Response Strategy...................74 Table 7 Key Events in BenQ Case...84 Table 8 BenQs Crisis Response Strateg.....110 Table 9 Key Events in HIH Case....119 Table 10 HIHs Crisis Response Strategy....140

LIST OF FIGURES Figure 1 Coombss Continuum of Crisis Strategies...18 Figure 2 Research Design.46 Figure 3 The Stock Price of MSO............78 Figure 4 Revenue and Net Income of MSO...........78 Figure 5 The Stock Price of BenQ.........112 Figure 6 Revenue and Net Income of BenQ........112 Figure 7 Comparison of Three Countries.........157 Figure 8 Situated Cultural Crisis Communication Model....199

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1 CHAPTER 1 INTRODUCTION Overview The personalities of strong business leaders can help shape the image of their companies. In some cases, the leaders become the virtual icon of the corporate brand, lending their personal prestige to the brand and personifying the company. They can also threaten the company when they are involved in a scandal. In this situation, the consequences for the company can be dire as in the Martha Stewart case in 2002. A similar event occurred in 2007 when Taiwanese chairman, K. Y. Lee of BenQ was charged with insider trading after BenQ officially made an announcement it would stop investing in Siemens mobile phone and file for bankruptcy protection in Germany. In another case, the HIH Insurance went into provisional liquidation on March 15, 2001, representing the largest collapse ever in Australian corporate history. The unethical behavior of the founder and CEO, Ray Williams, and the non-executive director Rodney Adler is believed to have contributed to the failure of HIH. This corporate disaster raised the concerns of risk management and corporate governance in Australia well before the Enron and WorldCom scandals in the U.S. Much of the literature in crisis public relations focuses on the technical role of planning, managing and responding (Borda & Mackey-Kallis, 2004; Coombs, 2007a). For example, organizations need to establish a crisis command center, designate a management team, develop a crisis plan, choose a single spokesperson with one voice, tell the truth and respond quickly when crisis encounters. However, very few studies on crisis communication focus on the role of cultural influences during a crisis (Marra, 1998;

2 Lee, 2005). Thus, the aim of this study is to conduct a cross-cultural comparison of U.S., Taiwan and Australia to examine whether these different cultural contexts are related to different crisis communication approaches. This study explores how the three companies Martha Stewart, BenQ and HIH responded when confronted with an organizational crisis that threatened existence. Allegations of insider trading against Martha Stewart led to her imprisonment. Her strategic plan in response to the insider trading accusations and the media attention surrounding this crisis left Stewart trying to take action to restore her image. Although the verdict of BenQs case has not been rendered, negative media stories have caused BenQs stock to decline rapidly and sales to drop sharply. Shortly after, BenQ restructured and renamed the company to stop the financial bleeding and to try to increase profits. HIH was unable to salvage its legitimacy, and business ceased less than a year after the media first reported concern for the companys future. Its share price fell steadily from more than A$1 in August, 2000 to its terminal price of A$0.175 on February 27, 2001. Not surprisingly, HIH collapse came as a shock to thousands of stakeholders. It is important to understand how these executives responded to their wrongdoings. More specifically, the strategies they used to address their corporate disasters drew widespread public criticism. To be more precise, this study seeks to investigate: 1) How did Martha Stewart, BenQ and HIH manage their communication during the corporate crisis? 2) How were these communication strategies received and interpreted by the stakeholders? 3) How did their communication strategies reflect different cultural factors?

3 This study collects two major types of data: documents and archival records. The actions and communication strategies used by Martha Stewart, BenQ and HIH are reviewed with information from their corporate websites, press releases and media coverage. The organizational archival records, such as stock prices, sales and annual reports help explain the extent in which the crises had an impact on these three companies financial performance and stakeholders. The official government archival information, such as court records and commission reports has added additional insights. Coombs (2007a) has synthesized Benoits image restoration theory (1995a) and other works, and suggested a dynamic typology of crisis response strategies. Thus, Coombss situational crisis communication theory (SCCT) is used to provide a framework to interpret and analyze the crisis response strategies that Martha Stewart, BenQ and HIH employed. It consists of four major crisis response strategies: denying strategies (attack the accuser, denial, scapegoat); diminishing strategies (excuse, justification), rebuilding strategies (compensation, apology); and reinforcing strategies (bolstering, ingratiation). Crisis communication studies are predominantly based on Western theories (mostly American) but there is a growing awareness of the need to address cultural differences in this area. Filling the gap left in current literature, the purpose of this study seeks to explore cultural differences in crisis communication. Drawing upon Halls context (1976), Hofstedes dimensions of culture (1980) and Trompenaars and Hampden-Turners cultural factors (1998), this study utilizes these guidelines as a framework to compare the different communication approaches in these cases from

4 three different countries. Through the cross-case analysis, this study aims to contribute to the body of crisis communication research in the context of cultural differences and its future direction. In short, when a crisis strikes, communication is critical for protecting the organizations image and reputation. An effective response might even prevent an escalating crisis. Specifically, what an organization says is a key element in managing the uncertainties during and in the post crisis situation. Three cases namely, Martha Stewart, BenQ and HIH are employed to examine their corporate messages in their corporate crises. I will take a closer look at the stakeholders perception of these communication strategies. This study also attempts to identify the similarities and differences in communication styles and strategies. The following section provides a brief overview of these cases. Background of Cases Martha Stewarts Insider Trading Beginning with the 1982 publication of her book Entertaining, Martha Stewart made a name for herself as a homemaking diva with an emphasis on do-it-yourself ingenuity. As the chief of Martha Stewart Living Omnimedia (MSO), Stewart used her name and face to make connections with various businesses including a line of housewares, television shows, radio channels, magazines and a series of books on entertaining. On December 27, 2001, Stewart sold 3,928 shares of her ImClone stock worth $228,000 the day before the U.S. Food and Drug Administration (FDA) rejected approval of Erbitux, ImClones anti-cancer drug. Stewart had denied any wrongdoing, insisting she did not receive any advance knowledge from Sam Waksal, the founder and

5 CEO of ImClone about the decision on Erbitux (Pollack, 2002). Instead, her sale of ImClone stock was part of a predetermined plan to sell if shares fell below $60. Later, Stewart was officially indicted on charges of obstructing justice and securities fraud related to her sale of ImClone stock on March 5, 2004. Judge Cedarbaum dismissed the securities fraud charge against Stewart, saying prosecutors had failed to present enough evidence on the issue. Charges of conspiracy, obstruction of justice and making false statements remained (Masters & White, 2004). Stewart was sentenced to five months in prison as well as a $30,000 fine, five months of home confinement and two years of supervised probation after her release. On October 8, 2004, Stewart reported to Alderson Federal Prison Camp in West Virginia (Newman, 2004) and was released on March 4, 2005 (Glater, 2005). BenQs Insider Trading BenQ, a Taiwanese based company, was established in 1984, initially known as Acer Peripherals Inc., and later rebranded as BenQ in December 2001. BenQ is a multi-faceted company with interests in mobile communications, visual display and network convergence technologies. Its principal products include LCD monitors, LCD TVs, MP3 players, digital projectors, mobile phones, and other gadgets. The company name reflects its vision: Bringing Enjoyment aNd Quality to life. On October 1, 2005, BenQ acquired the ailing mobile devices division of Germanys Siemens. The new business group and new brand, BenQ-Siemens became the 4th largest mobile phone company in terms of its market share (BenQ Press Release, 2005a). After BenQ bought Siemenss handset unit, it began accumulating losses of US$781 million in only one year. In late September 2006, BenQ decided to stop investing in the money-losing

6 operation and filed for bankruptcy protection in Germany (Wang, 2006a). Before BenQ made the losses public, chairman K. Y. Lee, president Sheaffer Lee, vice president Eric Yu instructed a group of financial employees to sell 6,769 undistributed bonus shares for NT$230 million (US$7 million) and put the money into the BenQ branch in Malaysia, Creo Ventures. Later they moved the money back to Taiwan and, when the plunge of BenQ share prices slowed down, used the money to buy back BenQ shares to boost the stock market (Pao, 2007). On May 8, 2007, chairman K. Y. Lee, president Sheaffer Lee, chief financial officer Eric Yu, financial officer Wei-yu Liu were charged with insider trading. The accounting section chief Ta-wen Liu who knew the companys financial situation but still helped transfer money to Malaysia, was charged with violating securities laws and money laundering (Wang & Chuang, 2007). The Collapse of HIH Insurance The HIH failure was Australia's biggest-ever corporate disaster. HIH collapsed on March 15, 2001, and moved from provisional liquidation to full liquidation on August 27, 2001. Prior to its collapse, the HIH Group was the second largest general insurer in Australia, comprised of 217 subsidiaries. HIH liquidators estimated that the company loss with debts was about A$5.3 billion (US$3 billion). Following the failure of the HIH group, the Australian Federal Government established the HIH Royal Commission to inquire into the causes of the collapse. Justice Neville Owen, who led the HIH Royal Commission, noted that the collapse of the HIH has reverberated throughout the community, with consequences of the most serious kind (The HIH Royal Commission, 2003). According to the report of the HIH Royal Commission, the primary reason for the failure was that adequate provision had not been made for insurance claims and past

7 claims on the policies had not been properly priced. This meant that HIH had mismanaged of its core business activity. Specifically, many of HIHs difficulties could be attributed to its failed acquisition strategy and business operation. Within HIH management, there appeared to be no clearly defined statement of duties or limits on authority. The HIH Royal Commission (2003) revealed that a corporate culture of not questioning leadership decision making appeared to have developed within HIH. The type of culture was inimical to sound management practices. It resulted in decision making that fell well short of the required standards. Executive self-indulgence and corporate expenditure also hurt HIH. For instance, the founder and CEO Ray Williams continued to give lavish presents and parties for friends and executives, when the company was already in financial straits (Donaldson, 2008). On April 15, 2005, Williams was jailed for 4 years 6 months with a non-parole period of 2 years 9 months, after pleading guilty to misleading shareholders about the financial position of HIH. He walked out of Sydneys Silverwater jail on January 14, 2008 (Main, 2008). Summary This chapter first identifies the lack of understanding cultural differences in crisis communication. To this end, it is important to explore how communication strategies reflect different cultural factors. Using the cases of Martha Stewart, BenQ and HIH from three different countries, the goal of this study is not only to understand the strategies they used to address their corporate crisis but also to examine the importance of cultural sensitivity in crisis communication. The next chapter examines the literature relevant to crisis communication in organizational settings. This literature review provides a more detailed rationale for the necessity addressing cultural issues in crisis communication.

8 CHAPTER 2 LITERATURE REVIEW This chapter provides a theoretical foundation for exploration of the role of the cultural factor played in crisis communication. I revisit the existing literature in public relations, crisis communication and intercultural communication for formulating three research questions and later for developing the research design. This chapter is divided into four sections: 1) crisis communication, 2) crisis communication and culture, and 3) cultural issues in crisis communication, and 4) the three research questions which will guide the analysis of this study. Crisis Communication Crisis & Crisis Communication Defined A variety of crisis typologies can be found in the literature (Coombs, 2007a; Ulmer, Sellnow, & Seeger, 2007). While crises possess different characteristics, basically they have been categorized into identifiable types. For example, Ulmer, Sellnow and Seeger (2007) describe two major types of crises: (1) intentional crises (i.e., terrorism, sabotage, workplace violence, poor employee relationships, poor risk management, hostile takeovers, and unethical leadership), and (2) unintentional crises (i.e., natural disasters, disease outbreaks, unforeseeable technical interactions, product failure, downturns in the economy). In this study, the crises of Martha Stewart, Ben Q and HIH occurred from organizational misdeeds which placed the stakeholders at risk. Specifically, the crises were created by the leaders of the organization whose unethical and knowingly illegal behavior violated the law. In fact, crisis events can and do strike organizations of all types. Every kind of

9 organization, from Fortune 500 companies to small family owned businesses, have the potential of being a victim of crisis (Seeger, Sellnow, & Ulmer, 2003). Fishman (1999) points to five elements that are common in most definitions of a crisis situation. First, an unpredictable event occurs. Second, important values for an individual or institution must be threatened for a crisis situation to exist. Third, the intention of an actor or an organization plays a minor, if negligible, role in analyzing a crisis situation. Fourth, a crisis occurrence represents a time-sensitive situation. Fifth, a crisis situation involves a dynamic or multi-dimensional set of relationships within a rapidly-changing environment. As such, effective communication is essential to maintaining a positive relationship with key stakeholders such as employees, customers, suppliers, and shareholders (Fishman, 1999, p. 348). Fearn-Banks (2007) defines crisis communication as the dialog between the organization and its public prior to, during, and after the negative occurrence. The dialog details strategies and tactics are designed to minimize damage to the image of the organization (p.9). Moreover, crisis communication is concerned with the transferring of information to significant persons to help avoid or prevent a crisis (or negative occurrence), recover from a crisis, and maintain or enhance reputation (Fearn-Banks, 2007). Crisis communication, as Seeger and Ulmer (2002) note concerns the processes whereby organizations create and exchange meanings among stakeholders regarding the risk of crisis, cause, blame, responsibility, precautionary norms, and crisis-induced changes in the organization and its relationship to stakeholders (p. 128). As noted earlier, for an organization to manage the effects of a crisis it must communicate to both internal and external stakeholders. Crises, in almost all

10 circumstances, immediately trigger a deluge of questions from an organizations many different publics (Marra, 1998). Reporters, employees, stockholders, government officials, and local residents all want to know what happened. Ulmer, Sellnow, and Seeger (2007) suggest all crises involve the general communication strategies of reducing uncertainty, responding to the crisis, resolving it, and learning from it. The ability to communicate quickly and effectively is clearly an important component of successful and effective crisis management. Effective crisis communication can not only defuse or eliminate crisis, but it can sometimes bring an organization a more positive reputation than before the crisis occurred (Kauffman, 2005). On the other hand, Marra (1998) argues if an organization fails to respond to a crisis in the correct manner, a bad situation can be made worse. Hence, crisis communication strategies can substantially diminish the harm caused by a crisis or magnify the harm if mismanaged. Several general theoretical frameworks have been adapted to explain a crisis situation. According to Seeger, Sellnow, and Ulmer (2003), these theories emphasize such crisis elements as uncertainty, the novelty of the situation, and the potential threat to established routines and order (p. 21). Further, they note that crisis theories try to reveal and explain the understanding of risk factors associated with the concept of crisis, organizations response to these factors, and the impact of crises on the key publics and stakeholders. Based on the need for better understanding of organizational crisis and communication, crisis communication studies have emerged as a vibrant research area. Fishman (1999) agrees that of all the areas in public relations, none has grown faster than crisis communication. Currently, the main lines of crisis communication research relevant to the current study are corporate apologia, image restoration, and situational

11 crisis communication theory. Corporate Apologia When an organization is criticized for wrongdoing, the situation can easily escalate into a crisis situation. This often happens when the organization is thought to be incompetent or is seen as being careless towards the community. At such times, discourse becomes an organizational resource that corporations utilize as part of a comprehensive crisis management strategy. The primary way to counter charges is to choose an apologetic strategy (Hearit, 1994). Ware and Linkugel (1973) are the first to classify apologetical discourses as a distinct form of public address and characterized apologia as speech of self-defense. They identified four factors commonly found in speeches of self-defense which included denial, bolstering, differentiation, and transcendence. Dionisopolous and Vibbert (1988) are the first to posit that the apologia genre can be applied to organization. Apologia seeks to defend an organizations or an individuals alleged offensive actions while reestablishing organizational legitimacy. They argue that organizations have a public persona and are generally perceived as individuals by their various stakeholders. If organizations are considered to be individuals and have personas, it is possible to experience attacks on character and the need to engage in self-defense (apologia). Hearit (1995) claims that in apologia, organizations employ three prototypical appearance/reality disassociations. These include 1) denial of guilt through opinion/knowledge disassociation, 2) differentiation of guilt by scapegoating through individual/group disassociation, and 3) distancing from guilt through act/essence disassociation.

12 Hearit (1994) explains that an apologia is not an apology (though it may contain one); rather it is a response to a social legitimation crisis in which an organization seeks to justify its behavior by presenting a compelling counter account of its actions. Although corporations are not individuals but rather juristic persons before the law, the current trend is for corporations to make use of the personae of CEOs as spokesperson to deliver their apologia (Hearit, 1995). The CEO may bring authority and credibility to a highly equivocal situation and establish the moral tone for the crisis response. The CEO may further accept responsibility and take steps to provide appropriate compensation and provide assurances that similar events will not occur again. Hearit (2001) indicates such a move has two effects. First, apologies are character-based defenses in which people measure the degree to which individuals have changed, and the use of CEOs assists auditors in gauging corporate sincerity. Second, if apologies fail, then there are ready-made scapegoats of individuals (i.e., the CEOs) who have publicly taken responsibility for the situations. In one of the most thoroughly studied examples of public relations and crisis management, Johnson & Johnsons CEO, James Burke took decisive action that helped save his company after 13 people died from Tylenol capsules laced with cyanide in 1982. Moving fast to save its product, the company withdrew the entire Tylenol stock from stores. Burke then appeared on the media to explain that the company had nothing to do with the poisoning incident. He further presented a plan to guarantee that Tylenol could never again be tampered with. Tylenol sales rebounded, largely because of the credibility of Burkes remarks and the personal reassurance he offered. He built credibility and goodwill through his appearance on the media, and this goodwill helped

13 the company survive (Ulmer, Sellnow, & Seeger, 2007). There are instances, however, when a CEO is not familiar or comfortable with the press, when he or she is not an effective communicator, and when it may not be appropriate to expose the CEO to probing media questions. When Exxons tanker Valdez ran into an Alaskan reef in 1989, spilling 1.5 million gallons of crude oil, chairman and CEO Lawrence Rawls response made the damage to the company much worse. Rawl defended the company and sought to avoid responsibility by blaming Captain Joseph Hazelwood for the spill and the State of Alaska for the failed clean-up. At the very time when cooperation was needed, Rawl became engaged in a public dispute with Alaskas Governor Steve Cowper. The Exxon Valdez oil spill is generally recognized as a public relations disaster which was compounded by Rawls behavior (Small, 1991). Image Restoration In image restoration theory, the organization determines what is threatening its reputation or image and also determines which publics must be addressed and persuaded to maintain and restore a positive image (Fearn-Banks, 2007). Specifically, when images are threatened, as they are during crises, organizations are forced to respond. They attempt to regain consumer confidence, minimize negative publicity, and return the company to economic stability. Based on the work of Ware and Linkugels (1973) theory of apologia, Burke's (1970) discussion on guilt, and Scott and Lyman's (1968) accounts approach to self defense, Benoit (1995a) has developed a comprehensive typology of image restoration strategies. This includes denial, evasion of responsibility, reduction of the offensiveness of the act, corrective action, and mortification.

14 There are two major assumptions that underlie Benoits (1995a) theory of image restoration. First, he argues that communication is a goal-oriented activity. This means that humans communicate with an agenda. Some goal or outcome is desired when humans communicate. His second assumption is that a very important communication goal is to maintain or preserve ones image or reputation after alleged or suspected wrongdoing. This process of image management is also known as face-work. Five strategies make up the rhetoric or image repair discourse and each of these strategies have a set of tactics within them as shown in Table 1.

Table 1: Benoits Image Restoration Strategies Strategy Key Characteristic Denial Simple denial Organization did not perform act Shift the blame Act performed by other Evasion of Responsibility Provocation Responded to act of another Defeasibility Lack of information or ability Accident Act was a mishap Good intentions Meant well in act Reducing Offensiveness of Event Bolstering Stress good traits Minimization Act not serious Differentiation Act less offensive Transcendence More important consideration Attack accuser Reduce credibility of accuser Compensation Reimburse victim Corrective Action Plan to solve or prevent problem Mortification Apologize for act Source: Adapted from Image repair discourse and crisis communication, by W. Benoit, 1997, Public Relations Review, 23, p. 197.

Benoit (1995a) argues that individuals made various communication decisions when responding to an accusation that threatens their image or reputation in order to restore their good standing before salient audiences. He further suggests that multiple

15 image repair strategies are most frequently used. If the organization or individual is falsely accused, says Benoit, denial might be an effective initial approach. Once the accused has established his innocence through denial, bolstering may still be required to repair residual effects of damage to his reputation. Mortification, for example, might be used to precede corrective action. Benoit and colleagues have developed and applied the model to a variety of different crisis situations. For instance, Benoit and Brinson (1994) analyze AT&Ts defense following an interruption of its long-distance service in New York in September of 1991. Initially, AT&T tried to shift blame to low-level workers. As the complete story emerged, however, AT&T apologized for the interruption (mortification) and began to bolster its image by stressing its commitment to excellence, the billions of dollars invested in service, and the quality of its employees. Finally, AT&T promised corrective action and introduced a comprehensive review of its operations to anticipate and prevent further problems. It also stressed its commitment to providing excellent service and its willingness to spend billions of dollars to do so. Given these corrective action strategies, AT&Ts finally restored its image. Benoit (1995a) also examines Union Carbides response to the Bhopal, India, gas leak that killed thousands and injured hundreds of thousands. Union Carbides primary strategies, bolstering and corrective action, were focused on four specific actions: a relief fund, an orphanage, medical supplies, and medical personnel. Although these strategies were appropriate and timely, Benoit claims that Union Carbide failed to address the most important question: What were they doing to prevent another tragedy? Fishman (1999) comments that the strength of Benoits typology lies in the details

16 that it provides, and that the model can be adapted to cover virtually every attack-defined situation from a celebrity crisis such as the Tonya Harding case (Benoit & Hanczor, 1994) to a company which defends its actions by promising reforms for overcharging its customers for automobile services (Benoit, 1995b). However, Fishman (1999) thinks that Benoits approach lacks a comprehensive picture of the entire cycle of a crisis as well as a mechanism for examining multiple parties and their culpability in the crisis. Burns and Bruner (2000) revisit Benoits theory, arguing that at certain points, it is constrained by its current language and mental representations and even invites misinterpretation (p. 27). They note that the theory reflects a more static or linear view of rhetoric which is based on a simple stimulus-response sequence that does not emphasize a more audience-oriented point of view (p. 28). They are also concerned that Benoits theory oversimplifies the assessment of effectiveness. Hence, they suggest that: 1) a more comprehensive understanding of multiple audiences may help focus the assessment of effectiveness, and 2) diverse and more precise measures of effectiveness may help in some cases. More specifically, the suggestion is to employ the triangulation of research methods to the measurement of precise relationship between image restoration discourse and other phenomena (Burns & Bruner, 2000). Ulmer, Seeger, and Sellnow (2007) also point out that the focus of image restoration is limited primarily to post-event discourse and to that communication specifically associated with accusations and responses (p.131). The success of image restoration strategies depends on the crisis and this focus can represent a small portion of the messages associated with a crisis event, both in terms of time and scope. While such strategies may be effective, they sometimes come across as insincere and even

17 deceptive, particularly when the organization is obviously in the wrong (Ulmer, Sellnow, & Seeger, 2007).
Situational Crisis Communication Theory

Coombs (1995) combines the work of corporate apologia and image restoration theory to develop situational crisis communication theory (SCCT). He synthesizes existing literature to create a list of crisis response strategies and develops a set of guidelines for the appropriate use of a given strategy. The guidelines are based upon the attribution theory and use the crisis situation and the public as the factors that help to determine when a crisis response strategy is appropriate. Attribution theory is premised on the belief that people assign responsibility for negative, unexpected events (Weiner, 1986). Coombs (2007a) indicates that crises are unexpected and negative, so they provoke attributions of responsibility. In turn, these attributions shape how a stakeholder feels and behaves toward the organization. Conceptual frameworks for Coombs approach have evolved over time. He states that a more productive approach is to identify the most common crisis communication strategies and to discover a thread that connects them together (Coombs, 1999). Coombs later revised his theory to place crisis situations along a continuum from weak responsibility to strong responsibility. The continuum reflects a range of actions from defensive to accommodative. In his revised approach, Coombs (1999) chooses strategies that are cited as most commonly being used by corporations faced with reputation-altering decisions. Figure 1 places the common crisis communication strategies on such a continuum. Accommodative responses accept responsibility, admit a problem exists, and/or attempt to take corrective action. Defensive responses insist

18 there is no problem, reassure the stakeholders that the organization can generate future revenues, and/or take action to restore normal operations.

Defensive

Accommodative

attack accuser denial excuse justification ingratiation corrective full apology action

Weak Crisis Responsibility

rumors natural disasters

Strong Crisis Responsibility

malevolence

accidents misdeeds

Source: From Ongoing crisis communication: Planning, managing and responding (p. 124), by W. T. Coombs, 1999, Thousand Oaks, CA: Sage Publications.

Figure 1: Coombs's Continuum of Crisis Strategies

In SCCT, a crisis manager begins by identifying the basic crisis type to determine the initial level of crisis responsibility stakeholders will attribute to the crisis situation. Next, performance history and the amount of damage are considered to determine if adjustment should be made to the original crisis responsibility assessment. After the final adjustment, the crisis managers select the crisis response strategy to fit the level of crisis responsibility. SCCT concentrates on crisis response strategies that will maximize protection of the organizations reputation (Coombs, 2006a). Using Coombss typology of crisis response strategies, Wilcox and Cameron (2006) examine the case of Intel. In 1993, Intel initially denied there was a problem with its Pentium 586 chip. As the crisis deepened and was covered in the mainstream press, Intel used the justification strategy by saying that the problem was not serious enough to warrant replacing the chips. It minimized the concerns of end-users such as engineers

19 and computers programmers. In fact, Intel mismanaged the handling of its crisis communication. First, it did not disclose to the public the information about the Pentium flaw when they initially realized there was a problem. Then when the problem finally did come out into the open, they downplayed it instead of helping the users who had purchased the flawed chips. Only after considerable damage had been done to Intels reputation and IBM had suspended orders for the chip did Intel take corrective action to replace the chips, and Andy Grove, Intels president, issued a full apology. According to Coombs (2006a), SCCT is offered as a theory-based, empirically tested method for selecting crisis response strategies. SCCT is composed of three core elements: 1) the crisis situation, 2) crisis response strategies, and 3) a system for matching the crisis situation and crisis response strategies. SCCT evolves from converging lines of communication research (e.g., Hearit, 1994; Benoit, 1995a) which state that the effectiveness of communication strategies is dependent on characteristics of the situation (Heath & Coombs, 2006). This means that the situation helps to determine an appropriate response. SCCT shares the belief in the power of communication with image restoration theory (Benoit, 1995a). However, Coombs (2007b) argues that image restoration theory offers no conceptual links between the crisis response strategies and elements of the crisis situation. SCCT draws upon the strategies articulated in image restoration theory by integrating those strategies into a system that predicts how stakeholders should react to the crisis and the crisis response strategies used to manage the crisis (Coombs, 2007b, p. 171). SCCT indicates that the way to protect the reputational resource is by selecting the crisis response strategies that best fit the reputational threat presented by the crisis.

20 As shown in Table 2, Coombs (2006a) defines the primary and supplemental crisis response strategies used in SCCT. Crisis response strategies are grouped into four clusters. Bolstering strategies are only supplemental and must be used with one of the other three.

Table 2: Coombss Crisis Response Strategies

Strategies Attack the Accuser Deny Denial Scapegoat Primary Crisis Response Strategies Explanation Crisis manager confronts the person or group claiming something is wrong with the organization. Crisis manager asserts that no crisis exists. Crisis manager blames some person or group outside of the organization for the crisis. Crisis manager minimizes organizational responsibility by denying intent to do harm and/or claiming inability to control the events that triggered the crisis. Crisis manager minimizes the perceived damage caused with the crisis. Crisis manager provides money or other gifts to the victims. Crisis manager publicly states that the organization takes full responsibility for the crisis and asks stakeholders forgiveness. Example The organization threatened to sue the people who claim a crisis occurred. The organization said that no crisis event occurred. The organization blamed the supplier for the crisis. The organization said it did not intend for the crisis to occur and that accidents happen as part of the operation of any organization. The organization said the damage and injuries from the crisis were very minor. The organization offered money and products as compensation. The organization publicly accepted full responsibility for the crisis and asked stakeholders to forgive the mistake.

Excuse Diminish Justification

Compensation Rebuild Apology

Secondary Crisis Response Strategies Explanation Example The organization tells stakeholders The organization restated its Reminder about its past good works. past good work and improved its recent work. Crisis manager praises The organization thanked stakeholders and/or reminds them stakeholders for their help. Bolstering Ingratiation of past good works by the organization. Crisis managers remind Victimage stakeholders that the organization is a victim of the crisis too. Source: Adapted from The protective powers of crisis response strategies: Managing reputational assets during a crisis, 2006, Journal of Promotion Management, 12, p. 248. Strategies

21 Although SCCT does have a limited scope of application, it can be used by organizations when they face any of the above crisis types. SCCT is not meant to apply to individuals such as politicians or celebrities. There are financial/legal limits to the selection of crisis response strategies (Coombs, 2006b). SCCT recognizes that crisis managers may be forced to use suboptimal crisis response strategies because the organization cannot afford the financial and legal liabilities of strategies that accept full responsibility for the crisis. At times, financial/legal constraints will prohibit an organization from using a crisis response strategy that openly accepts responsibility. On a related note, an organization can express compassion without accepting responsibility. Demonstrating compassion may be a way to enhance organizational credibility, a valuable aspect of the reputation. On the other hand, Coombs has frequently used empirical method to examine how an organizations reputation is impacted as a result of crisis (Coombs, 2004, 2006a). However, communication scholars do not always use empirical approaches because of the difficulty in controlling the uncertainty surrounding organizations in crisis. Seeger, Sellnow and Ulmer (1998) argue that the inherent threat to the organization and its employees may diminish respondents willingness to share information honestly on a survey (p. 259). In addition, when relying on student populations (as Coombs often does), comprised of neither the actual stakeholders of the organizations studied, nor even those representative of the actual stakeholders, artificiality is introduced (Ezzeddine, 2006, p. 48). In sum, the stream of image restoration research or crisis response strategy has helped establish a useful framework from which practitioners can determine the most

22 appropriate crisis response type, ranging from accommodative to defensive strategy. Specifically, they are designed to understand what strategy is relevant to be used for a given circumstance. An organization may use one or more crisis strategies in combination as long as they are not contradictory (Ihlen, 2002). For example, it is a contradiction if crisis managers used deny strategies with strategies that acknowledge a crisis has occurred. Face, image, reputation are important concepts embedded in this line of research. However, there is little research on the role of culture in crisis response strategies. In the next section, the concept of culture is reviewed. The importance of cultural factors in crisis communication is addressed as well.
Crisis Communication and Culture

Research by Pauchant and Mitroff (1988) indicate a strong relationship between an organizations overall culture and its response to crises. Sriramesh, Kim and Takasaki (1999) have followed the line of research and described how societal culture influences the practice of public relations in every nation and region of the world. Taylor (2000) argues that one of the most difficult challenges for public relations in the global marketplace will be in the area of crisis communication. She explains further that crises are exacerbated when they occur in an international environment. Similarly, Molleda and Quinn (2004) point out that public relations professionals practicing in more than one country are challenged by conflicts that impact their organizations or clients activities and reputation in more than one location at the same time. This is elaborated when a national issue becomes international in an instant, impacting host, home and transnational publics. In particular, nowadays the internet technology can inform their local public about problems in different areas of the world that become a global issue.

23 In short, to understand culture, we must find ways to assess and compare cultures. There are three influential and accepted comparison points for intercultural communication: Halls idea of context (1976), Hofstedes cultural dimensions (1980) and Trompenaars and Hampden-Turners cultural factors (1998). The following section explains each and relates them to the field of crisis communication.
High-Context and Low-Context Cultures

There are many different contexts which lead to differences in how and what people communicate. Edward T. Hall (1976) proposed the concept of high versus low context as a way of understand different cultural orientations. The difference between high and low context cultures depends on how much meaning is found in the context versus in the code. The code can interpret as message and context as setting or circumstance, including the people, in which the message appeared. More specifically, context leads to differences in how and what people communicate. In Halls view, a high context culture is one in which people are deeply involved with each other. As a result of intimate relationship among people, a structure of social hierarchy exists, individual inner feelings are kept under strong self-control, and information is widely shared through simple messages with deep meaning. The communication styles of Asian and Arab nations, for example, are high context cultures. In contrast, European and American communication styles are considered low context cultures. A low-context culture is one in which people are highly individualized, somewhat alienated, and fragmented, and there is relatively little involvement with others (Hall, 1976, p. 39). As a consequence, social hierarchy, as well as society in general, imposes less on individuals lives, and communication between people is more

24 explicit and nonpersonal. Lustig and Koester (2006) summarize the key communication differences between high and low context cultures as shown in Table 3.

Table 3: Characteristics of High and Low Context Cultures High Context Cultures Covert and implicit Message internalized Much nonverbal coding Reactions reserved Distinct ingroups and outgroups Strong interpersonal bonds Commitment high Time open and flexible Examples of context by country: Japan, China, Korea Low Context Cultures Overt and explicit Messages plainly coded Details verbalized Reactions on the surface Flexible ingroups and outgroups Fragile interpersonal bonds Commitment low Time highly organized Examples of context by country: Germany, USA, Great Britain, Australia

Source: Adapted from Intercultural competence: Interpersonal communication across cultures (p. 114), by M. W. Lustig and J. Koester, 2006, Boston: Allyn & Bacon.

Dimensions of Culture Hofstedes Dimensions of Culture

Various researchers have suggested underlying principles or dimensions that can be used to examine culture comparatively. The work of Geert Hofstede (1980) has been widely used as a foundation of culture and business communication. Hofstede (1980) defines culture as the collective programming of the mind which distinguishes members of one human group from another. He points out cultures are built on values; values create the collective programming. Collective programming means that people share patterns of thinking, feeling, acting, and reacting. Thus, people from different cultures can see and react to the same event in every different ways.

25 In a study of IBM employees from around the world, Hofstede (1980) found four dimensions of societal culture: power distance, individualism or collectivism, uncertainty avoidance, masculinity or femininity. Later, with Bond (1988) he identified a fifth category Confucian dynamism or long-term-short-term orientation that has its roots in Eastern culture. These five variables are present in all cultures and the degree of their presence influence the internal and external communication of any organization. Hofstedes (1980) first dimension, power distance focuses on how a society deals with the fact that people are unequal in physical and intellectual capabilities. Specifically, power distance refers to the openness of upward communication in an organization. In a high power distance culture, public relations practitioners may hesitate to express their opinions to their supervisors (Taylor, 2001). The individualism versus collectivism dimension focuses on the relationship between the individual and social group. People with high individualistic values tend to care about self-actualization and career progression in the organization, whereas people with collectivist values tend to value the overall benefits to the organization more than their own individual interests (Taylor, 2001). Sriramesh, Kim, and Takasaki (1999), for example, identify the collectivism as a major influence on Japanese public relations. The concept of wa, meaning harmony, and amae, meaning others goodness, results in public relations efforts that create a mutual solidarity in the organization. Hofstedes uncertainty avoidance dimension measures the extent to which different cultures socialize their members into accepting ambiguous situations and tolerating uncertainty. There tend to be more written rules, regulations, and stress in high uncertainty avoidance culture. Basically, humans have used technology (particularly

26 automation), rites and rituals (a facet of corporate culture), and formalization (also an aspect of corporate culture) to cope with ambiguity in organization (Sriramesh, Kim, & Takasaki, 1999, p. 275). Nations that have high uncertainty avoidance are not tolerant of risk or crisis. Taylor (2001) suggests that organizations that operate in high uncertainty avoidance nations must recognize that situations that may appear to be low risk may actually be perceived to be a crisis (p. 77). Masculinity versus femininity dimension looks at the relationship between gender and work roles. In masculine cultures, sex roles are distinguished and traditional masculine values, such as achievement and the effective exercise of power, determined cultural ideals. Finally, Hofstedes fifth and newest dimension, Confucian dynamism or time-orientation dimension, refers to a persons point of reference about life and work. Cultures that promote a long-term orientation toward life admire thriftiness, perseverance, and the desire for orderly relationships with others.
Trompenaars and Hampden-Turners Cultural Factors

In 1998, Trompenaars and Hampden-Turner incorporated some of Hofstedes dimensions, but used seven different terms to describe culture: 1. Universalism versus particularism Universalist societies emphasize standards and obedience to the rules; particularist societies are those in which particular circumstances and relationships are stronger than abstract rules. 2. Individualism versus communitarianism Individualism is about rights of the individual. It seeks to let each person grow or fail on their own, and sees group-focus as denuding the individual of their inalienable

27 rights. Communitarianism is about the rights of the group or society. It seeks to put the family, group, company and country before the individual. 3. Neutral versus affective orientation In emotionally neutral cultures, one carefully controls emotions. In cultures with an affective orientation, people freely express their emotions. 4. Specific versus diffuse People from a specific oriented culture tend to analyze elements of a situation separately, viewing the whole as the sum of its parts. People from a diffuse culture tend to see all elements of a situation as interwoven, viewing the diffuse whole as more than simply the sum of its parts. 5. Achievement versus ascription: Achievement oriented societies accord status to people on the basis of their performance only. Ascription oriented societies also attribute status based on age, class, gender, education, etc. 6. Internal versus external control orientation In cultures with an internal control orientation, people tend to believe that they can dominate their environment. In cultures with an external control orientation, people are inclined to adapt to external forces instead of resisting them. 7. Time orientation Cultures which focus on time give relevance to the past, present, and future and their short versus long-term orientation. Trompenaars and Hampden-Turner (1998) see culture fundamentally as the way in which groups of people solve problems and reconcile dilemmas. Thus, they propose

28 that value orientations represent a cultural groups solution to fundamental human dilemmas related to living together and interacting with the environment. While Hofstede talks about cultural difference in terms of a sort of psycho-emotional programming, Trompenaars and Hampden-Turner attempt to identify the varying internal logics used by differential groups to explain their value choices (Shaules, 2007, p. 53). Table 4 shows the comparison of Hofstedes and Trompenaars and Hampden-Turners cultural dimensions.
Table 4: Comparison of Hofstedes and Trompenaars and Hampden-Turners Dimensions Hofstede (1980) Individualism-Collectivism Uncertainty Avoidance Uncertainty Avoidance Long-term Orientation Masculinity vs. Femininity Power Distance Power Distance Trompenaars and Hampden-Turner (1998) Individualism vs. Communitarianism Universal vs. Particular Neutral vs. Affective Time Orientation Internal vs. External control Specific vs. Diffuse Achievement vs. Ascription

Cultural Issues in Crisis Communication Coca Cola Tainting Crisis in Europe

Taylor (2000) applies the concept of uncertainty avoidance and power distance to examine the case of Coca Colas tainting crisis in Europe. The case examined the crisis faced by Coca Cola in Belgium on June 14, 1999, in which school children fell ill after consuming its products. Coca Cola had to recall about 30 million cans and bottles, the largest ever product recall in its 113-year history. The crisis cost the company about $200 million (Mitroff, 2001). The Belgian government instructed Coca Cola to withdraw all of its products from the market and prohibited any distribution of related Coke products until government approval was obtained. Later, the governments of Spain and

29 France also banned the sale of Coca Cola to safeguard the health of their publics. Other nations, however, such as Denmark, Norway, and Sweden, did not ban sales of coke products. Taylor (2000) notes that uncertainty avoidance and power distance are most applicable and affect an organizations communication and public response to crisis in two ways. First, organizations from low power distance and low uncertain avoidance cultures may not see a need to communicate to the public about the situation. On the other hand, organizations from high power distance and high uncertainty avoidance cultures may directly communicate with governments during a crisis to secure their support. Second, the fact that power distance and uncertainty avoidance interact seriously affects how the public responds to the crisis. People who live in high uncertainty avoidance nations seek rules, rituals, and laws to guide behaviors, and in high power distance nations, people respect those who hold power. When these two dimensions interact, it has serious implications for crisis public relations (Taylor, 2000). The tainted Coca Cola crisis case showed that this multinational organization misjudged its publics on a variety of cultural dimensions. Belgium, France and Spain are high power distance and high uncertainty avoidance nations. The cultures of these three countries do not tolerate an incident that creates risk, ambiguity, and conflict. However, Coca Cola failed to communicate to each government during the crisis. The action was initially taken by Belgiums Minister of Health after the Coca Cola failed to respond in a timely and appropriate manner. Coco Cola delayed its response because it believed that there was nothing technically wrong and that the children and their parents were overreacting to the situation (Mitroff, 2001, p. 19). Taylor (2000) argues that it was Coca

30 Colas CEOs absence, in both comment and presence that directly affronted the high power distance nations during this crisis. The company was not condemned for the tainting situation. It was criticized because the company remained silent for over a week after the first illnesses. In contrast, more risk-tolerant nations including Sweden, Norway and Denmark appear to be more patient and if the Coca Cola crisis is any indication, more forgiving of mistakes (Taylor, 2000).
Airline Crash Crises

Drawing upon Hofstedes five dimensions of culture, Haruta and Hallahan (2003) contrast the organizational responses to two major airline crashes that occurred in 1985 in Japan and the United States. The study reveals significant cultural differences that affect communication practices by Japan Air Lines Flight 123 and Delta Air Lines Flight 191. Haruta and Hallahan (2003) point out that both airlines were obviously striving for the same goal of obtaining control over and alleviation of the crisis situation. However, each company followed a different set of protocols that had been thought to meet the expectations of their own corporate and national culture. In these two airline crashes, the study shows significant differences in the use of apology, media strategies, and litigation concerns (Haruta & Hallahan, 2003). Most importantly, the use of apology reveals the greatest contrast between the two societies. While JAL President Takagi was highly visible and repeatedly made public apologies to the victims families and the survivors, neither the CEO nor the president of Delta ever made a public apology. Strong Confucianism in the Japanese culture stress virtue. In this case, virtue dictated that JAL to offer an apology. Haruta and Hallahan (2003) emphasize when an organization makes a mistake that disrupts society, the large power

31 distance in Japanese culture also demands that the person at the top of the organizations hierarchy take the most responsibility. Reflecting the highly masculine culture in Japan, men are expected to take control of situations. People in a society that tends toward uncertainty avoidance also demand decisive leadership. In contrast, in the Delta crash case, the US airline never literally said sorry. It seems that making a public apology was neither desirable for Delta airline because of litigation concerns nor expected by the public. The findings suggest that cultural sensitivity is a key to developing a successful crisis communication plan in the airline industry.
South Asia Financial Crisis

Based on Trompenaars and Hampden-Turners framework (1998), PrudHomme (1998) analyzes the 1997 Asia financial crisis for understanding the relationship between culture and economic behavior. He argues that there are large cultural differences between the Western world and East Asia, but also within East Asia itself. Cultural similarities resulted in the crisis being felt similarly all over East Asia, but the differences enabled some nations to deal with it more successfully than others. Hong Kong, Singapore, China and Taiwan have emerged as relatively the best survivors, while Indonesia, Korea and Thailand needed IMF support packages and the near term outlook for Japan is still deteriorating, unless the government there introduces measures to address the financial sector problem. (PrudHomme, 1998, p. 27)

PrudHomme (1998) explains that concealment of financial losses underlines much of the crisis in the Japanese financial sector. The Japanese have a special word for practice of hiding losses, tobashi. For example, at Yamaichi Securities, the first financial institute to collapse during the crisis, losses of US$2 billion were hidden for seven years. Tobashi becomes a dangerous custom when the distinct Japanese

32 cultural values of particularism and external control orientation are taken to the extreme (PrudHomme, 1998, p. 27). To some extent, this reflects that the Japanese maintain harmony and discourage self-assertions. As a result, warning and negative comments against the organization are perceived as violating harmonization. Not surprisingly, problems are often hidden, until the situation explodes. PrudHomme (1998) acknowledges that the Hong Kong and Singapore systems seem to be reasonably stable and robust, perhaps because they integrate Western values with East Asian values. This integration leads to a combination of flexibility and focus, to transparency, and to fast response and long-term strategies. Given these examples, culture does matter and plays a major role in response to the crisis situation. However, crisis communication theory is largely rooted in the ethnocentric lens and based on Western (mostly American) theorizing about managing communication in times of crisis. As a result of its origins in American thought, little attention has been paid to the cross-cultural aspects of crisis communication. However, the American theory might not be extensive enough to address all situations and explain worldwide cultural variances. More specifically, ethnocentric assumptions and theories invariably reflect biases of the society in which those assumptions originate, and might not necessarily be applicable across cultures (Vercic, L. Grunig, & J. Grunig, 1996). Therefore, there is a need for cross-cultural study to understand the cultural dimensions of crisis communication. Although organizational culture is an important factor in crisis communication, this study emphasizes societal culture as the primary focus in these three cases. Organizational culture involves the internal dimensions of an organization, including

33 values, norms, traditions, symbols and communication processes, among other factors. An organizations individual culture obviously has some relationship to the societal culture within which it is embedded. Moreover, organizational culture will affect how the organization responds to a crisis and the organizational culture will be affected by crises the organization experiences.
Research Questions

Based on earlier discussion, this study seeks to understand how the organizational leaders make their public statements during the corporate crisis and explore the cultural differences in their crisis communication strategies. Simply put, this study focuses on two areas of communication: 1) corporate communication managing in times of crisis on the cases of Martha Stewart, BenQ and HIH, and 2) the cultural variances shown in crisis communication contexts. Specifically, this study is guided by the following three questions: RQ1: How did Martha Stewart, BenQ and HIH manage communication during their corporate crisis? RQ2: How were these corporate communication strategies received and interpreted by the stakeholders? RQ3: How did their corporate communication strategies reflect different cultural factors? These research questions are proposed based on the previous theoretical discussion and literature review. The first research question explores how Martha Stewart, BenQ and HIH manage their organizational crisis situation through communication. As such, this study first reviews what communication strategies Martha

34 Stewart, BenQ and HIH use in times of corporate crisis. Basically, image restoration strategies are designed to help the organization shift the blame, reduce responsibility, avoid damage to the companys reputation and get past the crisis as quickly as possible (Ulmer, Sellnow, & Seeger, 2007). Moreover, organizations use the impression management strategies, which Coombs (2007a) terms crisis response strategies, to repair reputational damage from a crisis. Coombs (2007a) points out crises threaten to damage reputations because a crisis creates negative impressions of the organization. Put in plain terms, reputations are widely recognized as a valuable, intangible asset. In essence, reputation management attempts to build and maintain a favorable perception of an organization among its stakeholders (Coombs, 2007a). Poorly managed issues, imposing excessive risk to others, and callous responses to crisis damage an organizations reputation. Similarly, Wilcox and Cameron (2006) affirm when this damage is extreme, image restoration strategies may help (p. 246). Hence, Coombss crisis response strategies (2007a) are utilized to examine how strategically these three companies disseminate their information to various stakeholders during the corporate crisis. The second research question further explores how these strategies are received and interpreted by the stakeholders of these three companies. The question tries to find out whether these strategies work out or not. Furthermore, how do these strategies impact on corporate performance (e.g., significant decline in stakeholder trust and stock price)? How do the news media report these crisis events? The third question examines the cultural differences of organizational responses following corporate leaders misconduct in the U.S., Taiwan and Australia. There may be

35 some generic similarities in managing basic crisis response procedure across cultures. However, practice is expected to be influenced by innumerable cultural factors. Under certain circumstances, the crisis responses need to be more culturally conscious. As mentioned earlier, culture is recognized as having an important effect on crisis communication. To be precise, this question explores the crisis response strategies and examines crisis communication in a context outside of American culture.
Summary

This chapter reviewed the fundamental concepts related to crisis communication. They included the definition of crisis communication, type of crisis and communication perspectives to crisis research. In particular, three crisis communication theories relevant to the current study, corporate apologia, image restoration, and situational crisis communication theory were addressed. However, existing theoretical frameworks of crisis communication may not be adequate in explaining the complex settings and dynamic mechanisms in international crisis communication. Thus, the importance of cultural factors in crisis communication is highlighted. The goal of this is to illustrate that one size may not fit all in the different cultural contexts of organizational crisis. Three research questions proposed in each case allow for an examination of these issues in more detail. The next chapter provides more detail about the rationale for using a case study method and explains in detail the data collection and analysis procedures.

36
CHAPTER 3 METHOD

This chapter provides a rationale and description of the case study method and demonstrates its applicability in the field of crisis communication. Specifically, this chapter details the three-case study methodology which is uniquely suited for highlighting similarities and differences in crisis response strategies and is used to answer the proposed three questions regarding how organizations manage their crisis communication. This chapter also describes the sources of data and explains the procedures for analysis.
Case Study as Method

Davey (1991) defines case study research as a method that involves an in-depth, longitudinal examination of single instance or event. It is a systematic way of looking at what is happening, collecting data, analyzing information, and reporting the results. Yin (1994) offers another description of the case study as an empirical inquiry that uses multiple sources of evidence to investigate a contemporary phenomenon within its real-life context, in which the boundaries between the phenomenon and its context are not clearly evident. Stacks (2002) mentions that an obvious strength of the case study method is that what is being studied has already occurred. The case study looks back in an attempt to explain through the use of direct observation, participatory informal research, and secondary research of what and why something occurs and how that outcome is managed. The case study, then, provides detail only found in hindsight and presents it in such a way as to establish what strategies work and why. Thus, the case study, for

37 example, in public relations can examine the way the problem is stated and the initial research gathering stages based on environmental scanning and monitoring; the strategic communication planning based on stated objectives; the messages themselves, the actual outputs; and the evaluation of the entire program or campaign (Stacks, 2002). Merriam (1998) emphasizes that the advantage of the case study is its ability to discover new relationships, concepts, and understanding, rather than verification of predetermined hypotheses. An objective of case study research is to generate knowledge of the particular. Schwandt (2001) explains that case study research seeks to discern and pursue the understanding of issues intrinsic to the case. Schwandt states, however, that cases can be chosen and studied because they are thought to be instrumentally useful in furthering the understanding of a particular problem, issue, and concept. According to Gomm, Hammersley, and Foster (2000), in-depth research of specific instances in case studies can actually show causal processes in context, which allows researchers to see which theoretical perspectives provide the best explanations. Wimmer and Dominick (2006) suggest case study research is most valuable when the researcher seeks to obtain a wealth of information about the research topic. Case study methodology is not only at the exploratory stage of research but also gathering descriptive and explanatory data. The case study method also affords the researcher the ability to deal with a wide spectrum of evidence.
Rationale for the Case Study Method in Crisis Communication

Crisis communication inquiries have traditionally been conducted using naturalistic and critical approaches (Seeger, Sellnow & Ulmer, 1998). Naturalistic

38 research in crisis communication can be categorized as either frequency-based or descriptive/exploratory. The frequency-based approaches have included surveys and content analyses and usually involve only one audience group. According to Seeger, Sellnow and Ulmer (1998), when a crisis is still unfolding or in the process of being managed, the practicality of administering and responding to a survey is often neither practical nor desirable. As such, case study analysis provides the crisis researcher with the opportunity to conduct descriptive and exploratory inquiries (Seeger, Sellnow, & Ulmer, 1998). Of all the methods, those that are descriptive/exploratory, like the case study method, tend to be best suited for the study of the messages addressed to multiple stakeholders in a crisis situation (Seeger, Sellnow, & Ulmer, 1998, p. 264). In other words, case study allows researchers to explore different outcomes of general processes suggested by theories depending on different crisis contexts, which suits crisis communication research that seeks application of theories to practice. In essence, it is not surprising that a growing number of crisis communication studies have used the case study approach (Benoit, 1995b; Benoit & Brinson, 1994; Fishman, 1999; Hearit, 1994; Kauffman, 2005; Seeger, & Ulmer, 2002; Seeger, & Ulmer, 2003; Taylor, 2000). Furthermore, the case study method draws on thick descriptions without disrupting the organization, victims of the crisis or the context. Ezzeddine (2006) also states that this allows researchers to examine a crisis even after much time has passed since the actual events. These historical approaches have the added benefit of allowing for an examination of the crisis events and their impact on multiple stakeholders over an extended period of time (Ezzeddine, 2006, p. 49).

39
Multiple Case Selection

Yin (1994) indicates that the evidence from multiple cases is often considered more compelling, and the overall study is therefore regarded as being more robust (p. 45). In this study, three cases, Martha Stewart, BenQ and HIH, are explored to examine the crisis communication practices among these organizations. Daymon and Holloway (2002) argue that the use of multiple case studies enables some measure of generalization to a wider universe. It is thus necessary to look closely at the individual case in order to discover what is essentially unique about them. To effectively analyze the data from the multiple case studies, the cross-case analysis technique is also employed (Merriam, 1998). Given the interest in cross-cultural studies, findings based on three countries are preferable to findings based on one because they encompass more of the cultural variety. Of particular interest is the different cultural variation from one case to the other. Cross-case analysis compares each of the cases in order to determine underlying similarities and differences. The distinctive feature then can be identified by evaluating similarities and contrast between cases. More clearly, cross-case analysis strengthens the precision, validity and stability of the research findings. The cases for this study Martha Stewart, BenQ, and HIH were selected because of their exemplary nature. First, these three cases are analogous each involving a similar crisis but within a different situation. The use of similar cases for analysis can provide larger contexts for understanding the specific circumstances of events. A more robust study can be constructed by gaining insights into the situation and phenomenon from similar examples. Second, these three cases have involved corporate executive wrongdoings. The corporate misdeeds have decreased stakeholder confidence and

40 raised the concern of corporate governance problems. Third, all of three executives are strong business leaders in their industry. Martha Stewart, K. Y. Lee and Ray Williams, through their unethical misconduct, placed these companies in crisis. In a sense, their personalities help shape the personalities of their companies brand. When personal reputation is impaired, as a result, corporate reputation and financial outcomes might be unavoidably and seriously undermined. Fourth, crisis communication studies are predominantly American-based. Through the comparative analysis of these cases from different countries, this study can shed some light on the importance of considering culture in crisis communication and point to a need for international crisis communication research and practice. In short, communication scholars often use the case study method in order to analyze individual and corporate communication strategies. For this study, a multiple-case study approach allows the research to perform a more complete and compelling analysis. Furthermore, the three research questions designed and guided for this study seek to increase the understanding of corporate leaders crisis response strategies and cultural variances in crisis communication.
Sources of Data

Generally speaking, the case study is flexible and unobtrusive in that data can be obtained both from the organization and from the public domain. One of the characteristics of the case study is the triangulation of data such as collecting evidence from multiple sources (Yin, 1994). According to Yin (1994), the six sources of evidence that are typically associated with the case study include documents, archival records, interviews, direct observation, participant-observation, and physical artifacts.

41 For this study, texts documenting Stewart, BenQ and HIHs discourse in response to incidents that threatened their image were collected from multiple sources. Specifically, this study employs predominantly two types of data: documents and archival records. It begins with gathering data and finding facts related to cases and defining the specific tasks. The actions and communication strategies used by Martha Stewart, BenQ, and HIH are reviewed with information from their corporate websites, press releases and media coverage. Martha Stewart, BenQ and HIH are all publicly traded companies. A look at the organizational archival records (e.g., stock prices, sales and annual reports) and official government records (e.g., court records and commission reports) contribute to understand the impact of corporate scandals have had on the companies financial performance and their stakeholders.
Selection of News Articles

Traditionally, media articles are considered a secondary source of data which illustrate how the organization is presented in the public discourse. To some degree, these data reflect the attitudes and interpretations of the media and the perceptions of the general public. The three cases in this study created a crisis on a national scale. As a result of the national nature, the data were focused on reports from the nations largest circulation national newspapers. More specifically, these sources were chosen because of their interest in the case and the amount of coverage on the crisis. In this study, the major criterion on organizational misconduct was that news had to focus on either the corporate executive or on the organization itself. The selected news article data were used to explore how the major media told news stories about the crisis situation of Martha Stewart, BenQ and HIH. Therefore, the contents of the

42 collected news articles were qualitatively analyzed to find the major concepts embedded in the news coverage and the attitudes of news narration. The media coverage on the Martha Stewart case was found through Lexis Nexis Academic keyword search of Martha Stewart & insider trading in The New York Times and The Washington Post. For the purpose of the valance of news narration in this study, the period of analysis covered two time frames (during the crisis and post-crisis). The first time frame started from the trading day to the verdict, beginning in December, 2001 and running through March, 2004. The second time frame started from the day of sentencing to her release from prison, beginning on July 16, 2004 and running through March 2005. Similarly, the keyword search of the BenQ case was BenQ & insider trading in the two major native language newspapers: The China Times and The United Daily News. The other two English newspapers in Taiwan, The Taipei Times and The China Post were also included. The period of analysis covered a five-month period, starting from the day of the investigation to the indictment of five executives, beginning on March 14, 2007 and running through August 21, 2007. For the case of HIH, the keyword search was HIH collapse in the two major Australian national newspapers: The Australian and The Australian Financial Review. The first time frame started in September, 2000, when the financial difficulties began in the market and ran through August, 2001. The analysis of the second time frame began with the post-collapse developments, such as the HIH Royal Commission Inquiry by Justice Neville Owen in 2003 and the sentencing to jail of the two HIH major directors, Ray Williams and Rodney Adler in 2005, through their release from prison in 2008.

43 In summary, three representative cases namely - Martha Stewart, BenQ and HIH were chosen for this study. They provided a larger context for understanding specific circumstances of corporate communication in times of crisis. Documents and archival records were the major sources of evidence. More specifically, data were collected from their corporate websites, press releases, media coverage, organizational archival records and official government records.
Unit of Analysis

According to Babbie (2007), units of analysis, are those things we examine in order to create summary descriptions of all such units and to explain differences among them. In other words, units of analysis in a multiple case refer to the phenomena being studied. As a general guide, the definition of the unit of analysis is related to the way the initial research questions have been defined (Yin, 1994, p. 22). Since the research questions of this study were related to crisis communication strategies, the unit of analysis for this study was the corporate response to stakeholders during and post crisis. The unit of analysis provided a message-centered technique for understanding how a company manages its corporate communication in times of crisis. Thus, the strategies were apparent through the types of evidence. As noted earlier, major theoretical frameworks such as crisis communication and intercultural communication served to explain how crisis response strategies are similar and different in these three cases.
Theory and Case Research

This study attempted to offer a rich overview of data, using both individual case and comparative analysis. Analyzing case study evidence is particularly difficult since techniques and procedures have not been well defined in the past (Yin, 1994). Yin

44 (1994) proposes following the theoretical propositions that lead to the case study and then linking data to the propositions. Yin (1994) argues that the original objectives and design of the case study presumably are based on propositions that reflect a set of research questions, the literature reviews, and new insights obtained during the early research stage. Hyde (2000) explains that theory testing through pattern matching is one procedure for linking data to propositions. Theory is expressed as a pattern of independent outcomes that are predicted to occur. Case data are compared to the predictions of the theory and predictions of the counter-theory. Hyde (2000) further states that support is demonstrated for the theory if the case data matches the predicted pattern of outcomes of the theory more closely than it matches the predicted pattern of outcomes for the counter-theory. If the results fail to show the entire pattern as predicted, the initial propositions need to be modified. Ideally, case studies should be used in combination with theory to achieve maximum understanding of data analysis (Wimmer & Dominick, 2006). Fishman (1999) states that an integration of theories provides a superior methodology for analyzing a complex crisis event rather than relying upon any one theory in isolation from the other. Hence, the analyses of Martha Stewart, BenQ and HIH cases relied largely on the theoretical contributions from crisis communication theories to explore the

multi-dimensional aspects of their crisis response strategies. Basically, crisis response strategies are what the organization says and does after a crisis the response to the rhetorical problem (Heath & Coombs, 2006, p. 205). In this study, Coombss typology of situational crisis communication theory (2007a) was utilized to understand the public relations and legal struggle contained in the Martha

45 Stewart, BenQ and HIHs corporate crises. Specifically, crisis response strategies as well as the impact of corporation reputation were examined. This study also paid particular attention to the findings on cultural variance of crisis communication between these three different cultures. To better understand this phenomenon, Halls (1976) context, Hofstedes dimensions of culture (1980), and Trompenaars and Hampden-Turners cultural factors (1998) were provided as the vehicles for comparing cultures. These frameworks correlated highly and represented methods for examining the cultural context for crisis. Their joint utilization offered a better understanding of the differences in culture.
Procedures for Analysis

Two stages of analysis were employed sequentially to answer the research questions in this study. The first stage of analysis is within-case analysis. Each case was studied comprehensively and analyzed in detail. In the second stage, a cross-case analysis was performed, seeking to build a general explanation that fits each of the individual cases, even though the cases will vary in their details (Yin, 1994, p. 112). In this study, the primary data included: 1) documents (e.g., corporate websites information, press releases, corporate statements); and 2) organizational archival records (e.g., stock price, sales and annual reports) and government records (e.g., court records and commission reports). The media articles represented the secondary data. By examining corporate communication employed by Martha Stewart, BenQ and HIH during the crisis, the procedures for analysis involved three steps. Specifically, the research design of this study is shown in Figure 2.

46

Cross-Cultural Study

Case 1 Martha Stewart (U.S.A.)

Case 2 BenQ (Taiwan)

Case 3 HIH (Australia)

RQ1: How did they manage communication during their corporate crisis? RQ2: How were these

Case 1
Data Analysis Crisis Response

Case 2
Data Analysis Crisis Response

Case 3
Data Analysis Crisis Response

communication strategies received and interpreted by the stakeholders?

Cross-Case Analysis
Data Analysis Cultural Variance

RQ3: How did their corporate communication strategies reflect different cultural factors?

Figure 2: Research Design

First, after the data were collected from multiple sources, I created a detailed timeline of relevant events leading up to the crisis itself, and the post-crisis process. For example, the chronological order of the Martha Stewart case was constructed in the following manner: 1) the investigation (January, 2002 - June, 2003); 2) indicted (June December, 2003); 3) verdict (January - May, 2004); 4) sentencing (June July, 2004); 5) in prison (October, 2004); and 6) release from prison (March, 2005).

47 Second, after the chronological order of actual events was refined and constructed a narrative description and process analysis of each event. A worksheet served as an organizing tool for evaluating each event. All data collected were analyzed using the typology of crisis response strategy. Organizational documents, archival records and media coverage were analyzed separately for the purpose of identifying organizational actions and responses. The analyses focused on how the organizations responded under different circumstances and with what effect. In particular, the analyses pointed out how the organizations strove to maintain a positive reputation. Furthermore, key audiences or affected stakeholders were noted if applicable to the event. Each case was organized and studied independently around research questions of its own. The third step, based on the analysis of each case, was to make a comparison between these three cases and then make cross-case assertions. I employed this approach to study the similarities and differences between these three cases. The content derived from the constant comparisons were interpreted and generated into assertions that answered the research questions. More specifically, using an interpretive paradigm, I analyzed the data from this multiple-case study following a comparative procedure based on thematic analysis. Drawing from Owens three criteria (1984), this study used 1) recurrence, 2) repetition, and 3) forcefulness to determine common themes found within and across three cases. Recurrence was identified when at least two parts of a data set had the same thread of meaning. Repetition was similar to recurrence except that it was the explicit repetition of the same key words, or phrases. Forcefulness referred to the underlining of words and phrases, the increased size of print or use of colored marks in written texts (p. 275-276).

48 In short, I employed two stages of analysis in this study, within-case analysis and cross-case analysis. The analysis relied on the theoretical frameworks that led to the case study and built an explanation of the cases. Specifically, the procedures for data analysis consisted of examining and categorizing the evidence to address the three research questions.
Summary

This chapter described the rationale for using the case study methodology to examine corporate response to crisis. In doing so, the case research method was determined as appropriate given the context associated with crisis communication research. Moreover, the types of evidence used in this research along with the importance of theory-based cases and procedures for analysis are discussed. What follows are three corporate crisis cases, Martha Stewart, BenQ and HIH. Each case begins with an introduction to the case and then analyzes the companys response to the crisis situation. Finally, each case concludes with a discussion for the case.

49
CHAPTER 4 CASE OF MARTHA STEWART Introduction

Chapters 2 and Chapter 3 of this dissertation described the research questions and research method in detail. The following three chapters, Chapters 4 through Chapter 6, use Martha Stewart, BenQ, and HIH as cases studies to illustrate corporate response strategies during a crisis. This chapter provides detailed insight into how the insider trading crisis of Martha Stewart impacted her companys financial performance and tarnished the corporate image. This chapter presents the data collected from news articles, the Martha Stewarts company websites and statements, press releases, organizational archival records and official government archival information. All of the information contributed to the overall timeline of documenting the crisis events, response strategies and action taken. This chapter is divided into three sections: overview of the insider trading accusations, analysis of Martha Stewarts crisis response and discussion. In the discussion section, three common themes are explored thoroughly: 1) stonewalling, 2) denial and shifting the blame to others, and 3) stakeholder perception.
About Martha Stewart Living Omnimedia Inc.

Martha Stewart was born in 1941 and raised in Nutley, New Jersey, in a family with six children. She developed a passion for cooking, gardening, and home making during her childhood years. Stewart worked as a fashion model to pay for her tuition at Barnard College and upon graduation she became a stockbroker on Wall Street, where she gained business training. After moving to Connecticut in 1972, she started her own catering business which inspired her to write her first cookbook, Entertaining, published

50 in 1982. In 1991, working with Time Publishing Ventures, she launched a new magazine Martha Stewart Living for which Stewart served as editor in chief. Stewart also became a regular on CBSs The Early Show.1 In September 1997, Stewart became chairperson, president, and CEO of her new company, Martha Stewart Living Omnimedia. Martha Stewart Living Omnimedia has been listed on the New York Stock Exchange under the ticker symbol MSO since 1999. As of January 2009, MSO has four major business operations: publishing, internet, broadcasting and merchandising the combination of which promotes synergy of their how-to content and products through business activities. The publishing business encompasses magazines and books. The magazines include Martha Stewart Living, Everyday Food, Martha Stewart Weddings and Body & Soul. In early 2007, the company relaunched the marthastewart.com website which now reaches 4 million visitors a month. MSOs broadcasting business segment consists of operations related to the production of television programming, the domestic and international distribution, and the operation of a satellite radio channel. Through MSOs merchandising business segment, MSO sells products at multiple price levels through several distribution channels, including everyday mass-market merchandise at Kmart; the Martha Stewart Collection of products for the home at Macys; Martha Stewart Crafts with EK Success; Martha Stewart Furniture with Bernhardt; Martha Stewart designed homes and communities with KB Home and Martha Stewart Rugs with Safavieh and others.2

ForadditionaldetailsofMarthaStewartsbiography,pleaseseewww.marthastewart.com ForadditionaldetailsofMarthaStewartLivingOmnimediaInc,pleaseseewww.marthastewart.com

51
Martha Stewart Insider Trading Crisis

On October 31, 2001, ImClone Systems, a New York biotechnology company, was attempting to get an anti-cancer drug, Erbitux, approved by the Food and Drug Administration (FDA). On December 28, 2001, the FDA publicly announced that it had rejected ImClones application for approval of its colon cancer drug, Erbitux, citing poorly designed clinical trials. The information was released after the stock markets closed. On the next trading day, the ImClone stock dropped from $55.25 to $46.46. The day before the FDAs Erbitux announcement, Aliza Waksal, the daughter of Sam Waksal, founder and CEO of ImClone Systems Inc, sold about $2.5 million in shares of ImClone stock through her Merrill Lynch stockbroker, Peter Bacanovic, on December 27, 2001 (Pollack, 2002). The Waksal investigation led investigators to Martha Stewart, a client of Peter Bacanovic and a close friend of Sam Waksal. Martha Stewart sold 3,928 shares of her ImClone stock at an average price of $58, the same day as Aliza Waksal (Pollack, 2002). By selling ahead of the FDA rejection, Stewart received about $45,000 more than if she had sold the stocks later. Compared to her wealth, it was certainly not a large sum and in fact, during her Larry King Live interview she said it was miniscule, really, about 0.006 percent of my net worth (Fournier, 2004). Later, congressional investigators working for a subcommittee of the House Energy and Commerce Committee, and others from the Securities and Exchange Commission and the Justice Department launched an investigation into the sale of ImClone stock prior to the FDA announcement. Bacanovic told the investigator that Stewart had told him to sell her ImClone shares when the stock was around $60 a share (Adams & Anand, 2002).

52 Waksal is now serving a seven-year prison sentence and was fined $3 million after pleading guilty to bank fraud, obstruction of justice, perjury, conspiracy, and insider trading of nearly $12 million in ImClone stock (Hays, 2003a). As for Stewart, Judge Miriam Cedarbaum dismissed the most serious fraud charge but kept the four remaining charges: obstruction of justice, conspiracy, and two counts of making false statements (Masters & White, 2004). Stewart served a five-month prison sentence between October 8, 2004 and March 4, 2005 for these charges. On August 7, 2006, Martha Stewart reached an agreement with the securities regulators over the insider-trading civil charges and agreed to pay $195,000 to settle a five-year legal battle (Thomas, 2006). The crisis of Martha Stewarts insider trading raised the issue about the Martha Stewarts multiplatform franchise that is the media world and homemaking empire are intricately interwoven with her persona. Martha Stewart Living Omnimedia (MSO), the company she founded in 1997, had grown to become a $295 million business in 2001 and produced $21.9 million in profit for her and its other shareholders before her insider trading crisis (Stanley & Hays, 2002). Stewarts empire has an impressive business synergy as shown by her TV programs that promote her magazines, her website which sells her products, and her products which are a link to her TV programs. Merchandising is the companys most profitable section, while other revenue comes from book and magazine publishing. Martha Stewart is the face, voice and personality behind the brand and, thus, the two Stewart and the brand are inseparable. Apparently, the interlocking nature of her business proves to be vulnerable and risky. The Martha Stewart company itself, before it began trading on the New York Stock Exchange in 1999, pointed out the risk factors associated with this highly intricate relationship. The

53 prospectus submitted to the Securities and Exchange Commission noted, We are highly dependent upon our founder, Chairman and Chief Executive Officer, Martha Stewart. Martha Stewarts talents, efforts, personality and leadership have been, and continue to be, critical to our success. Our success depends on our brands and their value. Our business would be adversely affected if Martha Stewarts public image or reputation were to be tarnished Our continued success and the value of our brand name therefore depends, to a large degree, on the reputation of Martha Stewart. (Martha Stewart Living Omnimedia, 1999)

As mentioned earlier, this chapter explores how MSO managed their corporate communication when Martha Stewarts public image and reputation were tarnished under the investigation of the insider trading scandal. Two research questions guided this analysis: 1) How did MSO manage their communication during the corporate crisis? 2) How were these communication strategies received and interpreted by the stakeholders? This analysis examines MSOs response to the crisis chronologically. The major crisis events are shown in Table 5. Specifically, this chapter not only examines the investigation, indictment in 2002-2003 but also covers post-crisis events including her sentencing in 2004, and her release from jail in 2005. This analysis utilizes Coombss (2007a) situational crisis communication theoretical framework and other crisis communication models to interpret the crisis response strategies that Stewart employed in her insider trading scandal. Following an analysis of the corporate crisis response, this examination highlights some common themes in Martha Stewarts insider trading crisis, which include stonewalling, denial and shifting the blame to others and stakeholder perception. In short, the Stewart case drew the attention of media for years. Her case is unique because she is the icon of her brand and company. Furthermore, Stewarts crisis

54 had both legal and public relations components (Jerome, Moffitt, & Knudsen, 2007). The tension between legal and public relations functions and crisis response strategies are discussed in the following section.
Table 5: Key Events in Stewart Case
Date
10/ 31/ 2001 12/27/2001 12/28/ 2001 1/7/2002

Events
ImClone Systems asks the government to review Erbitux, anti-cancer drug. Stewart sells all 3,928 shares of ImClone stock she owns. The FDA publicly discloses its decision to turn down ImClones application. Stewart's broker, Peter Bacanovic, tells the SEC that he and Stewart had agreed on Dec. 20, 2001, to sell ImClone if it fell below $60. Stewart gives the SEC, federal prosecutors and the FBI the same information about the $60 stop-loss order. Bacanovics assistant Douglas Faneuil pleads guilty to taking a payoff to keep quiet about the Stewart stock trade. Stewart and Bacanovic are indicted. Stewart resigns as chairman and CEO of her company but remains chief creative officer and a board member. Waksal is sentenced to more than seven years in prison. Stewart assistant Ann Armstrong testifies Stewart personally altered log of a message Bacanovic left on day she sold ImClone. Stewart friend Mariana Pasternak says Stewart told her days after ImClone sale

2/4/ 2002

10/2/ 2002

6/4/2003 6/10/ 2003 2/10/ 2004

2/19/2004

that she knew about Waksal selling and says Stewart added: "Isn't it nice to have brokers who tell you those things?"

2/ 27/2004 3/ 5/2004 3/15/2004 7/16/ 2004 10/8/ 2004 3/4/2005 8/7/2006

Judge throws out securities fraud count against Stewart. Stewart is found guilty of conspiracy, obstruction of justice and making false statements. Stewart steps down as director and chief creative officer of her company. Stewart is sentenced to five months in prison. Stewart reports to Alderson Federal Prison Camp in West Virginia. Stewart is released from prison. Stewart agrees to pay $195,000 to settle a five-year legal battle over insider-trading civil charges.

55
Analysis of Martha Stewart Crisis Response Investigation

The story about Martha Stewarts ImClone stock sale was broken to the public in the Wall Street Journal on June 7, 2002 (Adams & Anand, 2002). In the article, her lawyer, John Savarese, indicated that Stewart had set the price at $60 for selling the stock but in fact, as of June 7, 2002, the stock price of ImClone sank to a low $8.45 a share. Savarese further was trying to put distance between Stewart and Sam Waksal. There is absolutely no evidence whatsoever that she spoke to Sam, or had any information from anybody from ImClone during that week I am absolutely sure that there was no communication of any kind between her and Sam, no passing of any information from him to her. (Adams & Anand, 2002, p.B2)

On June 12, 2002, Waksal was arrested for insider trading and soon after, the stock price of MSO plunged 12 percent, closing at $15. Since June 6, 2002, when congressional investigators started looking into Stewarts sale of ImClone shares, the stock price of MSO had dropped 22 percent. Stewart immediately denied any insider trading or wrongdoing and in a statement she issued, she said she knew nothing about the pending FDA announcement. She claimed that when the share price dropped below $60 the level at which she had agreed with her broker she returned a call from her broker and sold the shares on December 27, 2001. She acknowledged that after the trade, she immediately called Waksal but did not reach him, and he did not call her back. The message she left read: Martha Stewart called. Something is going on with ImClone and she wants to know what (Hays, 2002a, p. C1). She proclaimed her innocence in her statement: In placing my trade, I had no improper information. My transaction was entirely lawful (White, 2002, p. E1). However, the congressional investigator raised

56 questions about Stewarts sale, noting that ImClone dropped below $60 at least once before while Stewart owned it (White, 2002). On June 18, 2002, Stewart tried to resolve concerns about her sale of ImClone shares and hired a new lawyer, James F. Fitzpatrick, who submitted several documents to congressional investigators. This was the first time Stewart used a strategy of corrective action to respond the inquiries. On June 19, 2002, MSO stock rebounded sharply, climbing $2.05, from $14.4 to $16.45, suggesting that her corrective action did work out. However, Ken Johnson, a spokesman for the House Energy and Commerce Committee, said the documents would help answer some questions but we still don't have an answer to the most nagging one: was Ms. Stewarts pre-existing agreement to sell reached in late November, as she says, or in mid-December as some reports have indicated? (Hays, 2002b, p. C7). On June 25, 2002, she appeared on CBSs The Early Show, and when asked by the host, Jane Clayson, about the ImClone shares during a cooking segment, she replied while slicing a cabbage with a big knife. Im involved in an investigation that has very serious implications. I have nothing to say on the matter. Im really not at liberty to say. And as I said, I think this will be resolved in the very near future and I will be exonerated of any ridiculousness. And I just want to focus on my salad because that is why were here. (Clayson, 2002)

Apparently, Stewart had no idea how to handle the situation and was unwilling to respond the questions. She continued to dodge public inquiries and ignored the increasing outcry for answers about her role in the insider trading scandal. When CBS News continued to ask her questions about the ImClone shares investigation, Stewart suspended her association with the program and constantly denied allegations of

57 wrongdoing and maintained her innocence. Shares of Martha Stewarts company stock continued to plunge and fell $3.2 to $10.4. This was a record low as new questions emerged about her sale of stock in ImClone Systems. On July 2, 2002, Sharon Patrick, president of MSO issued a statement to acknowledge that the media firestorm around this matter had placed unexpected and unusual business demands on MSO. However, it was too early to determine what, if any, long-term impact would result from this matter. She added, We intend to safeguard the companys business and to continue to build on MSOs outstanding brand labels, loyal customer relationships, quality products and talented employees We are also confident that the companys strong financial position provides us with strength to combat any short-term business we may encounter. (Hays & Pollack, 2002, p. C1)

Subsequently, Stewart hired another criminal lawyer, Robert G. Morvillo, as well as a crisis-management public relations firm, the Brunswick Group, to manage her increasingly complicated affairs (Hays & Pollack, 2002). As for the internal communication with employees, except for two-email messages, there were no meetings or any other communication between company management and the rest of the staff. The employees had to read the newspapers and watch television just like the public to find out what was happening with MSO (Hays & Pollack, 2002). On July 24, 2002, MSO acknowledged for the first time that Stewarts legal problems were having an impact on the companys business operation. Sales of advertisements for the flagship magazine were flat and products such as floor coverings and furniture were not being purchased by retailers at the rate the company originally expected. There were also other unanticipated costs such as the hiring of additional public relations specialists and lawyers.

58 In response to this financial situation, Stewart held a conference call with analysts and investors. Using a strategy of diminishing, she said that she and her company should be considered separately, although virtually every product, publication and broadcast program produced by the company bore her name (Hays, 2002c). She made an attempt to disassociate herself from the company. She added: It has been extremely difficult and painful for me to see a private matter of mine create a challenging environment for our company and its employees (Hays, 2002c, p. C1). Investors were clearly affected by the investigation. Analysts at Merrill Lynch also wrote in a note to investors that as we are unable to forecast the duration and magnitude of the impact on the business, we are placing the stock under review (Hays, 2002c, p. C1). Douglas Faneuil, the assistant to Stewarts stockbroker Bacanovic pleaded guilty to a misdemeanor charge on October 2, 2002. He revealed that he was given extra vacation time, a free plane ticket and additional pay, in consideration for not informing the SEC of all the true facts around Stewarts trade (Hays, 2002e, p. C1). Faneuils account undermined Stewarts explanation of her standing agreement with Bacanovic to sell if share price dropped below $60. Merrill Lynch said it could not find any record of such an agreement. Both Bacanovic and Faneuil were eventually dismissed. On the following day, Stewart utilized corrective action by resigning from the board of the New York Stock Exchange on October 3, 2002. In a press release, she said she quit because she did not want the media attention currently surrounding me to distract from the important work of the NYSE and thus I felt it was appropriate to resign (Rozhon, 2002, p. C1). With investor confidence badly shaken, shares of MSO plummeted further, closing at $6.21, the lowest price ever.

59 Due to the negative publicity and suggestions by her advisers, Stewart agreed to a formal interview, in the February 3, 2003 issue of The New Yorker magazine, when she discussed her feelings about the investigation and the public reaction. She would not speak on the record about the sale of the 4,000 ImClone shares. Breaking a seven-month silence, Stewart discussed the damage to her business and described the public reaction as puzzling and also confusing (Toobin, 2003). Stewart estimated that the investigation had cost her at least four hundred million dollars, mostly in the decline in value of her MSO shares, legal fees and lost business opportunities. Although she was under investigation, she vowed never to walk away from her company. In summary, Stewart avoided inquiries into the insider trading scandal by saying I want to focus on my salad, providing late night talk shows with considerable fodder for jokes. Except to say she did nothing wrong, she declined to comment about her sale of the ImClone stock which was under investigation. Her mistake was to forget that her actions reflected directly on her brand and company. Most importantly, no comment left the media free to speculate that there was something she was hiding behind. Many lawyers advise defendants to say little or nothing due to the legal consequence or liability. In fact, Stewarts lawyer, Morvillo, did not approve of the interview with The New Yorker when Stewart finally broke a seven-month silence to spell out how much money she had lost and how people seemed to dislike her (Hays & Eaton, 2004). Moreover, Stewart underestimated the importance of effective employee communication during this crisis. Left in a vacuum, employees often seek their information by filling in the blanks with rumor or innuendo. Specifically, Stewart could have communicated with her internal stakeholders and guided them to speak up for the company.

60
Indictment

On June 4, 2003, Martha Stewart was indicted on criminal charges. Stewarts charge included conspiracy, obstruction of justice and securities fraud, all linked to ImClone shares trading in 2001. The Securities and Exchange Commission also sued her for insider trading. According to the indictment, Stewart fabricated and attempted to deceive investigators with a fictitious explanation by telling them that she and her stockbroker had previously agreed to sell the shares if their market value fell below $60 and altered a phone message from the broker in her assistants computer immediately following a lengthy conversation with her attorney (Hays, 2003b). By responding to the indictment, Stewarts lawyers issued a statement saying she was being made the subject of a criminal test case designed to further expand the already unrecognizable boundaries of the federal securities laws and they predicted that she would be fully exonerated (Hays, 2003b, p. A1). Stewarts criminal lawyer, Robert Morvillo, used the strategy of attacking the accuser and further suggested that his client had become a target for government prosecutors on account of her fame. He asked in a statement and challenged the motives behind her charges: Is it for publicity purposes, because Martha Stewart is a celebrity (Eichenwald, 2003, p. C4). At a news conference announcing the charges against Stewart, James Comey, the United States attorney for the Southern District of New York, insisted that this criminal case is about lying, lying to FBI, lying to SEC, lying to investors and he added Martha Stewart is being prosecuted not for who she is, but because of what she did (Hays, 2003b, p. A1). After her indictment, the most serious impact for Stewart was the damage to her corporate image. She is not only the founder, chief executive of MSO, and largest

61 stockholder but most importantly, she is the face of her company. Fombrun (1996) suggested that to restore a reputation after a crisis hits a company requires removing all negligent incumbent managers and appointment of credible leaders. On June 5, 2003, the day after her indictment, Stewart took corrective action by stepping down as chairperson and CEO of MSO (Hays, 2003b). Sharon Patrick was appointed as the new chief executive officer and Jeffrey Ubben, a major shareholder was succeeded as chairperson. Nevertheless, Stewart did not completely separate herself from MSO. She remained on the board of directors and remained a force as the companys chief creative officer. Shortly after, Sharon Patrick, the new chief executive said in a prepared statement that the company was expanding its focus to include products not directly tied to Stewart, such as its new Everyday Food magazine and a line of pet products (White & Masters, 2004). Meanwhile, Stewart paid for a full-page advertisement in the USA Today. In the advertisement, she denied receiving insider information and maintained her innocence. She also launched a website www.marthatalks.com with an open letter of defense to my friends and loyal supporters. The spokesman of MSO said the website was to stay in direct touch with Stewart in public (Hays, 2003c). It was thought that the direct communication helped her image and would encourage public support. Within the first 16 hours, www.marthatalks.com received more than one million hits and about 12,000 emails messages (Hays, 2003c). On the website, she argued that the government brought charges against her for matters that were personal and entirely unrelated to the business of MSO. By using denial and attacking the accuser strategies, Stewart further asserted that,

62 I want you to know that I am innocent and that I will fight to clear my name The governments attempt to criminalize these actions makes no sense to me I am confident I will be exonerated of these baseless charges, but a trial unfortunately wont take place for month. (Hays, 2003c, p. 1)

On June 11, 2003, Judge Pauley sentenced Waksal, the founder of ImClone Systems, to more than seven years (87 months) in prison and a $3 million fine for securities fraud, perjury and other crimes he committed while orchestrating ImClone stock trades for himself and family members at the end of 2001. Judge Pauley pointed out, The harm that you wrought is truly incalculable You abused your position of trust as chief executive officer of a major corporation and undermined the publics confidence in the integrity of the financial markets. Then you tried to lie your way out of it, showing a complete disregard for the firm administration of justice. (Hays, 2003a, p. C1)

Waksal told the judge directly: Please know how much I have tried to do for cancer patients. Erbitux is one of the most important things in my life and moving forward to help cancer patients (Hays, 2003a, p. C1). However, Judge Pauley was unimpressed, telling Waksal that your spectacular success in building ImClone into a company worthy of inclusion in the Nasdaq 100 led you to disconnect from reality and, most importantly, from the rule of law (Hays, 2003a, p. C1). Later, Waksal used a strategy of mortification and addressed the court, saying that he wanted to apologize to his family, his employees, ImClone investors and cancer patients. He added: I feel great remorse about what I did, but I do not feel bitter. I feel gratitude for everything this country has allowed me to do. I know that life begins on the other side of despair (Hays, 2003a, p. C1).

63 On October 6, 2003, Stewarts lawyers had a 122-page motion document filed which asked Judge Cedarbaum to dismiss Stewarts securities fraud, the most serious criminal charge she faced. At issue was whether Stewart lied to investigators when they investigated whether she had traded on insider information and whether her public statements about her lack of wrongdoing in the stock sale were trying to manipulate the share price of MSO. The papers said that she was only exercising her constitutional right to speak freely about her actions: Ms. Stewart is a person, not commodity She has a personal reputation. She is entitled, as is anyone, to speak out to defend herself (Masters, 2003a, p. E1). In addition to attacking the count of securities fraud, the lawyers also argued that one obstruction of justice charge should be dropped because Stewart was not attempting to hinder the SEC investigation. The lawyers continued to argue this charge is unprecedented in the 70-year history of the federal securities laws. It violates the First Amendment, the Due Process Clause, and the securities itself (Masters, 2003a, p. E1). After filing, Stewart mentioned the court files on her website to keep her supporters updated and she also posted some media commentaries that were favorable to her. Obviously, Stewarts legal team intended to minimize the legal charges before the trial, while prosecutors sought to keep the case intact for a jury trial. Later, on November 7, 2003, Stewart, in her first interview since she was indicted, talked to ABC News Barbara Walters and acknowledged that she was scared of prison but I do not think I will be going to prison, though (Walters & Stossel, 2003). In a major setback for Stewart, on November 19, 2003, Judge Miriam Cedarbaum categorically rejected Stewarts assertion that the fraud charge violated her First

64 Amendment rights by prosecuting her for asserting her innocence during the investigation of ImClone stock sale (Masters, 2003b). The judge said Stewart misled investors by issuing a false news release about her ImClone sale which is unquestionably a novel interpretation of the securities laws, but she added the Constitution does not prohibit the prosecution of lies that are part of a course of criminal conduct (Masters, 2003b, p. E1). In summary, Stewart said she sold her ImClone stock sale because of a pre-existing arrangement with her broker, Bacanovic, to dump the stock when it breached $60 a share. However, prosecutors found that the story was false and that Stewart sold the stock after learning from Bacanovics assistant, Faneuil that Waksal was trying to sell his shares. In the indictment phase, she de-personalized the business, stepping down as chairwoman and CEO of MSO immediately. In this full-blown crisis stage, Stewart started a campaign to restore her public image. A full-page advertisement of the USA Today was purchased and a website was devoted to her side of the story. She tried to salvage her reputation through her public relations specialists and legal advice team. She was interviewed by both Larry King and Barbara Walters, two carefully planned television appearances that allowed her to proclaim her innocence to large audiences (Hays & Eaton, 2004).
Verdict

At the trial, two witnesses testified that Stewart either knew the insider information of ImClone or did something wrong. For example, the testimony of Stewarts assistant, Ann Armstrong, showed that Stewart sat down at her computer a month after selling ImClone shares and deleted part of the record of a phone message from her

65 stockbroker, Bacanovic, after a telephone conversation with her lawyer (Hays, 2004a). The message she typed on December 27, 2001, read, Peter Bacanovic thinks ImClone is going to start trading downward (Hays, 2004a, p. C1). On January 31, 2002, Stewart rewrote it to read: Peter Bacanovic re ImClone (Hays, 2004a, p. C1). Armstrong said that within moments of altering the message, Stewart asked her to put it back the way it was (Hays, 2004a, p. C1). Further, Stewarts close friend, Mariana Pasternak, testified Stewart told her days after ImClone sale that she knew about Waksal selling. Pasternak further mentioned that Stewart added: Isnt it nice to have brokers who tell you those things while they were traveling in Mexico (Hays, 2004b, C1). However, on the next day under cross-examination by Stewarts lawyer, Pasternak made a partial reversal and said that perhaps those words had simply crossed her own mind, rather than coming from Stewarts lips. Both testimonies, nonetheless, supported prosecutors accusations that her brokers tipped her to sell her ImClone stock and that later she tried to cover up the information about the sale. On March 5, 2004, a jury of eight women and four men reached a verdict and found Stewart guilty on all counts of conspiracy, obstruction of justice and making false statements. In fact, earlier, Judge Cedarbaum had already tossed out the most serious charge, securities fraud, against Stewart (Masters & White, 2004). Judge Cedarbaum stated that the evidence and inferences the government was presenting was simply too weak to support a finding of criminal intent beyond a reasonable doubt. Stewart declined to comment upon leaving the courthouse. In a statement posted on her website, Stewart utilized a minimization strategy to diminish her charge.

66 I am obviously distressed by the jurys verdict but I continue to take comfort in knowing that I have the confidence and enduring support of my family and friends. I will appeal the verdict and continue to fight to clear my name. I believe in the fairness of the judicial system and remain confident that I will ultimately prevail. (Masters & White, 2004, p. A1)

Not surprisingly, there was an immediate negative impact for the company as a result of the conviction. The stock plunged to 22.6 percent, losing $.3.17 and closing the day at $10.86. Two columns, distributed by The New York Times Syndicate, were renamed: AskMartha became Living, while AskMartha Weddings was simply Weddings (Hays, 2004c). On March 8, 2004, the syndicated TV show Martha Stewart Living was taken off the air on 12 local CBS stations owned by Viacom Inc. and a few UPN local stations, including those in major media markets such as New York, Chicago and Los Angeles (Hays, 2004c). It was estimated that they lost nearly half of their viewers from the time of the verdict. The conviction proved detrimental for a brand so intimately associated with a single personality. On March 15, 2004, as a result of her conviction and in an attempt to salvage the company which bore her name, Stewart utilized corrective action and resigned her position as board member and chief creative officer of MSO. The company announced that Stewart would continue as a creative adviser, calling the move in the very best interests of MSO and its shareholders (Hays, 2004d, p. C1). Stewart released a statement saying she was changing her role in the company because I think its the right thing to do (Hays, 2004d, p. C1). Stewart described herself as heartsick about my personal legal situation and added that she was deeply sorry for the pain and difficulties it has caused our employees (Hays, 2004d, p. C1). To show support for Stewart, the companys chief executive, Sharon Patrick, said the company was deeply

67 saddened by its founders situation but added: Wherever and whenever possible, we believe that MSO and our consumers should not be deprived of Marthas unique gifts (Hays, 2004d, p. C1). In summary, Stewart was not charged with insider trading, suggesting that if she had simply told investigators the truth she would not have faced criminal charges. Obviously, the negative impact of Stewarts conviction was mitigated by the nature of the crime. Stewarts case illustrates the breadth of the law, which prohibits lying to any federal investigators, even by a person who is not under oath and even by a person who had committed no other crime (Berenson, 2004). Specifically, this trial sent an important message about enforcing the transparency of financial markets. It also made executives think twice before lying to stakeholders and government officials. On the other hand, the company slowly distanced itself from its founder Stewart. The flagship magazine Martha Stewart Living no longer included her monthly calendar and her name shrank on the cover. To de-emphasize Stewart, her name was entirely eliminated from the cover of the new launching magazine Everyday Food.
Sentencing & Releasing

On July 16, 2004, Stewart received the minimum sentence five months in federal prison, five months of home confinement, two years probation, and a $30,000 fine. In the courthouse, Stewart shifted the blame away from company and referred to her circumstances as a personal matter. Today is a shameful day. It is shameful for me, for my family, and for my beloved company and all of its employees and partners. What was a small personal matter became over the last 21/2 years an almost fatal circus event of unprecedented proportions spreading like oil over a vast landscape I have been choked and almost suffocated to death. (Masters, 2004, p. A1)

68 Meanwhile, Stewart used a strategy of bolstering and asked the judge to remember all the good that I have done, all the contributions I have made . . . My hopes that my life will not be completely destroyed lie entirely in your competent and experienced and merciful hands (Masters, 2004, p. A1). In the remarks after the sentencing, Stewart took a more defiant tone and apologized, asking for forgiveness from the people who lost their jobs at her company as a result of this situation. Stewart said, I want them to know how very sorry I am for them and their families (Masters, 2004, p. A1). She added she was, all the while more concerned about the well-being of others than for myself, more hurt for them and for their losses than for my own, more worried for their futures than the future of Martha Stewart the person. (Hays, 2004e, p. A1)

Stewart then thanked the 170,000 people who wrote to her personal defense website. Undoubtedly, Stewart understood how to take advantage of publicity. She immediately put in a promotion for her MSO. Perhaps all of you out there can continue to show your support by subscribing to our magazines, by buying our products, by encouraging our advertisers to come back in full force to our magazines. Our magazines are great. They deserve your support, and whatever happened to me personally shouldnt have any effect whatsoever on the great company Martha Stewart Living Omnimedia. (Hays, 2004e, p. A1)

Investors seemed to be optimistic after the sentencing. MSOs share closed at $11.81, up $3.17 for the day. The company issued a statement in which it called itself saddened for Martha, but also alluded to the sentencing as an important step toward closure for MSO (Hays, 2004e, p. A1). Since Stewart was indicted, MSO had been distancing itself from her image by not using her name on some of their products. When

69 she was indicted, she stepped down from chief executive and chairperson of the board. Later, she resigned as chief creative officer and board director. However, she still remained the largest shareholder with about 60 percent of the stock. The company was likely to face a tough battle. However, she was motivated by a desire to reclaim her life, a life that included choosing to start sentence early. On October 8, 2004, a message posted on her website. By the time when you read this, I will have reported to a minimum-security prison in Alderson, West Virginia to begin serving my five-month sentence. As I announced in September, although my lawyers remain very confident in the strength of my appeal and will continue to pursue it on my behalf, I have decided to serve my sentence now because I want to put this nightmare behind me as quickly as possible for the good of my family and my company. (Newman, 2004, p. C3)

During her five-month jail term, Stewart began restoring her image making friends with inmates and teaching yoga in prison. She also wrote on her website to call for sentencing reform and to mention the bad food in prison. Her website served as a vehicle to communicate with her fans and supporters even when she was in jail. By speaking to her constituents through her website, Stewart established a private connection in a very public platform to draw peoples attention. On March 4, 2005, Stewart was released from prison. Stewart wore a handmade poncho crocheted by a fellow inmate on the day of her release made headline news. Later, she wrote a statement on her website. The last five months in Alderson, West Virginia has been life altering and life affirming. Someday, I hope to have the chance to talk more about all that has happened, the extraordinary people I have met here and all that I have learned. (Glater, 2005, p. 4)

70 During the investigation, the company tried to distance itself from her name. In contrast, the new strategy was a significant switch after her release. The new strategy was to have Martha Stewart in the public eye every day from the time she was released (Carr, 2005). Two new television programs were scheduled on the air: a new syndicated daily daytime show entitled Martha and the NBC prime-time series The Apprentice: Martha Stewart. A new Martha Stewart cookbook was also in the works. Later, the company introduced around-the-clock Martha Stewart programming on Sirius satellite radio. Clearly, Stewart resumed her public prominence and literally speaking, has affirmed that her name, brand and company are inseparable. It seemed to her that she had a determination to stay close to her company. I always disagreed with the separation of the name and the brand and the person. To build on that name and brand is one thing. To divorce the name and the brand from the person was not an approach that I agreed with. (Carr, 2005, p. C1)

On August 8, 2006, Stewart agreed to pay $195,000 to settle civil insider-trading claims, marking the end of a long and costly legal battle. The settlement also barred her from serving as a board director of a public company for five years or to engage in financial activities such as reporting about the companys profit outlook. She neither admitted nor denied wrongdoing. As for this settlement, Stewart issued a statement through her publicist: This brings closure to a personal matter and my personal nightmare has come to an end (Thomas, 2006, p. C1). Shares of her company closed at $16.95, up seven cents or less than one percent. As an important symbolic function of MSO, Thomas (2006) indicates that the prohibition from commenting publicly about MSOs financial prospects in the presence of shareholders might be likely to hurt

71 Stewart. Although she is not allowed to fulfill any directorial duties, she is still the largest individual shareholder and this makes it difficult for the board to ignore her. In summary, Stewart who used prison to restore and soften her image emerged into public with a monumental comeback. She attempted to cast herself as a new Martha who was different from the perfectionist executive she was criticized for before her sentence. Once again she became a television celebrity. She was more open, saying we are not going to avoid things (Carter, 2005, p. C1) and took questions from a live audience every day on the daytime show, expecting the issue of her conviction to be raised. She further stated: Its not off limits, lets put it that way. I think it will come out naturally. Its part of my life. Its there. Its not going to go away (Carter, 2005, p. C1). Although Stewart has been limited in any executive capacity and barred from serving as a director of a public company, it is unlikely that Stewart will end her role at MSO. In her current role as founder of MSO, she still gets involved in all aspects of business operation. This section has mainly discussed the Stewarts crisis response strategies during her trial for insider trading. The next section discusses three themes which emerged from in this case, namely stonewalling, denial and shifting the blame to others and stakeholder perception.
Discussion Stonewalling

Stewart did not offer any significant response on the day the scandal broke. She was not aware of the urgency until she was charged with securities fraud, conspiracy, and making false statements on June 4, 2003. To complicate things further, as the

72 controversy began enveloping her and her company, she arrogantly tried to publicly avoid the issue or minimize it, instead of managing the crisis. It was as if she believed the crisis would disappear if she ignored it. In fact, it is Stewarts personal image that drove the fortunes of her company, and she got more and more involved into the insider trading crisis, her company suffered right along with her. There is no doubt that company attorneys often advise corporate leaders to say as little as possible following a crisis in an attempt to minimize potential liability. Specifically, they typically argue that any statement about the crisis could be used against the organization and could increase the liability the organization would have to face (Ulmer, Sellnow, & Seeger, 2007). By the same token, Stewart did not respond effectively partly because her lawyers attempted to limit the flow of information. However, Benoit (1997) suggests that image restoration concerns may, admittedly, conflict with a desire to avoid lawsuits, and the firm must decide whether it is more important to restore its image or avoid litigation. Ideally, companies in times of crisis would have direct communication channels with key constituencies internal employees and external stakeholders to avoid reliance on the media for speculating or carrying out the companies key message. Ulmer, Sellnow and Seeger (2007) reveal that failure to be open and honest usually compounds the crisis and makes the media even more aggressive. It was noticeable that Stewart avoided the media in the beginning of the investigation. The problem was that because of her lack of response, reporters began to question her innocence. While professing her innocence, she offered nothing that would help clear her name. Her attitude seemed to be: I am Martha Stewart. It should be good enough that I say I am innocent (Slater,

73 2006, p. 101). Reber, Cropp and Cameron (2001) note that nonresponse on the part of an organization points to guilt, whether the organization is guilty of allegations or not. Jerome, Moffitt and Knudsen (2007) also argue that Stewarts reluctance to immediately go public and answer her critics and the negative media coverage in a timely manner did extensive damage to her personal and corporate images and her legal case. The absence of information from Stewart effectively lent credibility to her accusers. As such, the Stewart case showed the importance of an immediate and honest response to avoid the harm of the corporate image.
Denial and Shifting the Blame to Others

During the initial stage of the investigation, Stewart denied that she received improper information from the founder of ImClone, Waksal. In her statements, she told the stakeholders that she had done nothing wrong and her stock sale on December 27, 2001, was entirely proper and lawful. She justified by explaining that she had no insider information on ImClone and sold the stock under pre-arranged stop-loss order that allowed her stockbroker Bacanovic to sell her ImClone shares if the price went below $60 per share. She had not explained publicly and was unable to shake public debate about the timing of the sale. No evidence supported her claim as well. Her assertion was the main hurdle for prosecutors until Bacanovics assistant, Faneuil, testified that such a stop-loss order didn't exist. Table 6 shows the crisis response strategies Martha Stewart used during the investigation, indictment, verdict, and sentencing in prison.

74
Table 6: Martha Stewarts Crisis Response Strategy
Date
6/7/2002

Events
The Wall Street Journal writes an article breaking story about Martha Stewarts ImClone stock sale. Her lawyer puts distance between Stewart and Waksal. Waksal is arrested and charged with insider trading. Stewart

Strategy
Differentiation

Denial of any wrongdoing

6/12/2002

issues a statement repeating her assertion that she had a $60 stop-loss order. She states that her transaction is entirely lawful.

6/18/2002

Stewart tries to resolve concerns and her new lawyer submits several documents to congressional investigators. Stewart appears on CBSs The Early Show, and dodges the questions. She maintains her innocence. Stewart tells investors that she and her company should be considered separately. Stewart resigns from the board of the New York Stock Exchange. Stewart is indicted. Her lawyer suggests that she becomes a

Corrective action

6/25/2002

Denial of any wrongdoing Differentiation

7/25/2002 10/3/2002

Corrective action Shifting the blame Attack the accuser Corrective action Differentiation Denial Corrective action Attack the accuser Diminishing

6/4/2003

target for government prosecutors on account of her fame. Stewart resigns as chairwoman and CEO of her company but remains chief creative officer and a board member. Stewart pays for a full-advertisement in USA Today and unveils a

6/5/2003

personal website in which she proclaims her innocence and insists she will fight to clear her name.

3/5/2004

Stewart is convicted. She states that she will appeal the verdict and continue to fight to clear her name. Stewart steps down as director and chief creative officer of her company. Her new title is chief creative adviser. Stewart receives a five-month sentence in prison. She asks the

3/15/2004

Corrective action Differentiation Bolstering Apology

7/16/2004

judge to remember all the good that she has done. She also apologizes and asks for forgiveness.

10/ 8/2004 3/4/2005 8/8/2006

Stewart reports to Alderson prison in West Virginia. Stewart is released from prison. She resumes her public prominence. Stewart agrees to pay $195,000 for settling civil claims.

Corrective action Rebuilding

Corrective action

75 Through the trial phase, Stewart kept her public persona intact, ignoring or downplaying her role in the insider trading scandal. Stewarts legal team tried to keep her legal issues separate from her business empire. Specifically, Stewart attempted to disassociate herself from her company by saying it was a personal matter. In addition, her attorneys strongly positioned her as the innocent victim. Her conduct in the stock sale was blameless. When Barbara Walters asked her in a television interview, As you sit here today, can you tell me if you are guilty or innocent? Stewart replied with denial, I would like to say, out loud that I have done nothing wrong, Barbara. I am innocent. And I think that the judicial system, the upcoming trial, will prove that (Walters & Stossel, 2003). Obviously, the statements tried to shift the blame and told her audiences that she was innocent of any wrongdoing, implying that the government had wrongly accused her (Jerome, Moffitt, & Knudsen, 2007). In short, Stewarts early response to her insider trading crisis demonstrated lack of situational awareness. She had failed to follow a public apology for the wrongdoing in a timely manner. Apparently, she showed a lack of crisis leadership during her trial. However, if she apologized for her false statements earlier, she might have saved her image and company reputation.
Stakeholder Perception

Martha Stewart went from a celebrity entrepreneur to defendant in her own lying to federal investigators trial. After Stewart was indicted, a poll released by the Siena Research Institute at Siena College in New York on June 13, 2003, found that 60 percent of the 567 people interviewed thought Stewart was guilty of insider trading and 51 percent thought she was guilty of obstruction of justice (Hays, 2003d). Fifty four percent

76 thought she should be punished if convicted, while, in a separate question, 46 percent said she had suffered enough. Also, 22 percent said her legal problems would make them think twice about buying her products. Later, in a similar poll conducted by The Washington Post and released on January 20, 2004, found that 58 percent of the 1,036 adults said they believed that the charge that Stewart obstructed justice was probably true, while 23 percent believe it was probably false (White & Masters, 2004). Jerome, Moffitt and Knudsen (2007) reveal that such data indicate that the negative media messages shaped the audience opinions more than did any message put out by Stewart. In a broader context, Stewarts lack of response to the crisis has impaired her image. From these two polls, the majority apparently agreed with the indictment of Stewart, however, there was a distinct level of support receiving from her family, friends and colleagues. Each day, one of a rotating cast of senior executives of MSO took a seat in the courtroom to show support. From the entertainment world, Bill Cosby and Rosie ODonnell had also appeared in court on different days. Stewart is frequently referred her as the domestic diva (Gabler, 2003), the celebrated domestic tastemaker (Thomas, 2006) and lifestyle guru (Brady, 2006). However, most of the time, the mainstream press have vilified Stewart. As a result, Stewarts image has been portrayed negatively and unfavorably in the media. For years, another, darker Martha Stewart has been fodder for the gossip pages. That Ms. Stewart is portrayed as arrogant, demanding and snippy to her employees queenly rather than housewifely. Worst of all, she is called a fake. She didnt actually make all those canaps herself. (Gabler, 2003, p. A33) Many women resent her for setting unrealistic standards for housekeeping, crafts and dining especially if they, unlike Ms. Stewart, need more than three hours of sleep a night. (Hays & Eaton, 2004, p. A1)

77 The trial shed an unflattering light on Stewart, who was described by witnesses as rude to subordinates and penny-pinching to the point of trying to bill her company for haircuts and weekend trips. (Masters, 2004, p. A1)

Stewarts supporters contended that the decision to prosecute her was motivated by the desire to take down a popular and very public female chief executive (Glater, 2004). They pointed out that she had competed aggressively and acquired a reputation for a successful leader in a world dominated by men. Further she fought back defiantly rather than retreat demurely (Lamb & McKee, 2005). From a feminist scholar point of view, Stabile (2004) argues that coverage of Stewart was skewed because of her gender because the fall of powerful women elicits more derision and hatred on the part of the media than the fall of powerful men (p. 325). For example, the language used in the news media to describe Stewarts demise manifests a spiteful gleefulness a tone strikingly absent from coverage of Tycos Dennis Kozlowski, Enrons Kenneth Lay and WorldComs Bernard Ebbers and others. Stabile (2004) claims that a double standard in reporting of corporate scandal: for men, just the facts, written in a language devoid of adjectives, for Stewart, a narrow focus on personality and appearance (p. 326). In addition to the jokes on the websites, blogs, late night talk shows, she has been exposed in two unauthorized biographies and a NBC TV movie in which Cybill Shepherd portrayed her as a shrewd and manipulative woman. Stanley and Hays (2002) comment that her peers in the media world, however, say that she has not stored up enough goodwill for them to stand by her through this crisis. The audiences of The Martha Stewart Living television program decreased 50% after her trial due to sponsors and networks withdrawing their support of her (Martha

78 Stewart Living Omnimedia Annual Report, 2004). The net loss in profit in 2003 was $2.7million as compared to 2002 when there was a profit of $7.2 million. Clearly, the trial and conviction of Martha Stewart had a resounding and negative fiscal impact on her company. Shareholders certainly suffered. Figure 3 shows the change of MSO stock price during the insider trading scandal. Figure 4 shows the revenue of MSO between 2001 and 2005.

30.75 US$16.72 10
selling ImClone 12/27/2001 indictment

10.86
verdict

11.81
sentencing

16.02
prison release

6/4/2003

3/5/2004

7/16/2004

10/8/2004

3/4/2005

Figure 3: The Stock Price of MSO

Revenue US$288 (million)

295 245 187 209

Net Income 21.9 (million) Year 2001 2002

7.2 2003

-2.7 2004

-59.5 2005

-75.7

Figure 4: Revenue and Net Income of MSO

79 Stewart started restoring her image during her jail term and after her release from the prison. She launched a highly publicized comeback. She expressed regret on her website and thanked supporters for encouragement. While the company still faced the financial uncertainties, the public sentiment gradually seemed to have swung in Stewarts favor (Slater, 2006). For example, a group of fans used their website savemartha.com to get their message out. Fans purchased merchandise with slogans like Free Martha, Save Martha, and Pardon Martha boldly written. The public seemed to exhibit a warm affection for the new Martha Stewart (Slater, 2006). A Gallup poll released earlier August, 2005 suggested, with a 52 percent favorable rating, that she was actually more popular than she was years ago, before there was a hint of legal trouble (Carr, 2005). In short, Stewart has begun a comeback after her prison release and even produced positive outcomes. Stewart wrote a letter posted on her website about her plans to turn things around. She personally assured the stakeholders of the business operation and the companys future. The corporation also included a series of forward-looking statements in the annual report. One mission was to get back the sponsors that cancelled their contracts when Martha Stewart was convicted. It appeared that part of the strategy for image restoration was to suggest that MSO had recovered from the crisis.
Summary

Stewart used her company to become the American apostle of domestic aestheticism (Gabler, 2003). Basically, Stewart sold her idea to middle-class woman that their chores could be perfect. When consumer bought her products, they were buying

80 the idea of her personal touch. It was on that basis that her empire grew (Gabler, 2003). Obviously when the corporate brand is closely associated with the individuals who founded or manage them, the reputation of high-profile leadership affect their corporate image. On the courthouse steps after the conviction, Stewart told the press, Whatever happened to me personally shouldnt have any effects whatsoever on the great company Martha Stewart Living Omnimedia (Hays, 2004e, p. A1). Unfortunately, that was not in the Stewarts case. Stewart did not realize that her business was based on her persona. Without her, there is no MSO that the stakeholders can identify. To sum up, Stewart in her insider trading case had communicated incomplete and inconsistent message which made her vulnerable to crisis.

81
CHAPTER 5 CASE OF BENQ Introduction

The previous chapter discussed the insider trading crisis of Martha Stewart Living Omnimedia Inc. In this chapter, I examine another insider trading case BenQ beginning with an overview of the company and following with the analysis of crisis response strategies. I explore how BenQ responded during the crisis based on two research questions: 1) How did BenQ manage their communication during the corporate crisis? 2) How were these communication strategies received and interpreted by the stakeholders? As the chapter progresses, each of the response strategies is explained in detail. Finally, I discuss three common themes in this case: 1) stonewalling, 2) denial and shifting the blame to others, and 3) stakeholder perception.
About BenQ Corporation

BenQ Group was established in 1984, a spin-off of the Taiwan technology stalwart, Acer Group. It was initially known as Acer Peripherals Inc., then Acer Communications and Multimedia. On December 5, 2001, it was finally renamed BenQ. The name, BenQ, is derived from their corporate vision: Bringing Enjoyment aNd Quality to life and reflects the brand promise of Enjoyment Matters. Its goal was to solidify its strengths and make a strong push towards a global brand. Headquartered in Taipei, the BenQ Group is comprised of 12 companies which operate independently while collaborating, sharing resources and leveraging synergies across the entire Group. In 2007, the revenues of the BenQ Group exceeded US$22 billion dollars. BenQ Corporation is one of the 12 companies of the BenQ Group and the major

82 product lines of BenQ (BenQ Corporation is hereafter referred to as BenQ) include mobile communications products (e.g., mobile phone), consumer electronics (e.g., digital projector, LCD TV, digital camera, MP3 players), and computing products (e.g., LCD monitor, laptop computer, computing peripherals). BenQ currently employs over 2,000 people from more than 40 nationalities. With sales to nearly 100 countries, BenQ owns and operates five global branch offices in Asia Pacific, China, Europe, North America and Latin America. K. Y. Lee is the chairman of BenQ Group. Lee first started his career at the Acer Group in 1976. Under his leadership, he transformed Acer Peripherals into BenQ for a strategic move from peripherals manufacturer to a multi-faceted communications, optical and multimedia brand. K. Y. Lee frequently cited Steven Jobs of Apple as a key source of inspiration. Lee especially admired the way Jobs has nurtured the Apple brand (Einhorn, 2004). Lee said that technology changes so fast, and consumer habits are changing all the time. The only thing a company has in the long term is the brand name and the management philosophy (Einhorn, 2004, p. 26). With this in mind, Lee not only shifted his focus away from a contract manufacturer and more towards the production of self-designed products but he also promoted the BenQ brand image. The revenue of the BenQ Corporation grew rapidly from US$60 million in 1990 to US$1.38 billion in 2007. Today, BenQ, like its former parent Acer, has become one of the most successful Taiwanese consumer-electronics brands. BenQs products have received both global recognition and top international design awards. It was also rated by the Taiwan External Trade Development Council as one of 2007s Top 10 Taiwan global brands.3

Foradditionalcompanydetails,pleaseseewww.benq.com

83
BenQ Insider Trading Crisis

For years, BenQ has been a consumer electronics contract manufacturer. It quickly expanded to include clients such as the giant cell phone brands, Motorola and Nokia. Lee, the chairman of BenQ sought to develop a globally recognized brand image, increase the product line and expand its contract manufacturing business. Unexpectedly, BenQ grabbed the international headlines on October 1, 2005, when it acquired the money-losing mobile phone division in Germanys Siemens for launching the new brand, BenQ-Siemens. With the new merger, BenQ Mobile became the worlds 4th largest mobile phone maker in terms of its market share value (BenQ Press Release, 2005a). After suffering a huge loss of US$760 million in less than one year, BenQ decided to terminate further investments and declared the insolvency of its German subsidiary, BenQ Mobile on September 28, 2006 (Wang, 2006a). Before BenQ made the announcement public, executives sold undistributed bonus shares ahead of the companys announcement of the huge losses incurred from its takeover of Siemens's handset division (Pao, 2007). They then gradually put the money into the BenQ branch in Malaysia, Creo Ventures. Later, when the share price continued to plummet, they transferred funds back to Taiwan and used the money to buy back BenQ shares to boost the stock market. On May 8, 2007, chairman K. Y. Lee and four other executives were indicted for insider trading. This analysis examines BenQs response to the crisis chronologically. Specifically, this chapter not only examines the acquisition of Siemens in 2005 but also covers the insider trading trial in 2007. The major crisis events are shown in Table 7.

84
Table 7: Key Events in BenQ Case
Date 6/7/2005 10/1/ 2005 9/28/2006 3/14/2007 3/20/2007 Events BenQ announces the acquisition of Siemenss mobile phone unit. New company name, BenQ Mobile, and the new brand BenQ-Siemens start operation. BenQ announces to terminate further investments and files for insolvency protection of its German subsidiary, BenQ Mobile. BenQ is investigated for insider trading. Chairman K. Y. Lee tenders his resignation at a board meeting but the board turns it down. Chairman K. Y. Lee and president Sheaffer Lee are named as defendants. 4/11/2007 4/25/2007 5/8/2007 Later they are released on bail of NT$15 million and NT$10 million respectively. BenQ announces plans to spin-off its business operations. Chairman K. Y. Lee and the other four executives are indicted for insider trading. Chairman K. Y. Lee loses his CEO title but retains his chairmanship at the 9/1/2007 BenQ Group. BenQ restructures and spins off its brand business and changes its name to Qisda.

As discussed earlier, this chapter explores how BenQ managed their corporate communication when BenQs public image and reputation were damaged during the investigation of insider trading, stemming from the takeover of Siemens. Two research questions guided this analysis: 1) How did BenQ manage their communication during the corporate crisis? 2) How were these communication strategies received and interpreted by the stakeholders? Similarly, this analysis utilizes Coombss (2007a) situational crisis communication theoretical framework and other crisis communication models to illustrate the crisis response strategies that BenQ used in these events. Following an analysis of the corporate crisis response, this examination highlights some common themes in

85 BenQs insider trading crisis, which include stonewalling, denial and shifting the blame to other and stakeholder perception.
Analysis of BenQ Crisis Response Acquisition of Siemens

For years, the island of Taiwan has spawned global, top tier electronic components, vendors and contract manufacturers. As profit margins for contract manufacturing began to shrink, Taiwanese executives saw moving beyond low-cost manufacturing as vital for a profitable future. As such, Taiwanese companies tried to make a shift from being an anonymous contract manufacturer to building their own brand names. One way to an immediate global presence was to acquire an attractive existing brand. In this case, it was Siemens. On June 7, 2005, the news of BenQs acquisition of the ailing Siemens mobile phone division drew a lot of media attention. The CEO of Siemens, Klaus Kleinfeld, and the chairman of BenQ, K. Y. Lee, announced that BenQ had agreed to take over Siemenss unprofitable mobile-devices business unit. Lee said at the press conference, BenQ has been seeking ways to boost its economic scale and manufacturing capabilities to become a leading mobile phone player. We think Siemens is a partner that will be complementary (Wang, 2005a, p. 1). Then, Siemens was expected to regain investor confidence through the selling of their money-losing mobile phone unit, and shifting its focus to its more profitable industrial operations, including power turbines and automation equipment. In response to this transaction, the shares of Siemens jumped to 61.9 euros, up 3 percent. In contrast to the optimistic view of Lee, however, BenQ shares went down 2.7 percent on the

86 Taiwan Stock Exchange after the purchase of Siemenss handset division was disclosed. Later, Lee told reporters at a press briefing in Beijing, China that BenQ would be able to make Siemenss debt-ridden mobile handset unit profitable in two years. He pointed out We can achieve a profit quickly because we have sales and distribution channels globally. We complement each other. What Siemens has, we don't. What we have, Siemens doesn't (BenQ boss sees Siemens unit turning profit in 2007, 2005, p.11). The acquisition propelled BenQ into the worlds fourth-largest handset brand after Nokia, Motorola, Samsung, bringing BenQ with combined annual revenue of $10.9 billion (BenQ Press Release, 2005a). Most importantly, the Siemens deal highlighted BenQs ambition to become a major consumer electronics player on the global stage. In particular, this deal was to boost BenQs morale because it had just lost its biggest contract client, Motorola, after BenQ launched its own mobile phone brand (Kovac & Ewing, 2005). Under the agreement, BenQ acquired 100% of Siemenss mobile-devices unit without directly paying the German company. Instead, Siemens would provide BenQ with 250 million euros ($307 million) to help fund the business, and later would pay 50 million euros to buy newly issued shares in BenQ. In addition, Siemens would continue to carry the units losses, about 1.5 million a day, until the transaction was completed in September 30, 2005 (Dean, Karnitschinig, & Pringle, 2005). Siemens also would continue to work with BenQ on developing handset technologies. As part of the transaction, BenQ gained the exclusive right to use the Siemens trademark for mobile phones for a period of 18 months and co-branding rights to BenQ-Siemens for a period of 5 years. It was estimated that this deal cost Siemens about 350 million euros.

87 Meanwhile, BenQ agreed to fulfill Siemenss obligations under labor agreements with the cell phone employees through the end of 2006 (Dean, Karnitschinig, & Pringle, 2005). The new business division, BenQ Mobile, started its operation on October 1, 2005. The new companys headquarters were based in Munich, Germany and had over 7,000 employees worldwide working on research and development, design, sales, and marketing. In the press release, Lee said The synergies created by this partnership, and the eagerness shown by employees on both sides, make us look to the future with great pride and confidence (BenQ Press Release, 2005b). Lee claimed a key reason for the previous troubles at Siemens Mobile was excessive turnover in executive management. He said In the last two and a half years, they had six management changes. That was why they fell down so rapidly (Einhorn, Wassener, & Reinhardt, 2005, p. 18). Thus, Lee kept Clemens Joos on as the division chief executive. A total of 2,800 research and development staffs were also retained, Lee, however, avoided the question of layoffs among the 2,000 workers at the plant inherited from Siemens in Kamp-Lintfort, Germany. Instead, he said that so far BenQ does not plan to shut any factories (Einhorn, Wassener, & Reinhardt, 2005, p. 18). Companies undergoing a merger or acquisition might face an array of intense internal and external challenges. To obtain an entire business and its known brand for free was too good to be true for BenQ. Certain risks needed to be considered in this acquisition. As a matter of fact, what BenQ got was a business that had been a big financial drain on Siemens for years. Kovac and Ewing (2005) reported that, after achieving the fourth position and nine percent of the market share in global handset sales in 2002, Siemens slipped to fifth in 2005, with a share of just 5.5%. In 2004, the

88 losses were $615 million on sales of $5.8 billion. Siemenss efforts to cut costs at the mobile phone unit were hampered by the unions in Germany, which had resisted moving jobs to lower-cost locations. Although Siemenss effective network of businesses would have been helpful to BenQ in European and Latin markets, where Siemens is a leading player, BenQ had to wrestle with the same labor issues that had plagued Siemens, when they took over 3,700 workers in high-cost Germany. Kovac and Ewing (2005) further stated that Siemens has rid itself of a headache. But for BenQ, making this deal of the century will take plenty of hard work (p. 27). The same concern also was raised by the financial analysts. The Hong Kong based, Credit Suisse First Boston analyst, Alison Yip, was skeptical about how BenQ could turn around Siemenss mobile devices division over the short term, given BenQs weak financial position and the problems of costs cutting (BenQ boss sees Siemens unit turning profit in 2007, 2005). After the transaction announcement, she changed her recommendation on BenQs stock to underperform from neutral and lowered the target price for BenQs stock to NT$27 from NT$33. In particular, she argued that the potential layoff of high-cost employees, the pension fund, and outstanding liabilities in Germany could take BenQ a long time to make the acquired business profitable. Meanwhile, there were other questions about whether BenQ could overcome cultural differences, especially in management, which Lee admitted could be costly to the company. In the past, the former parent Acer had already paid a high price for acquiring experience to create its own brand name. Ho (2005) indicates that cultural differences were one of the major reasons that led to Acers debacle after acquiring Counterpoint Computer in the U. S. in 1987, Altos in 1990, and its failure to buy Siemens

89 Nixdorfs PC department in 1998. Acers business culture did not blend in with these merged companies. As a result, Acer plunged into financial crisis due to the employee turnover and declining sales. After many years of effort, Acer gained more experience in cross cultural management. Recently, it successfully acquired Gateway and Packard Bell to complete Acers global footprint by strengthening its presence in the U. S. market. Although today Acer is able to focus on marketing its brand name around the globe and ranks the third largest computer brand after HP and Dell, it was still a valuable lesson for BenQ. According to Ho (2005), BenQ worked with Philips by forming a $20 million company named Philips BenQ Digital Storage in 2003. However, the joint venture was headquartered in Taipei, Taiwan, and the companys size and capital were far less than the billion dollar handset unit based in Munich, Germany. BenQ had to face the challenge of cutting costs while managing in Germany, where workers were supported by a strong labor union environment. In fact, the union leaders threatened to take legal action against Siemens over the sale of its money-losing mobile phone unit to BenQ (Paterson, 2005). The union leaders at Siemens were unhappy about the way the deal was handled. The union said it would have preferred that Siemens had kept the cell phone unit, and that employees were concerned about their job and uncertain future (Paterson, 2005). In Taiwan, the workers are less aware of their interests and rights. According to Hofstede (1980), the Taiwanese society is a high power distance culture which displays degrees of centralization of authority and of autocratic leadership. It is the extent to which the less powerful members of organizations accept and expect that power is distributed unequally. Moreover, it is best explained by a sense of Confucian dynamism where relationships are ordered by

90 status differences. People accept their positions in the hierarchy, fulfill their roles within it, and not challenge the order. Given the role of hierarchical relationships and high power distance in Taiwanese culture, the function of the labor union is not as powerful as their counterpart in Germany. Basically, the low power distance Germans show less concern about differences in rank, indicating that superiors and subordinates should have equal rights. Hence, unions are very strong in Germany and provide workers with many rights to get involved in shaping the firms goals and responsibilities. As such, BenQ had to face the challenge of cross-culture management issue and learn how to maintain a good relationship with Siemenss labor union. In summary, Lee, chairman of BenQ, tried to create the companys own brand name. When the opportunity knocked, he took a shortcut strategy to the global mass market. However, the acquisition of Siemenss mobile phone unit lost over 500 million euros in 2005, with little sign of financial improvement ahead. Immediately, BenQ had to face Siemenss falling market share, huge operating expenses and higher manufacturing costs. The analysts questioned whether an inexperienced BenQ was able to turn around the money-losing mobile phone unit, where the giant German electronics company could not. Furthermore, BenQ had to resolve different corporate culture, stricter labor law and union dispute. Thus, the financial analysts suggested that the investors remain cautious because of the uncertainty about the integration of BenQ and Siemens.
An Investment in Failure

BenQ intended to turn around the unprofitable Siemens mobile phone division in the short term. However, completing that task turned out to be more difficult than Lee ever imagined. To meet the expectation, Joos, the CEO of BenQ Mobile based in

91 Germany, shut down a handset site in Ulm, South Germany, and sold a Danish research center to Motorola to cut costs and consolidate research and development in two plants in the cities of Munich and Kamp-Lintfort (BenQ Mobile on track to profitability, 2006). Obviously, the acquisition of Siemenss handset operation increased BenQs strengths, allowing it to directly compete with other leading brands. However, this might create a conflict of interest with BenQs current leading customers. BenQ previously had lost its biggest customer, Motorola, when BenQ established its own mobile phone brand name. Nokia also cut its purchase with BenQ in the wake of its takeover of Siemenss handset unit (Wang, 2005b). BenQ suffered from growing pains after acquiring Siemens. For the first half of 2006, the companys core business recorded sales of NT$112.7 billion, and a net loss after taxes of NT$7.5 billion. BenQ explained the issues related to product roll-out came in late with average selling prices remaining weak (BenQ Press Release, 2006a). Apparently, BenQ would not be able to break even in the foreseeable future and could not take too long to get over this phase. On September 28, 2006, BenQ announced that it would discontinue and stop pouring money into BenQ Mobile, its German mobile phone subsidiary in order to manage losses (BenQ Press Release, 2006b). The subsidiary was also filing for insolvency protection plan in a Munich court as well a move to protect the interest of creditors. BenQ Mobile would hand over its management to a new team appointed by the German government. As a result, BenQ Mobile caused a public outcry in Germany due to a loss of nearly 3,000 jobs. Using diminishing strategies, Lee expressed, Since October 2005, we have committed and invested an inordinate amount of capital and resources into our German mobile phone

92 subsidiary. We have worked alongside our German colleagues from the beginning and were able to achieve quite a number of milestones. Despite the progress achieved in reducing cost and expenses, widening losses have made this very painful decision unavoidable. (BenQ Press Release, 2006b)

The decision was made after BenQ posted a loss of about 600 million euros (US$760 million) since it had acquired Siemenss handset division less than a year ago. The mounting loss was mainly due to the integration of the Siemenss mobile phone unit and the marketing of the BenQ-Siemens brand. The amount was almost comparable to the companys total capital of NT$26.25 billion (US$794 million). Explaining the failure in acquisition, Lee shifted the blame by saying that constant delays in new product roll-out in the short life cycle handset industry, as well as an uncompetitive cost structure, were the main reasons behind the companys massive loss (Wang, 2006a). After the announcement, the BenQ share jumped to almost their seven percent daily-limit at NT$19.45. However, the companys share price had been battered by nearly 45 percent losses after the acquisition of Siemens (Wang, 2006a). Lee made the first public apology at the institutional investor conference on October 24, 2006 (Chang, 2006). He said sorry to both Taiwanese and Germany stakeholders. In his apology, he acknowledged the huge losses had been incurred and promised with a forward-looking statement. Lee told investors with relief that the worst period was behind it. We now are fixing some of the remaining problems. We hope the company will soon be on the road towards healthy growth (Wang, 2006b, p. 12). Though BenQ stopped investing in Siemenss mobile phone unit, the company faced other challenges. The CEO of Siemens, Kleinfeld, said that BenQs handling of the mobile business was unacceptable and reiterated that Siemens could take legal action

93 against the Taipei-based firm (Graham, 2006). Labor leaders, politicians and media commentators in Germany also accused Siemens as well as BenQ of betrayal and put significant pressure on the Munich-based company to step in to help (Graham, 2006). They had accused Siemens of knowing that its mobile unit was doomed when BenQ took it over and that it was trying to avoid the big payoffs typically awarded to German workers when they are unemployed (Siemens agrees to fund insolvent BenQ units in Germany, 2006). In responding to this accusation, Siemens shifted the blame and insisted that it believed that BenQ could bring the company back into profitability. Later, on November 24, 2006, Siemens agreed to provide more help for workers at the insolvent mobile phone unit. Siemens said that it established a 35 million euros (US$45 million) fund to support the units 3,000 workers and help them find new jobs (Siemens agrees to fund insolvent BenQ units in Germany, 2006). BenQ did not successfully take over the Siemenss mobile phone unit and failed to expand its presence globally. Lee admitted that BenQ moved recklessly to make the acquisition decision. For fear of missing out on the rare opportunity of taking over a global brand, BenQ did not do its homework when evaluating its merger target during due diligence a process that is critical to the success of a merger or acquisition (Huang & Sun, 2006). The devil is in details. For example, BenQ did not carry out on-site investigations of the Siemens handset factories. Instead, they only evaluated piles of files and documents. In fact, of the some 1,000 patents that BenQ bought from Siemens, BenQ later found out just seven turned out to have any core value (Huang & Sun, 2006). Put simply, BenQ staff only looked at the written material provided by the Siemens side. They had no clue at all what they bought because of a lack of on-site investigations.

94 The announcement of discontinuing BenQs investment in Siemens mobile phone unit seemed to surprise many industry observers. However, this situation linked closely to Hofstedes (1980) concept of uncertainty avoidance. Taiwanese electronics companies have been known for its cost conscious and cost-cutting procedures, applying Confucian virtues of thrift, saving, and perseverance toward results (Hofstede & Bond, 1988). An immediate narrowing of losses was the only way to save a business. In a broader entrepreneurial context, BenQ had lower uncertainty avoidance. According to Hofstede (1980), the uncertainty avoidance reveals the extent to which individuals feel threatened by uncertainty and attempt to prevail in these circumstances. Since it acquired the ailing Siemens handset unit, BenQ had incurred a staggering loss of NT$36.7 billion, while its bank debt spiraled from NT$26.5 billion to NT$42 billion before the merger (Huang & Sun, 2006). After this huge loss, BenQ did not have deep pockets and was not comfortable with taking risk for an ambiguous profit. More clearly, BenQ needed to build a firewall to avoid its Taiwanese headquarters from further financial deterioration. From this perspective, it is understandable that BenQ divorced this business marriage and stopped the bleeding in less than a year. Stan Shih, the Acer group founder and on the board of directors of BenQ, is recognized for his achievements in brand-business building, and for his unique Smiling Curve, a business model that illustrates the vitality of the global information technology industry. After the debacle of BenQs acquisition, Shih indicated three reasons for the failures of this acquisition (Huang & Lin, 2006). First, one noticeable challenge was the cultural differences which occurred through the integration of the management of the Taiwanese headquarters and its German foreign subsidiary. Chairman Lee noted that

95 corporate cultures between BenQ and Siemens were, to some extent, incompatible (Huang & Sun, 2006). As a consequence, conflicting corporate and national cultures often lead to tensions in a newly merged environment. Second, considering the business scale, BenQ was a small company taking over a larger company. The task was more complex than a larger company taking over a smaller company. Third, prior to its acquisition of Siemens, BenQ was a regional brand which lacked high level international management talent. Breaking one month of silence after the announcement of funding discontinuation, in an interview with Common Wealth Magazine, Lee pointed out that the biggest clash came from a different sense and perception of speed. Lee offered an example and said, BenQ has a rather flexible, informal corporate culture, while the century-old Siemenss corporate culture is centered on doing things by the book and following standard operating procedures (Huang & Sun, 2006, p. 153). Lee further explained that after BenQ acquired the Siemens mobile phone unit and the newly merged entity formally started operations in October, 2005, the German subsidiary put off closing the account until December. This held up many decisions that BenQ could have made. Furthermore, the production of BenQ Mobile phones was also in constant delays during the short life-cycle handset industry. On October 16, 2006, the editorial of the Taipei Times described the tough task of managing between these two different cultures. Disagreements or miscommunication between BenQs German management and Taipei headquarters over the development process of new products and the speed of reorganization highlight some of the difficulties of integration. BenQs decision to cut its financial support for the German subsidiary was condemned as rash and irresponsible in Germany, while it was deemed rational to many in Taiwan. (Editorial: Bridging the gap crucial in M & As, 2006, p. 8)

96 With regards to BenQs internal communications, the research literature implies that the communication variable is the most important factor during all mergers and acquisitions, and communication is the key to a successful integration of two clashing cultures (Appelbaum, Gandell, Yortis, Proper, & Jobin, 2000). Communication should be treated as a key element, particularly considering the amount of confusion, uncertainty and media attention that tends to surround such events. Its effect on employees is pervasive and significantly influences the adoption of a new culture, the change process itself, and the level of stress employees can experience. However, communication is difficult to achieve since there are numerous potential obstacles. After the acquisition, BenQ planned to have new business strategies implemented in the newly established BenQ-Siemens brand. However, the organization should never have assumed that the employees would understand why these changes are taking place. Changes require not only good decisions to be made, but also that these points be well communicated. Obviously, a series of miscommunications are rooted in these cultural, communication, language and management differences. These differences could be attributed to the high and low context cultural backgrounds (Hall, 1976). German society is low context and people use more direct verbal expression in their communication. In contrast, Taiwanese communication style is considered high context culture. Most communication relies more on the physical context and less information is contained in the verbal part of the message. Under such circumstances, German employees might need to put the message in the appropriate context in order to understand the right meanings conveyed by their Taiwanese supervisors. As a result, conflict and miscommunication unavoidably occur because Germans low context

97 communication style tends to be more context-free, and much more reliant on explicit communications. In hindsight, Lee doubts that BenQ took the right approach in the first place. Lee noted, Instead of gradually restructuring the German subsidiary, BenQ should have opted for radical change by replacing the entire subsidiary management team. Then it would have been possible to improve the speed gap and the communication problem (Huang & Sun, 2006, p. 153). Taiwanese society is high collectivism. In high collectivism countries, organizations are expected to look after employees like a family and to defend their interests (Hofstede, 1980, p. 173). Moreover, collectivists conform, obey, and maintain in-group harmony and the social order. Thus, this employee/people oriented expectation made BenQ keep all the original German management team. It emphasized on stability and harmony in the initial stage to reduce potential confrontation. However, Lee thought that in the early stages of the business operation he should focus on the money orientation rather than the people orientation approach. In summary, cultural factors sometimes can raise the costs of doing business. BenQ was unable to meet the expectation of turning the unprofitable Siemens mobile phone unit around. Despite Siemenss brand recognition, constant delays in the new product roll-out, added to the challenge of a short life cycle and high-volume handset business. Increasingly, it was difficult to compete with leading rivals, such as Nokia and Motorola. The failure of the BenQs acquisition of the Siemens handset was a wakeup call and provided a valuable lesson to all Taiwanese companies which intend to create their own global brand recognition. In a sense, it is necessary to be familiar with the cultures of the countries in which they operate.

98 BenQ Mobile was effectively placed under the supervision of a state-appointed bankruptcy administrator in Germany. In February, 2007, BenQ Mobile was disbanded since a suitable buyer could not be found. Unexpectedly, BenQ was investigated for insider trading due to the huge loss of the acquisition of Siemenss phone mobile unit. The following sections discuss this crisis in detail.
Investigation of Insider Trading

Taiwanese prosecutors raided BenQs headquarters in Taipei, as well as its factory in Taoyuan on March 13, 2007 (Chang & Wang, 2007). They were informed by the Financial Supervisory Commission alleging that the company was involved in an insider trading scandal. The company was suspected of trading BenQ shares just before it released its fourth-quarter earnings report for the year of 2005 on March 14, 2006, which made public a loss of NT$6 million (Chang & Wang, 2007). The loss was mainly pulled down by the acquisition of the unprofitable Siemens handset in Germany. When BenQs offices were searched during the insider trading probe, the investors lost confidence in the company and rushed to sell their shares. The stock price fell to NT$13.5 per share, a ten-year historical low. The District Court ordered the detention of Eric Yu, the company spokesman and chief financial executive, because he played a key role in steering BenQs financial operations and was suspected of illegally selling stock options, ahead of the announcement of the losses, via the subsidiary company, Creo Venture Corporation in Malaysia. When BenQs stock plunged in the wake of its failed Siemens investment, Creo was reported to have entered Taiwans stock market as a foreign investor and heavily bought BenQ share to boost its stock price (Pao, 2007).

99 Furthermore, two other BenQ officials were questioned by prosecutors about their suspected involvement in the scandal. After questioning, the financial officer, Wei-yu Liu, was released on bail of NT$5 million, while Ta-wen Liu, an accounting manager, was released on bail of NT$2 million. At the same time, chairman K. Y. Lee was prohibited from going abroad. Prosecutors discovered that Yu was not in a position to make the final authorization of the entire share trading, but Lee was, making him someone the prosecutors wanted to question later. In consideration of the internal stakeholders, BenQs president, Sheaffer Lee, sent an email to the employees that the companys operations would not be significantly affected by the investigation. To communicate with external stakeholders, BenQ chairman, K. Y. Lee, released an open letter to the public. This was a right move because it extracted the company from the public relations disaster while, at the time, the company name was connected with the governmental investigation. Managing stakeholder confidence through effective ongoing communication is important. It is also helpful to shape the target audience perception to a specific direction. Lee first denied the insider trading allegations that they had illegally sold shares ahead of the disclosure of massive losses report. Using the strategy of bolstering, Lee then reminded the stakeholders of past good works by BenQ. He said, We have been in business for 20 years. During this time, we have established a reputation for having honest and ethical corporate governance and have earnestly strived to ensure that integrity is the driving force behind all our actions. (Pao, 2007)

In a response during times of scrutiny, corporate leaders usually publicly pledge their cooperation. Lee stated in the letter that he and the company respected the legal

100 process and were cooperating fully with law enforcement authorities for the ongoing investigation (Pao, 2007). Lee said with confidence that they trust that the results of the investigation will vindicate BenQ of any wrongdoing. Furthermore, using the strategy of attacking the accuser, Lee accused the media reports for speculating that BenQ might be involved in insider trading or irregular stock transactions which he said was false. He also said any negative reports about BenQs senior financial executive, Eric Yu, were baseless and untrue. Westwood (1997) indicates that the boss in Chinese business needs to signal that the authority inherent in his role is not being exercised purely for his own self-interest but on behalf of the collective, taking account of the well-being of all concerned (p. 467). Thus, Lee further explained that the stock transactions and establishment of Creo Venture in Malaysia had been aimed at talent overseas and dealt with bonus issuance for employees, rather than for the benefit of any individual. On March 20, 2007, taking a corrective action strategy for the financial crisis and insider trading investigation, chairman K. Y. Lee tendered his resignation at a board meeting. However, the board turned it down and expressed confidence in Lee for his longtime leadership, insisting that he stay and help bring the company back to profitability (BenQ Press Release, 2007a). The board of directors also expressed its support of BenQs management team, but to avoid any further controversy, it requested that the management team engage legal counsels. When a crisis hits a company, the board of directors should act to protect stakeholders from the fallout immediately. In most cases, the first action is to remove the negligent executives, using a strategy of scapegoating (Fombrun, 1996). In contrast, BenQs board of directors made a different decision. A paramount cultural trait of the

101 collectivistic Chinese cultures is tuan jie, the idea that the in-group member must come together tightly, especially in times of crisis. It reflects the old saying united and we can stand strong. Thus, BenQs directors defended their own network by bonding the members inside it. The Chinese term, guanxi, denotes particularistic ties of this bonding (Tsui & Farh, 1997). Guanxi literally means personal relationships and in business settings, it can be better understood as connection. The practice of guanxi has its roots in Confucianism. It advocates establishing harmony in a society through a strong and orderly hierarchy. Meanwhile, it fosters the broad cultural aspects of collectivism manifested in the importance of networks of interpersonal relations. When a situation arises which is beyond an individuals capacity, the guanxi network is then mobilized to accomplish desired results (Redding & Ng, 1982). Most importantly, Stan Shih, Acer group founder and on the board of directors of BenQ, strongly trusted Lee and expected him to turn the company around as soon as possible. Shih also wrote an open letter, reassuring the protection of stakeholders interest. In a collectivist and high context culture such as Taiwan, communication is more indirect or implicit and intermediary is more likely to use. Because social harmony and face maintenance are crucial, communication through intermediaries is especially functional because using intermediaries eliminates face-to-face confrontation and reduces the risk of losing face (Jandt, 2007, p. 65). Face has a special meaning in Chinese societies both in social life and the business world. For the Chinese, face is conceptualized in two ways: lian (face) and mianzi (image). Lian represents the confidence of society in the integrity of the egos moral character while mianzi represents a reputation achieved through success and ostentation (Bond & Hwang, 1986). Thus,

102 Shih played a role as an intermediary not only to reduce the level of blame towards BenQ but also to minimize Lees risk of losing-face. Meanwhile, the other issue that was discussed in the board meeting was whether Lee should appear at the institutional investor conference on the following day or not (Chen, 2007). Lee wanted to attend and explain to the investors what had happened. The companys public relations consultants also suggested that he go because of the perception of the public. The lawyers, however, disagreed because of legal concerns. As a result, Lee did not attend the institutional investor conference and tried to keep a low profile during the insider trading investigation. Instead, Jerry Wang, vice president and other executives were present. Just like the case of Martha Stewart, the company lawyers limited the flow of information in an attempt to minimize potential liability following the crisis. Heath (1997) argues that at some point in every crisis, executives must listen to legal counsel; perhaps they listen too much and too soon to counselors trained to think only of court proceedings and not the court of public scrutiny (p. 299). For Lee, silence was golden. However, while the companys outlook was clouded by the financial disaster and insider trading allegations, two-way communication might have been a better choice for helping the stakeholders understand the situation. In summary, the insider trading investigation marked the second fiasco for BenQ after its failure to invest in Siemens. Following with crisis management, BenQ communicated with both external and internal stakeholders through open letters and emails to ease their worries and concerns. In response to the investigation, BenQ denied any wrongdoing and believed that their name would be cleared by a fair trial. However,

103 the absence of Lee at the institutional investor conference disappointed the investors. The lack of prompt communication with the stakeholders also led the media and critics to assume that BenQ had done something wrong. Failure to address the problem increased the rumors which further damaged the reputation of the company.
Indictment

On April 11, 2007, prosecutors summoned chairman, K. Y. Lee, and president, Sheaffer Lee, and named them as defendants in a case of insider trading. The spokesman for the District Prosecutors Office, Chin-feng Chang said We discovered new evidence through the questioning and the Lees seemed to be a lot more involved in the case than we had originally expected, so we decided on bail deals for them (Wang & Chuang, 2007, p. 12). Chairman, K. Y. Lee and president, Sheaffer Lee, were released on bail of NT$15 million (US$453,100) and NT$10 million (US$331,000) respectively. Later on May 8, 2007, K. Y. Lee, and Sheaffer Lee were charged with a violation of the Securities and Exchange Law in connection with insider trading. The other two financial officers, Eric Yu and Wei-yu Liu, were also charged with insider trading. The accounting manager, Ta-wen Liu, was charged with violating securities law and money laundering. After release on bail, they declined all requests for comment and resisted calls from some investors. But in an email statement released the next day, K. Y. Lee denied the company was involved in insider trading. He said it would do everything it could to clear its name (Wang & Chuang, 2007). He also defended the chief financial officer, Eric Yu's innocence following his detention on allegations of illegally selling stock options via four companies registered overseas ahead of the release of the companys 2005 fourth-quarter losses in March 2006. In a consistent tone, Lee said the company was not

104 involved in any irregularities and denied speculation that stock which should have been given to the companys overseas employees as bonuses had been stolen and traded (Wang & Chuang, 2007). In response to the indictment, BenQ issued a statement saying that they were confused by the prosecutors action. The company, which had denied it was involved in insider trading and denied any wrongdoing on the part of its executives, said that it was shocked and perplexed by the charges, but it respected the judicial system and expected a fair trial (BenQ execs shocked by indictment, 2007). BenQ then shifted the blame by explaining that it was just a transaction and the Malaysian company was in fact part of a legitimate accounting scheme set up to help overseas employees sell their share bonuses. The BenQ executives stated that it is common knowledge that most business mergers suffer operating losses at the initial stage. They stressed that the BenQ management never had any intention of withholding business and financial information or using the information to make financial gains through insider trading. In summary, indictments against Lee came after a two-month probe by Taiwanese prosecutors into the share sales by the BenQ executives. The tone and message of chairman Lee were consistent throughout the investigation. He denied all the allegations against him and BenQ and claimed the share transaction was legitimate. Despite the denial of wrongdoing, investors reacted negatively to the news, pushing the companys shares further down.
Restructuring

Crisis may produce losses as well as gains. For example, changes are accelerated and new strategies evolve. Three major corrective actions were

105 implemented as part of BenQs image restoration strategy and financial rescue plan. First, BenQ adopted a new name, Qisda, to distant the contract manufacturer from the brand maker. Second, management made major changes in the companys top management team. Third, BenQ proposed capital reduction and sold assets to help pay off debt and shore up its balance sheet. On April 25, 2007, Lee made a surprising announcement, at the institutional investor conference, saying that the company would spin off its brand operation, allowing the company to focus on the original design manufacturing (ODM) operations (Tan, 2007a). More specifically, BenQ restructured and spun off its brand business and changed its name to Qisda (Quality, Innovation, Speed, and Driving Achievements), returning to its roots, and concentrating on its core contract manufacturing business. Its brand business then became a spin-off unit of Qisda. The name change was based upon a strategy of differentiating the manufacturing from the brand-name businesses. The BenQ Group called it Dual Core Competency Strategy which focused on the core competencies of manufacturing & technology, and brand & services to maximize competitiveness and efficiency (BenQ Press Release, 2007b). In the restructuring plan, BenQ is 100% owned by the Qisda Corporation at the initial stage, but Qisda gradually will reduce its shareholdings in BenQ while BenQ will explore options for finding strategic partners and investors. The new operation of the spin-off plan started on September 1, 2007. Lee admitted that it would be easier to spin off the brand business. Thus, Qisda could make products for foreign clients as well as under their own BenQ name brand and separate the contract manufacturing operations from the name brand business in order

106 to avoid any conflict of interest with clients. On June 15, 2007, at an annual shareholders meeting, Lee reassured investors that business operations would be profitable soon. For Lee, it was difficult saying goodbye to the brand business and a sad ending to a story about ambitions and efforts in building a globally recognized brand that ultimately failed. Industry watchers remained skeptical regarding the spin-off project, saying it would take some time to assess its real impact. However, the financial analyst of SinoPac Securities Corp, Hsin-Kai Tseng agreed that the separation plan will definitely benefit BenQs ODM business and further expand its ODM client base (Tan, 2007a, p. 12). Still, Tseng pointed that the effect of the spin-off would be more visible only after the brand unit cuts its dependence on Qisda to become a listed firm run by new management. A management reshuffle was also announced and took effect by September 1, 2007. BenQs board lost some confidence in K. Y. Lee. Lee, the long-standing chairman of the company and head of the BenQ Group, lost his CEO title at BenQ Group but retained his chairmanship. Hui Hsiung became the new president and CEO of Qisda, while Conway Lee became the president and CEO of BenQ. BenQ was operating in the red since acquiring Siemens unprofitable cell phone unit with six straight quarterly losses. BenQs financial performance was likely to get worse, and its bottom line continued to bleed. Hence, an on-going financial strategy was implemented to make up losses, increase cash flow and enhance BenQs financial structure. BenQ decided a 40 percent or NT$10.26 billion reduction in capital to NT$15.38 billion (Tan, 2007b). Following the capital reduction plan, its outstanding

107 shares were expected to fall to 1.5 billion shares from 2.56 billion shares. The reduction enabled BenQ to write off losses incurred by the mobile phone business in 2006, and increase their net value per share to NT$11.3. Further, BenQ started selling its long term profitable investment in shares such as AU Optronics Corporation, one of the top three worldwide LCD manufacturers (Tan, 2007c). In addition, BenQ sold two office buildings and factory facilities to raise funds. Altogether, these generated an estimated NT$12 billion in cash. After getting the financial boost, for the first time in seven quarters, BenQ was back in the black after struggling with the failure of the cell phone unit it acquired from Siemens in 2005. BenQ posted a net income of NT$570 million (US$17.3 million) on August 23, 2007, compared to a loss of NT$2.5 billion for the same period in 2006 (Tan, 2007c). BenQs shares also closed up 3.6 percent at NT$15.90 before the earnings release. The company started gaining new orders and customers after the company announced that it would spin off its brand business and return to its forte, contract manufacturing. In summary, after the financial disaster and insider trading scandal, BenQ took corrective steps that were designed to foster the rebirth of the company. Under the major restructuring plan, the company was separated into two entities, renamed itself as Qisda, which concentrates on manufacturing and created BenQ as a subsidiary under the newly named company which focuses on branding operations. Subsequently, capital reduction and management reshuffle were implemented. For BenQ, it is necessary to take appropriate actions to restore the stakeholder confidence and show them the path to recovery and growth.

108 This section has mainly discussed the BenQs crisis response strategies during their investigation of insider trading. The next section discusses three themes which emerged in this case, namely stonewalling, denial and shifting the blame to others and stakeholder perception.
Discussion Stonewalling

BenQ was under media scrutiny after Taiwanese prosecutors investigated the company for insider trading. Chairman, K. Y. Lee and four other executives were indicted, denied the allegations, and stated that they would do everything they could to clear their names in court. The crisis response of BenQ was common. During the investigation of insider trading, Lee sought to motivate employees and other stakeholders to stay with BenQ and rebuild it to a level that surpassed its insider trading crisis. BenQ mainly used press releases sent by fax, e-mailed statements and open letters as channels for communicating with the stakeholders. Despite these efforts, public speculation remained high. Lawyers often advise their clients to remain silent because anything they say could be used against them in a court of law. Following the lawyers suggestion, Lee did not attend the institutional investor conference during the investigation of insider trading. The stock price immediately plummeted 6% due to his absence as the investors questioned whether Lee was hiding something. Fearn-Banks (2007) points out that no comment is perceived by the public as an admission of guilt; furthermore, anything you do not say can be used against you in the court of public opinion (p. 32). Specifically, this lack of communication could create the perception of wrongdoing. Ulmer, Sellnow

109 and Seeger (2007) argue that organizations often choose to withhold information by trying to remain strategically ambiguous, or they simply stonewall. However, these kinds of responses are usually not ethically justifiable and often lead to even more damage to the organizations reputation (Ulmer, Sellnow, & Seeger, 2007, p. 172). When a company loses in the court of public opinion, it also loses its reputation, good name and positive image (Fearn-Banks, 2007).
Denial and Shifting the Blame to Others

The prosecutor accused BenQ executives of using their insider's knowledge to benefit from the share sale. BenQ firmly denied the claim of wrongdoing. The company shifted the blame by saying that the transactions were conducted to help overseas employees execute share options (Hille, 2007). By finding excuses and using a justification strategy, BenQ senior executives diminished the accusation by explaining that Taiwanese law does not allow foreigners to trade shares of Taiwan-listed companies unless they come to the island to open an account in person. Coombs (2007a) suggests that excuses only emphasize the organizations lack of control over the event and lack of intent to do harm. Thus, organization can claim that the situation is an accident which is difficult to prevent. Similarly, BenQ argued that setting up offshore vehicles to deal with overseas employee bonus shares was a widespread practice by Taiwans information technology companies for the purpose of circumventing government restrictions (Hille, 2007). Table 8 shows the crisis response strategies BenQ used from the time it took over Siemenss mobile phone, to the indictment of insider trading and company restructuring.

110
Table 8: BenQs Crisis Response Strategy Date Events
BenQ discontinues funding of Siemens mobile phone unit. 9/28/2006 German media criticize BenQ, merely wanting to inherit Siemens's name and not wanting to revive it. BenQ is investigated for insider trading. Denial of the allegations Shifting the blame to the 3/14/2007 Taiwanese financial system Bolstering and reminding the stakeholders of past good works Attacking the media speculation 3/20/2007 Chairman Lee tenders his resignation but the board turns it down. Stan Shih, Acer group founder and on 3/20/2007 open letter, reassuring the protection of stakeholders interest. 3/21/2007 Chairman Lee does not appear at the institutional investor conference. Chairman Lee and four other executives Denial of the charge 5/8/2007 are indicted for insider trading. BenQ restructures and spins off its brand business, changing its name to 9/1/2007 Qisda. Capital reduction plan Management reshuffle Excuse and justification Diminishing Corrective action Differentiation Rebuilding Corrective action Silence Intermediary the board of directors of BenQ writes an Face saving Corrective action

Response Strategy
Diminishing the issue Shifting the blame to cultural difference Apology for the huge losses Denial of the charge

111 In short, BenQ justified its actions by saying that it is common knowledge and publicly known that there must be losses in the companys consolidated revenues in the early stage after the Siemens mobile phone business acquisition. BenQ claimed there was no secret and the management team certainly did not use such information to engage in insider trading to make profits. BenQ denied all the allegations, saying they were false. Chairman K. Y. Lee defended the company, insisting on their innocence. This insider trading case is in trial and a verdict has not been rendered yet. If any of these charges prove to be true, however, there will be an even more serious crisis to the companys reputation and image afterwards.
Stakeholder Perception

BenQ made headlines about its global strategy when it bought the money-losing mobile phone unit of Siemens in 2005. Unfortunately, it drew media coverage again in 2006 when it abandoned the unit due to huge losses from the acquisition and failure of integration. Eventually the company declared insolvency of its German subsidiary, BenQ Mobile. Since then, BenQ has faced blame for putting the company on what turned out to be a losing strategy. Meanwhile, the German media criticized the move and triggered speculation that BenQ, a nearly unknown company before 2005, merely wanted to inherit Siemenss name to launch the BenQ-Siemens line of mobile phones and did not want revive it (BenQ rejects German creditors compensation claim, 2007). BenQ, however, firmly denied this charge. Adding to the companys problem, BenQs offices were searched by the prosecutors, leading agents from the Investigation Bureau. It was believed that BenQs executives sold their company shares ahead of the companys announcement of huge

112 losses incurred from its takeover of Siemenss mobile phone division. The impact of the insider trading investigation was significant. Specifically, the public market assessed the impact of BenQs insider trading crisis and adjusted stock price accordingly. Figure 5 shows the change of BenQ stock price from the takeover of Siemenss mobile phone to the indictment of insider trading. Figure 6 shows the revenue of BenQ from 2004 to 2007.

NT$32.5 28.4 18.2 13.05 12.25 indictment 15.05

acquisition

new brand operations 10/3/2005

disconituing investment 9/28/2006

investigation

restructuring

6/7/2005

3/14/2006

5/8/2007

9/1/2007

Figure 5: The Stock Price of BenQ

Revenue NT$147,770 (million) 124,407 Net Income NT$7,619 (million) 130,255 122,254

-5,226

-27,611

4,772

Year 2004

2005

2006

2007

Figure 6: Revenue and Net Income of BenQ

113 In fact, journalist Wu (2007) stated that Taiwans insider trading regulations have never been a preoccupation on CEOs or corporate managers in the past. Taiwans insider trading laws were passed in 1988. At the time, the maximum sentence for the crime was two years, but most of those found guilty were sentenced to six months or less to jail and could have their jail terms commuted to a fine instead. After being amended three times, the law on insider trading now mandates prison sentences of between three and ten years for those convicted of insider trading (Wu, 2007, p. 62). Hille (2007) believes the move against BenQ appeared to be aimed at showing the governments determination in investigating irregularities in the stock market and strengthening corporate governance. Acer founder and on the board directors of BenQ, Stan Shih pointed out that Taiwan already had become a democratic society, but after many years, the democratic grounding and the acceptance of the rule of law still truly needed to be strengthened. He agreed that Taiwan was left with a deeply rooted culture of graft, influence peddling, and manipulation, which had become accepted values ingrained in daily behavior. Therefore, Shih said defending share prices and insider trading are cultural problems (Wu, 2007, p. 70). In short, BenQ sold its assets to help repay the debt. Furthermore, the allegations affected the companys long standing reputation and raised concerns among customers, employees and the public. The negative publicity sent shares of the company downward and threatened the image of the company. A companys reputation is its most valuable and powerful asset. Apparently, the insider trading crisis not only impacts the reputation of BenQ but also the confidence of foreign investors in doing business with Taiwanese companies.

114
Summary

BenQ chairman, K. Y. Lee, was counting on the acquisition of the Siemenss mobile phone unit to turn BenQ into a globally recognized brand. The acquisition which required that the company balance two cultural contexts ended in less than a year because of significant financial losses. Later, five executives including Lee were charged with insider trading. The insider trading crisis had serious negative impacts on BenQs reputation and stakeholder confidence. To manage the ongoing crisis, BenQ took corrective actions to rebuild stakeholder confidence. Under the recent restructuring plan, capital reduction and management reshuffle were implemented. BenQ renamed itself Qisda and created BenQ as a subsidiary under the newly formed company. Through these actions, BenQ wanted to show its stakeholders it has moved on. However, as of January 2009, the verdict of the insider trading case has yet to be rendered. BenQ has not completely recovered from the current crisis.

115
CHAPTER 6 CASE OF HIH Introduction

The preceding chapters discussed the cases of Martha Stewart and BenQ. This third case examines the demise of HIH Insurance. The collapse of HIH in 2001 was the largest corporate failure in Australian business history, forcing the government to establish a Royal Commission to launch its largest investigation ever. This chapter is divided into three sections: overview of the HIH collapse, analysis of HIH crisis response and discussion. This chapter begins with an overview of the HIH corporate history and its collapse. It explores how HIH responded during the corporate crisis based on two research questions: 1) How did HIH manage their communication during the corporate crisis? 2) How were these communication strategies received and interpreted by the stakeholders? Finally, I discuss three common themes in this case: 1) stonewalling, 2) denial and shifting the blame to others, and 3) stakeholder perception.
About HIH Insurance

HIH Insurance was founded in 1968 by Ray Williams and Michael Payne and it was known as M W Payne Underwriting Agency Pty Ltd. It was acquired in 1971 by the British company, CE Heath PLC, and Ray Williams was appointed to the board of CE Heath PLC in 1980. The business operations of this CE Heath PLC were transferred to CE Heath International Holdings Ltd in 1989. In 1992, CE Heath International Holdings was on the Australian Stock Exchange (ASX) as a public listed general insurer. In May, 1996, CE Heath International Holdings was purchased by Winterthur Swiss Insurance Company and then changed its name to HIH Winterthur. Winterthur Swiss sold its 51%

116 share in HIH Winterthur to the public and HIH changed its name to HIH Insurance Ltd in 1998. After 1995, HIH acquired a large number of companies both in Australia and globally. In particular, HIH completed a A$300 million takeover of a large Australian insurance company, FAI Insurance, whose chief executive, Rodney Adler, became the director of HIH in 1999. According to the HIH Royal Commission (2003), the FAI takeover was a key factor in the HIH collapse. By 2001, the HIH group consisted of 217 subsidiaries. The ambitious growth strategies through acquisitions and mergers had a serious impact on the companys financial structure, generating significant losses.4
HIH Collapse

HIH was placed into provisional liquidation on March 15, 2001. The estimates of the losses were up to A$5.3 billion, the largest collapse in Australian business history. Tony McGrath of KPMG was appointed as provisional liquidator to HIH and 17 of its controlled entities. On August 27, 2001, HIH was officially placed in liquidation under the Corporations Act. HIH Insurance is now in run-off, which means it is handling its claims and not managing any new business. According to the liquidator, Tony McGrath, this process could take several years to complete and even warned it could take up to 10 years before some creditors are paid (White, 2001a). Undoubtedly, its collapse directly affected tens of thousands of insurance-holders who wanted protection from unforeseen calamities. Ironically, the HIH collapse has instead put them into a crisis and left them with worthless insurance. Many shareholders lost huge amounts of money because the company shares were of no value. The impact of the HIH collapse has been wide-reaching since then.

ForadditionalHIHcorporatehistoryanddetails,pleasesee http://www.hihroyalcom.gov.au/finalreport/index.htm

117 After the crisis of the HIH collapse, the questions and concerns raised were: 1) What went wrong? 2) Whos to blame? In The Australian dated January 14, 2003, journalist David Brearley (2003a) reported the investigation of senior commission counsel, Wayne Martin, regarding the HIH collapse. Martin pointed fingers directly at weak management, a timid board, slack auditors, less-than-professional advisers and a hopelessly inept regulator. Martin offered four dominant reasons for HIHs failure: 1) the consistent underestimation of liabilities; 2) losses in the British operation; 3) losses in the US market; 4) and the acquisition of FAI Insurance in 1999. Martin further added that its senior management and directors were dominated by Ray Williams, whose business judgment was in the end shown to be faulty (Brearley, 2003a, p. 4). All the usual mechanisms for preventing corporate collapse failed at HIH. The groups chairman, Geoffrey Cohen, was utterly ineffective as were its non-executive directors and the committees on which they served. The board itself had no real strategy. HIH auditors Arthur Andersen were misled and lied to, but yielded too easily to management and failed to respond with appropriate diligence and resolve (Brearley, 2003a, p. 4). Finally, Martin was critical of the Australian Prudential Regulation Authority (APRA), which lacked the expertise, the human resources and the requisite culture to undertake any effective form of regulation of HIH (Brearley, 2003a, p.4). As previously mentioned, this chapter explores how HIH executives managed their corporate communication when the company was under siege. For the purpose of this study, the analysis of this case focuses on the unethical actions, behavior and response of two HIH key protagonists, namely, founder and former CEO, Ray Williams, and non-executive director, Rodney Adler, because of the distinctive way in which their

118 identities are constructed in the corpus of HIH texts as corporate crooks (Duarte, McAllister, & Gray, 2005, p. 12). Two research questions guided this analysis: 1) How did HIH manage their communication during the corporate crisis? 2) How were these communication strategies received and interpreted by the stakeholders? This analysis examines HIHs response to the crisis chronologically. Specifically, this chapter not only examines the HIH collapse crisis in 2001 but also covers post-crisis events such as the investigation of the HIH Royal Commission in 2003, and the sentencing to jail of these two HIH directors in 2005, and their release in 2008. These more recent events address the changes, if any, created by the unethical directors. The major key crisis events of HIH are shown in Table 9. In the same approach as the previous cases of Martha Stewart and Ben Q, this analysis utilizes Coombss (2007a) situational crisis communication theoretical framework and other communication models to interpret the crisis response strategies that HIH employed in their corporate collapse. Following the analysis of the corporate crisis response, this examination highlights some common themes in HIH collapse, which included stonewalling, denial and shifting the blame to others and stakeholder perception.

119
Table 9: Key Events in HIH Case
Date 5/1996 9/1998 11/1998 1/1999 4/16/1999 9/13/2000 10/12/2000 12/15/2000 2/22/2001 2/26/2001 2/27/2001 3/1/2001 3/15/2001 5/16/2001 5/21/2001 7/2/2001 8/27/2001 8/29/2001 3/14/2002 4/16/2003 4/2005 Events CE Heath International changes name to HIH Winterthur. HIH Winterthur announces its proposed takeover of FAI Insurance Ltd. Changes name to HIH Insurance Ltd. HIH completes a $300 million takeover for FAI Insurance. FAI CEO Rodney Adler is appointed to the board of HIH. HIH sells part of its domestic personal lines business to German insurance giant Allianz for nearly $500 million. Ray Williams resigns as CEO. Ray Williams resigns as director. Randolph Wein is appointed to the new position of CEO. Australia Stock Exchange (ASX) trading halts at the request of HIH. Rodney Adler resigns as director of HIH. ASX trading resumes. HIH credit rating is downgraded to BBB- by Standard & Poors. ASX trading suspension announces at the request of HIH. HIH places into provisional liquidation with losses of up to $5.3 billion. Australian Securities and Investments Commission launches its biggest ever investigation, seizing HIH documents. The federal government announces a Royal Commission into what is Australia's biggest corporate collapse. ASX removes HIH from its official list. HIH places in liquidation under the Corporations Act. Letters Patent appointing the Royal Commission are signed. NSW Supreme Court rules Adler and Williams breached 13 sections of Corporations Act in a last-ditch attempt to prop up HIH share price. The Royal Commissions report is publicly released together with the governments response. Adler sentences to four and a half years jail, with a non-parole period of two and a half years. Williams sentences to four and a half years jail with a non-parole period of two years and nine months. 10/13/2007 1/14/2008 Adler releases on parole after serving two and a half years. Williams is released from Silverwater jail.

120
Analysis of HIH Crisis Response Financial Difficulties in the Market

In September 2000, HIH sold off half of its retail general insurance business to the German insurance giant, Allianz. HIHs price fell from A$1.05 to A$0.45 after an announcement of losses and rumors in the financial community about the underlying financial condition of the company. In fact, three months ago, HIH still denied it needed fresh capital to meet regulatory requirements for prudential margins by the Australian Prudential Regulation Authority (Boreham, 2000). In June 2000, HIH made a statement that based on our current three-year business plan and taking into account possible regulatory changes no capital raising is required, imminent or planned (Boreham, 2000, p. 21). HIH continued to say the Australian market which accounted for 67% of total business remained a very solid core business base and UK market which is HIHs largest international exposure will undergo a strong rate of recovery in the 2000-2001 year (Boreham, 2000, p. 21). On the other hand, HIH Insurance CEO, Ray Williams, was also prompted to write to the chief executives of all the major insurance brokers. Assuring the brokers that HIH was rock solid and paid the vast majority of claims large and small, quickly (Westfield, 2000a, p. 21). He also wrote that HIH was sound and dependable, urging them to renew their clients professional insurance needs with HIH (Westfield, 2000a, p. 21). Williams asserted: Our clear market leadership in professional indemnity and public and product liability as well as our innovation in workers compensation and other corporate classes provide tangible evidence of our expertise (Westfield, 2000a, 21). In the meantime, several other HIH directors declared share purchases which gave the

121 appearance the directors were endeavoring to show they had confidence in the company. The most significant purchases were by Ray Williams who acquired 1.7 million shares (Frith, 2001). Simply put, HIHs message was designed to downplay the deteriorating financial condition. It also tried to reassure the stakeholders that everything was fine at HIH when it was not. Specifically, HIH sought to conceal all the negative information about the financial status quo and sugar-coat the situation. Arguably, HIH appeared to ignore the warning sign for its financial difficulties in the initial stage. HIH employed six external actuaries. In 2000, the principal actuary, David Slee, warned that HIH was vulnerable and faced dire consequences unless it changed its accounting policies. Later, Slee warned the board again in March, 2001: It has become apparent that not all details have been supplied in a full and consistent manner in the past (Dore, Harris, White, & Magnusson, 2001a, p. 17). Obviously, his warning appeared not to have reached the board or to have been ignored until the very end. Boreham (2000) criticized that HIH was responding to what it called a significant level of misinformation prevalent in relations to the company and its operation (p. 21). In summary, the executives of HIH downplayed warnings of financial crisis. They had been reluctant to disclose the state of HIHs deteriorating position. They further denied the speculation about their financial difficulties. In contrast, they said that the company outlook was positive. Unfortunately, the misleading information had a significant impact on the stakeholders afterwards.
Resignation of CEO Ray Williams

HIH lost A$22 million in the second half of 2000. Shareholders generally saw no relief to the crisis of confidence following the deeply disappointing annual result.

122 Impatient shareholders who saw their shares drop had been putting strong pressure on Williams to raise money to remedy HIHs perceived lack of capital. They also expected the CEO Williams to step down (Westfield, 2000b). In the mean time, Adler sold his shares at a loss which was adding to the pressures on Williams to retire. Adlers selling indicated he had no confidence in the future of the company and was prepared to lose money on the sale of his shares because he believed the stock had further to fall (Westfield, 2000c). Williams had resisted calls for his resignation, although the stock price continued declining. Shortly after, using a strategy of corrective action, HIH made an announcement that the company had appointed a search firm to find a replacement. On October 12, 2000, shares in HIH soared nearly 21% when chief executive Williams announced he would quit the company and plan to leave the company by December, thus, ending a 30-year association with the company he founded (White, 2000). Specifically, HIH used a strategy of differentiation to put some distance between the company and Williams. HIH shares climbed 9.1 cents from 43 cents to 52 cents within minutes of the announcement, winning market acclaim for changes regarded as overdue. In response to the resignation of Williams, Adler said we are in a very vicious cycle and we need a circuit breaker and part of that circuit breaker will be unfortunately, Mr. Williams leaving and a new guy coming (Vicious cycle runs HIH down, 2000, p. 21). After a brief search for a replacement, the board handed Williamss job to Randolph Wein, a Hong Kong branch director, although Williams continued to work as a consultant to the company. On December 15, 2000, Wein told the shareholders at the

123 annual meeting that I am convinced that an energetic and motivated management team will be able to restore the fortunes of the company and rebuild shareholders wealth (Westfield, 2001a, p. 29). In summary, the founder and CEO, Williams exercised complete control over the company. As enormous losses occurred, he was forced to resign. He resisted but finally quit in December 15, 2000. While the resignation distanced his association with HIH, he still worked as a consultant in the company.
HIH in Provisional Liquidation

HIH appeared to be in deep financial trouble in early of 2001. HIH requested a suspension of trading its shares from February 22 to 25, 2001. In an effort to diminish the financial issues, HIH said it requested the suspension because a comprehensive statement on its finances would not be available until it worked out how big the impact of its restructuring plan would be. In 1998, the stock price was A$3.4. In January, 2000, the stock was still trading as high as A$1.53. After a trading halt imposed by HIH, stock price plunged to a new low of 15.5 cents. Its market capitalization since early 1998 had fallen from A$1.5 billion to A$ 82.4million on February 26, 2001. As a result, Standard & Poors lowered and downgraded its credit rating from triple B plus to triple B minus which was barely investment grade. Market speculation put the loss at up to A$500 million although HIH directors said they were not at this point aware of the quantum of the interim loss. HIH affirmed that any estimates about the size of the loss were pure speculation (Westfield & White, 2001, p. 21). Regulators and investors had become increasingly concerned that the company had not kept them fully informed about its affairs amid mounting speculation about the

124 size of the expected loss (White, 2001b). As such, the Australian Securities & Investments Commission (ASIC) forced HIH to suspend its shares for the second time in as many weeks and launched a formal investigation into the troubled companys market disclosure. The investigation focused on HIHs record of disclosure of price-sensitive information to the share market. The HIH spokesman said we are continuing discussions with the ASIC and the Australian Stock Exchange to determine the limit to which we can go in providing information to the market that is reliable (White, 2001b, p. 23). On March 15, 2001, HIH was placed into provisional liquidation with losses of up to A$5.3 billion. Tony McGrath said on the day he was appointed provisional liquidator, it appeared to me that the HIH were all insolvent and that no recovery of the business was possible (Dore, Harris, White, Magnusson, 2001b, p. 21). After the provisional liquidation, former CEO Williams kept a low public profile. Breaking months of silence, Williams defended his role in the demise of HIH Insurance and spoke of how the collapse of the company he founded 33 years ago had personally devastated him. Williams insisted he was unaware of the massive financial catastrophe facing the company, saying, I was totally shocked, just shocked. If I didnt think the company was in solid shape I wouldnt have been saying what I did (Magnusson, 2001a, p. 21). Although organizational leaders cannot know all that goes on in their organizations, they are responsible for maintaining a fundamental knowledge of operations and activities (Seeger & Ulmer, 2003). As a CEO, Williams was fully involved in daily operations and decisions at HIH. He appeared to seek conditions of plausible deniability in which he claimed his unawareness of some activities. According to Seeger and Ulmer (2003), such strategies are clearly unethical and designed to avoid

125 accountability by manipulating his knowledge of the events. Williams did not single out any one factor for the corporate disaster, instead pointing to a whole series of situations that caused the company to be put into provisional liquidation. Using the strategy of shifting the blame to others, Williams argued that I was the CEO that doesnt mean there werent other executives that had autonomy over the way in which we operate, (Magnusson, 2001a, p. 21). Williams claimed he had not received a $5 million severance package. Asked if he expected to see it, Williams said: I hope so and I say that not for me personally. I hope the same for all creditors. I have suffered greatly financially by HIH going into voluntary liquidation, he added like a victim (Magnusson, 2001a, p. 21). Again, Williams took a parting shot at his fellow directors on August 19, 2002, claiming they could have saved the company if they had not been trying to cover their backsides. Williams said all directors were fully informed about HIHs finances and could have done more to save the company. Williams shifted the blame and indicated that perhaps its wrong of me to say it, but I think instead of people trying to protect their backsides, really (trying) to protect this company and (going) to APRA I think the outcome would have been drastically different (White, 2002, p. 3). Williams tried to justify himself by saying that no one has put it to me that I was a crook. I may have made mistakes in my time. I may well have been a generous employer. I may have been taken in but I tried to act honorably (White, 2002, p. 3). With blame in the air, shareholders and directors questioned again whether the $300 million HIH had paid for FAI was too much. As such, Adler became the subject of an ASIC investigation relating to his role in the HIH collapse. By responding to this

126 concern, Adler said that FAI delivered to HIH some well-known brands, most of which had been sold into the Allianz joint venture, and that no one forced HIH to make the bid in the first place (Westfield, 2000c). He further said that I had a job to sell FAI and that's what I did. If they paid too much for it, then I did my job well (Dore, Harris, White, & Magnusson, 2001b, p. 21). To attack the accusers, he emphasized management rather than the FAI acquisition was to blame for HIHs financial crisis. In particular, Adler distanced and excused himself from the disaster. He mentioned that he warned the board the company faced financial problems more than six months before HIH went into provisional liquidation. I started to voice my concern on the board via questions to the chairman and to management in August-September of last year, and I wrote to the chairman and to various board members asking questions that concerned me, Until I resigned I did not believe HIH was insolvent, I was just worried about the financial affairs of the company On the day I resigned I was not of the opinion the company would collapse, I was just of the opinion that I felt uncomfortable being a director. (Magnusson, 2001b, p. 4)

He also sought to shift the blame through a scapegoat. I dont want to single out Ray Williams, but as chief executive you take the credit and you take the blame. But the mistake wasnt Rays alone. There was a team, an executive team, there was a board and everyone must take a percentage of blame. (Magnusson, 2001b, p. 4)

White (2001c) argues that plenty of expressions of sympathy and regret have been made since the HIH collapse, but so far no one has said sorry (p. 7). Williams cited legal advice in refusing to discuss the collapse. He only expressed as a human being I want to put on record my sympathy and regret for what has happened (White, 2001c, p. 7). As for Adler, he had hired a public relations consultant Anthony McClellan, a former

127 60 Minutes producer, to represent him. In a statement issued by McClellan, Adler claimed: I was not involved in the day-to-day operation of HIH I was shocked when the extent of the losses became known. Also, I personally lost substantially through HIH (Videnieks, 2001, p. 2). The statement said Adler was also upset about the terrible fate that has befallen all those involved with HIH and that the interests of policyholders were paramount (Videnieks, 2001, p. 2). In summary, HIH requested a suspension of trading and eventually went into liquidation. The collapse threw the insurance industry into chaos and left thousands of policyholders without cover. However, the executives, Williams and Adler, either denied any wrongdoing or shifted the blame to each other. Arguably, no one made a public apology for the largest failure of a company in Australian history. Williams refused to discuss the collapse due to legal concerns. Meanwhile, Adler tried to restore his image and portray himself as a victim with the help of public relations consultant.
The HIH Royal Commission

Faced with criticism that Australias watchdogs had failed to act on HIHs problems, the Australian Prime Minister John Howard quickly announced that a Royal Commission was established to investigate the companys collapse on May 21, 2001. According to Prasser (2003), Royal Commissions are special advisory and investigatory bodies rooted in Westminster-type democracies such as United Kingdom, Canada, New Zealand and Australia. Originally appointed or commissioned in Britain by the monarch to investigate a particular issue or problem, Royal Commissions are formally established in Australia by letters patent issued by the governor or governor-general on the advice of the government. Royal Commissions have been held at a federal level since 1902 in

128 Australia, when the Royal Commissions Act 1902 was passed by the parliament. The Royal Commission is part of the executive, not the judicial arm of government and its main function is to inform government. The investigations of the Royal Commissions report directly to parliament. Letters patent appointing the HIH Royal Commission were signed on August 29, 2001, and Justice Neville John Owen was appointed to head the Commission. The HIH Royal Commission mainly focused on several key issues such as: 1) when did HIH become unable to pay its debts on time, 2) whether the board or management withheld material information from shareholders, potential investors and APRA, 3) whether the board or management misled the market or APRA, and 4) the causes of the collapse, extent of the loss and those who are accountable. During the investigation, Williams claimed that the HIH Royal Commission treated him unfairly because his evidence was misquoted to other witnesses. A submission through his lawyer, Arnold Bloch Leiber, stated, At no time did Williams act dishonestly, nor did he act to gain any personal financial advantage. Williamss actions or omissions were always made in good faith and solely in the interest of the company as an overriding consideration. Any recommendation to make a finding of personal dishonesty against Williams is rejected. Indeed, it is submitted that there is no evidence to support any such finding. (Harris, 2003a, p. 5)

In a 71-page submission to Royal Commissioner Justice Owen, Williams denied any allegations and claimed that commission lawyers were focusing on irrelevant personal matters instead of investigating operations of the corporate collapse. For example, Williamss submission said focusing on the gold taps fitted in his Melbourne offices luxurious bathroom was irrelevant. But commission lawyers hit back by saying

129 that A$32 million of the companys money was spent on the HIH executive office just one year before its collapse. The general topic of executive self-indulgence was a legitimate topic of inquiry, counsel assisting, Wayne Martin and Simon White, said in a written response (Harris, 2003a, p. 5). Similarly, Adler was presented with a 153-page submission prepared by his legal team, as well as a 9-page signed personal statement. Adler said the statement was to reaffirm integrity and refute any accusations made against him. His said that there is so much detail, so much innuendo, so much shall we say, biased comments by self-interested people (Harris, 2003b, p. 3). He portrayed his role as a scapegoat by indicating it is very hard to constantly battle against a board that believes you are a trouble-maker when what you are really trying to do is protect all shareholders (Harris, 2003b, p. 3). After sixteen months of commission hearings, the HIH Royal Commissions report was publicly released on April 16, 2003. In a 1500-page report, Justice Owen said he found no evidence of wholesale fraud or embezzlement behind the A$5.3 billion collapse (The HIH Royal Commission Report, 2003). He pointed out that the failure was due to a lack of attention to detail, a lack of accountability for performance, and a lack of integrity in the companys internal processes and systems. As such, the mismanagement and an inadequate response to emerging pressures in international insurance markets had caused the failure of HIH (The HIH Royal Commission Report, 2003). According to the HIH Royal Commission (2003), the HIH board had failed to monitor the performance of management and there was little, if any, analysis of future strategy. The 1993 expansion into Britain was extremely imprudent and ultimately very

130 costly. The territory itself and the type of business written there was new and unfamiliar to HIH. The 1996 re-entry into the US market was an ill-advised debacle that typified the way Williams and his management made decisions. Moreover, HIH unwisely launched A$300 million takeover of FAI in 1999 a move Justice Owen concluded contributed to the HIH collapse (The HIH Royal Commission, 2003). Justice Owen pointed out that the takeover of FAI Insurances was impetuous and based on completely inadequate information (The HIH Royal Commission, 2003). Five of the 12 directors were not even present when the board voted to pay A$300 million for FAI. The poor decision making continued until the very end. The joint venture with the German insurance giant Allianz was the last straw to hasten the demise of the HIH group. When HIH entered a joint venture deal with Allianz in late 2000, it involved the sale of HIHs profitable retail lines, most of which had come from the FAI acquisitions. Desperate for cash, management had been working on the deal for months, but the board knew nothing of it before (The HIH Royal Commission, 2003). In his report, Justice Owen particularly indicated a corporate culture in HIH that was characterized by blind faith in a leadership that was ill-equipped for the task. Directors of board were unduly deferential to Williams, failed to challenge or endorse company strategy and had little understanding of conflicts of interest. By not coming to grips with the serious problem of under-provisioning in the accounts, the board was never able to deal with the looming crisis (The HIH Royal Commission, 2003). Justice Owen stated the dominant personalities of Williams as follows: No one rivaled him (Williams) in terms of authority or influence. Even as his business judgment faltered in the second half of the 1990s he remained unchallenged. No one else in senior management was equipped to grasp what was happening and to bring about a change of

131 direction for the group. There was a lack of accountability among senior management and the board of directors, and there was a singular failure to assess performance in the context of deteriorating financial results. (The HIH Royal Commission, 2003)

In the end of the report, the HIH Royal Commission had cited 56 possible breaches of the Corporations Act or the Crimes Act, split equally between civil and criminal offences, and recommended that the Director of Public Prosecutions or the Australian Securities and Investments Commission considered laying charges. By responding to the HIH Royal Commission report, Williams argued Justice Owen had vindicated him. Speaking through his lawyer, Robert Heathcote, Mr. Williams said he was guilty of mistakes and poor judgment but had never deliberately tried to defraud the company that he founded. He feels vindicated because his position in the commission has been adopted. Justice Owen did not find that he stole any money, that he was guilty of any fraudulent behavior or lined his own pockets. He will continue to co-operate with authorities and in particular ASIC if any investigations arise in future. (Harris, 2003c, p. 4)

In summary, the HIH Royal Commission was established to inquire into the companys collapse. The head of the inquiry, Royal Commissioner Justice Owen, identified and explained mistakes made by HIH. He found no evidence of fraud or embezzlement in the case of HIH. Instead, the mismanagement had caused the failure of HIH. The founder and CEO, Williams, turned a blind eye and failed to see its increasing financial crisis. In addition, the board of directors was not proactive and did not put pressure on the incumbent top management team. Thus, the corrective actions had not been taken to save the company.
Pleading Guilty & Sentencing

On April 14, 2005, Adler, the former FAI managing director and HIH director was

132 sentenced to four years and six months in jail, with a minimum of two years and six months after pleading guilty to four counts including lying about share purchases, obtaining money under false pretences and failing to discharge his duties as a company director (King, 2005). The first two charges dealt with purchases of HIH shares arose from an article in The Australian Financial Review on June 19, 2000 (Mellish, 2000a). Adler told The Australian Financial Review journalist Morgan Mellish that he bought A$1.87 million HIH shares with his own money and increased his stake to 1.6%. In an attempt to stabilize and push up the HIHs declining share price, he mentioned that he was confident about the company medium-term outlook. Following with a subsequent statement in the press, Adler falsely created the impression he was snapping up cheap shares for himself because they were undervalued (Mellish, 2000b). However, the shares were bought through Pacific Eagles Equities which was funded by HIH. Thus, he broke the law by lying about share purchases and obtaining money. Justice Dunford said that Adler had disseminated information which he knew to be false, that he had purchased shares with his own money, which was likely to induce other persons to purchase HIH shares (King, 2005, p. 4). The third charge dealt with lies Adler told Williams in September 2000 about a planned A$5 million fundraising for the company Business Thinking System. Adler was a director of the company, which was in financial straits. He asked Williams to invest A$2 million because of A$2.5 million shortfall. Adler said he would invest A$500,000 but he had no intention at all. Judge John Dunford said that Adler had used his testimony to minimize his culpability in relation to a charge that he deceived Williams into believing he was investing A$500,000 of his own money into a company. Justice Dunford claimed

133 that the offences displayed an appalling lack of commercial morality (King, 2005, p. 4). In fact, Adler attempted to portray his deception as a thoughtless, unintended event. He told his sentencing hearing considering the charges of dishonesty and making intentionally misleading statements that saying sorry could not reverse the impact of his conduct. He told the New South Wales Supreme Court that, There is no excuse. Even though I can justify it today, the justification is not acceptable. One would like to say sorry but there is no mechanism to say sorry. You can't reverse it (Korporaal, 2005, p. 5). Further, he admitted telling lies to shareholders. He said, I put my personal interest above the interest of HIH In a board sense; it was stupid errors of judgment ... to cut corners in order to achieve a result. It was a serious error of judgment and not in the best interests of shareholders. (Sexton, 2005, P. 1)

Adler also portrayed himself as a victim and mentioned that he lost A$10 million in his investment in HIH shares after he sold them at a loss in September 2000. However, Justice Dunford was unconvinced by Adlers contrition and indicated his lies were deliberate. Justice Dunford said that Although he accepts that his conduct is unacceptable to others, he does not really acknowledge to himself the full extent of its wrongfulness in the business sense (Carson & Warne-Smith, 2005, p. 1). One day later, on April 15, 2005, Williams joined Adler behind bars. Williams was sentenced to four years and six months in jail, the same as Adler received, and a non-parole period of two years and nine months three months longer than Adler. Williams had pleaded guilty to three charges arising from the management ineptitude of HIH between 1998 and 2000 (West, 2005). The first related to reckless conduct as a director of HIH when he signed a misleading letter. The second charge was related to the

134 withholding of information from a prospectus, and the final, most serious charge, as Justice Wood described it was for the financial reinsurance breach. Justice Wood further argued that Williamss conduct involved a most serious departure from the acceptable standards of competence and diligence expected of the chief executive officer of a major public company (West, 2005, p. 33). Subsequently, Justice Wood suggested that a proper standard of punishment was paramount. Which could not have done other than to present a most misleading picture to shareholders, policyholders and creditors, as well as regulators. I find that the defendant's criminality fell into the upper range for the offence charged. (West, 2005, p. 33)

In summary, Williams and Adler were convicted of crimes related to their misconduct. During the investigation, they attempted to portray themselves as victims. The result was that they ended up becoming the true villains of the HIH collapse. Understandably, their sentencing illustrated that organizational leaders unethical behavior deserved harsh punishment.
Release from the Prison

On January 14, 2008, Williams walked out of Sydneys Silverwater jail. Finally, he offered his first apology. Williams told the reporters that the last thing in the world I would have wanted was for HIH to fail, for people to be hurt and for people to suffer financial loss. And I really am very sorry that occurred (Main, 2008, p. 3). While he began enjoying his freedom with his family, Treasurer Wayne Swan, Australias finance minister, said the victims of HIH were justified in their anger towards Williams (Main, 2008). Swan told reporters that victims of the collapse had a right to feel that Williams should have been punished more harshly. Apparently, the apology was too late and was

135 not much use to those HIH victims who lost their savings or their livelihoods. The victims will continue to suffer for the consequence of Australias biggest corporate collapse. Main (2008) claimed that some investors and businesspeople believed that Williamss sentence was inadequate. From the perspective of the public sphere, the resentment of those still suffering heavy losses is understandable. Although Williams made a public apology after his jail term, other allegations against him such as transferring millions of dollars of assets into his wifes name continued to emerge. The transferring of assets included mansions worth A$12 million in Mosman, a A$5 million Lake Macquarie retreat, a Gold Coast unit as well as millions of shares and superannuation (OBrien, 2008). However, Williams denied the allegation of transferring assets to his wife and said that this was dealt with in the hearings into his bankruptcy in 2005, which found no such transactions. In summary, an unfavorable prior reputation will still intensify the reputational threat afterwards (Coombs, 2007b). Williams did not engage in a dialogue with their stakeholders and show little considerations for them during the crisis. He failed to take responsibility for the corporate collapse and assisted victims with concerns. Literally speaking, Williams did not apologize until he finished serving his jail term. Obviously, some stakeholders appeared not to forgive him. After his release from prison, the public resentment against Williams remained. This section has mainly discussed the HIHs crisis response strategies during their investigation of corporate collapse. The next section discusses three themes which emerged in this case, namely stonewalling, denial and shifting the blame to others and stakeholder perception.

136
Discussion Stonewalling

Throughout its steady demise over the past years, HIH had failed to give transparent information and disclose the extent of HIHs deteriorating financial crisis. As such, its lack of disclosure is believed to be a major course of inquiry of ASIC (Westfield, 2001b). The financial commentator, Mark Westfield (2001c), argued that the stock had been trading in an information vacuum for at least six months before HIH suspended the trading. Mark Westfield (2001d) further captured the significance of HIHs mistakes, HIHs main sin was its failure to publicly disclose its deteriorating position. Listed companies are obliged by law to warn the market of material information that might have an impact on their share price. HIH told the market the exact opposite, claiming as Williams did in a letter to insurance brokers last June that HIH was rock solid and here for the long-term. (Westfield, 2001d, p. 4)

Clearly, the board was not fully aware of the companys declining financial situation. Warnings about a looming crisis at HIH were given to management in 2000 by the principal actuary, David Slee. Later, he even complained of difficulties in obtaining details from the company in a full and consistent manner. But independent director, Justin Gardener, said Mr. Slees warnings went to management and were absolutely not seen by independent directors of HIH. Director Gardener indicated that I don't know whether they were kept from the board intentionally or whether they just thought they weren't relevant. I have no idea (White, 2001d, p. 4). Another board member, Neville Head, sent a letter to the chairman of the board, raising concerns over the quality, amount and relevance of material provided to the board (Mellahi, 2005). He noted that the materials were insufficient to make decisions.

137 Unfortunately, Heads concerns were ignored and marginalized by the CEO Williams and the chairman Cohen. Head subsequently resigned from the company, in part due to the lack of response to his concerns. The HIH Royal Commission report indicated that Heads concerns should not have been dismissed summarily. This was a lost opportunity for HIH. In June 1999, the company could have grasped the magnitude of a serious management problem (The HIH Royal Commission, 2003). Mellahi (2005) pointed out that the culture of the HIH board was dominated by a groupthink mentality. The combination of groupthink culture and high compensation could have numbed board members awareness of possible unintended negative consequences of management actions (Mellahi, 2005, p. 270). As a result, the board never rejected a proposal put forward by management. Moreover, the HIH management withheld crucial information from the board, concealed important facts from the auditors, and believed executives were invincible such that they could ignore risk controls. The inability to understand the warning signs prevented the board from taking early corrective actions. When the board finally exercised some control over the company, the damage had already been done. In this way, it showed that at the final crisis stage the likelihood that board members can influence the boards decisions to any significant degree through the formal channel is minimal (Mellahi, 2005, p. 277). HIH had a corporate governance model which was clear in their annual reports. But there was little, if any, evidence that the board periodically assessed the companys corporate governance practices to ensure that they were, and continued to be, suited to the changing environment in which the company operated (The HIH Royal Commission, 2003). If there had been a more prompt response

138 to the problem, the situation at HIH might have been avoided. On the other hand, the HIH collapse also raised serious questions about the inactivity of the insurance watchdog, APRA and the corporate regulator, ASIC. Both APRA and ASIC failed to ring the alarm bells earlier. In summary, the overstatement of HIHs profits was both misleading and significant. HIH also did not reveal any negative information about their financial performance. They downplayed bad news, dissent, and warning signs. Specifically, they tried to maintain an attitude and image of business as usual. However, openness in the financial reporting system is the fundamental requirement for the proper functioning of the system. Openness is based on truthfulness and transparency. This means that both the numbers and the statements made about them must be honest. Shareholder trust shrank due to a lack of openness and transparency of HIHs reporting. As a result, investment activities dropped and eventually came to a halt. Inevitably, a corporate disaster followed.
Denial and Shifting the Blame to Others

HIH was never able to voluntarily accept responsibility for the decline and eventual liquidation of the company. The HIH Royal Commission attempted to identify who might have been responsible for the misdeeds of many inept individuals. In the case of HIH, there were four possible culprits: management, the board, the auditors, and some general regulators such as APRA and ASIC. Subsequently, however, those named denied any wrongdoing. While the regulators and others accepted some of the blame, the primary responsibility for this debacle rested with the HIH management team from the CEO down (McLean, 2001).

139 In the beginning, Williams said that he was devastated by the collapse, that he thought the company was in good shape and was unaware of the extent of the problems. The report of the HIH Royal Commission (2003) put much of the blame for the collapse on Williams. Williams rejected the claim in his denial, saying that the board was highly qualified and was made up of a majority of non-executive directors. He was only one member of a 10-person board with one vote. He never acknowledged that HIH did anything wrong and claimed that HIH was unable to raise additional money to cope with appalling market conditions. He denied that he had withheld information on HIHs losses from the board. Instead of taking the responsibility for the decline and eventual liquidation of HIH, he suggested that market conditions in the global insurance industry in the late 1990s were the worst in modern times. It, like a number of insurers in Australia and other insurers around the world, failed to survive that period (Harris, 2003a, p. 5). He conceded there were errors of judgment but that they were made in good faith. Nevertheless, he defiantly claimed he had neither lied nor deceived anyone, and only admitted he may have been foolish and, at times, gullible. Williams then blamed HIHs A$300 million takeover of FAI for the collapse and claimed that Adler misled him in the years leading up to the collapse. Williams appeared to use FAI as the scapegoat for HIHs entire decline. As noted earlier, the FAI takeover was singled out in the commission report as a key factor in the collapse. Adler responded to the allegations that the purchase price of his company was too high by stating that the price was set, by definition, between consenting intelligent parties with appropriate advisors on both sides. Adler claimed HIHs collapse had nothing to do with him. He also pointed out that HIH approached him

140 with a bid for FAI and they offered this bid without the necessary due diligence. He argued that no one forced them. Table 10 shows the crisis response strategies HIH used from the period of the financial difficulties in the market to the sentencing of Williams and Adler.

Table 10: HIHs Crisis Response Strategy

Date
6/2000

Events
Ray Williams writes to the chief brokers that HIH is rock solid, sound and dependable.

Response Strategy
Denial of speculation about financial situation Diminishing the financial issue Differentiation Corrective action

9/2000

HIH directors declare share purchases to show that they have confidence in the company.

10/12/2000

Ray Williams resigns as CEO. Randolph Wein is appointed to the new position of CEO.

12/15/2000 2/26/2001 2/22/2001

Ray Williams resigns as director. Rodney Adler resigns as director. HIH requests suspend trading of its shares from February 22 to 25, 2001.

Corrective action Corrective action Diminishing the financial issue Denial of speculation

2/27/2001

Market speculation puts the HIH loss at up to A$500 million.

5/18/2001

Ray Williams hands in his passport and says he has nothing to hide.

Denial of wrongdoing Shifting the blame Distancing & Excuse Scapegoat

5/12/2001

Adler emphasizes management rather than the FAI acquisition is to blame for HIHs crisis.

6/8/2001

Adler complains that he is a scapegoat and a victim of the tall poppy syndrome.

Shifting the blame Shifting the blame Scapegoat

8/19/2002

Williams justifies himself by saying that he was but one member of a 10-person board with one vote. Williams uses FAI as the scapegoat for HIHs decline.

4/2005

Adler is sentenced to four and a half years jail and Williams is sentenced to four and a half years jail.

Corrective action

1/14/2008

Williams walks out of jail and offers his first apology.

Apology

141 In summary, HIH executives used denial and shifting the blame to defend their wrongdoings. They did not accept responsibility for the biggest collapse in Australian business history nor did they address the concerns of stakeholders. Rather, there were a series of ongoing public fights between Williams and Adler. A subtle blame game was developed between them as well. However, it was difficult for them to deny because the financial crisis was the result of their misdeed. Both of them were roundly criticized in the media for lacking of remorse and contrition.
Stakeholder Perception

The demise of HIH affected everyone from the companys 4,000 employees, two million policyholders and their families, regulators and investors. Hearit (1995) argues that an organizations continued existence is contingent upon its ability to receive support or approval from shareholder audiences or constituent communities important to the organization. HIH founder and former CEO Williams provided a contemporary example of a corporate leader who violated the trust of the stakeholders. Williams appeared to deceive the stakeholders by assuring them that the firm was in good shape even as it was headed toward collapse. Ultimately, HIH ceased business operations soon after the collapse. The media played a crucial role in the HIH crisis. Almost a year before the collapse, there were newspaper reports critical of HIH management. The media had raised concerns about the companys financial situation and started asking questions about its solvency. The negative perception of HIH persisted after the share price remained flat. The resulting media scrutiny compelled the regulatory body such as APRA and ASCI to tackle the serious issue of poor reporting and disclosure practices.

142 The media had been full of horror stories showing destitute families with no insurance. The media also began to question the misconduct of HIH directors. Consequently, the media carried a very strong tone of moral indignation concerning the unscrupulous actions of HIH executives. Thus, the key protagonists of HIH were consistently characterized as greedy, dishonest, deceitful and opportunistic (Duarte, Gray, & McAllister, 2005). There was an abundance of coverage in news media to illustrate unethical behaviors. Similarly, Justice Owen asked in his report: Did anyone stand back and ask themselves the simple question Is this right (The HIH Royal Commission, 2003)? Brearley (2005) argued that clearly HIH did not work that way. The greed was spectacular. Everywhere there were men with contempt for other people's money and yet nothing but lust for money to call their own Some of them weren't even witnesses before the commission but merely names that existed in abstract, faceless players in this or that regrettable episode. They lived in London or Monte Carlo or maybe on some island in the Caribbean, and their sole professional function in life was to deal with money source it, shift it, grow it, hide it, work it. These men lived in a vacuum. (Brearley, 2003b, p. 25)

After the failure of HIH, Williams earned the title of Australias most-hated man (Dalton & Carson, 2005). In particular, Williams was severely criticized for his personal profligacy and wealthy lifestyle. For example, Williams booked the seat next to him for his briefcase on his frequent first-class trips to London and let his secretary stay at company expense in a plush Sydney hotel during the week, and fly 900 kilometers (560 miles) home each weekend. One year, HIH also spent A$1.7 million on lavish Christmas parties with limos for all attendees, and the day before its collapse the company paid out A$10 million in bonuses to senior executives. According to Duarte, McAllister and Gray (2005), the media portrayal of Williams was more positive when Williams was arrested.

143 The last thing Ray Williams did as a free man was embrace Sydney woman Diane Burton, one of the thousands of little people hurt by the $5.3 billion collapse of his HIH insurance empire A distraught Mrs. Burton demanded an apology for the loss of insurance cover on the construction of her home. The confrontation ended in an embrace, with Williams kissing her on the cheek before entering the court to learn how much porridge he must eat The NSW Supreme Court judge said every character witness had confirmed Williamss deep concern and shame for the effect of the HIH collapse on creditors, shareholders and policyholders people just like Mrs. Burton. (Conway, 2005, p. 1)

Although Williams served two years and nine months jail term and apologized to HIH investors and customers for their losses, the stakeholders resentment remained the same. The stakeholders thought his sentence was not long enough and even his neighbor felt sick at his release (Main, 2008). Both Williams and Adler were the members of the Order of Australia which is an order of chivalry established by Queen Elizabeth II, for the purpose of recognizing Australian citizens and other persons for their achievement or meritorious service. After the criminal convictions, they were stripped of their Order of Australia medals. Williams was also banned by ASIC from managing an Australian corporation and acting as a director for ten years (OBrien, 2008). As for Adler, the ban was for twenty years. Obviously, media coverage was far less sympathetic towards Adler than Williams (Duarte, McAllister, & Gray, 2005). Despite ample evidence against him, Adler thought he was an honest businessman and a smart investor. According to Korporaal (2005), sorry was the hardest word for Adler. Adler accepted no blame for HIHs collapse and pointed the finger at those he thought were to blame. There was no positive image of Adler to the end. Instead, many media reports focused on Adlers unwillingness to accept that he did anything wrong.

144 Of course not contrition is not Adlers style. At 42, he is brash and self satisfied, a chance who until recently liked seeing himself in the newspapers. Risk is his creed; mistakes, should there be any, are not necessarily cause for apology. In the witness box, he denies every charge, allows nothing that even hints at retreat or reflects poorly on his name. His more animated protests of innocence have a fantastic childlike quality that is not as appealing as it might sound. (Brearley, 2003c, p. 4)

Adler was supercilious and was criticized for his lack of remorse and failure to convincingly apologize for his role in the HIH debacle to the end, even as he tried to cut a deal with the Daily Telegraph earlier this week, making the offer of exclusive photographs in return for positive editorial. (West, 2005, p. 33)

The failure of HIH has led to intensive investigations of reporting practices and proposals for changes to give investors and other stakeholders much greater confidence. For example, the corporate regulator ASIC, is much more vigorous today in pursuing corporate crimes. In the past, white-collar crimes tended to be seen as victimless (Frith, 2005). Moreover, the government has made some reforms include protection for corporate whistle-blowers and a tightening of audit practices, including a mandatory audit committee to be established for Australias top 500 corporations. Admittedly, the debacle of HIH demonstrated the need for good corporate citizenship and corporate social responsibility. In short, HIH failed to survive the crisis. Justice Owen commented that this debacle should serve as a reminder to all shareholders that they need to be especially alert to firms for their corporate governance (The HIH Royal Commission, 2003). Specifically, the crisis puts to test how companies treat corporate social responsibility. The corporate executives need to identify and examine what they regard as the basic moral underpinning of their system of values.

145
Summary

This chapter discussed the collapse of HIH, the largest corporate failure in Australia. The company grew too quickly and did not have the appropriate operational protocols in place to support the business expansion. Lies and deception within HIH hurt corporate profitability and accountability. Apparently, the HIH debacle was a story of a company that showed no concerns for its investors and customers. The HIH collapse could not be blamed on executive officers alone, however. Each layer of protection failed from internal management to external regulatory authorities and the like. The jail terms handed out to Williams and Adler were a further demonstration that the Australian legal systems reformed and hardened their approach to wrongdoing by company directors in this case.

146
CHAPTER 7 SIMILARITIES AND CULTURAL DIFFERENCES IN CRISIS COMMUNICAITON Introduction

The previous three chapters discussed the cases of Martha Stewart, BenQ and HIH. Each chapter analyzed how these companies managed their communication during times of crisis. Much of the crisis communication literature has focused on prevention, preparation for and response during a specific time period associated with a crisis (Coombs, 2007a). However, this chapter explores a central question rarely treated in the literature: how communication strategies reflect different cultural factors. As discussed earlier, understanding the effects of national culture on crisis communication has been important in global public relations. This chapter, therefore, identifies and describes the similarities and differences of crisis responses in these three cases. The chapter is divided into three sections. First, it discusses the similarities in these three cases as they relate to crisis communication. Second, it explains how the three companies differ in the way they managed their crisis communication. Finally, I address the question of whether culture played an important role in these crisis situations and in the subsequent response strategies.
Similarities in Three Cases

One of the ways of learning how to effectively manage a corporate crisis is to learn from the mistakes of others. After analyzing the cases of Martha Stewart, BenQ and HIH, this section illustrates three themes emerged from the data of these three cases: 1) abuse of asymmetrical information, 2) ignoring the warning signs, and 3) failure

147 in crisis response.

Abuse of Asymmetrical Information

Bowie (2004) argues that an abuse of asymmetrical information occurs when one person has information that another person does not have and the first person does not share that information with the other. Specifically, the other person has the right to the information. Insider trading is a paradigm case of the abuse of information asymmetry, and it is considered illegal and immoral on grounds of fairness (Bowie, 2004, p. 63). The crime of insider trading occurs when information asymmetry enables company insiders or those obtaining information from insiders to make significant financial gains at the expense of others, usually small shareholders (Wu, 2007). All the three cases examined here involved insider trading. Martha Stewart had insider information from Sam Waksal, founder of ImClone and sold of her ImClone stock to make a profit that was not available to the public. Another example of the abuse of insider information occurred when K. Y. Lee and four executives of BenQ sold their company shares. They had insider information regarding the bad news of discontinuing investment at Germanys Siemens mobile phone division before it was made public. A similar situation existed in the HIH case. HIH ran into financial difficulties and its stock began to decline. Executives including founder Ray Williams and non-executive director Rodney Adler sold their shares before other stakeholders were aware of its financial crisis. Ironically, Williams and Adler protected their investment while the stakeholders were left with huge losses. According to standard financial accounting practices, publicly traded companies must provide updated financial information to the public. The stockholders have the right

148 to know. Belasen (2008) suggests that financial results should be communicated in a consistent, conclusive, and concise way and in a manner that shows the company is proactive and responsive (p. 77). Moreover, Grunig (2001) argues that responsiveness is consistent with both the two-way symmetrical views of corporate communication and the stakeholder model of organizational ethics. Company executives have more access to information than others because they are more likely to participate in the decision-making processes. In fact, CEOs should often be the ones who communicate the companys performance and financial results to stockholders (Belasen, 2008). Belasen (2008) further indicates that lack of transparency creates asymmetry between communication activities and stockholders knowledge about outcomes such as cash flows. When financial results are reported to a companys stockholders, this asymmetry is reduced. Although Martha Stewart was not charged with insider trading in the end, her case sent an important message about enforcing the transparency of financial markets. BenQs case illustrated that the Taiwanese government has been pushing to establish stronger financial rules to protect shareholders interests and rights, along with stricter punishments for corrupt directors and auditors. Similarly, after the collapse of HIH, many new rules were being formulated by the Australian regulators to require information be provided by companies and their auditors. To some extent, asymmetrical information involves deception of stakeholders such as stockholders, investors and employees. It appeared that Stewarts case was prosecuted in part to make executives think twice before lying to stakeholders and government officials. Asymmetrical information that involves deception is clearly wrong because such informational disparities are unfair or creates injustice (Bowie, 2004). An

149 Australian financial commentator, Mark Westfield (2001c) claims that the HIH stock had been trading in an information vacuum for at least six months before HIH suspended trading. HIH had failed to provide transparent information and disclose the extent of HIHs deteriorating financial situation. HIH officials manipulated information to protect their interests. Furthermore, HIH executives deceived their stakeholders employees, stockholders, investors and policyholders. Unfortunately, the executives saved their retirement money while lower-paid employees, innocent stockholders and policyholders were left destitute. In summary, transparency is a universal and necessary condition for financial success at the firm level, regardless of the cultural context (Bowie, 2004). The reason is simple: less information means less certainty for stakeholders. Transparency also implies openness, communication, and accountability. In these three cases, corporate executives traded on insider information to make a profit that is not open to all. Thus, the abuse of information asymmetry led to a decline in stakeholder trust and undermined the credibility of corporate business operation. In general, stakeholders usually seek full disclosure. The more companies address openness, the more stakeholders feel confident about the companies. This appears to be a value that is important in all three cultural contexts examined.
Ignoring the Warning Signs

Crisis does not occur in a vacuum. Fink (1986) proclaims that all crises have warning signs or prodromes, indicating that a situation has the potential to develop into a crisis. Finding problems in the prodromal stage, before they turn into full-blown crisis can reduce the organizational harm and damage of reputation. Coombs (2007a) notes that a

150 crisis can be prevented if appropriate action is taken in response to the warning signs. However, Hearit (1994) claims that most corporations wait until public relations problem reaches a crisis status before they respond, for example, that their actions have hurt people, have cut into profits, or have damaged their carefully crafted images (p. 114). In this study, the data indicated that all these three companies were not aware or ignoring the warning signs. When the principal actuary, David Slee warned that HIH was vulnerable to financial distress, HIHs leader Williams and other executives downplayed warnings of financial difficulties. One of the board members, Neville Head raised that concern the materials provided to the board were insufficient to make decisions. Similarly, Heads concerns were ignored and marginalized by Williams. Unfortunately, some HIH board members did not get involved the companys finances or operations. As a result, they failed to take needed action, exercise proper oversight, and shoulder responsibility for the ethical missteps of their company. Inevitably, the companys financial crisis led to the demise of HIH. Australian researcher, More (1995) indicates that only about one-third of Australian organizations have some type of crisis management planning in place. She argues that Australian organizations not only do not prepare for the dysfunctional dimensions of crisis, but also are not aware of its positive dimensions or the real role that crises per se play in organizational life. In contrast, Wrigley, Salmon, and Park (2003) found that 70% of the American companies in their sample had crisis management plans in place. Even so, the high-profile executive Martha Stewart failed to perceive and act on crisis cues. Stewart kept her public persona intact and ignored the increasing outcry for answers about her role in the insider trading scandal. She was not able to shake public debate about the

151 timing of the sale. Furthermore, Stewart did not manage her communication in a timely manner. As a result, what Stewart called a small personal matter later became a full-blown crisis. This crisis not only led her to prison but also hurt her brand equity. Taiwans insider trading law has been amended three times since 1988. According to Financial Supervisory Commissions (FSC) data, 75 cases of insider trading have either been referred to judicial authorities by the FSC or pursued independently by prosecutors since the financial regulatory body was established in July, 2004 (Wu, 2007). Almost one out of every fifteen listed companies was under investigation or prosecution for insider trading and more than twenty cases led to indictments during that period (Wu, 2007). Chairman K. Y. Lee of BenQ may not pay attention to the major changes made to insider trading law or may naively fail to understand that his share transactions lead to illegal behavior. Arguably, he placed the company into being investigated by the prosecutors due to his negligence of insider trading regulation. Worst of all, the company lost the investors confidence. In summary, Pauchant and Mitroff (1992) indicate that those organizations that ignore messages signaling problems are more prone to experience crises. It is evident that the inability to handle warning signals also indicates a potential threat to the organizations future survival. In these three cases, the corporate leaders were not aware of or ignored their potential unethical practices and eventually created crises for their organizations. The companies also created impediments to the communication of crisis signals. If they have protocols and mechanisms in place to manage issues in a timely or responsible manner when they emerge, these crises may have been avoided or the magnitude of the crises might be reduced and minimized.

152
Failure in Crisis Response

The most effective way to manage a crisis situation is to communicate with the public accurately and as quickly as possible (Coombs, 2007a; Fearn-Banks, 2007). Lack of communication increases the impression that the company has something to hide. The company must demonstrate they are responsible and responsive to the needs and expectations of stakeholders. Appropriate response strategies not only provide the stakeholders information but also illustrates that the organization has a strategy for moving beyond the crisis. However, in these three cases, each company failed to manage their crisis communication from the beginning, by communicating in a proactive manner. Instead, they used stonewalling approaches by refusing to answer and withholding information. During the initial stage of the investigation, Martha Stewart avoided the media and tried to avoid questions about the probe of insider trading. For example, she appeared on CBSs The Early Show, and when asked about the ImClone shares transaction, she replied that she wanted to focus on her salad. Then she cancelled all her public appearances for more than a year until the indictment was filed against her. Chairman K. Y. Lee of BenQ did not attend the institutional investor conference after the company was investigated of insider trading. However, the media had no comment from Lee and they were left to freely speculate and assign guilt. The media often has an amplifying effect to magnify interest in the issue through news coverage and even bring the issue up in the first place. The media raised concerns about the HIHs financial situation for months. The CEO, Williams, made no response about the growing speculation. Conversely, the company claimed that many of the articles being published were

153 self-serving and wrong. It was believed that lack of disclosure was one of the major factors resulting in the collapse of HIH. Denial and shifting the blame to others are the prototypical strategies in Martha Stewart, BenQ and HIH cases which they tried to distance themselves from the wrongdoings. Coombs (2007b) suggests that denial strategies attempt to remove any connection between the organization and the crisis (p. 171). Stewart denied that she received improper information from ImClone founder, Waksal. She insisted that she sold the ImClone stock shares under pre-agreement with her stockbroker Bacanovic if the price went down $60 per share. Stewart blamed the government for its attempt to criminalize these actions which she claimed made no sense to her. When the prosecutors accused BenQ executives of using their insiders knowledge to get profits from the share sale, chairman K. Y. Lee of BenQ denied the insider trading allegations. The company shifted the blame by saying that it was just a transaction to help overseas employees sell their share bonus money. It was suggested that was a widespread practice by Taiwans information technology companies for the purpose of circumventing government restrictions (Hille, 2007). HIH denied that the company had financial difficulties and refuted the speculation and rumors from the financial market and media. The founder and CEO, Williams, even assured the stakeholders that HIH was rock solid, sound and dependable. His overstating of HIH outlook was clearly misleading. When HIH Royal Commission placed responsibility on him, he denied he did anything wrong or withheld information on HIHs losses from the board. By shifting the blame, he said he was only one member of a 10-person board. However, research has shown that 95% of the people are more offended by a

154 companys lack of honesty than by the crisis itself (Borda & Mackey-Kallis, 2004). Ulmer, Sellnow and Seeger (2007) conclude that regardless of how crisis is approached, leaders should be visible, open, and honest. Simply put, in any crisis, whatever the extent of the damage, a truly authentic leader is able to communicate the realities and possibilities in a context of complete, unwavering honesty (Schoenberg, 2005). No evidence supported what Stewart asserted; a pre-existing agreement to sell her ImClone shares. In essence, the verdict proved she lied. She was found guilty of having lied to federal investigators about her sale of ImClone shares. Her attempt at cover-up accelerated her downfall. Organizations often deny or refute the charges of immoral conduct. However, if the actions make organization directly responsible for their impact, a strategy of distancing the organization from the crisis or a non-existence strategy that denies the existence of the crisis is thus futile (Coombs, 1995). Williams deceived the stakeholders by assuring them that HIH was in good shape and was not aware of the seriousness of collapse. Lee denied of any wrongdoing and maintained his innocence. Taken together, the leader is the face for the company, and the public expects him or her to step up and be the voice of the company. Unfortunately, Lee of BenQ did not appear at the institutional investor conference after the investigation. The lack of visible leadership drew wide criticism from the public because the leader was not available to lead during the crisis. Specifically, leaders should rise up to the occasion, take action, exercise discretion, and provide direction for the organization. Though the verdict has not yet been rendered, his company and his reputation will have serious impact if his guilty is found.

155 In addition to communicating with external stakeholders during the crisis, it is important to keep internal stakeholders employees informed. The employees generally want to know what they can or should do when the company is in trouble. Whenever possible, internal publics should not learn of the crisis from the news media and they should know about it before external publics do (Fearn-Banks, 2007, p. 38). If they are not given information, rumors will develop and employees may lose faith in the companys ability to manage the crisis. Stewart, Lee and Williams all failed to engage in an honest dialogue with internal stakeholders preceding external communication. Under conditions of low morale and a lack of trust, the employees were left just like the public to search crisis information from the media. If those employees were being communicated with in an open, timely and truthful way, the companies might foster better understanding and gain support. In these three cases, they did not manage their crisis well, to some extent because of legal concerns. Fearn-Banks (2007) points out that lawyers frequently advise clients in crisis to: 1) be silent, say nothing, circle the wagons; 2) say as little as possible but reveal what information you have as quickly as possible; 3) deny blame and guilt; 4) shift blame to others or share it with others; and 5) anything you say can be used against you in a court of law. Stewart, Lee and Williams all followed their lawyers instructions to limit the flow of information to mitigate legal liability. Understandably, the company needs to protect its financial assets. However, these actions are in contrast with good crisis public relations practice be quick, be consistent and be open (Coombs, 2007a). Quite simply, sometimes the situation does not allow for an immediate response or some legal reason for not revealing certain information. However, the company should tell

156 stakeholders why the question cannot be answered and explain this as much as possible and promise to reveal the information at a specific time (Coombs, 2007a; Fearn-Banks, 2007). In summary, these three companies were not able to provide information quickly when handling their corporate crises. In contrast, they used the strategies of denial and shifting the blame to others to distance themselves from the wrongdoings. Consequently, they did not manage their crisis well due to legal concern. They did not offer a vision of the companys future and offered specific commitments. As a result, Stewart, Lee and Williams were not able to generate support from a wide range of stakeholders. Thus, their companies suffered substantial financial losses and tarnished reputations.
Cultural Differences

Apart from the similarities discussed in the previous section, this section explores the role of cultural factors in these three cases. To better understand the differences in these three countries, America, Taiwan and Australia, Figure 7 provides a numerical rating based on Hofstedes five cultural dimensions: individualism (IDV) versus collectivism, uncertainty avoidance, power distance (PDI), masculinity (MAS) versus femininity, and long-term orientation to time (LTO). The numbers serve to highlight differences among these three countries. Hofstedes five cultural dimensions have been discussed in Chapter 2. Each of Hofstedes five dimensions provides insights into the influence of culture on the communication process (Lustig & Koester, 2006). On Hofstedes cultural dimensions index, a clear disparity between the United States and Taiwan is evident in all five cultural dimensions. As Figure 7 indicates, the United States (PDI = 40) scores lower than Taiwan (PDI = 58) on the power distance

157 index; whereas the United States (IDV = 91) scores much higher than Taiwan (IDV = 17) on the individualism index. However, the cultural value index of the United States is similar to Australia which means the United States and Australia would likely have similar communication patterns. In Trompenaars and Hampden-Turners term (1998), Taiwanese society is emphasized on particularism which focuses more on relationship than on the rule of law. In contrast, the USA and Australia are characterized by universalism which general rules and obligations are a strong source of moral reference.

USA
91 90

Taiwan

Australia
87

69 58 40 17 46 36 51

62 45

61

29

31

Individualism

Power Distance

Uncertainty Avoidance

Masculinity

Long Term Orientation

Source : Adapted from Geert Hofstede Cultural Dimensions, Retrieved December 8, 2008, from http://www.geert-hofstede.com/hofstede_dimensions.php

Figure 7: Comparison of Three Countries

Huge

cultural

differences

can

be

explained

by

differences

on

the

individualism-collectivism dimension (Lustig & Koester, 2006). Similarly, Triandis (1995) believes that the individualism-collectivism is by far the most important attribute that distinguishes one culture from another. This dimension appears to be identical to Trompenaars and Hampden-Turners (1998) individualism versus communitarianism. As

158 such, I use individualism-collectivism as a major framework to explain the differences of crisis communication in these three cases. Specifically, I point out the distinct characteristics such as decision-making and face-saving in these three cultures. Other dimensions such as uncertainty avoidance will thus illustrate as well. Further, preference for high-context messages and low-context messages offers other variations in cultural patterns.
Individualism vs. Collectivism

According to Hofstede (1980), individualistic cultures put the needs and goals of the individual and his or her immediate family first. In individualist cultures, the autonomy of the individual is paramount. The emphasis on individual performance in many Western societies, in particular, the business world finds expression in an admiration of entrepreneurship. There is no doubt that Martha Stewart is a successful entrepreneur, businesswoman, and an American icon. Everyone recognizes Stewart who is not only a founder of her company but also a public celebrity. She became rich and famous, which is seen as a fulfillment of the American dream. Given the emphasis on individualism in the American value system, Martha Stewart is deeply immersed in what she calls this era of me (Brady, 2006). Naturally, Stewart prefers not to talk about what the company would be like without her. However, she would hope that her name will have the longevity of Coco Chanels or Walt Disneys (Brady, 2006). Triandis (1995) agrees that in individualistic cultures people have more personal constructs. In professing her innocence, Stewart, however, offered no evidence that would help clear her name. Instead, her attitude seemed to be: I am Martha Stewart. It should be good enough that I say I am innocent (Slater, 2006, p. 101). Stewart

159 ultimately went to prison to prevent her corporate collapse. During her insider trading trial, she downplayed, deemphasized and dissociated the Martha Stewart name which caused significant damage to her company. After completing her five-month sentence, she argued that I never agreed with that strategy because I believed in myself (Brady, 2006, p. 76). As strong as Stewarts comeback ultimately has been, her goal now is to take her name as far as it will go. This reflects the American culture values which encourage individual achievement and success. In individualistic cultures, a judgment about what is right or wrong is usually made only from the point of view of each individual (Lustig & Koester, 2006). CEO Williams and non-executive director Adler of HIH put their own personal interests above the loyalty to everyone else with a stake in the companys fate. They wielded their individual power ruthlessly and abused the trust of those who worked for them. Ironically, founder and CEO, Williams did not step forward to accept blame for what happened after the collapse of HIH. In addition, director Adler claimed that he had done nothing wrong and had nothing to be ashamed of. Speaking of his charges, he complained that he was a scapegoat and a victim of the tall poppy syndrome (White & Milligan, 2001). According to Haley (2007), a tall poppy is someone who stands above the crowd because of his achievements. Tall poppy syndrome is the inclination for the media and the general public to belittle the achievements of prominent individuals. Specifically, the tall poppy syndrome is the tendency to cut down the ostentatious or merely successful (Haley, 2007, p. 34). Thus, the phrase bringing down the tall poppy is well known in Australia. Simply put, the way Australians treat the tall poppy depends not so much on their

160 success but on their attitude to their success (Feather, 1998). If the tall poppy is seen as arrogant or conceited, there is a desire to pull the tall poppy down. Therefore, the way the tall poppy behaves is very important. This comes about because Australia is an egalitarian society. Since its beginning as a penal colony, there is likely to be little respect for authority. Everybody is regarded as equal no matter how wealthy or successful. Based on this social value, Williams earned the title of Australias most-hated man after the failure of HIH (Dalton & Carson, 2005). The American culture is somewhat distinctive in having a stronger emphasis on individual pursuit and achievement. People also would see the successful as an example to emulate and expect that high achiever should receive social recognition. Although Stewart blamed the government for criminalizing her, she still received support from her fans outside of the court and even from inmates in the prison. After her release from prison, investors and stakeholders encouraged her enterprising spirit and provided her with a warm welcome. Her company stock rose significantly and new media programs produced positive outcomes. According to Hofstede (1980), Taiwan is a collectivistic culture rooted in Confucianism. Collectivistic cultures privilege the desires of the larger group. Members of these societies stress connection instead of separateness, putting a high value on their place in the collective. Collectivistic societies take a more utilitarian approach, seeking to generate the greatest good for in-group members. This value was evident when prosecutors investigated BenQs share trading, chairman Lee claimed the establishment of Creo Venture in Malaysia had been aimed to lure talent overseas and to deal with bonus issuance for employees, rather than for the benefit of any individual.

161 Collectivistic cultures believe in obligations to the group, dependence of the individual on organizations and institution, a we consciousness, and an emphasis on belonging (Lustig & Koester, 2006). The group is expected to look out for and take care of its individual members. When the chief financial executive Eric Yu was detained for the allegations of insider trading, the chairman himself threw his full support behind Yu. Lee was defended in an open letter to the press and said that negative media stories about Eric Yu are baseless and untrue (Pao, 2007). Lee stated in a strong tone that everyone that has worked with Eric Yu both inside and outside the company can attest to his integrity, honesty and ethical character. Lee further said Eric Yu has selflessly served BenQ for many years and he believed that his name would be cleared soon. In individualistic societies, decisions are based on what is good for the individual, not for the group, because the person is the primary source of motivation (Lustig & Koester, 2006). Under such circumstances, many corporate scandals demonstrate what can happen when the executives put their personal interests above the company interest or boards of directors fail to live up to their responsibilities. Far too many boards were rubber stamps. Nadler (2004) suggests that during a crisis boards should become intervening boards by becoming intensely involved in decision making on key issues, dedicating more time to the organization and convening frequent intense meetings. Similarly, Mellahi (2005) also claims that board members should establish new and effective communication channels to voice their concern and discuss the future direction of the organization. They should also bring the crisis to the attention of shareholders to put more pressure on the incumbent top management team. Unfortunately, the HIH board failed to detect warning signals and take corrective

162 actions in time. According to Leung and Cooper (2003), the HIH board was dominated by founders or the relatives of founders. Among them were Williams and Adler with potential conflicts of interest and loyalties to the company. These issues may have colored their judgment. As noted earlier, when HIH executives realized that financial performance was deteriorating, they played down the signals and began withholding information from the board. Furthermore, the CEO Williams reduced communication with the board to overcome board opposition. Williams carefully managed the amount of time and nature of information given to the board members in order to control the boards decision-making process. Mellahi (2005) argues that Williams made an example of dissenting board members, bypassing and marginalizing them, thereby setting into motion a destructive spiral of silence and self-censorship by the rest of members (p. 275). To complicate things further, the board members did not pay attention to the obvious warning signals and remain passive. As the situation deteriorated, the board realized that they lacked of power to influence events, board members started missing more meetings and putting in less effort (Buchanan, Arnold, & Nail, 2003). As a result, the board was not able to be in a position to alert the management or take corrective actions to save the company. In contrast, in collectivistic cultures, decisions that juxtapose the benefits to the individual and the benefits to the group are always based on what is best for the group, and the groups to which a person belongs are the most important social units (Lustig & Koester, 2006). Chinese cultural values are often seen as an important factor in determining Chinese business organizational and managerial practices (Bond & Hwang, 1986). The unique characteristics of Chinese organizations include highly centralized

163 decision-making, paternalistic style of leadership and strong emphasis on collectivism and group behavior. As a Chinese society, Taiwan shares these cultural dynamics. When BenQ was investigated with insider trading, chairman Lee reported to the board members in the first place. Jandt (2007) points out that the collectivist value of Confucianism mandate a style of communication in which respecting the relationship through communication is more important than the information exchanged (p. 30). Subsequently, the board meetings were held, members were well informed, and they accepted the company executives explanation. Triandis (1995) argues that individualists are most concerned with saving their own face (self-face concern); collectivists are also concerned with saving the face of in-group members (other-face concern). Understanding face concerns leads to a better understanding of different styles in the two kinds of culture. Chairman Lee took responsibility and offered to resign on March 20, 2007, after BenQ posted a disastrous record loss for 2006, reflecting his failure to boost earnings through the acquisition of Siemens's unprofitable cell phone unit in 2005. In Chinese culture, preserving others face in social encounters is important so supervisors usually do not directly point out mistakes. Redding and Wong (1986) state that generally the nature of the Chinese organizational leadership process is didactic and the management control process relies heavily on conformity, nepotism, and obligation networks (guanxi), not through performance contingent rewards and punishments. The cultural preference for harmony means that dissatisfaction among the subordinates and conflict between cliques are unlikely to be brought into the open. This may be related to the Chinese way of establishing and keeping interpersonal relationships. People try to get economic or

164 social resources through the informal social structures of guanxi (connection or personal relationship) rather than through the formal structures. As discussed earlier, the concept of mianzi or face is a critical element in Chinese culture. In the business world and interpersonal relationship, it is important for the Chinese that they maintain face and avoid offending the face of others. Specifically, mianzi is important for the individual but also for ones group or family. Thus, with respect to Lees long-term leadership, directors at BenQ rejected chairman Lees resignation and instead told him that he should aim to turn around the company as soon as possible. In summary, these three cases suggested that a cultures individualism or collectivism affects crisis reaction and response in many ways. In view of BenQ case in terms of the collectivist value of Confucianism, group harmony, group decision-making, avoidance of loss of face to others and oneself are different from individualistic cultures. Individualistic cultures such as the United States and Australia, people emphasize self-direction, self-achievement and keep ones personal rights or autonomy. These reflect how Stewart, Williams, and Adler put their personal interests above what was best for the company. It is also obvious that personal misconduct did the most damage to corporate image and reputation.
Uncertainty Avoidance

According to Hofstede (1980), cultures differ in the extent to which they prefer and can tolerate ambiguity, and therefore in the means they select for coping with change. Hofstede refers to these variations as the uncertainty avoidance dimension, or the extent to which the culture feels threatened by uncertain situations and tries to avoid them by establishing more formal rules and structure. Specifically, uncertainty avoidance is useful

165 in understanding how culture influences the solution that has been chosen. Generally speaking, high uncertainty avoidance countries are negatively correlated with risk taking and positively correlated with fear of failure (Hofstede, 1980). Under this dimension, BenQ has higher uncertainty avoidance and is intolerant of ambiguity. After a huge loss of acquisition, BenQ made an announcement to discontinue investment in Siemens mobile phone unit in less than a year. The decision was made not to drag BenQ into deepening losses and take on further risk for ambiguous profitability. By the same token, BenQ employed restructuring plans after the financial disaster and investigation of insider trading. The corrective actions included a company name change, capital reduction and management reshuffle. They believed that immediate actions were needed for company survival. In contrast, individuals in low uncertainty avoidance cultures such as the United States and Australia accept uncertainty as a fact of life, are more contemplative and likely to trust their own judgments or common sense (Hofstede, 1980). Thus, executives in low uncertainty avoidance societies are more willing to take risks. In the case of HIH, two major blunders sowed the seed of HIH failure (Mellahi, 2005). This included the decision to establish operations in the U.K. and the decision to re-enter the U.S. market. In 1993, the board did not consider whether entering the U.K. was compatible with HIHs larger strategy. The operations in the U.K. were estimated at a loss of A$1.7 billion. In 1997, management asserted that entry to the U.S. market was also good for HIH strategy. Unfortunately, it appeared that HIH did not carry out due diligence investigations and was not aware of the high risk involved. HIHs U.S. operations were closed in 2000 with an estimated loss of A$620 million.

166 Despite the existing condition of substantial losses, HIH took on further risk to acquire FAI in 1998. According to Mellahi (2005), the board meeting was called at short notice early on the day the decision was to be made. Five out of 12 directors did not attend, and of the seven directors present, four directors participated by video conferencing. The board did not know much about the financial position of FAI but just decided to go ahead with the takeover. After acquiring the FAI, the overall loss was estimated A$590 million. Later, HIH undertook a joint venture with Allianz in 2000 which exacerbated HIHs cash position and led to a cash flow crisis and the collapse of HIH (Mellahi, 2005). Again, there was no evidence to show the board had analyzed the likely cash flow implications prior to HIH entering the joint venture. Mellahi (2005) found that management considered several restructuring options before the HIH collapse. However, these did not bring to the attention of the board. For years, HIH took a series of risky investments. However, they did not stop the bleeding after those consecutive losses. Unavoidably, the struggling company had simply closed its door. In summary, uncertainty avoidance dimension of a culture concerns how the organization responds when it feels threatened by uncertain or unknown situations. BenQ exists within a high uncertainty avoidance culture. The company avoided risk in terms of its deteriorating financial situation and sought security by restructuring as soon as possible. Countries with weak uncertainty avoidance cultures tend to accept high risks. In addition, people in low uncertainty avoidance cultures such as Australia, generally have a low rule orientation. The HIH Royal Commission (2003) concluded that the cause of HIH collapse lay in bad judgment about business risks, rather than systematic wrongdoing. HIH undertook a series of high risk investments and joint

167 ventures since 1998. Many of HIH difficulties can be attributed to its aggressive acquisition strategy and the creation of many subsidiaries. Unfortunately, the executives neither understood nor learn the lessons from failed investments. The company continued along the path towards financial crisis leading to the collapse.
Low Context vs. High Context

Hall (1976) categorizes culture as high or low context which lead to differences in how and what people communicate. In low context cultures such as the United States and Australia, much more meaning is embedded in the words that make up the verbal message and speakers are relatively direct and straightforward. Moreover, people from individualistic cultures are more likely than those from collectivistic cultures to use confrontational strategies when dealing with interpersonal problems (Lustig & Koester, 2006). Triandis (1995) also agrees that individualists use confrontation, pay attention to the content, use hyperbole, and adopt an anticlimactic sequence of presentation in low context communication. In the beginning of the insider trading investigation, Stewart avoided the media and failed to communicate with the public for more than one year. When her allegations drew heavy media scrutiny, she hired the public relations firm, Brunswick Group to help manage the crisis. Stewart personally, of course, was a considerable newsmaker. She gained a strong media presence by advertising and conducting interviews. She created her personal website and developed direct two-way communication with her audiences. From a communication perspective, two-way symmetrical model consists of dialogue rather than monologue (Grunig, 2001). Communication thus can flow both ways between on organization and its stakeholders. The goal then can be achieved to exchange views

168 and to reach mutual understanding between both parties. Martha Stewart knew how to take advantage of publicity. She stood on the courthouse steps, apologized to the company employees who lost their jobs, and made a pitch for her products and her magazine. Adler, director of HIH, complained about being a victim of the tall poppy syndrome. On the one hand, he attempted to clear himself of responsibility for the HIH collapse. He hired a public relations consultant to represent him and salvage his public image. On the other hand, he blasted his fellow HIH directors including founder and CEO, Ray Williams, and blamed the collapse of HIH on gross mismanagement, a dysfunctional board and poor accounting (Kemp, 2001). Adler publicly criticized and confronted that he had been selling HIH shares because there was no real vision, no real plan, no understanding of the future (Kemp, 2001, p. 1). In contrast, in high context culture such as Taiwan, most of the information about the meaning of a message is contained in the context. The collectivists are likely to use avoidance, third-party intermediaries, or other face-saving techniques (Lustig & Koester, 2006). Triandis (1995) indicates that East Asian collectivists use an interdependent orientation during communication, with more we than I. When BenQs executives were charged with insider trading, BenQ expressed shock and called the prosecutors move unacceptable. BenQs communication was always one-way, from the organization to its stakeholders. Chairman Lee basically denied the existence of an insider trading issue and remained silent most of the time. Lee failed to actively communicate and engage with stakeholders. For Taiwanese executives, silence is golden. Literally speaking, silence is a virtue in the Confucian context (Jandt, 2007).

169 Coombs (2007a) argues that silence is a very passive response and reflects uncertainty and passivity (p. 129). In essence, a silent response suggests that an organization is not in control and is not trying to take control of how it or the crisis is perceived by stakeholders (Hearit, 1994). Hall (1976) explains that in high context cultures people sometimes appear to express themselves in a roundabout way because they want to reduce the chance of an open and direct disagreement, especially regarding issues that might be disagreed upon. For example, when asked about the Siemens employee layoffs issue, Lee through his ambiguous and indirect response avoided direct and open confrontation by saying that so far BenQ does not plan to shut any factories (Einhorn, Wassener, & Reinhardt, 2005, p. 18). Since Lee was aware of the impact of his words and deed on other people, he chose to divert the conversation and obscure his answer to specific questions. As Lustig and Koester (2006) suggest, in high context cultures, one purpose of interaction is to promote and sustain harmony among the interactants. Therefore, unconstrained and explicit reactions could threaten the face or social esteem of others. Hence, it is difficult for the Chinese to be open and straightforward in their interaction with others, especially during the times of crisis. Thus, third-party intermediaries can serve as strong and more credible sources of supporting information than a company speaking on its own behalf. An intermediary is a go-between. Intermediaries are used to initiate social contacts and avoid conflicts, and preserve face. When the company manages corporate crisis, testimonials from respected sources can hold great weight in the court of public opinion and can safeguard a company public image. This explains why the open letter written by Acer founder, Stan Shih is important in Chinese cultural

170 context. Shih backed Lee and reassured the protection of stakeholders interest. He served as a third-party intermediary to minimize the degree of blame towards BenQ and reduce Lees risk of losing-face. Comparing these three cases, Martha Stewart overall managed her crisis communication more effectively than did Williams and Lee. Stewarts strategies began to evolve over time with some adaptation during the insider trading investigation of her stock sales. She used image repair discourse on multiple occasions. She was visible in the news for her trial, the incarceration, and her successful comeback. For example, she said she would be back after her sentencing hearing. She encouraged people to continue buying her products. While she was in prison, she wrote open letters to the public. Her communication strategies enabled her company to minimize the crisis and later she staged a highly publicized comeback. The denial strategy used initially by Stewart did not help her restore a favorable public image. However, she later employed bolstering and corrective actions which should have been used from the beginning of the scandal. These may have prevented her small personal matter from becoming a full-blown crisis and destroying her company. In summary, communication in high-context cultures such as Taiwan is more indirect or implicit and is more likely to use intermediaries in handling the crisis response. Concerned with group harmony and face maintenance, BenQs crisis communication through intermediary was functional which eliminated direct confrontation and reduced the risk of losing face. Furthermore, silence was used as a communicative tactic because they did not rely on verbal communication as their main source of information. Low-context cultures, such as the United States and Australia typically use direct and

171 explicit messages. Stewart, Williams and Adler hired public relations professionals to help them handle the crisis situation. Frequently, they talked to the media. Martha Stewart even created her personal website to communicate directly with her supporters. These efforts at least suggested that people from the low context cultures feel a need to speak during the crisis.
Conclusion

In these three cases, executive wrongdoing was primarily the failure of business ethics. Poor managerial judgments also contributed to the corporate crises. Character might also play an important role in crisis leadership. Martha Stewart, K. Y. Lee and Williams cast shadows due to greed, arrogance, dishonesty and other character failings. During a corporate crisis and its aftermath, internal and external stakeholders often seek to resolve their uncertainty. Crisis may produce huge losses and damage to corporate integrity and name. The insider trading crises of Martha Stewart and BenQ have severe impact on corporate profits and HIHs collapse ultimately lead to the demise of the business. The unwanted public scrutiny and government investigation have caused negative employee morale and lost consumer confidence. We now live in a global economy shaped by multinational corporations. Increasing business contacts and interdependencies across cultures are inevitable. Even nations share as much as the United States and Australia still manifest important differences. Corporate executives must recognize that they currently operate in constantly shifting environments. There is no one size fits all approach to manage crisis communication. When crises are international in nature, intercultural values often become important (Seeger, Sellnow, & Ulmer, 2003). Each crisis requires a different response. Ignoring or

172 mishandling differences can mean inability to preventing failures and mistakes from cultural misunderstandings and mismanagement.
Summary

Drawing from the cultural context, this chapter analyzed the similarities and differences of crisis communications in these three cases. From the data analysis, three common themes were found across all three cases: 1) abuse of asymmetrical information, 2) ignoring the warning signs, and 3) failure in crisis response. Overall, in these three cases, the organizational leaders did not manage their crisis communication well, in part, because of legal concerns. As a result, they were not able to generate support from their stakeholders and suffered from huge losses. In addition to financial losses, the companys reputation was also ruined. Based on the cultural variations, the findings showed the differences from these cases in the dimensions such as individualism vs. collectivism, uncertainty avoidance and low context vs. high context. Taiwan is identified as high context, high uncertain avoidance and collectivistic culture rooted in Confucianism. It reflects that BenQ considered group harmony, group decision-making, avoidance of loss of face to others and oneself while they managed their crisis communication. Thus, third-party intermediaries, face-saving techniques and silence are communicative tactics often used. In contrast, the individualism, low context and low uncertainty avoidance cultures such as the United States and Australia emphasize goals and accomplishments of the individual rather than the group. Martha Stewart and HIH cases presented that individualist cultures train them to speak out as a means of resolving difficulties during a crisis. Thus, confrontational techniques used more often in their crisis response.

173
CHAPTER 8 CONCLUSION

The purpose of this study was to conduct a cross-cultural comparison of U.S., Taiwan and Australia to examine whether these different cultural contexts are related to different crisis communication approaches. The three case studies Martha Stewart, BenQ and HIH examined here explored corporate responses to crises. This chapter reviews the conclusions drawn from this research. This chapter is divided into six sections. First, the three cases are re-examined and summarized in light of the goals of the study. Second, the three research questions that guided this study are presented and answered. The implications of this study are explored in the third section. Limitations of this study are described and directions for future study related to these cases are proposed in the fourth and fifth section respectively. Finally, the conclusions of this research are presented.
Re-Examination of the Three Cases

Pauchant and Mitroff (1992) suggest that crisis-prone organizations are those managed by individuals who fail to take responsibility. They argue that managers need to engage stakeholders in dialogue regarding key ethical issues. In these three cases Martha Stewart, BenQ and HIH, the corporate leaders were all accused of unethical or immoral conduct and this conduct was associated with the scandals. According to Seeger, Sellnow, and Ulmer (2003), a corporate leader often becomes the organizations public face in a crisis, playing a critical role by providing information to stakeholders. The corporate leaders in these three cases also served as the major spokespersons explaining the crisis to the public. Thus, Martha Stewart, BenQ and HIH provide a

174 context to examine corporate communication during the crises. In addition, these cases focus on the role of the leaders. They also represent different countries and cultures allowing for the examination of the role of cultures play in crisis. Martha Stewart was under investigation for alleged insider trading for selling 3,928 shares of ImClone on December 27, 2001, the day before FDA rejected ImClones anti-cancer drug, Erbitux. Through all the investigations and allegations, Stewart denied receiving any information from Sam Waksal, the founder and CEO of ImClone about the decision on Erbitux. She said her sale of stock was a pre-agreement if share fell below $60. She was charged with securities fraud, obstruction of justice, and obstruction of justice and making false statements on June 4, 2003. In the end, she was not convicted on the original charge of insider trading, but on the cover-up that took place. She was sentenced to five months in prison and released on March 4, 2005. A small personal matter, as she called it later, became a full blown crisis damaging her image and creating detrimental effects for her company. Chairman K. Y. Lee of BenQ and other four executives were indicted with insider trading on May 8, 2007. The investigation concerned BenQ executives selling undistributed bonus shares ahead of the companys announcement of significant losses incurred from its takeover of Siemenss handset division. Later, they gradually put the money into the BenQ branch in Malaysia, Creo Ventures. When the share price of the company plummeted, they transferred money back to Taiwan and used the money to buy back shares to boost the stock market. This case is still being tried in court and has not yet resulted in a verdict. However, the negative publicity has severely damaged the company image.

175 HIH insurance group was placed in provisional liquidation on March 15, 2001 and moved to full liquidation on August 27, 2001. This was the largest corporate collapse in Australias history. The Australian government quickly set up a high level judicial inquiry known as the Royal Commission to investigate the demise of HIH. The investigation found that the collapse was primarily due to its failure to provide properly for future claims. Further, the failure was deteriorating because of mismanagement and inadequate response to pressures emerging in insurance markets internationally. Recently, several HIH directors have been prosecuted for numerous offences. Among them, the founder and CEO, Ray Williams pleaded guilty to three criminal breaches of the Corporations Act. The three charges included failing to act properly as a director, authorizing the release of a misleading prospectus and making a misleading annual report of HIH (West, 2005). He was sentenced to four years and six months in jail, and a non-parole period of two years and nine months. The other non-executive director, Rodney Adler was sentenced to four years and six months in jail, with a minimum of two years and six months after pleading guilty to four counts including lying about share purchases, obtaining money under false pretences and failing to discharge his duties as company director (King, 2005). The collapse of HIH had devastating consequences for the various stakeholders Australian insurance industry, shareholders, policyholders, and employees. In summary, these three case studies were designed to explore the intersection of crisis communication, intercultural communication and crisis leadership. This study sought to understand the public statements of the corporate leaders in times of corporate crisis. It also explored the cultural differences associated with their crisis communication

176 strategies. The findings from this study are discussed below in relation to the three research questions that guided this investigation.
Re-Examination of the Three Research Questions

An extensive review of pertinent crisis communication and intercultural communication literature grounded this project. Based on the understanding of crisis communication, three questions were proposed to guide this analysis. 1. How did Martha Stewart, BenQ and HIH manage their communication during the corporate crisis? 2. How were these communication strategies received and interpreted by the stakeholders? 3. How did their communication strategies reflect different cultural factors?

The various crisis response strategies were further identified on the basis of how the corporate leaders managed their corporate communication and how communication was perceived by the stakeholders. Though crisis communication was discussed widely, there were few systematic inquiries into cultural differences. Thus, the aim of this study was to compare these cases to explore the role of culture played in each companys response to the crisis situation. From this perspective, comparisons were made between the crisis response strategies employed by these executives to restore their corporate image and reputation during the crises. Similarities and differences in the strategies are described. The following section presents these findings.
Research Question # 1

The first research question asked: How did Martha Stewart, BenQ and HIH manage their communication during the corporate crisis?

177 As discussed in Chapter 7, three themes emerged in the data analysis across all three of these cases: 1) abuse of asymmetrical information, 2) ignoring the warning signs, and 3) failure in corporate response. It was evident in these three cases that no singular strategy was implemented, but rather several actions and communication initiatives were taken. However, the results of the study also indicated that denial and shifting the blame to others were the prototypical strategies in these cases especially as the leaders tried to distance themselves from the wrongdoings. Stewart declared her innocence and denied that she received any information from ImClone founder, Sam Waksal. She blamed the government for its attempt to criminalize her. She implied that she had been unfairly targeted because of her celebrity. Chairman K. Y. Lee of BenQ denied the insider trading allegations involving illegally sold shares ahead of the announcement of significant losses. The company shifted the blame by responding that this was a transaction to help overseas employees sell their share bonuses. It also noted that this was a common practice in electronic companies for the purpose of circumventing government restrictions (Hille, 2007). HIH denied that the company had financial problems and refuted the speculation from the media. As the bad news spread, the finger-pointing between CEO, Williams and non-executive director, Adler began and continued unabated. After the collapse of HIH, Williams shifted the blame by saying that he was only one member of a 10-person board and tried to distance himself from responsibility for the corporate failure. As for Adler, he portrayed himself as a victim and mentioned that he lost substantially in his investment in HIH shares. According to Seeger, Sellnow and Ulmer (2003), denial is unlikely to be a

178 successful strategy in cases where the crisis type indicates that the company is likely at fault. They indicate that when the crises type suggests organizational culpability, denial will increase the harm by reducing credibility and creating the impression that something is being hidden (p. 51). Too often, organizations are reluctant to respond due to fear of creating or enhancing legal liability (Seeger, Sellnow, & Ulmer, 2003). Martha Stewart, BenQ and HIH all followed a legal approach that privileged concern for legal liabilities rather than a public relations stance for the public opinion. Instead of focusing on long-term reputational concerns, Hearit (2007) argues that a denial approach privileges short-term legal consequences and views community outrage to be painful but more tolerable than a negative legal judgment (p. 171). However, the legal approach may function to help a company on a financial level but it may also provoke an angry backlash from stakeholders. Effective communication strategies from the executives are critical during the crisis because communications are important tools in managing the impressions of key stakeholders. Lack of response would have resulted in the negative effects from the public and damaged corporate image and reputation. In essence, these stonewalling strategies are seen as an admission of guilt. Leaders who mishandle the early phases of a crisis might prevent the company from identifying the problem, taking control of their situations or having any proactive voice in defining the crisis. Specifically, if the warning signals are not identified and/or addressed at an appropriate time, they may result in management inaction or taking inappropriate action that my lead to the collapse of the organization (Mellahi, 2005, p. 262). Garcia (2006) claimed that the missteps have two negative effects. First they make the crisis worse and second, they distract internal

179 attention from solving the underlying problem, while lending management to a false sense that the crisis is being dealt with. In these three cases, leaders did not fully communicate with their stakeholders early in the development of the crisis. When the media generated extensive attention, Stewart grew more intense in dodging reporters. She avoided reporters by using a private entrance and service elevator where she was scheduled to appear (Lamb & McKee, 2005). When questioning her ImClone stock sale at The Early Show, she replied that she wanted to focus on the salad she was making. With the allegations spinning out of control, Stewart began to repair her image and the companys reputation. Similarly, K. Y. Lee of BenQ remained silent and made no appearance at the institutional investor conference after the investigation of insider trading. As such, there had been much negative publicity and media speculation concerning the financial status of the company. Consequently, the strategy of no comment or silence gave stakeholders the impression that the company was hiding something. These stonewall strategies might raise suspicions and increase uncertainty about the organization (Fink, 1986). It also allowed the accusers full freedom to define the crisis. Similarly, Williams of HIH failed to admit mistakes and apologize to the stakeholders after the collapse of HIH. The arrogance helped him gain the title of Australias most-hated man. Comparing these three cases, Martha Stewart responded more effectively than BenQ and HIH. It is noticeable that Stewarts strategies evolved and adapted to fit her own particular situations. BenQ and HIH made more counter-productive attempts to divert attention away from crisis and these strategies were noticeable. Such closed door policies created more tension between the companies and their stakeholders. Clearly,

180 after the major setback in the beginning of the investigation, Stewart started to invest resources to repair her image. First, when Stewart found that she had little control of traditional media, she paid for a full-page advertisement in the USA Today and launched her own website to serve as a personal platform to tell her side of the story. The website included updates on the trial process, her personal statements, and letters from supporters. She even posted her news on the website from inside prison. She maintained two-way communication with her supporters and fans, as a result, she was able to emerge from jail with a warm welcome from many of her supporters. Second, Stewart successfully portrayed herself as a victim and a scapegoat of post-Enron witch hunt against corporate excess and corporate scandals. Her celebrity and public figure played a major role in the visibility of media. BenQ and HIH did not have the power to influence the medias agenda. Most importantly, Stewart knew how to take advantage of publicity. She had significant experience as a media figure and she used this experience in managing the crisis. She frequently spoke of the impact of the investigation, trial and verdict on her company. As for an entertainment personality, her media coverage was nonstop. Therefore, she dialed up her rhetoric as much as possible, particularly in the later stages of the crisis. For instance, in an interview with Barbara Walters, Stewart spoke out just hours after hearing her sentence. She compared herself to Nelson Mandela. If it is looming ahead of me, Im going to have to face it, and take it and do it and get it over with. Theres many other good people that have gone to prison. Look at Nelson Mandela, 27 years in prison (Walters & Stossel, 2004). Not surprisingly, she successfully pitched her story to gain national media attention.

181 On the other hand, her friends from the entertainment world also expressed support for her. Rosie ODonnell and Bill Cosby frequently appeared in court. Rosie ODonnell said to Newsweek: I am outraged and beside myself. This is a travesty. Shame on the federal government (Naughton & Gimbel, p. 28). These entertainment supporters used the media as a vehicle to relay their message of support through the media and facilitated Stewarts image repair efforts. In another example, using strategies of bolstering and apology, Stewart wrote Judge Cedarbaum a four-page letter before her sentencing. Stewart started asking the judge to remember all the good that she has done, all the contributions she has made. She then said it is very import for me to inform you that I never intended to harm anyone and I am dreadfully sorry that the perception of my conduct has caused my family, my friends and especially my beloved company so much damage (Hays, 2004e). To some extent, her rhetoric asked for leniency which helped in the court. In announcing the sentence, Judge Cedarbuam said that she had received more than 1,500 letters written on behalf of Stewart. The judge stated that it is apparent that you have helped many people outside of your own family and that you have a supportive family and hundreds of admires (Hays, 2004e). Stewart received the minimum sentence five months in prison and five months in home confinement. In response to her relatively light sentence, the stock price of her company rose by 37% immediately (Hays, 2004e). Credibility and prior reputation are two additional points which might affect crisis response strategies (Coombs, 2007a). Credibility is based on an organizations concern for or its knowledge and goodwill towards its stakeholders. According to Coombs (2007a), a strong, favorable, precrisis organization-stakeholder relationship can act as a

182 shield to protect the organization from harm (p. 146). Because of good relationship, stakeholders might ignore negative news assuming a good company would not have intentionally done anything wrong. For years, BenQ has worked hard to create value for shareholders and given back to the community. For their efforts, BenQ was recognized as one of 2007s Top 10 Taiwan global brands. Given the prior favorable reputation with stakeholders, BenQ was able to make them easier to deliver their side of the story. Comparatively speaking, BenQs insider trading investigation did not generate widespread media criticism. In contrast, Coombs (2007b) indicates that an unfavorable prior relational reputation suggests an organization shows little consideration for stakeholders across a number of domains, not just in this crisis (p. 167). HIHs stakeholders lost substantial amounts of money from a series of risky investments on business expansions. The company also hid negative information and the risks were not properly identified. Moreover, the executives were widely criticized for their self-indulgence, profligacy and lavish lifestyle. Accordingly, HIH did not earn the goodwill of their diverse stakeholders. As a consequence, the stakeholders did not stand by them through the crisis. In summary, crisis frequently requires the company to respond to the accusations of wrongdoing and explain the situations to stakeholders. This study showed that the chosen strategies of these three cases used to defend themselves were denial or shifting the blame to others. The reasons were because they were more concerned about avoiding legal liabilities instead of public opinion.
Research Question #2

The second research question asked: How were these communication strategies

183 received and interpreted by the stakeholders? Galford and Drapeau (2002) point out that if leadership is unethical, employees and customers lose trust in the capacity of the organization to meet their needs. Furthermore, if clients do not trust an organization, they may take their business elsewhere. When employees trust and confidence in the leadership is compromised, productivity and loyalty suffer as a result. When stakeholders found out the truth regarding HIHs financial situation, they lost confidence in the company. Ultimately, the collapse of HIH was inevitable. There was no evidence to show that Stewart had a pre-agreement to sell her ImClone shares. As such, she was charged with having lied to federal investigators about her sale of shares. Her small personal matter not only made her step down as chairperson and CEO of her company but also resulted in a jail term. Although the indictment of insider trading has not been proven in the case of BenQ, the company has suffered substantial losses due to the investigation. Knight and Pretty (1997) conducted a study on the impact of catastrophes on shareholder value. They found that company mishandled crises resulted in a 10% decrease in stock price after the first week of the crisis and a 15% decrease below pre-crisis prices after the first year following the crisis. On the other hand, firms that effectively managed the crisis had only a 5% stock price decrease after crisis, and during the subsequent year there was quick stock recovery. Fearn-Banks (2007) points out that there are three possible results for a crisis: 1) the organization is put out of business, ruined, possibly sued, and key executives possibly charged with crimes, 2) the organization continues to exist, but it has lost some image and respect in its publics eyes, and perhaps a great deal of financial position, 3) the organization, in a hard-fought

184 battle, has won a war of public opinion and is seen as favorably as before or perhaps more favorably (p. 22). HIH insurance failed to survive the crisis. The executives were convicted with crimes and the company is no longer in business. The HIH collapse provided an example of a corporation that showed no concerns for its stakeholders. What HIH lacked was a sense of urgency. HIH did not address their financial situation in a timely manner and they were not being honest and open with their stakeholders. In many occasions, HIH used more than one strategy when confronted by the stakeholders. Among them, denial of responsibility was used more often than any other strategy. However, this strategy suggested that the stakeholders felt betrayed by the company in some ways. Specifically, employees lost their jobs, the insurance-holders were left with worthless insurance and shareholders lost their investment. Although founder and CEO Williams served two years and nine months in jail and apologized to HIH stakeholders for their losses, the stakeholders resentment remained the same. Stewart and BenQ continue to operate their businesses, but the impacts of the crises are enormous. BenQ was recognized as one of 2007s Taiwan global brands. However, stakeholders are often affected negatively by a crisis and may withdraw their support. Though the company denied any wrongdoing and maintained innocence, the rumors and speculation of hostile takeover were spreading in the market. In reaction to the investigation of insider trading, the falling investor confidence sent BenQs stock price down to a ten-year historical low. Meanwhile, the low morale among BenQ employees increased the employee turnover rate. The effect of high employee turnover rate also had a significant impact on the quality of the product and customer service.

185 Martha Stewart places her name on her products. She is the voice of her brand. When Stewarts personal problem occurred, she made her company identity vulnerable as well. Her iconic image can bring the brand down when there is personal misconduct. Her cover-up scandal had negatively affected the earnings of her company. Although she stepped down as chairperson and CEO of her empire, her multimedia companys stock dropped significantly since her investigation. Even the support that Stewart got from other entertainment figures such as Rosie ODonnell and Bill Cosby seemed to have worked against her. Juror Hartridge asserted, Like that was supposed to sway our decision (Naughton & Gimbel, p. 28). Juror Hartridge also expressed her perception of Stewart to a Newsweek reporter: She seemed to say: I dont have anything to worry about. I fooled the jury. I dont have anything to prove (Naughton & Gimbel, p. 28). Despite her repeated assertions of innocence, the stakeholders thought she was guilty. A survey from Siena Research Institute found that fifty four percent of the public thought she should be punished and twenty two percent said her legal problems would make them think twice about buying her products (Hays, 2003d). The media played a crucial role in these three corporate crises. According to Seeger, Sellnow and Ulmer (2003), media attention functions to publicize initial interpretations of the crisis event, repeating and enhancing the impact of these interpretations. Organizations that deal openly and honestly with the media are more likely to be treated fairly by the media during a crisis and vice versa. HIH was generally portrayed as a severely dysfunctional company which resulted in a profound failure of management. Almost a year before the collapse of HIH, the media raised concerns about the companys financial status and started asking questions about its solvency.

186 Although HIH denied its financial difficulties, the negative perception of HIH persisted with media criticism. Nevertheless, the executives shifted the blame and distanced themselves from the accusations. The media thus aroused a strong tone of moral indignation concerning the misconduct of HIH executives. Consequently, they were consistently portrayed by the media as greedy, dishonest, deceitful and opportunistic (Duarte, Gray, & McAllister, 2005). Adler was criticized for extracting money from HIH for his own interests, whereas Williamss misdeeds were all about trying to tell investors that everything was fine at HIH when it was not. Williams was described as an autocratic manager who dominated everything and no one rivaled him in terms of authority or influence. He was also portrayed as a greedy man who believed he was entitled to help himself to his companys funds. As for Adler, he received far less sympathetic coverage than Williams and was presented principally as a shiv, a shonk, and a corporate cowboy whose dishonesty helped bring HIH down (Duarte, Gray, & McAllister, 2005). Similarly, during her initial lack of response, reporters began to question Martha Stewarts innocence. Stewarts image had taken a beating from the media. In addition to the jokes on the tabloids, websites, blogs, late night talk shows, she had been exposed in unauthorized biographies and a NBC TV movie in which Cybill Shepherd portrayed her as shrewd and manipulative woman. Although the Taiwanese media have not criticized much about the BenQs insider trading case, the negative publicity of allegations have ravaged the BenQ brand and its earnings. Comparing these three cases, the stakeholder reactions to Stewarts verdict were mixed. As discussed earlier, some believed that Stewart was justly tried and convicted,

187 while others agreed that Stewart was a victim of a well thought out witch hunt. When Stewart emerged from the court house, her fans displayed their support, standing outside the courthouse against police barricades chanting we love you Martha (Naughton & Gimbel, 2004). They thought that Martha was innocent and strongly supported her. The numbers who visited her website clearly indicated that she had a loyal supporter base. In summary, a crisis may even threaten the existence of a company. In these three cases, the illegal of insider trading occurred when information asymmetry enabled Stewart, Lee and Adler to make significant financial gains at the expense of others. During the corporate crisis scandal in these three cases, stakeholders found little comfort or reassurances in their codes of ethics. The crisis response strategies they employed denial and shifting the blame, decreased their credibility and were viewed as a lack of transparency in communication. On the whole, crisis communication becomes important as a result of these three high-profile crises that have damage their corporate business. Consistent and responsible communication with stockholders can reduce any asymmetry that might harm relationships with them (Belasen, 2008).
Research Question #3

The third research question asked: How did their communication strategies reflect different cultural factors? The results of this study echoed similar conclusions reached by Haruta and Hallahan (2003), in that cultural factors played a role in each case and the responses to each of the crisis situations. People who have different cultural norms reflect different crisis communication strategies. In a highly collective society such as Taiwan (Hofstede,

188 1980), where the social bond among members is very strong and people look out for one another, a we consciousness is emphasized. Both chairman Lee and financial officer Yu of BenQ claimed that the stock transactions and establishment of Creo Venture in Malaysia had been aimed at talent overseas and dealt with bonus issuance for employees, rather than for the benefit of any individual. In addition to Lee, four other executives were indicted with insider trading. Lee saw himself linked to his subordinates and thus felt that it was his duty to take care of their personal problems. He not only defended his innocence but also attested to his subordinates integrity and honesty. PrudHomme (1998) notes that Asian collectivistic value translate into a need for maintaining harmony, controlling emotions and avoiding losing face (p. 27). Accordingly, the concept of lian (face), mianzi (image), and guanxi (personal relationship or connection) are critical to understand Chinese collectivism when they handle the crisis. As discussed earlier, the notion of face is a universal phenomenon. What constitutes a desirable face, however, is culturally more specific. According to Bond and Hwang (1986), ones face is more interconnected with that of others, and its protection and enhancement more disciplined by concerns about hierarchical order in Chinese culture than in more individualistic egalitarian cultures (p. 249). Chinese attempt to save face for their affiliated groups, whenever possible (Yu & Wen, 2003). Chairman Lee of BenQ took responsibility and offered to resign after a disastrous record loss through the acquisition of Siemenss unprofitable cell phone unit and the subsequent investigation of insider trading. Respecting his long term leadership and saving his face, the board of BenQ rejected his resignation and expected him to turn the company around as soon as possible. This implies that guanxi with nonfamily member

189 functions because of the reciprocity in the exchanges of favors. These favors are repaid not because of legal considerations, but because of the fear of losing ones face or public image (Bian, 1997). Specifically, the mechanism of coping with the face-losing situation is to deemphasize the seriousness of the face-losing event. People pay attention to preserve others face in social encounters, especially the face of superiors. According to Bond and Hwang (1986), since exposing a persons mistake may provoke public reaction and create disharmony, Chinese usually show heightened reluctance to criticize others. If it is necessary to do so, they tend to speak vaguely and use indirect language to protect the face of those being criticized. In essence, Chinese people emphasize interpersonal relationship might explain that the use of diversion and ambiguity could avoid direct confrontation and reserve buffers for relationship maintenance (Huang, Lin & Su, 2005). In other words, the fundamental cultural preference for harmony is reinforced by the typical structure of Chinese discourse. Weber and Hsee (1998) further point out that in collectivist cultures, family or other in-group members will step in to help out any group member who encounters a large and possibly catastrophic loss after selecting a risky option. The board of BenQ stepped in to restructure the company in order for the company to survive. In a high uncertainty avoidance culture, BenQ felt threatened by ambiguous situations and tried to avoid them by taking immediate actions. The subsequent corrective actions included a company name change, capital reduction and management reshuffle. In individualist cultures like the United States and Australia, on the other hand, a person making a risky decision will be expected to personally bear the consequences of their decisions. When Martha Stewart was investigated for insider trading, she resigned

190 from the board of the New York Stock Exchange. She said that she did not want the media attention surrounding her to distract from the work of NYSE (Rozhon, 2002). Later, the day after her indictment, Stewart took corrective action by stepping down as chairperson and CEO of MSO to distance her wrongdoing from her company. In a sense, it explains when the crisis is precipitated by some failure in leadership or when the leaders fail to manage the crisis successfully, shifts in top management are often important symbols of change (Seeger, Sellnow, & Ulmer, 2003). If a companys leader fails to satisfy stakeholders, he or she will not retain a leadership position. By the same token, shareholders saw no relief to the financial crisis of HIH. Impatient shareholders expected the CEO Williams to resign and raise money to remedy HIHs capital needs. Although Williams had resisted calls for his resignation, the stock price continued declining forcing him to step down. Stewart was an American icon who sold her distinct image through media and thousands of products. Whether people love or hate Stewart, she has been one of the most successful women capitalists in the United States. She is the epitome of the American dream. She was a female entrepreneur who created a business that was, in effect, herself. She was famous and wealthy. Stewart, however, was also the epitome of the American dream which was gone badly. She had ever been reduced to a common criminal. However, Stewart was very vocal about her ambition that she would be back. As a rule, the doctrine of individualism holds that each individual should be allowed autonomy in making his or her own decisions and supports the liberty of individual to own property. Moreover, Americans encourage individual aspirations, achievements and success. After her release from prison, Stewart showed her strength in the capacity of

191 individual action of restoring her unique identity. She has currently resumed her public prominence and her company started to rebound. Specifically, the spirit of individualism allowed Stewart to relaunch her career, seek to reposition her company and step into the limelight once again. Triandis (1995) points out collectivistic cultures emphasize context more than content; more emphasis on the implicit than on the explicit; more use of silence and ambiguity. In a high uncertainty avoidance culture, when face with highly uncertain condition such as the investigation of insider trading, most of the time BenQ chose to remain silent. Following Confucian philosophy and social ideology, that unnecessary communication can only lead to unnecessary risk (Yu & Wen, 2003). Chinese communication studies scholar, Lee (2005) suggests that Chinese culture values silence and emotional restraint as acts of wisdom (p. 294). There is a Chinese saying, Trouble is born out of the words you speak illustrating the specific value on silence (Yu & Wen, 2003). In high context cultures, the rules for communication are implicit, minimizing the content of verbal messages, and being sensitive to the social roles of others (Hall, 1976). Therefore, the anxiety of communication in crisis situations polarizes the Chinese to either avoid communication or use communication to divert attention from the crisis (Yu & Wen, 2003). Because of concern with group harmony and face maintenance, BenQ used intermediaries which eliminated direct confrontation and reduced the risk of losing face. In low context cultures such as the United States and Australia, communication generally relies on the verbal message for creating and interpreting meaning. Hence, people communicate with direct and explicit messages. Stewart, Williams and Adler

192 delivered a direct style of communication, defended themselves and said what they thought. Confrontational techniques emerged more often in their response. Comparing their counterpart, K. Y. Lee of BenQ, Stewart and HIH tolerated relatively little ambiguity, and placed reduced emphasis on personal relationship and face-saving. Moreover, Western cultures values individualism and rejects hierarchic status, which makes power distance or authority recognition an unwelcome proposition. Hence, they tend to lessen the distance between stakeholders in an attempt to provide various channels of communication and create more horizontal relationships through two-way interaction with them. In contrast, traditional Chinese culture places more weight on vertical interpersonal relationship. As mentioned earlier, Stewart and Adler hired public relations consultants to help them address crisis situation and manage their image. In particular, Stewart has a strong media presence to help her use the media as a vehicle for conveying her message. Stewart thus frequently issued press releases and launched her own website to interact with her audiences in two-way communication. Therefore, she was easily able to get her message across. There are many ways in which Americans and Australians are similar. However, there are also certainly many differences between these two cultures. For example, people from the United States and Australia both speak English, but the meaning of certain words can be quite different, sometimes even opposite in these two countries. In the United States, much emphasis is placed on the American dream which promises that through hard work, free choice and determination, people can pursue their goals and achieve prosperity. As noted earlier, Americans give more emphasis to achievement, competence, and conformity values and are more in favor of rewarding high achievers.

193 This explained that Stewarts supporters provided a warm welcome after her release from prison. However, Australians, do not value wealth, power, and mastery as highly as Americans and they appear to value egalitarianism more. Feather (1998) indicates that Americans are more in favor of rewarding so called tall poppies than are Australians, which is consistent with the American dream and the notion that wealth and success are particularly admired characteristics. Given that Australians place a relatively high value on equality, Australia has a very fair go ethic. In Australia, criticism of those who achieve too much is referred to as the tall poppy syndrome where those who stick too much above the others are cut down to size (Haley, 2007). Thus, the phrase of bring down the tall poppy is well known in Australia. Based on this cultural phenomenon, Adler of HIH claimed that he was a tall poppy paying price for success when he was pleading guilty with four charges (White & Milligan, 2001). For historical reasons, Australians tend to use the direct style of verbal communication and not shy away from disagreement. Australia, at first, was a penal colony. Most of the early settlers often looked for freedom and escape in this new land. Australia and the United States shared a similar pioneer heritage and a frontier spirit. Due to its harsh environmental conditions, however, Australia developed in a different way than the United States. Based on a strongest sense of egalitarianism, this makes Australians put directness before diplomacy. Consequently, Australians freely criticize others and are criticized themselves. Given the above cultural history, direct confrontation strategies were frequently used by Williams and Adler while defending themselves and seeking scapegoats to evade responsibility for their misconduct. Comparing Stewart and Lee, Williams and

194 Adler became increasingly aggressive in their rhetoric than their counterparts. Williams and Adler were frequently criticized for lacking remorse, for failing to show contrition and for failing to apologize and be seen to be apologetic for their role in the HIH debacle (West, 2005). Adler spoke of the shame that his criminal charges had brought on his family, but insisted there was no point in apologizing for his crimes against the shareholders of HIH (Korporaal, 2005). Williams did not accept that he did anything seriously wrong and did not accept that HIH had to die A$5.3 billion of identified debt notwithstanding. He declared that No one has alleged I desired or derived any personal benefit from any of the transactions which led to the collapse of HIH No one has put to me that I was a crook (Brearley, 2003d, p. 7). Williams also shifted the blame to his fellow directors, claiming they could have saved the company if they had not been trying to cover their backsides (White, 2002). Moreover, the public fights between Williams and Adler became bitter after HIH was forced into liquidation. Williams blamed Adler misled him to take over of FAI, a company which founded by Adlers father a move contributed to the HIH collapse. By responding to this accusation, Adler said he did a good job to sell FAI and emphasized management rather than the FAI acquisition was to blame for the HIHs financial crisis. Meanwhile, Adler also blasted his fellow directors, including Williams, and attempted to clear himself of responsibility for the collapse (Kemp, 2001). Not surprisingly, Justice Dunford commented that Adlers offenses are serious and display an appalling lack of commercial morality (Carson & Warne-Smith, 2005). And Justice Wood said of Williams was a most serious departure from the acceptable standards of competence and

195 diligence expected of the chief executive officer of a major public company (West, 2005). In summary, crisis response is unique within each culture and there are both similarities and differences across cultures. The differences can be explained theoretically using dimensions of cultural variability. The results indicated that individualism-collectivism, uncertainty avoidance, and low-high context communication showed significant differences in these three cases when handling their corporate crises. This study confirmed the view that cultural sensitivity is a key to successfully manage crisis communication.
Implications

The results of this study are important in understanding crisis communication. First, the findings indicate that crisis tests an organization and its leadership capability. There is no greater test for an organization than how it deals with a crisis. Mitroff (2001) indicates that all businesses need to dedicate a proactive and high-level function to crisis leadership and have structures in place that enable them to conduct business with few interruptions. Specifically, crisis communication creates close associations between the leader and the crisis. Effective leadership is critical to overcome a crisis. Leaders need to be visible, attentive, open and responsive during a crisis, they need to develop a strong positive reputation for the organization, their response need to create opportunities for renewal, and they should cooperate with others following a crisis (Ulmer, Sellnow, & Seeger, 2007). Former New York City Mayor Rudy Giuliani was praised for his crisis leadership in the aftermath of 9/11. Giuliani provided consistent information and reports to New York residents and the world. His leadership style calm, collaboration, steely command and

196 steady presence reassured everyone affected by the terrorist attacks. Conversely, ineffective leadership can cause a crisis or make a crisis much worse. Firestone CEO John Lampe and Ford CEO Jacques Nasser blamed each other for faulty tires and faulty vehicle designs over a series of accidents involving Ford Explores equipped with Firestone tires. The public finger-pointing not only ended a 100-year relationship between the two companies, it also seriously damaged both companies reputation and cost billions of dollars in lawsuits. In fact, the key is to be prepared by anticipating the possibility of a crisis and establishing a mechanism to handle bad news and negative publicity. Crisis management works best when it includes avoiding or preventing crises (Coombs, 2007a). If the organization lacks planning, its reputation will erode. Moreover, companies that know how to recognize and manage the warning signs and issues before they lead to more serious consequences, have a potential of even profiting during a crisis (Fink, 1986). Generally speaking, as business environments grow increasingly complex, it is particularly important that leaders develop a set of skills that will help them prevent and effectively respond to crises and other strategic issues (Garcia, 2006; Mitroff, 2001). Second, given the executive misconduct scandals in these three cases, the need for better business ethics seems obvious. Ethical issues are fundamental to organizations, to both their normal operations and to the abnormal conditions of a crisis (Seeger, 1997). Furthermore, business ethics in organizations also require values-based leadership that includes comprehensive standards of appropriate conduct, as well as openness to improve the organizations ethical performance. Organizations that ignore and violate stakeholder or fundamental social values, for example, are more likely to

197 experience crisis (Seeger, Sellnow, & Ulmer, 2003). The behaviors of Stewart, Lee and Williams were judged as corporate misconduct because they were inconsistent with the values and norms of the business operations. In addition, they responded by denying any wrongdoing, shifting the blame to others and by refusing to taking responsibilities. These kinds of responses are not ethically justifiable and have a devastating impact on a companys reputation in terms of profitability and credibility. In fact, crisis stemming from a scandal is difficult for a company to deny because the event is usually the result of fault or misdeed. Seeger and Ulmer (2001) suggest that one effective approach in a crisis is to fall back on core values. A value-based response to a crisis can bolster an organizations reputation and ultimately lead to renewal (Ulmer, Sellnow, & Seeger, 2007). Therefore, developing a value-based orientation fosters a system that provides a core of standards such as openness, respect, honesty, trust and responsibility. Communication is particularly critical to organizational ethics (Seeger, 1997). Organizations can communicate their ethical value and other ethics-related messages through training, publishing the code of ethics and executive speeches. In general, business ethics is the essential component of corporate governance. The company with effective corporate governance based on core value will have an added competitive advantage in the marketplace. Third, few examples of cross-cultural issues on crisis communication have been examined in the literature and more research is needed. Haruta and Hallahan (2003) indicate that extant crisis management principles are highly ethnocentric and based on Western cultures. Ethnocentrism in management communication theory assumes that a single approach to a problem is deemed appropriate across all situations and cultures.

198 Lee (2005) argues that the scarcity of international crisis communication writings may reflect a Western-dominated practice both organizationally and ideologically, but international crisis communication is not a simple transfer of Western crisis communication practices to new territories (p. 287). Thus, one important contribution of this study is its cross-cultural focus. This research applies cultural difference as a device for crisis communication practices. Outcomes of cross-cultural comparisons between America, Taiwan and Australia, contribute to better understanding of each others cultural factors, and consequently meaningful explanations are suggested. Moreover, this study has tried to extend the crisis-response theory to include situations where strategies have to take cultural factors into account in a multinational organization setting. Based on Coombss (2007a) situational crisis communication theory, three factors in the crisis situation shape the reputational threat: 1) crisis type, 2) crisis history, and 3) prior relational reputation. These elements allow corporate executives to anticipate how stakeholders will perceive and react to the crisis and the organization in crisis. Furthermore, understanding these reactions allows the organizations to anticipate the level of reputational threat a crisis poses. However, as discussed earlier, cultural sensitivity plays a larger role in crisis communication, and such situations are not adequately addressed in the literature. Conceptually, this study shows the important theoretical implication and proposes a Situated Cultural Crisis Communication (SCCC) model (see Figure 8) to emphasize the role of cultural factor in crisis communication. The SCCC model provides practitioners who respond with a cultural framework through which to view crisis situations. The first step is to identify the crisis type. Each

199 crisis type features certain aspects of the crisis. The second step is to assess the contextual factors. Drawn from Coombss factors that shape the reputational threat (2007a), SCCC places crisis responsibility, crisis history and relationship history into contextual factors. Research has found that each crisis type creates predictable attributions of crisis responsibility among stakeholders (Coombs & Holladay, 2002). For example, natural disasters have very little attribution of crisis responsibility but organizational misdeeds have strong attributions of crisis responsibility. According to Coombs (2007b), a history of similar crises intensifies the reputational damage of a crisis. Similarly, an unfavorable prior reputation intensifies the reputational threat as well (2007b).
Contextual Factors 1. Crisis History Crisis Type 2. Relationship History Situationally Appropriate Response Strategies Cultures Characteristics Strategies low-context, direct, Individualists precise, explicit, face less important denial, diminishing, rebuilding, bolstering

3. Crisis Responsibility

denial, diminishing, high-context, rebuilding, bolstering, Collectivists indirect, ambiguous, ambiguity, implicit, face is key intermediary, saving face

4. Culture Figure 8: Situated Cultural Crisis Communication Model

In addition, cultural factors are added to highlight the differences between different cultures. Once the reputational threat is assessed, the company selects the recommended crisis response strategy. The crisis response strategies used by Coombs (2007b) which have been grouped into four clusters: 1) denial, 2) diminishing, 3) rebuilding, and 4) bolstering. The details of these crisis response strategies were

200 discussed in Chapter 2 (see Table 2). Basically, Coombss crisis response strategies are based on Western cultures (i.e., individualism) which may not apply to collectivistic cultures without modifications. However, cultural factor can affect the way people respond to crisis communication. In SCCC, the strategies have been extended to reflect other cultural values (i.e., collectivism). As the results of this study suggest, the response strategies such as ambiguity, intermediary and saving face which are distinct in collectivism cultures. Nevertheless, the model of the Situated Cultural Crisis Communication needs more testing and scrutiny in the future research. A fourth implication communication practitioners can take from this study is that the companies need to adapt different cultural factors to the multicultural setting in times of crisis. Today, multinational corporations operate in multiple culture environments. The scope of its global operations also means that it has an extensive communications and public relations operation (Wilcox & Cameron, 2006). However, cultural diversity makes communication more difficult. As such, these multinational corporations are challenged to communicate across borders and cultures, in a variety of languages. Sometimes, these larger, multi-national organizations ignore the subtle factors in multiple cultures. The problem is compounded by the fact that many organizations manage their transnational communication efforts from home headquarter offices. Cultural differences require greater communication efforts to handle the sensitive cultural expectations. This is particularly difficult in a highly charged crisis situation. As the nations of the world have become increasingly interconnected, the use of culture as a key factor in management communication planning is inevitable (Banks, 1995). As a matter of fact, when an organization lacks competence in understanding the cultural norms of host nations, then

201 unfortunate incidents can become enormous crises that damage the relationship between an organization and its publics (Taylor, 2000, p. 278). Corporate communication practitioners must recognize that there is no one size fits all approach to manage crisis communication. In short, while the major guideline of crisis response strategies is widely considered to be universal across cultures, the way in which it operates is still viewed as culturally specific.
Limitations

This study has several limitations that should be considered in interpreting these results. First, the built-in limitations of the qualitative results, by their nature, are not replicable. As such, the main criticism of a case study is that it is not amenable to generalization (Wimmer & Dominick, 2006). Prominent cases such as Martha Stewart, BenQ and HIH represent only a tiny fraction of large corporation in their countries. Hence, the first limitation of this study is that it examines only one case from each country. This sampling method may limit the scope of generalization for the findings of this study. However, this is an interpretive article with distinct drawbacks regarding the potential for generalization. It does not aim to provide a model of standard response or cover all organizational behaviors in a crisis. Therefore, there is no basis to infer from them that the crisis response strategies are typical of strategies in general. Additional studies, using multiple methods and more cases probably are needed to gain an understanding of how these findings can be generalized to other cultural settings. Second, this study only examined three cultures American, Taiwanese and Australian, in relation to crisis communication strategies. The limited numbers of cultures might limit the scope of generalization for the findings. Corporate executives from

202 different countries may hold different orientations and therefore could vary in their responses to crises based on different cultural values. Extending the scope into multicultural contexts could contribute significantly to our understanding of international differences with respect to crisis response strategies. Third, this study only took societal culture into account. It did not, however, account for the role of the organizational culture in these three cases. The factor of organizational culture has played a role in the crisis management and communication (Pauchant & Mitroff, 1988). For example, the type of organization, crisis planning policy of the company and the past crisis experience all exert impact upon corporate response. Crises, by their nature, bring out the organization's underlying core values. Moreover, corporate leaders shape and reinforce culture by how they react to crises. In a sense, corporate culture places a factor in affecting crisis outcomes. Fourth, the primary source of news media in this study is from each nations largest circulation national newspapers. The study does not examine coverage beyond the mainstream media. However, the rise of new media such as internet based nontraditional newsgroup, bloggers, message boards, and independent news website has created a new paradigm shift in the public arena of opinion. From Burns and Bruners point of view (2000), news media such as The New York Times limits the scope to the elite audiences which might affect the effectiveness of the discourse. They argue to take more of an audience-oriented approach and determine which forms of discourse are effective with relevant non-elite audiences. Finally, the BenQs insider trading is an ongoing trial and a verdict has not been rendered yet. Basically, there will be new legal concerns and emerged crisis issues

203 sparked at BenQ. However, this analysis only covers the crisis events for the time being, as of January, 2009. Thus, it does not present the full cycle of post-crisis discourse of BenQ case.
Directions for Future Study

This study suggests at least five directions for future study. First, this study discusses the national culture level as a primary focus for research. The role of societal culture has long been identified as a key characteristic underlying systematic difference in behavior. Thus, this study mainly explores the role of national culture in crisis communication research with special emphasis being given to national cultural frameworks. Further inquiry into the relationship between individual corporate culture and societal culture in crisis communication is needed. Researchers have examined how corporate culture affects organizations response to crisis (Pauchant & Mitroff, 1988). Their results indicate a strong relationship between an organizations overall culture and its response to crises. Marra (1998) advocates that public relations practitioners need to shift their emphasis from crisis communication plans to crisis management strategies that consider organizational characteristics such as culture and autonomy. In this vein, exploring the organizational culture in determining the success of an organization crisis management effort from different country is needed for future studies. Second, currently crisis communication studies in non-Western culture are relatively rare. It is necessary for more non-Western culture in crisis communication as a topic for future studies. Thus, it is necessary to develop a non-Western crisis communication theory. The notions of crisis communication have received continuing attention in the public relations literature. However, many crisis communication theories

204 have been developed only in Western contexts, particularly the U.S. In such a mindset, crisis communication researchers and practitioners may slip into the trap of ethnocentrism without knowing it (Lee, 2005). The further advancement of crisis communication theories as an academic discipline requires to be examined in other cultural settings as well to identify their degree of generalizability and to uncover boundary conditions. In a broader context, this study points out a need for non-Western perspective research with cultural features involving crisis communication. As such, further research is required to develop and validate the model of Situated Cultural Crisis Communication. Third, PrudHomme (1998) argues that there are large cultural differences between the West and East, but also within East itself. For instance, Bond (1999) notes that Chinese from different geographical areas hold different cultural values. Extending this to the concept of guanxi relationships, it is possible that the characteristics and nature of guanxi are quite different between Chinese in Hong Kong and Chinese from Taiwan. The influence of capitalism and exposure to Western ideas seems to have brought about more individualism in Hong Kong, whereas traditional and collectivistic Chinese culture still rests on in Taiwanese society. In the future, the additional study can focus on different countries in the same region and see whether there is difference on crisis communication within the same region. Fourth, this study only examines the crises which were created by the corporate leaders whose unethical and knowingly illegal behavior violated the law. However, crisis could be natural (e.g., earthquake, fire, and flood) or created (e.g., terrorism, disease break, product failure, and workplace violence, etc.). These crisis events can do and

205 strike organizations of all types. The future study can explore these types of crisis in different cultures whether they have different crisis response strategies. Finally, a follow-up analysis for BenQs update legal issues is necessary while they are available.
Conclusion

Organizational crisis almost always brings up basic ethical issues about wrongdoing, intent, cause, blame and responsibility (Seeger, 1997). More importantly, the organizational crisis will affect stakeholder perceptions and the impact on reputational assets. As noted by Coombs (2007b), reputations shape how stakeholders interact with organization, protecting the reputation yields behavioral benefits as well. Tylenol poisoning incident in 1982 is an example of an organization that was able to rebound from crisis. Under the courageous leadership of James Burke, Johnson & Johnson immediately took the responsibility and action which cost the company millions but ultimately saved its reputation and preserved customer faith in Tylenol brand. On the contrary, the crisis at HIH illustrates the unethical leader in organizational crisis. Ironically, HIHs director Rodney Adler even proclaimed his innocence and declared that he was a scapegoat and a victim of the tall poppy syndrome. The companys collapse destroyed thousands of investors' savings. Stewarts small personal matter was transformed into a full-blown crisis which put her in jail and threatened her company reputation. BenQs insider trading case damaged the well-recognized brand. Corporate leaders have somehow forgot that business is all about values and are now paying the price in a downward market with a loss of stakeholders confidence. Most importantly, as Byrne (2002) points out, executives are now learning that trust, integrity, and fairness do matter and are crucial to the bottom line.

206 The purpose of communication during a crisis is to influence the publics perception of the organization and to maintain a positive image or restore a damaged image among stakeholders (Belasen, 2008). Today, organizations with multinational operations need to manage communications programs across borders, understand the risks of dynamic situations, and adapt quickly to either opportunities or problems (Lamb & McKee, 2005). Culture does matter and play a major role in response to crisis situation. The companies need to fit a culturally specific situation to the multicultural setting in times of crisis. Thus, understanding no one size fits all approach is essential for managing crisis communication in international crisis communication.

207
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229
ABSTRACT A CROSS-CULTURAL STUDY OF CORPORATE RESPONSE AND THEIR IMPACT IN TIMES OF CRISIS

by
SHU-HUI SOPHY CHENG

May 2009 Advisor: Major: Degree: Dr. Matthew Seeger Communication Doctor of Philosophy

Crisis communication studies in non-Western culture are relatively rare and few examples of cross-cultural issues have been examined in the literature. Filling the gap left in current literature, the purpose of this study was to conduct a cross-cultural comparison of U.S., Taiwan and Australia to examine whether these different cultural contexts are related to different crisis communication approaches. Specifically, the three case studies Martha Stewart, BenQ and HIH were designed to explore the intersection of crisis communication, intercultural communication and crisis leadership. From the data analysis, three general themes emerged across all three of these cases: 1) abuse of asymmetrical information, 2) ignoring the warning signs, and 3) failure in crisis response. It was evident in these three cases that no singular strategy was implemented, but instead several actions and communication initiatives were taken. However, the results of the study indicated that denial and shifting the blame to others were the prototypical strategies in all three cases, especially as the corporate leaders tried to distance themselves from the wrongdoings. They were more concerned about

230 avoiding legal liabilities rather than public opinion. In these three cases, stakeholders also found little comfort or reassurances in their codes of ethics. Furthermore, crisis response is unique within each culture and there are both similarities and differences across cultures. The differences can be explained theoretically using dimensions of cultural variability. The results suggested that individualism-collectivism, uncertainty avoidance, and low-high context communication showed significant differences in these three cases when handling their corporate crises. This study confirmed the view that cultural sensitivity is a key to successfully manage crisis communication. Therefore, corporate communication practitioners must recognize that there is no one size fits all approach to manage crisis communication. In short, culture does matter and plays a significant role in response to a crisis situation. While the major guideline of crisis response strategies is widely considered to be universal across cultures, the way in which it operates is still viewed as culturally specific. The implications of this study point to a further need for developing a Situated Cultural Crisis Communication model.

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AUTOBIOGRAPHICAL STATEMENT

Shu-hui Sophy Cheng received her Bachelor of Arts in Foreign Languages & Literature from the National Sun Yat-sen University, Taiwan, in 1988, and her Master of Arts in Communication & Mass Media from Temple University, Philadelphia, in 1992. Prior to her PhD studies, she held a number of positions in media consulting firm, radio station and academic. Her primary research interests are in the areas of public relations, crisis communication, and intercultural communication. Upon completion of her doctoral work, she will teach communication theory and public relations courses in the Department of Communication Arts at the Chaoyang University of Technology in Taiwan.