Book Excerpt: 7 Lessons for Leading in Crisis

In Leadership Is an Art, Max DePree writes, "The leader's first job is to define reality. The last is to say thank you." Before you can lead your organization through a crisis, you have to acknowledge that you are indeed in one. Next, you have to get everyone else to acknowledge it as well. Only then can you define the problems accurately and develop plans to deal with them. Why is this so difficult? Leaders often go into denial about the urgency and severity of the challenges they are facing. Or they tend to blame external events, people, or organizations for their problems. Without accepting that the problem is theirs to fix, they cannot understand what they are dealing with. Often the hardest part is to acknowledge your role in the origins of the crisis. Even when leaders acknowledge their responsibility, they may face significant resistance from their organizations in solving it because people have great difficulty in admitting their mistakes. This is why crises require so much skill on the leader's part.

Philip McCrea learned the hard way how difficult it is for a young entrepreneur to face reality in his fledgling business. Founding San Francisco–based Vitesse Learning in 2001 at age thirty-two, McCrea saw only upward possibilities for his Webbased sales training company. McCrea was highly skilled in bringing in contracts, which often contained significant amounts of custom software for his young software team to develop. Starting with only $1.2 million of capital, Vitesse made money its first two years.When it missed its 2003 targets by 40 percent, McCrea was forced to raise an additional $500,000. Vitesse rebounded strongly in 2004, thanks to expanded agreements McCrea negotiated with numerous divisions of Johnson & Johnson, as well as moving into financial services and a custom contract with Corning.

McCrea was a born optimist whose entire life had been successful. He noted, "I sometimes get too aggressive about the results we will achieve. It has been a challenge for me to open up and see that I don't have all the answers." In 2005 McCrea's business turned down once again, shortly after he moved his family to New Jersey to be closer to his customers. With software programmers left behind without clear leadership, software costs escalated, leading to a new cash flow shortfall. McCrea hesitated in addressing the core problem of leadership in his software group. Strapped for cash, he instead searched for external options and decided to sell Vitesse to a Canadian company with a software team in Nova Scotia.

The merger did not go well, as attempts to migrate software development to Nova Scotia led to sharp reductions in quality and extensive customer complaints. Eight months into the merger, McCrea resigned, feeling the business had no future. Six months later, the Canadians declared bankruptcy and shut down the company, and 175 people lost their jobs.

McCrea described the previous two years as an "emotional rollercoaster." For the first time in his life, he had to acknowledge he had failed. "I had to look myself in the mirror and accept my failure," he said. "My greatest growth came through learning that failure is okay. During this time I was intolerable. Although I wouldn't admit it, I was depressed and got angry very easily."

After reflecting on what went wrong, McCrea became CEO of ClearPoint Learning, a sales training software firm with low-cost operations in India. Having learned from his mistakes at Vitesse and how important it is to face reality, he felt well positioned for success at ClearPoint.

It isn't just entrepreneurs who struggle with facing reality. Veteran leaders have an equal amount of difficulty. In 1991 Salomon Brothers faced possible criminal prosecution for submitting false bids to the U.S. Treasury, but its management was in complete denial about what had happened. This caused its largest shareholder, Warren Buffett, to take control of the company.

Buffett's first task was to get the organization to face reality. He immediately forced top management to resign, although its leaders were denying any knowledge of the false bids. Then he went against the advice of the company's lawyers and public relations specialists and agreed to provide complete transparency to the U.S. government, even if the information could be used against the company in a criminal prosecution.

Buffett understood the company would almost certainly face criminal indictments if it continued to stonewall investigations by the U.S. Treasury and Justice departments. That would have precluded Salomon from bidding in government auctions and put the company into bankruptcy. By putting his personal credibility on the line, Buffett spared Salomon from criminal indictments and was able to restore its operations. Salomon shareholders were fortunate that Buffett was so willing to step into this messy situation and keep the firm from going under. That's what courageous leaders do when faced with a crisis.

...Denying reality has destroyed more careers and organizations than incompetence ever did. Instead of asking yourself why it is so difficult for other leaders to face reality, ask yourself instead, "Why is it so hard for me?"

The first reason is that people always prefer good news or a quick fix. Rarely are they willing to acknowledge that their organization is facing a crisis. Crises often start out in relatively benign ways, and then seemingly minor events escalate into major ones. Unless leaders face reality early, they can easily miss the signals of the deeper crisis that is waiting ahead. Until its leaders acknowledge the crisis, their organizations cannot address the difficulties.

Many people find reality is just too horrible to face or they are too ashamed, so denial becomes a convenient defense mechanism. If you feel yourself getting defensive, ask yourself, "What am I defending against? How might denying reality make the situation worse?"

DON'T SHOOT THE MESSENGERIn January 2009 I was chairing a panel on "Crisis, Community, and Leadership" in Davos, Switzerland, when panelist Jamie Dimon, J. P. Morgan's CEO, shared this vignette: "At a management meeting a woman got up and said, 'If you're a leader, you need one person who tells you the truth every time something goes on.'" To which Dimon noted, "If you have ten people around you and only one of them is telling you the truth, you have a real problem, because everyone has to do it."

Why aren't there more truth tellers in organizations? The reason is that they are afraid of getting in trouble with a boss who won't accept bad news. Leaders who are approached by a bearer of bad news may wind up shooting the messenger, because reality is just too painful to face. Look at what happened to Enron's Sherron Watkins when she took her concerns about financial misstatements to chairman Ken Lay. She was not only rebuffed but ostracized within the firm. No wonder many employees hesitate to tell the truth to their bosses.

Sadly, most organizations operate more like Enron than J. P. Morgan. Instead of building an organization of truth tellers, many leaders surround themselves with sycophants who tell them only what they want to hear, rather than sharing the stark reality. Without a culture of openness and candor, leaders are highly vulnerable to missing the signals of big problems ahead.

By the time they acknowledge how deep their problems are—or outsiders like government agencies, consumer watchdog groups, or the media do it for them—it is too late. Then they find themselves forced to defend their companies against charges that are even worse than reality.

I used to tell people at Medtronic, "You'll never get fired for having a problem, but you will get fired for covering one up. Integrity is not the absence of lying. Rather, it is telling the whole truth, so that we can gather together the best people in the company to solve the problem."

It is important to publicly express appreciation to the truth tellers so others in your organization will follow suit. Only with a culture of candor and openness can organizations cope with crises and act in unison to get on top of them.

Before it's here, it's on the Bloomberg Terminal.