What’s the difference between a scandal and a crisis? 

These two words often get mixed up. This conflation is a big problem, as the effective methods of dealing with a scandal and a crisis vary significantly. Get it wrong, and the future of the company is at stake. Most businesses have some crisis management contingency, as this field has been studied to a far greater level. But very few have any actual preparations in place for a scandal. 

A crisis is like rough surf. People with the right skills know what to do. A scandal is a riptide. Far deadlier. 

A scandal is indeed a crisis, but a crisis is not necessarily a scandal. And to complicate matters, a scandal masquerades as a crisis, making it doubly hard to work out what’s happening.

Let me explain further. 

Crisis: Rough surf needs expert surfers

I had a front-row seat in a major crisis earlier in my career while working for Heinz. Soon after I joined, the steady hum of this business behemoth suddenly came to a screeching halt. On May 1, 1989, the company awoke to tabloid headlines: bleach was reportedly in Heinz baby food. An extortionist claimed he had injected small amounts into just a very few jars using a syringe. But which jars, and where? Was any baby hurt? 

A race against time began, as not everyone reads the headlines, and most don’t believe them. As we read through the papers that morning, parents could be feeding their baby poisoned food. Heinz was one of the world’s most trusted brands, now threatened by one man with a syringe. 

I was too new and junior to have any role in the crisis, but entirely by chance, my office was close to Mike Sargeant, the burly, mild-mannered head of public affairs who led the crisis response. What I witnessed was a masterclass in crisis response. Mike and his team had learned how to recall products from the crisis in the car industry. 

The one thing I noticed was that the regular management structure dissolved. MBO, management by objectives, was set aside as the whole management crew focused on crisis recovery and rapid data acquisition. OODA (Observe, Orientate, Decide and Act) was that every jar, in every store and in every truck, had to be tracked and recalled nationally and globally. Not one jar could go anywhere near a baby. 

The existential threat was crystal clear and understood precisely by everyone. As we shall see, clarity is exactly the ingredient missing in a scandal. 

The management hierarchy gave way to a tightly knit task force of specialists who could move light lightning and had been trained for this scenario. They could crossover boundaries and organisational silos, set tasks for the most senior officers, and reorientate teams as needs changed. Interestingly, Desert Storm and Gulf War I took place just a year later and put into practice the military doctrine of Colonel Boyd and the lessons he gleaned from the debacle in Vietnam. In so many ways, we are having to relearn these same lessons. 

The police caught the culprit. A former Metropolitan Police detective was proven guilty and sentenced to 17 years in jail. As a result of a collapse in consumer confidence, warehouses full of baby food were destroyed, and millions of pounds were written off. No baby was harmed. 

But how do you recover the brand? How would parents feel safe again using shop-bought baby food- or any food in a jar or can, for that matter? Sales had collapsed, consumer demand cratered, and the share price crashed. 

The recovery phase after the crisis had passed needed the same mode of OODA-based working. Transdisciplinary work teams rebuilt the product plan to work on a solution to convince shoppers to start spending again. They came up with the genius idea of switching from jars to white-coated tins. The tin was more resilient than the tin foil on the jar, and the plastic coating would display any pin prick. 

Threat clarity and role fluidity enabled human genius to flow. Within weeks, sales had recovered. The in-hand product experience reassured shoppers, and the Heinz brand became trusted again. And, because the baby food crisis had affected the whole sector, with competitors affected as well by the collapse in confidence, Heinz soon found themselves enjoying a competitive advantage on the upside. 

Crisis as turning point. 

Scandal: A Riptide with concealed dangers

In October 2015, Theranos CEO Elizabeth Holmes stood before the town hall meeting involving hundreds of scientific and technical staff, convened in response to the crisis caused by the FDA rejection of the blood diagnostic tool. She convincingly and forcefully stated, “…everything is fine. Back to work”. 

Elizabeth Holmes was then one of the wealthiest women in America, valued at $4.5 billion. Oracle CEO Larry Ellison was an investor, along with legendary Silicon Valley VC Tim Draper, and the famous Henry Kissinger was on the board, so what could possibly be wrong? Surely, they’d all checked, right?  

But, she was lying. 

Despite a Wall Street Journal investigation exposing the bogus claims, based on whistleblower evidence, Homes appeared at a televised conference organised by WSJ on October 21 2015, and stated, “We know what we’re doing, and we’re proud of it.” 

These are precisely the words you would want your CEO to say amid a crisis. You might argue that, as CEO, Holmes managed the crisis well. She deflected and evaded the truth for years and kept the business going despite everything. 

But it wasn’t merely a crisis. 

By then, no amount of wilful blindness could have prevented her from realising that the data submitted was faked. There would never be a viable finger prick diagnostic tool saleable via Walmart. The person, the company and all the staff, were relying on to lead them through the crisis was the same person who had wilfully distorted the lab results, presenting traditional syringe test results as if they had been made using the new Wonder Diagnostic Stick Pen device. 

One problem exposed by scandals is that many of the CEOs at the eye of the storm would score highly on most leadership competency assessments. Elizabeth Holmes had leadership smarts. Hundreds of very clever people followed her, and experts believed her. She was visionary, passionate, persuasive, hyper-networked, and relentlessly focused. 

However, she lacked an ethical compass and perhaps a soul, which became clear years later. It took until March 2018 for Holmes to be charged with massive fraud. Given the number of false positives, many people will have died through misdiagnosis. 

A $9 billion company was essentially valueless. That’s certainly a crisis. But the much bigger problem is the scandal that caused the crisis in the first place. And the author of the scandal was, of course, Elizabeth Holmes. The crisis was resolved through Theranos’s bankruptcy in September 2018 and Holmes’s imprisonment for 11 years. 

Only the professionals at the relatively slow-moving and ponderous FDA provided the backstop society needed. The WSJ broke the story very late in the day. The investment and audit communities had utterly failed to spot the scam. 

The audit and investor communities’ gullibility is one of many contributing factors to a scandal. It is one reason a scandal can look benign, like a riptide. The auditors make everything seem just fine. Back to work. It’s just the bureaucrats and the FDA being awkward. They’re government, you know. 

The riptide being concealed was that the CEO was a crook. 

As the Theranos debacle highlights, a scandal might well be caused by the CEO in charge of a crisis response. The CEO IS the crisis, and asking them to resolve it is like asking a corrupt cop to stamp out the Mafia. Amid a scandal, the situation seems helpless. And it often is by then. 

How to Prevent a Scandal

But consider this backstory: Elizabeth Holmes dropped out of Stanford University and did not have the required medical qualifications to make the claims she did*. Moreover, when pitching her ideas for a pinprick diagnostic tool in 2003, her professor, Phyllis Gardner, believed that medical science was impossible. The critical issue was the temperature of the blood and the unreliability of any test instrument that could not regulate this. The year, once again, was 2003, over a decade before the regulatory approval problems emerged. 

Holmes’s break came when she convinced the Dean of Engineering, Channing Robertson, to back her. Although a senior figure, he was not a medical scientist. He became the first board member of Theranos, and introductions to venture capitalists followed. Holmes was then able to raise $400 million without having to prove any medical claims. 

This says a lot about the culture of Stanford University and its hunger for entrepreneurship. It teaches its students to fail fast, move fast and break things, build the parachute on the way down, and, worst of all, “fake it until you make it”. 

Who is the real villain here? Was Elizabeth Holmes a naive student misled by the venture-fuelled ethos of Stanford? Or was she a criminal mastermind? On May 30, 2023, she surrendered herself and began serving an 11-year sentence. 

This backstory highlights the failings in this specific case but also points to the flaws present in so many scandals that we’ve studied:

  • A fall in norm standards, fostered by commercialised universities, consulting-driven auditing and star-struck media hungry for interview access. The warning lights failed. 
  • Turbo-charged venture capitalism, eager for multiple returns and a quick exit
  • Charismatic leadership, able to beguile, bully and manipulate experts and professionals
  • The “Icarus Complex” is a psychoanalytical term for individuals who seek out exceptional risk. 
  • Wilful blindness in the face of dishonesty. 
  • Governance failings, created in part by the dominant role of the unitary boards
  • Cultural weakness, ruled by fear, makes whistleblowing difficult. 
  • Cynical alienation and lack of ethical concern 

Some of these are hard to spot, but many can be identified early with good governance, effective leadership and the proper checks and balances. 

Conclusion 

The distinction between a scandal and a crisis is not simply the presence of dishonesty and malfeasance by the person leading the crisis response. In Heinz, the existential threat was clear. The entire focus of attention was on the safety of infants. In the case of Theranos, the focus was solely on the company’s survival and not the safety of its customers. 

In Heinz, information flowed freely. In Theranos, information was distorted through the prism of lies and deceit. 

The baby food crisis could not have been avoided in Heinz. In Theranos, the scandal was utterly avoidable, and as Prof. Phyllis Gardner showed, the scam was evident even without hindsight. Foresight was needed, however. 

Despite being commonly conflated, they are quite different phenomena that need to be treated with distinct governance and leadership methodologies. 

Academic Definition 

In one of the most comprehensive literature reviews conducted on scandals in 2017 by Dr Dia Andrews at the University of New South Wales (Canberra), she states, “Despite the upsurge of interest, a perception persists that the nature of the phenomenon is poorly understood and that a general definition remains elusive.” (Andrews, 2017). 

Dr Andrews then goes on to offer a handy and, in my view, durable definition of a scandal: 

“mediated episodes of conditioned public moral conflict concerning contaminating and provoking transgressions wherein reputations are at stake” (Andrews, 2017). 

Scandalarity

Our Scandalarity team have identified 21 common factors that contribute to creating scandal conditions. 

We examined hundreds of cases to determine the unique anatomy of a scandal and what companies can do to anticipate, prepare for, respond to, and recover from a scandal. What we have found is that underneath the surface, there are patterns that can be spotted. Like riptides, underlying cases can be identified and prepared for. 

This detail falls beyond the scope of this article, but please get in touch to find out more at scandalarity@protonmail.com

And if you are just generally interested in scandals, tune in to our new Scandalarity Podcast, where we’ll delve deep into scandals at https://scandalarity.com

Sources and References 

  • John Carreyrou. (2023). Bad Blood: Secrets and Lies in a Silicon Valley Startup: The Story of Elizabeth. New York: Picador.
  • 20/20. (2019). ‘The Dropout’ Part 1: Where ex-Theranos CEO Elizabeth Holmes got her start. ABC News, March 16, 2019.
  • Lauren Rogal. (2021). Secrets, Lies, and Lessons from the Theranos Scandal. UC Law Journal. 72 Hastings L.J.(166). [Online]. Available at: https://repository.uclawsf.edu/hastings_law_journal/vol72/iss6/3 [Accessed February 7 2024].
  • Rodney W. Forsman, BS. (2017). Theranos Lessons: Déjà Vu All Over Again?. Clinical Leadership & Management Review. 1stQuarter;(31(1): 2), pp.26 – 28. [Online]. Available at: https://eds.p.ebscohost.com/eds/pdfviewer/pdfviewer?vid=7&sid=3ac2ade2-ee9a-4515-9b0b-36cf1c61f025%4 [Accessed February 7 2024].

*Note: Elizabeth Holmes dropped out of Stanford after being raped. The psychological effects of this have not been researched, or at least not available to the public. However, we know she did not enrol in other scientific or medical studies at any other campus or online. She was wholly unqualified to make the claims she did or supervise senior scientists reporting to her.

What to find out more?

Dare2Know has developed a whole course packed with detailed case studies on 21 business and financial scandals, just like this. Learn about the common patterns and underlying causes of scandals, and how you can anticipate and mitigate the effects of scandals on your organisation.

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