Stasia Kelly, currently of counsel to DLA Piper’s White Collar, Corporate Crime and Investigations Practice, has had a long career as a general counsel at companies including AIG [where she also served as vice chairman]; MCI/WorldCom; Sears, Roebuck &Co.; and Fannie Mae. She shared her insights on crisis management preparation in an interview with InsideCounsel for the October Feature, “Deflecting Disaster.” Following is an edited transcript of that interview.

Q. What is the most important thing for a general counsel to understand about crisis management?

A. I think the single most important thing is advance preparation, and the willingness to admit when a crisis hits that you don’t have all the answers and you may not have the people and the resources in-house to control the message and manage the situation.

If you think back, it’s almost like companies learn this the hard way and other companies never seem to learn from the experience of companies before them. People still talk about the company that did it best, Johnson & Johnson back in the Tylenol scare 28 years ago. And they had a recent scandal that wasn’t so well managed, I think.

Q. What can in-house counsel do to prepare for a crisis?

A. I’ve thought a lot about that and I think that human nature plays a huge role. When a company hits a crisis, the first instinct is to become insular and hunker down and gather your people together to figure out what to do. While that is an important step, it’s not enough. Crises are outside the normal course of a company’s existence. As prepared as you are with a war room, and knowing where everyone is, it is almost impossible to prepare for the actual circumstance, because they are all different and you can’t really predict them.

Most of the time companies need to have at their disposal outside experts who know enough about the company, its history and culture to jump in and help shape the response to the crisis. I am talking about a good PR firm, a good law firm and a good firm that knows how to get to the constituents on the Hill, federal and state regulators and legislators. The most important things are knowing where everyone is and having a crisis response plan of sorts on the shelf, but also having your outside resources ready to go for you. If you are not out there managing the message in the first 24 hours, you’ve lost a huge advantage. Then you spend the rest of your time trying to catch up instead being out there in front of the message itself.

Q. How do you draw the balance between being prudent about what you say and not jeopardizing the company image?

A. [The key is] having a general counsel along with the senior management team who understand it is important that not just one internal voice gets heard. It’s not just the legal voice, or the regulatory voice, or the business voice. It should be a matter of the senior team coming together and deciding: What is the balance here? What risks should we be willing to take to be sure we are managing the situation in the most appropriate way? In some cases, the possible legal and regulatory implications are so serious that you want the legal voice to take the lead in fashioning the message. But it could also be that it is more of a business issue, where the business risk outweighs the regulatory and legal risks.

Q. Can you give an example?

A. Several years ago when I was at Sears, Sears had just negotiated a successful contract to sell Benetton clothes in its stores around the country. That was a real coup for Sears. But as the clothes started to come in, Benetton was doing a public policy exercise in the US where they were coming out against the death penalty. They didn’t tell us they were doing this, of course. As part of this they had billboards with pictures of convicts on death row with messages like, “He shouldn’t die.” We had a huge reaction from our customers, one of whom, unfortunately, was the widow of a state trooper who had been killed by one of the guys on the billboard.

In a 24-hour period, people starting to picket the stores, saying “How can you carry Benetton when they are against our policemen?” Luckily, our senior team was all in Chicago that weekend and we got them all in one room. The business wanted to pull the clothes off the shelves and send them back because it wasn’t worth the risk of reputational damage to continue to try to carry those clothes. The business wanted to be able to stand up and say, “We heard our customers, we want to do the right thing by them, so we are breaking our contract with Benetton.” On the other hand they looked at me and said, “But we have to breach our contract in order to do that and what are the ramifications of that?”

We decided the legal ramification of breaching the contract was much more manageable than the risk of damage to the company by not doing what the business thought was the right thing. So we sent back the clothes and severed the relationship, Benetton was obviously unhappy and threatened litigation, but it never came to pass. They realized they would have an uphill battle fighting something which had such a visceral reaction from folks in the US, and that was the end of that. It’s a good example of where it was clear the legal risk was there, but it was outweighed by the reputational risk.

Q. What should a crisis plan include?

A. In large part it doesn’t matter what the subject matter of the crisis is. Ten years ago people would say, in generating a crisis management plan, “Let’s say the corporate plane crashes with four execs aboard. What do we do?” Or they would say, “The Justice Department has an indictment ready. What do we do?” People were trying to design the plan around the specifics of the crisis, when in fact, in large part, if you define the way you would react for each of your constituencies, it doesn’t matte r what the crisis itself is and you can never predict them anyway.

So you have to define the constituencies that you have to deal with immediately. You have to deal with the CEO, and that one is really important because most CEOs want to be in control–that’s why they are CEOs. They want to be the one calling the shots. Sometimes that is not the right answer when you might have a crisis that might implicate the CEO, and many of them do. One of the first things you do is get an agreement from the CEO that this will be a team effort. He must be willing to take advice from members of his inner circle so he is not surprised when someone says, “Wait a minute boss.” So that is a conversation with the CEO.

Then there is the board. You never want to blindside the board of directors, so I always have someone in-house ready to communicate with the board, no matter where they are in the world. If they are at a cocktail party and someone says, ‘Did you see Bloomberg? It just came over the news that the company you are on the board of had one of its tankers blow up,’ that is not a good thing. With our Blackberries, we can get something from the Wall Street Journal in a nanosecond so it is important to get to that constituency. It is just not good corporate governance not to have them know what is going on.

Then the next piece is communicating with the senior team and employees. Employees are usually the last people to know what is going on, and that’s a shame, because no matter what the crisis is, you have to run the business and most of the time the crisis is 2 percent of the company’s livelihood. So you want to get to the employees soon enough because otherwise you lose huge amounts of productive time with them wondering whose in charge and what are we doing. The internal communications folks must be ready, getting help from the outside PR folks. Also involve the HR people because they will get questions and concerns.

Just as important are the regulatory and legislative constituencies. The sooner you can get them information, the less likely they are to get information that is not accurate. In a regulated industry like insurance, one of the things we did [at AIG] when the crisis hit in 2008 was to be sure that within 24 hours we had a system set up so we could communicate with the regulators of our business around the world. It was hard enough to know what was going on with the regulators in the US, but the regulators in Asia, for example, hadn’t any idea what was going on, and they were interested in the policy rights of the people in their countries who held AIG policies. We were in constant communication with regulators around the world so they had someone they could talk to, either by phone or email.

Q. What about the media?

A. You have to decide who is going to talk to the media and what the company’s policy about talking to the media is. Will you have “no comment,” which I think is a crazy thing these days? You can’t deal with that. Do you talk on background? The consequences of those decisions are very different.

I have been in companies where people want to be on the record right away and other companies where we want to talk on background or we want to find a friendly reporter who understands the company. I think it really depends on the issues. I am fine talking to the media. But if you have a crisis with significant competitive ramifications or it’s very emotional and people don’t have all the facts, you have to think about if I go on record and I’m not correct, then I have more of a problem than if I did either a background interview or tried to find a reporter I could educate and have them help me get the story out.

It depends on what kind of issue it is and how the company feels about it. I remember one instance there was an issue I dealt with – it was very emotional and we were being hit with information by the other side that was wrong. But we decided that taking the high road was more in line with the company’s culture and governance. Here is where the CEO might want to exert control and say, “I don’t want to be as down and dirty as the other side.” This happens all the time in litigation. It will drive the PR people crazy.

I used to say it is a three dimensional chess game. Every move you make will trigger a consequence, whether intended or unintended. So you ought to be very careful about how you make those moves.

Q. How do you mitigate friction between legal and PR over crisis communications?

A. That’s why it’s so important to have these conversations before the crisis happens. The PR people are going to want to be out there with as much information as possible. The legal people, particularly where there is a regulatory issue involved, are going to want to control how the PR people manage that message.

At AIG we had a team after the crisis hit. We would get together every day when the crisis was in full swing so legal, PR, internal communications, government relations and HR could talk about the issues the company was facing. Part of their job is talking to each other, so the first time they talk to each other isn’t when something bad happens.

It is hard to convince companies and very busy people that these discussions and having preparations is a good use of their time when everything is going well. That is the heart of the problem. When the crisis hit AIG, it did not have the infrastructure that would give it the best preparation; it did not have the teamwork. There is nothing like a crisis to bring people together. Companies that are cooking along fine are saying, “Why should I take the time to get ready for a crisis that will never exist?” That is where companies become vulnerable. It may never happen but if it does, you have lost a huge strategic advantage.

Q. What else is important in managing a crisis?

A. Most crises end. [It's important to review] the lessons you just learned. How do you incorporate those into your crisis response plan? That’s very important so you don’t lose the lessons you just learned.

Also, make sure the GC and staff are aware of all the crises that are hitting corporate America. With instant news cycles, being aware of what is going on and how something might impact your company and your industry is important. Make sure your major law firms and PR guys understand that part of their job is to alert you to things that are happening that might affect your company. That’s a great service that law firms can provide to companies. Good outside counsel are thinking about their clients, even if they are not actively involved in a matter for them.

Q. Why do big crisis communications blunders continue to happen in big companies with lots of legal and PR resources?

A. At the end of the day, all of this goes back to human nature. Every company is made up of people, and they react similarly when something happens. Human nature is to hunker down and only talk to the people you know and not admit you need any help. It’s the same thing time after time. You scratch your head and say, “Why isn’t there an ability to teach a company to do this?” But most companies don’t want to spend the time and money when they don’t foresee a crisis.