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

ii

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.

iii

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

iv

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

vi

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
y Denial
Simple denial
Organization did not perform act
Shift the blame
Act performed by other
y 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
y 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
y Corrective Action
Plan to solve or prevent problem
y 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.

Accommodative

Defensive

attack
accuser denial excuse justification ingratiation corrective full apology
action

Strong Crisis
Responsibility

Weak Crisis Responsibility

rumors natural
disasters

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

Excuse
Diminish
Justification

Compensation
Rebuild
Apology

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.

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

y
y
y
y
y
y
y
y
y

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

y
y
y
y
y
y
y
y
y

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

y
y
y
y
y
y
y

Hofstede (1980)
Individualism-Collectivism
Uncertainty Avoidance
Uncertainty Avoidance
Long-term Orientation
Masculinity vs. Femininity
Power Distance
Power Distance

Trompenaars and Hampden-Turner (1998)

y Individualism vs. Communitarianism
y Universal vs. Particular
y Neutral vs. Affective
y Time Orientation
y Internal vs. External control
y Specific vs. Diffuse
y 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

Case 2

Case 3

Martha Stewart

BenQ

HIH

(U.S.A.)

(Taiwan)

(Australia)

RQ1: How did they

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

Case 1

Case 2

Case 3

Data Analysis

Data Analysis

Data Analysis

Crisis Response

Crisis Response

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

Events

10/ 31/ 2001

ImClone Systems asks the government to review Erbitux, anti-cancer drug.

12/27/2001

Stewart sells all 3,928 shares of ImClone stock she owns.

12/28/ 2001

The FDA publicly discloses its decision to turn down ImClones application.

1/7/2002

2/4/ 2002

10/2/ 2002

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

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

2/19/2004

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

Stewart is found guilty of conspiracy, obstruction of justice and making false

statements.

3/15/2004

Stewart steps down as director and chief creative officer of her company.

7/16/ 2004

Stewart is sentenced to five months in prison.

10/8/ 2004

Stewart reports to Alderson Federal Prison Camp in West Virginia.

3/4/2005

Stewart is released from prison.

8/7/2006

Judge throws out securities fraud count against Stewart.

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

Events
The Wall Street Journal writes an article breaking story about

6/7/2002

Strategy
Differentiation

Martha Stewarts ImClone stock sale. Her lawyer puts distance

between Stewart and Waksal.

6/12/2002

Waksal is arrested and charged with insider trading. Stewart

Denial of any

issues a statement repeating her assertion that she had a $60

wrongdoing

stop-loss order. She states that her transaction is entirely lawful.

6/18/2002

6/25/2002

7/25/2002
10/3/2002

6/4/2003

6/5/2003

3/5/2004

3/15/2004

7/16/2004

Stewart tries to resolve concerns and her new lawyer submits

Corrective action

several documents to congressional investigators.

Stewart appears on CBSs The Early Show, and dodges the

Denial of any

questions. She maintains her innocence.

wrongdoing

Stewart tells investors that she and her company should be

Differentiation

considered separately.
Stewart resigns from the board of the New York Stock Exchange.

Corrective action

Stewart is indicted. Her lawyer suggests that she becomes a

y Shifting the blame

target for government prosecutors on account of her fame.

y Attack the accuser

Stewart resigns as chairwoman and CEO of her company but

y Corrective action

remains chief creative officer and a board member.

y Differentiation

Stewart pays for a full-advertisement in USA Today and unveils a

y Denial

personal website in which she proclaims her innocence and

y Corrective action

insists she will fight to clear her name.

y Attack the accuser

Stewart is convicted. She states that she will appeal the verdict

Diminishing

and continue to fight to clear her name.

Stewart steps down as director and chief creative officer of her

y Corrective action

company. Her new title is chief creative adviser.

y Differentiation

Stewart receives a five-month sentence in prison. She asks the

y Bolstering

judge to remember all the good that she has done. She also

y Apology

apologizes and asks for forgiveness.

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

Stewart reports to Alderson prison in West Virginia.

Corrective action

Stewart is released from prison. She resumes her public

Rebuilding

prominence.
Stewart agrees to pay $195,000 for settling civil claims.

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

16.02

11.81

10.86

10
selling
ImClone

indictment

verdict

sentencing

prison

release

12/27/2001

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
209

187
Net
Income
21.9
(million)
Year 2001

7.2

2002

-2.7
2003

-59.5
2004

-75.7
2005

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

Later they are released on bail of NT$15 million and NT$10 million
respectively.

4/25/2007
5/8/2007

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

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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,

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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

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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

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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.

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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.

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Table 8: BenQs Crisis Response Strategy
Date

Events

Response Strategy

BenQ discontinues funding of Siemens

y Diminishing the issue

mobile phone unit.

y Shifting the blame to cultural

difference

9/28/2006

y Apology for the huge losses

German media criticize BenQ, merely

y Denial of the charge

wanting to inherit Siemens's name and

not wanting to revive it.
BenQ is investigated for insider trading.

y Denial of the allegations

y Shifting the blame to the
Taiwanese financial system

3/14/2007

y Bolstering and reminding the

stakeholders of past good works
y 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

y Corrective action
y Intermediary

the board of directors of BenQ writes an y Face saving

open letter, reassuring the protection of
stakeholders interest.

3/21/2007

Chairman Lee does not appear at the

y Silence

institutional investor conference.

Chairman Lee and four other executives y Denial of the charge

5/8/2007

are indicted for insider trading.

y Excuse and justification

y Diminishing

9/1/2007

BenQ restructures and spins off its

y Corrective action

brand business, changing its name to

y Differentiation

Qisda.

y Rebuilding

y Capital reduction plan

y Corrective action

y Management reshuffle

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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

15.05

12.25

acquisition

new brand
operations

disconituing
investment

investigation

indictment

restructuring

6/7/2005

10/3/2005

9/28/2006

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)

Year 2004

2005

130,255

122,254

-27,611

-5,226

2006

4,772

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.

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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.

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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%

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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

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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

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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.

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Table 9: Key Events in HIH Case
Date

Events

5/1996

CE Heath International changes name to HIH Winterthur.

9/1998

HIH Winterthur announces its proposed takeover of FAI Insurance Ltd.

11/1998

Changes name to HIH Insurance Ltd.

1/1999

HIH completes a $300 million takeover for FAI Insurance.

4/16/1999

FAI CEO Rodney Adler is appointed to the board of HIH.

9/13/2000

HIH sells part of its domestic personal lines business to German insurance
giant Allianz for nearly $500 million.

10/12/2000

Ray Williams resigns as CEO.

12/15/2000

Ray Williams resigns as director.

Randolph Wein is appointed to the new position of CEO.

2/22/2001

Australia Stock Exchange (ASX) trading halts at the request of HIH.

2/26/2001

Rodney Adler resigns as director of HIH.

ASX trading resumes.

2/27/2001

HIH credit rating is downgraded to BBB- by Standard & Poors.

3/1/2001

ASX trading suspension announces at the request of HIH.

3/15/2001

HIH places into provisional liquidation with losses of up to $5.3 billion.

5/16/2001

Australian Securities and Investments Commission launches its biggest

ever investigation, seizing HIH documents.

5/21/2001

The federal government announces a Royal Commission into what is

Australia's biggest corporate collapse.

7/2/2001

ASX removes HIH from its official list.

8/27/2001

HIH places in liquidation under the Corporations Act.

8/29/2001

Letters Patent appointing the Royal Commission are signed.

3/14/2002

NSW Supreme Court rules Adler and Williams breached 13 sections of

Corporations Act in a last-ditch attempt to prop up HIH share price.

4/16/2003

The Royal Commissions report is publicly released together with the

governments response.

4/2005

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

Adler releases on parole after serving two and a half years.

1/14/2008

Williams is released from Silverwater jail.

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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

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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.

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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.

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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

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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).

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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

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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

9/2000

10/12/2000

Events

Response Strategy

Ray Williams writes to the chief brokers that HIH is

Denial of speculation

rock solid, sound and dependable.

about financial situation

HIH directors declare share purchases to show that

Diminishing the

they have confidence in the company.

financial issue

Ray Williams resigns as CEO.

y Differentiation

Randolph Wein is appointed to the new position of

y Corrective action

CEO.
12/15/2000

Ray Williams resigns as director.

Corrective action

2/26/2001

Rodney Adler resigns as director.

Corrective action

2/22/2001

HIH requests suspend trading of its shares from

Diminishing the

February 22 to 25, 2001.

financial issue

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

Denial of speculation

2/27/2001

million.
5/18/2001

Ray Williams hands in his passport and says he has

Denial of wrongdoing

nothing to hide.
5/12/2001

Adler emphasizes management rather than the FAI

y Shifting the blame

acquisition is to blame for HIHs crisis.

y Distancing & Excuse

y Scapegoat

6/8/2001

Adler complains that he is a scapegoat and a victim of

Shifting the blame

the tall poppy syndrome.

8/19/2002

Williams justifies himself by saying that he was but

y Shifting the blame

one member of a 10-person board with one vote.

y Scapegoat

Williams uses FAI as the scapegoat for HIHs decline.

4/2005

Adler is sentenced to four and a half years jail and

Corrective action

Williams is sentenced to four and a half years jail.

1/14/2008

Williams walks out of jail and offers his first apology.

Apology

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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.

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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.

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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.

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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.

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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.

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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

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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

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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

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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

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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

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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.

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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

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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

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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.

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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

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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

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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

Taiwan

Australia

90

87
69
58
40

46

62
51

61
45

36

29

31

17

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

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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

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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

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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.

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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

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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

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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

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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

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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.

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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

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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

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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).

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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

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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

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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.

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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

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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.

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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

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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?

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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

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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

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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,

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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.

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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

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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

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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

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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.

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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.

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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,

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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,

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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

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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

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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

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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

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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.

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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

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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

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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

Situationally Appropriate Response Strategies

Cultures
Characteristics
Strategies

2. Relationship History

low-context, direct,
Individualists precise, explicit,
face less important

3. Crisis Responsibility

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

denial, diminishing,
rebuilding, bolstering

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

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

by
SHU-HUI SOPHY CHENG

May 2009
Advisor:

Dr. Matthew Seeger

Major:

Communication

Degree:

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

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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.