5 Things Your Company can do Today to Prepare for Regulatory Induced Crisis

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In certain areas of the Southern United States, there is a substance known as plough-mud (pronounced “pluff”). Like quicksand, the more you struggle, the deeper you sink (and you almost always lose your shoes). Jack Healey helps businesses avoid the figurative mud-hole muck.

Lumber Liquidators Deep in Mud-Hole of Wildlife Regulations

Friday September 27, 2013 was a normal day at Lumber Liquidators home office, that is until federal agents from the Customs Enforcement Homeland Security investigations unit and the U.S. Fish and Wildlife Service armed with court ordered sealed search warrant invaded their offices in Toano and Richmond, Virginia. Management of the discount flooring company was caught completely off guard as the agents seized records pertaining to the sourcing of some of their product. The company’s market value plunged 11% and according to news reports, the company had no idea what the scope or size of the investigation was — but one thing was for certain — their business was in crisis. The company found themselves knee deep in a corporate mud-hole filled with government agents, bad publicity and threatened supply chain.

How did this happen and what should they do now?

lumberThe genesis of this investigation was the source of one of the company’s lumber products. The company operates more than 300 retail stores, sources from more than 110 International and U.S. mills and has more than 60 associates who oversee the sourcing operation. Yet, Korean Pine and Mongolian Oak, woods from far-east Russia were allegedly sourced in violation of the Lacey Act. The Lacey Act is a federal conservation statute that makes it illegal to import or sell fish, wildlife or plants if it violates state or foreign law. The act—which carries criminal penalties of up to $500,000 per violation—was amended in 2008 to include wood varieties and curb illegal logging.

The woods where the lumber was allegedly harvested are home to the Siberian Tiger, an endangered species with only about 450 left in the world. The tiger feeds on wild deer and boar found in the woods; the deer and boar feed on the pine nuts and acorns the trees produce; accordingly, the wood falls under the Lacey Act. Illegal logging is prevalent in the Russian forest and these products frequently find their way into the supply chains of global companies.

Wal-Mart recalled cribs and toilet seats made in China from this same forested wood in 2007, and signed an agreement with the World Wildlife Federation to verify the source of all the wood used in their furniture within 5 years.

This raid is reminiscent of the Gibson Guitar raid in August 2011, where agents seized more than $1 million in rare Indian ebony, finished guitars and electronic data. Gibson paid fines and forfeited product in excess of $600,000, but fought a very public battle over the affair. Gibson claimed that some of the wrath of the Federal Agents was due to their political affiliation with the Republican Party, and quickly pointed out same woods use in many of their competitors’ products. Interestingly, Lumber Liquidators is an advertiser for conservative talk-show host Rush Limbaugh’s syndicated program, although Lumber Liquidators was quick to issue a statement that distanced them from that show, stating that their advertising was placed by a third party.

Whether a target of zealous, selective regulatory enforcement or poor supply chain management, what should you do if you and your management team misstep into a mud-hole? The supply chain and sales channel has been and will continue to be a source of risk for all global companies whether it is through regulations like the Lacey Act, Foreign Corrupt Practices Act, or the UK Bribery Act.

5 Things Your Company can do Today

Companies put policies and procedures in place to try and limit their exposure, but there will never be 100% certainty that there are not illegal acts taking place either by the company or by its agents. With social media and extended global sales channels and supply chains, it is almost inevitable that management will find themselves in a regulatory mud-hole. Here are the 5 things you should do if this happens to you:

1) Have a financial crisis plan mapped out ahead of time. Firestorm’s PREDICT.PLAN.PERFORM.® process is an excellent formula to follow. Although the actual type of crisis is not known, the response elements and people who will respond to a financial/regulatory crisis are known. This plan should include corporate governance protocols including: prompt notification of Board members, legal counsel and auditors, a well-defined communication protocol and crisis response teams.

2) Cooperate with authorities. Assuming that this was an inadvertent misstep by management, cooperating with the authorities, including doing the ‘heavy lifting’ in data mining will get you through the process quicker and give you a little more control over the situation. It will also be less disruptive on your company in the long run. Lumber Liquidators is cooperating with the authorities and they clearly want to protect their brand. Wal-Mart did this by voluntarily researching other supply chain activities.

3) Admit where mistakes were made and correct them. If unfavorable information comes to light, avoid the temptation to ‘spin’ or cover up the problem. The authorities would like to move onto their next “project” and your stakeholders will appreciate and value honesty. Clearly articulate where mistakes were made, and give details of how you are addressing these issues so they do not occur in the future. Focus on the future!

4) Don’t forget to teach others from your mistakes. Once the crisis is over, and the impact has been dealt with, make the lessons learned a part of your corporate training. Don’t try to hide the ordeal, but make it a part of your corporate culture, how you admit to mistakes and errors and learn from them. There is risk inherent in every business; acknowledging that mistakes will happen and they should be dealt with, not ignored, will lessen the likelihood of an error going undetected in that little problems can become big problems very quickly!

5) Do your homework now! If you have not mapped out your supply chain and sales channel, you need to do it immediately. Understanding not only your suppliers but your suppliers’ -suppliers is imperative. The same is true for your sales channel. Have you mapped all known agents and customer relationships? Items 1-4 above will be of little use if you have not done your homework first.

Remember, by struggling against the pull of the muck you sink lower. By expecting and planning today for the regulatory mud-holes of tomorrow, you will increase the likelihood that your exit from the mire will go smoothly (and you just might get to keep your shoes).

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