When Crisis Hits Business Value

How many times have you heard senior executives say reputation management, more so, crisis management is just a PR or comms department issue? How often have we heard business leaders say crisis simply depends on the news cycle – that it will just go away if the organization chooses to stay quiet. How frequent have we heard C-Suite execs pooh pooh reputation management as a cost center, and therefore not worth giving enough resources?

These are real scenarios that are often played during “peace” time in most organizations until they are hit by a crisis that threatens the very existence of the organization.

Executives need to realize early on that success does not happen overnight, but failure does. And yet many continue to fail – either by sheer incompetence or complete ignorance. Many executives continue to think that crisis is something that can only happen to “others”. Worse, senior leaders assume that crisis is a distant thought, that it can simply be relegated to the back burner and simply focus on “growing the business.”

However, many studies have shown that crisis can impact the business in several ways – in areas that can negatively impact the value of the business and the brand.

A crisis, for one, can result in the loss (or inability to attract) talented employees. Top performers want to work in great companies that are not just financially stable (and growing), but also meet certain moral and ethical standards that are aligned with their own values.

So, when a crisis erupts due to some corrupt practices or environment-destroying activities like illegally dumping chemicals into rivers resulting in fish kill, employees may choose to leave or potential talented employees may lose interest.

Additionally, a crisis may result in a massive loss of stakeholder trust. This is especially true when the crisis is emotional or tied to people’s core values. The continuing “double speak” among some organizations in relation to sustainability campaigns is a ticklish issue among partner stakeholders. Organizations that claim to be pro-environment, but accept donations from businesses known to violate environmental laws and safeguards may lose passionate executives who have devoted their lives to a more sustainable way of living.

More than the “soft” costs of crisis, failure to immediately arrest and manage crises also lead to serious financial losses – which have not been measured yet in the Philippines – a project which the Reputation Management Association of the Philippines will soon tackle. It is time we measure how crisis in the Philippines negatively impacts the business value of organizations.

Fortunately, we have very recent studies that show how a crisis can send shivers to senior leadership.

Just this year, An Australia-based agency, SenateSHJ, studied the impact of a crisis on 30 listed companies from around the world over the past 40 years. The research project, titled, Crisis Value Erosion Study, used several crises that happened in different sectors – technology, automotive, aviation and financial institutions – among others.

One of the key findings is that 70 percent of companies that suffered a crisis experienced a significant drop in share prices and earnings per share (EPS). On average, organizations saw a 19 percent drop in share price. Based on the study, the smallest drop was recorded at 2.1 percent on the alleged racist advertisement of Volkswagen, and the highest recorded drop was at 50.4 percent, which was experienced by British Petroleum during its Deepwater Horizon explosion and oil spill.

While some companies that experienced a share price drop had no change in their EPS values, there are companies that suffered the worst – Union Carbide experienced an EPS drop of 382 percent during its Bhopal gas disaster. Based on the study, the median EPS drop for all crises was a whopping 222 percent.

As regards which industry was mostly affected, the mining and entertainment sectors were hardest hit in terms of the average and median share price drop. They were followed by technology, pharma, travel, retail, automobiles, airlines and electronic sectors. The fashion and FMCG sectors were least affected. As to what types of crisis caused a huge drop in share prices, environmental damage and casualty accidents result in a far higher share price drop compared to white collar crimes or discrimination.

For those executives who still think the crisis is just passing time and will be easily forgotten when the next news cycle rolls over, well, think again. According to the study, recovery time is longer for companies experiencing larger share price drops. It noted that the correlation between share price drop and EPS drop is also high. When a large crisis hits, the organization and its shareholders should brace for major financial impact. Share prices took an average of 147 days to recover. Crisis also placed a huge financial toll on organizations in terms of providing compensation to those affected by the crisis. The study shows that organizations that provided compensation experienced an average share price drop of 25.2 percent and average days to recovery totalled 249.

Evidently, companies in crisis will likely incur a one-time or even recurring, unexpected costs. These could range from increased operating, capital or regulatory costs – which could come from updating manufacturing operations to correct a product recall issue, to paying legal fees and settlements resulting from a customer lawsuit.

It’s really an uphill battle, and one that can be avoided (or at least eased) by preparing for a crisis before it occurs. Preparation is, indeed, always cheaper.

Indeed, crisis that is left unchecked and unmanaged can have a substantial impact on the value of the business and the brand. At the minimum, it will take months or years to recover from a crisis. Worse, recovery may not happen at all.

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