We know that many types of reputation crises influence shareholder value, but is there any way to predict how much, or in what manner? International law firm Freshfields Bruckhaus Deringer set out to answer this question by analyzing some 78 major reputation crises across 16 stock markets and came away with some intriguing figures.
Limited window for crisis response
Among the findings was a reinforcement of the fact that a rapid initial crisis response is crucial to protecting your financial value. Chris Pugh, global head of disputes at Freshfields, states:
"Our research shows that directors typically benefit from a window of 24 to 48 hours, during which financial market reaction to news of a major reputational crisis will be relatively restrained. It’s often their last chance to take quick and decisive action before financial news bulletins take centre stage."
Remember, the media has no reason to keep the situation calm. Drama sells, and unless you get your response out first you're likely to be reading a sensationalized version of it the next day, along with your worried shareholders. Social media only compounds this concern, vastly widening the reach of damaging rumor and innuendo.
The impact of reputation crises
The study also uncovered several useful statistics regarding the specific impacts that various types of reputation crises have on shareholder value.
- ‘Behavioural’ crises such as money laundering or anti-competitive conduct have the greatest short-term impact on shares. However, they are the only type of crises where companies come close to regaining pre-crisis valuations after six months (down just 2%).
- ‘Operational’ crises such as accidents or asset seizures have the greatest long-term effect on share price – down almost 15% after six months. A quarter of companies were still down on pre-crisis levels after a year.
- ‘Corporate’ crises such as those affecting companies suffering a liquidity issue or material litigation made up more than one quarter of companies experiencing a share drop on day one. Typically shares recovered swiftly with only one in seven affected after six months.
- ‘Informational’ crises, such as those stemming from customer data losses or theft of commercial secrets, were of moderate concern to markets. Affected companies’ shares did not fall more than 3% on day one. None saw shares fall more than 30% within a year of the crisis breaking.
- ‘Unpredictable’ crises have the greatest up-front shock value. Problems that go to the heart of a company’s operations deliver a longer-term negative impact. One year later, three-quarters of companies experiencing share price falls of more than 70% tended to be those suffering a crisis that struck at businesses’ hearts.
As you can see, the type of crisis significantly impacts not only how quickly and to what degree shareholders react, but also how long the recovery time will be. It's clear that the most dangerous crises are those that disrupt an organization's ability to do business, and as such, maintaining operations even in the face of adversity should be one of the primary considerations of any crisis management plan.
The other less sensational crises are not to be ignored however, and these statistics present a valuable data set for crisis response. By knowing the typical speed of shareholder reactions and average rate of recovery for companies in similar crises, you will be better prepared to employ the correct strategy up front while planning for and allocating proper resources to the work that comes ahead.
Good crisis management software can play a key role in the success of a response, and can even help mitigate an incident before it blossoms into a full-blown crisis.