A crisis destroys value

There is an eighty percent chance of a company losing more than a fifth of its value at least once over a five year period as a result of a badly handled crisis, according to new research.

The study by Oxford Metrica, which looked at over a thousand companies, reinforces the need for excellent crisis planning and management.

When struck by a crisis, companies quickly fall into two groups; they are either winners or losers. Organisations that handle a crisis well (the winners) actually stand to gain a valuable reputation boost.

The key factor driving value recovery is a good communications strategy, according to the study. Strong leadership, rapid response and sensitive communication during a crisis can shape a company’s reputation.

There is an eighty percent chance of a company losing more than a fifth of its value at least once over a five year period

Crises, or reputation threats, which range from operational hazards to product recalls or lawsuits and regulatory action, put at risk a significant portion of a company’s value.

Research leader Deborah Pretty, from Oxford Metrica, said that the lost value is not just temporary but in fact a “sustained, seismic shift in the value of a company”.

“Most CEOs will experience one of these events during their tenure,” she said. “The more prepared they are the more placed they will be to respond and recover.”

Introducing the research at the Ferma Forum in Stockholm, Aon’s chief executive officer, Greg Case, called the findings “staggering”.

Having in place a effective crisis recovery budget and a good communications strategy are the key differences between “winners” and “losers”, explained Pretty, adding that: “The market is very quick to work out if you’re a winner or a loser.”

All crises are ultimately a “nexus of opportunity”, according to Oxford Metrica. They can be used to reinforce company’s values and prove to stakeholders that the business can handle complications and come out of them even stronger than before.

Businesses failing to grasp the opportunity will leave behind disappointed stakeholders and revise downwards their expectations of future performance. Consequently, their share price or market value will fall.

Reputation, the report implies, is a significant source of value for many companies. And managing risk is an essential element of a successful reputation strategy.

Risk managers could benefit significantly from educating their board about these matters—it could be an important way of getting boardroom attention.

In fact, buy-in from the top is critical if the organisation is going to respond and recover after a crisis. CEO’s really need to understand what’s at stake if a major crisis occurs, said Pretty.