Risk Indicator: The price of reputation

There is an 80% chance of a company losing more than 20% 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 more than 1,000 companies, reinforces the need for good crisis planning and management, and notes that organisations that handle a crisis well actually stand to gain a valuable reputation boost.

All crises are ultimately a “nexus of opportunity”, according to the report. They can be used to reinforce a 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. Oxford Metrica research leader Deborah Pretty said that the lost value is not just temporary but in fact a “sustained, seismic shift” in the value of a company.

All crises are ultimately a “nexus of opportunity”

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

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.

According to Pretty, risk managers could benefit significantly from educating their board about these matters. In fact, buy-in from the top is critical if the organisation is going to respond and recover after a crisis. “Chief executives really need to understand what’s at stake if a major crisis occurs,” she said.