Tag: Crisis Management

Can you afford to lose 20% of your Market Value?

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A Corporate Crisis consumes most CEOs. Are you prepared for yours?

According to Oxford Metrica, a strategic advisory firm, every company today faces an 82% chance of experiencing a Corporate Disaster within any 5-year period.

They define a Corporate Disaster as an event that results in a company losing 20% of its Market Value.

So if you believe them – and they are a rigorous analytics company that is respected around the world, so I think you can – your company will experience a sudden and dramatic loss of your company’s Market Value in the near future.

According to another study by the Wharton School of the University of Pennsylvania, a sudden Stock Price drop is not just a short-term problem – it’s a long-term problem.

On average, it takes 80 weeks for a company’s Stock Price to recover after a sudden price drop – that’s 1½ years before the company’s Stock Price recovers to its original value.

If the Stock price fall is the result of Earnings Risk, recovery takes longer: 93 weeks.

If it’s the result of Acquisition Risk, it’s 121 weeks.

If it’s Industry Risk, it’s 137 weeks.

And if it’s Competition Risk, the recovery time is more than 3 years – or 162 weeks.

They also analysed the recovery time by risk, across industries, and the situation is much more extreme for the IT, Utilities and Healthcare sectors.

So the brutal conclusion is this:

  1. Your company will probably experience a Corporate Disaster that could result in a sudden 20% loss of Market Value, sometime in the next 5 years.
  2. After this event, it could take 1½ years on average for your Stock price to recover – maybe more.

Equilar calculates that the average S&P 500 CEO serves just 7.4 years in charge of their company – and just 6.0 years at the median.

So it’s likely that your imminent Corporate Disaster will dominate your tenure.

But recent research has shown how companies with strong Corporate Reputations are less affected by Corporate Crises, and recover from their Crises faster.

At Reputation, we advise listed Corporations how to prevent, prepare for and manage Reputation Risk.

If you are a CEO of a listed Corporation, and you would like to discuss the best ways to prepare for, prevent and manage Reputation Risks, please contact us via our website, or email us at Connect@TheReputationPartnership.com and we will reply, in total confidence, by return.

How to protect your Share Price in a Corporate Crisis.

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Every Second Counts

A recent article in the Financial Times analysed Samsung’s response to the Galaxy Note 7 Crisis.

The conclusion was simple:

In a Corporate Crisis, the longer you delay, the bigger the cost.

The Historical Perspective

There are two famous and powerful historical examples that illustrate the point: Johnson and Johnson’s response to the Tylenol Crisis of 1982, and Merck’s response to their Vioxx Crisis of 2000.

Johnson & Johnson made the decision to withdraw its entire stock of Tylenol from shelves within just 5 days of discovering that a small sample of the product had been tampered with cyanide.

The company’s share price declined by 9.5%.

On the other hand, Merck took 1,065 days of obfuscation and regulatory negotiation between 2000-2004 before it eventually confessed to safety issues with its Vioxx pain drug and activated a global recall.

Throughout that 3-year period, Merck stock lost an enormous 46% of its value.

All the textbooks and PhD Theses use these two case studies to prove that fast actions reduce financial impact.

But do those principles still apply today?

Crisis Response Today

Several recent and ongoing Corporate Crises give us good opportunities to compare the impact of speed versus hesitation.

VW is an excellent, live example.

It took VW 476 days after the first evidence of its diesel emissions tests emerged in 2014, before it admitted that 11 million cars were actually equipped with illegal engine software.

Over that ridiculously prolonged period, VW’s share price collapsed by 45%.

Takata, the world’s largest suppliers of automotive air bags, took 194 days after the first report of fatal defects appeared in the New York Times in November 2014, before it confirmed the potentially fatal defects.

That was long enough for its share price to fall by 30%.

Despite all the hype, Samsung has actually handled its Galaxy Note 7 Crisis relatively well.

After first reports of its exploding problem emerged in September 2016, it took Samsung just 42 days to manage their way through 9 different phases of Crisis Management, resulting in the final closure of the entire product line.

The fall in share price was only 5%.

Target moved even faster in 2013. They told 40 million customers that their data had been compromised just 29 days after discovering the breach.

Their share price declined just 3%.

GM’s Mary Barra set a new standard in 2014. It took only 13 days for GM’s new CEO to admit to faulty ignition systems and start recalling vehicles.

As a result, GM’s shares lost only 6% in the next quarter.

On the other hand, Yahoo waited 55 days after discovering their data breach to tell 500 million customers in September 2016.

That delay could just have cost them US$5 billion of Verizon’s money.

The Speed of a Tweet

Social Media and Digital News make the need for speed greater than ever.

According to recent research by Freshfields Bruckhaus Deringer LLP, 28% of Corporate Crises have become international news within 1 hour.

Yet it normally takes companies at least 21 hours to formulate an official response.

And one year later, 53% of companies had not seen their share price regain pre-crisis levels.

So it’s truly amazing that companies like VW and Takata still think that procrastination can save them.

When it’s most likely to destroy them.

At Reputation, we help listed Corporations get prepared for potential Reputation Risks.

If you are a CEO of a listed Corporation, and you would like to discuss how to minimise the impact of a Reputation Crisis, please connect via our website or by email to Connect@TheReputationPartnership.com – and we will reply, in strictest confidence, by return.