The cost of crises

There has been much research on the benefits of handling crises effectively but now there is new evidence about the cost of doing it badly.

 Tony Jaques, in his invaluable Managing Outcomes newsletter, has recently reported on a number of new studies and linked them to some older ones, to give insights into the consequences of not handling crises well. The full report can be found at  Jaques says: “A study by international law firm Freshfields Bruckhaus Derringer examined 78 major reputation crises across 16 stock exchanges – including New York, London and Australia – and found not only a share price hit but an increased departure rate among executives in companies which were less able to resolve a crisis. The departure rate of senior executives from companies which suffered a share price hit averaged almost 10% within a year of the crisis breaking.  This increased to 15% among executives unable to steer their company’s share price back to previous levels within six months, but dropped to just 4% among those who did.

 “A statistical examination of corporate crises in South Africa, published in 2011, found that the greater the speed and number of positive steps taken in the two weeks after a crisis, the less the company share price fell. It also found that the more the company share price increased after the crisis the greater the perception of its corporate reputation and brand strength. And a famous study at Oxford University in the late 1990’s demonstrated that one year after a crisis, the share price of well-prepared companies rose on average by 7%. Companies poorly prepared for a crisis were still 15% behind a year later, a staggering 22% difference in market valuation of the organization.”

 The question is what makes some companies better at managing crises than others? A significant factor is probably culture – a culture of openness to thinking about the environment in which they operate; one that accepts the need for proactive issues management and environmental scanning; values effective stakeholder engagement;  a culture which is strong enough to allow an organisation to recognise when it has been wrong, apologise sincerely and rectify the situation as quickly as possible; and, which encourages a touch of humility in senior management. Denial is natural when disasters strike. But companies with strong cultures don’t ask why us?  They just fix the problem and get the benefit.

And in the meantime, before the crisis hits, I strongly recommend regular reading of Managing Outcomes.