Never underestimate the crippling cost of a crisis
by Tony Jaques, Director of Issue Outcomes Pty Ltd, for people who work in issue and crisis management
With cyber-attacks in the headlines, a new report provides a gloomy reminder of the deep and long-lasting impact when things go wrong in public corporations.
A fresh analysis by SenateSHJ showed companies struck by a crisis suffered, on average, a drop in share price by 19%, and share value took 147 days to recover. Moreover, crises involving environmental damage resulted in almost twice as severe impact on average share price.
The cost of crises increasingly features in the headlines. For example, when Facebook, Whatsapp, and Instagram had a six-hour global outage late last year, Facebook shares fell by 5%, costing founder Mark Zuckerberg an estimated $US6 billion in personal wealth.
And after hackers stole data from Medibank in October, its shares fell 15% in one day after a week-long trading halt. The company – which reportedly did not have cyber insurance – initially estimated the cyberattack would cost it between $25 million and $35 million before potential remediation, regulatory, or litigation impacts.
Some high-profile crises over the years show the cost impact can be staggering.
- BHP Billiton lost $8.9 billion of market value in a single day when the Brazilian government announced a mega-claim against the company arising from the Samarco dam collapse.
- Two 737 Max airliner crashes cost Boeing more than $US20 billion, including payments to families of those killed, with a further $US200 million penalty just weeks ago for a misleading media release.
- After Goldman Sachs was accused of fraud, its shares lost $US12.4 billion in one afternoon and $US20 billion in a week.
- The notorious Toyota vehicle recall saw the carmaker’s shares on the Tokyo Exchange fall $US30 billion over four weeks.
- Following the failure to cap its leaking Gulf of Mexico oil well, BP shares lost £12 billion in one day. Record fines and other costs from the disaster were calculated at about $US54 billion.
Of course, shocking crisis losses don’t just impact massive multinationals. In the wake of the fatal accident at Dreamworld on the Australian Gold Coast, shares in parent company Ardent Leisure fell by up to 22% the next day, slashing about $200 million from market value, and have never fully recovered.
And when an Australian anti-coal activist issued a fake news release adversely affecting Whitehaven Coal, their share price collapsed, wiping more than $314 million off the value of the company before the forgery was exposed. The share price largely recovered by day’s end, but not before many investors lost almost 9% by selling on the false report.
A famous Melbourne University review of Australian crises over a decade revealed one in four of the crises incurred direct costs of over $100 million, and more than a quarter of the companies affected by a crisis did not survive.
Similarly, a more recent American study found companies suffered an average shareholder loss of $US226 million in the three days after the announcement of arrests, lies, or extramarital affairs of top executives. And stock prices overall fell between 11% and 14% in the subsequent 12 months.
By contrast, the new research by SenateSHJ – which analyzed 30 high-profile crises over 40 years – didn’t just review headline changes in share value. It also examined the drop in earnings per share and the financial impact of other factors including executive resignations, whether compensation was offered, and differences between categories of crises.
In addition, a parallel study by SenateSHJ interviewed managers where a crisis had occurred and found only 31% said the organization had planned and was prepared, while 24% said the risk was pre-identified but not planned for.
Former US President George W. Bush once famously said: “They misunderestimated me.” While research consistently shows that too many companies still fail to prepare for disaster, there simply is no excuse to “misunderestimate” the terrible financial impact of a corporate crisis.
++++++++++++++++++++++++++++++++
A Parting Thought
People will forgive you for making mistakes, but they will never forgive you for not caring
– Maya Angelou
++++++++++++++++++++++++++++++++
Tony Jaques is Director of Issue Outcomes Pty Ltd, for people who work in issue and crisis management
Learn more about Reputation Risk, CEO apologies, and Crisis communication in Tony Jaques’ new book, Crisis Counsel: Navigating Legal and Communication Conflict.
“Crisis Counsel confirms Tony Jacques’ position as one of the industry’s foremost experts on issues and crisis management. In addressing the complex interactions between legal and communication crisis responses Dr. Jacques provides riveting case studies and practical advice. It highlights the financial and reputation risks of not effectively integrating communications and legal counsel. It should be on every communications practitioner’s reading list and companies should insist their in-house and external legal counsellors read it.” – Noel Turnbull, Former Chair of Turnbull Porter Novelli, Adjunct Professor, RMIT University.
“For senior managers who find themselves in the C-suite for the first time, Crisis Counsel should be mandatory reading. Such specific legal and communications provocations are not covered in university management courses, and the introduction is replete with illuminating case studies and key takeaways. The author provides sage advice for Chief Executives who must ultimately make a decision based on what they think is the right thing to do; often under pressure. Crisis team leaders and team members will find this book equally of value, as the more you know about it, the better you and the team will be.” – Jim Truscott, Director, Jim Truscott & Associates Pty Ltd, Perth, Australia
“For far too long, the role of lawyers in crisis management has been neglected. If discussed at all, it is often in negative terms. Tony Jaques adjusts this picture in masterly, yet eminently readable terms. His comprehensive discussion of apology in crisis management is likely to be a go-to source for years to come. This is a welcome book for anyone interested in how crisis-confronted corporations (and other organizations, too) can navigate the tricky legal waters of communicating under fire. For university teachers like me, it’s a rich source of well-researched case studies. A gem!” – Chris Galloway, PhD, Head of Public Relations, Massey University of New Zealand