SenateSHJ partner Craig Badings recently published this article in October's issue of Equity Magazine.
How much is an organisation’s reputation worth? What is the financial impact of a damaged reputation?
Much is said and written about personal, brand and company reputations. And these two questions are often asked but not answered. We set out to do just that.
When all is said and done reputation rests on three pillars: context, stakeholders, and culture.
Context is critical because what happens around you can dictate the level of risk associated with an organisation’s operations and your business decisions. That is true from a government, social, environment and economic perspective.
What was acceptable 20 years ago may not be today. What is right according to the letter of the law, may not be perceived as right according to shifting community moral standards.
Stakeholders are equally critical. If an organisation fails to engage with stakeholders - listen to them, tap into their zeitgeist - they increase their reputation risk.
Finally, there is culture, probably the most important factor. An organisation can have the best reputation and risk management practices in the world but if their culture is not aligned with their values or purpose, they dramatically increase their organisation’s risk exposure. Almost every crisis in which SenateSHJ has been involved, as well as most I’ve read about, stem from poor behaviours.
The mark of culture is defined by the smallest behaviours management is prepared to accept. Misjudgement or mismanagement in this regard can land them in a crisis. It costs money, and damages reputation equity. And reputation accounts for a large portion of an organisation's intangible asset value; in fact, a Cap Gemini EY study in 2003 found 80%-85% of market value of S&P 500 comprises intangible value.
So, what is the true impact of a crisis on this intangible value? To find out, SenateSHJ worked with Gautham Ravi, a data scientist from UTS.
The study, Crisis Value Erosion, included ASX- and NZX-listed companies which had experienced a major crisis over the past 10 years. These included: NAB, AMP, CBA, Cochlear, Qantas, AWB, Channel Seven, Ardent Leisure, BHP, David Jones and NZX company Michael Hill.
The findings were eye opening.
The hit to their market capitalisation ranged between $12m to $6.4bn. On average they experienced a 30% drop in earnings per share (EPS). Share prices took between eight to 12 months to recover and, in some instances had yet to recover to pre-crisis levels at the time of the research.
The total loss in market capitalisation across all 11 companies was AUD$12.606bn. Market capitalisation loss was calculated from the time of the crisis to the point of share price recovery or the point at which the share price flatlined.
In one instance, it took nine years for one company's share price to recover to pre-crisis levels while another recovered swiftly because of the positive and prompt actions taken by management.
The research also considered daily media sentiment, closing share prices and share price recovery time. Besides the obviously large financial implications, in the case of two companies, media sentiment took years to turn positive. In one instance it still hadn't when we completed the research.
Most of these crises could be attributed to culture. Specifically, this included one or a combination of the following: an imbalanced focus on shareholders versus the customer, poor governance, under-reporting, under-staffing, unrealistic deadlines, poor training and staff development, a lack of accountability and measurement, and management style.
Despite the cost to a company, the impact on personal reputations and the potential loss of executive and other jobs, just 50% of Australian organisations have a crisis communication plan, and only 18% test their plans annually.*
This is worrying given what is coming - corporate culture has been tested in new ways during the pandemic, but a much larger culture test awaits post the pandemic.
The challenge for many companies will be the potential cost of taking short cuts to get ahead quickly. It may require behavioural trade-offs that can lead to damaging reputation results.
Corporate behaviour and, by implication, culture will be severely challenged and with it loom reputational risks. In this environment, leadership must set out clearly acceptable behaviours that shape cultures and lead to sustainable results and reputations.
Culture is moulded daily by management and individuals. It is set by the values and norms these teams and individuals want and act upon. Sadly, the benchmark is often set by the worst behaviour the business is prepared to tolerate.
This pandemic has brought with it a lack of certainty and ambiguity about the future of businesses. Management teams will need to deliver even greater clarity on expectations around culture and how they manage the behaviours which reflect it.
A strong culture is a powerful differentiator. It is difficult for competitors to replicate. It is one of the best magnets for new talent and a great retention strategy for existing employees. And it is ultimately attractive for suppliers and customers alike. But businesses need to act now to make sure the culture they create reinforces and rewards behaviour that bolsters their best reputation in the COVID world we live in and beyond.
Getting this right provides the most powerful risk and reputation shield and provides shareholder confidence.