Posts Tagged ‘Investors’
What spooks markets the most? If you closely follow crises, you probably think about how many different types of crises there are. For example, how do the markets react to a crisis that is due to the questionable behavior of the company or employees? What about product recalls? Or litigation? What about loss of customer data? All good questions to ask about reputational damage. International law firm Freshfields Bruckhaus Deringer decided to investigate how the markets react to different crises and how long the crisis lingers. This chart below is from their study:
Behavioral crises (company or employees acting questionably or illegally) have the greatest short-term impact on shares and the only type where the companies have the possibility of regaining their market share after six months. However, they spook the markets the most and can cause shares to crash by 50% or more on the day they become public, according to the researchers. Investors, however, forgive these types of crises more quickly than others.
Operational crises (when the company’s functioning is halted due to a major product recall or environmental disaster) have a modest impact in the first two days of the crisis breaking but the greatest long-term effect on share price…down almost 15% after six months. One quarter are still down one year later. These type of crises strike fear in companies and reputations are hit for the longest period of time.
Corporate crises (companies where the financial wellbeing is affected such as liquidity issues or material litigation) made up more than one quarter of companies experiencing a share drop on day one. Most often, these companies recovered quickly.
Informational crises (when companies IT such as system failures or hacking) were of moderate concern to the markets. They did not fall more than 3% on day one. According to the research, none saw shares fall more than 30% within a year of when the crisis struck. Possibly, investors figure these can be resolved and its everywhere today, not necessarily at the core of the company’s business.
As the research states, “Our research shows that directors typically benefit from a window of 24 to 48 hours, during which financial market reaction to news of a major reputational crisis will be relatively constrained.” In the public relations world, we often refer to the first hour after a crisis breaks as the “golden hour.” According to Freshfields, it sounds like there is an even longer” golden window.”
The natural question to raise is why does operational crises do the worst? Freshfields answers appropriately, “Crises that strike at a business’ core have a greater long-term impact on share price as markets are more likely to lose faith in a management team that cannot resolve a crisis that is intrinsic to its operations.” As Oxford Metrica’s research in 2012 for AON showed, management response is showcased for all to see when crisis strikes. The kind of CEO or executive response can make or break reputations and create reputation loss of great magnitude if done poorly. To prevent such reputation loss, prepare!
Another reason for why CEOs matter. Today’s story in the WSJ focused on how investors are increasingly demanding CEO face time in order to get greater insights into the company’s strategy and future and determine whether it is worth their investment to take a stake. One of the CEOs complained said that meeting with investors and analysts is taking up too much time. This should not come as such a surprise. The job of CEOs today is not to only run the business but be that communicator-in-chief with its portfolio of stakeholders which I grant is expanding by the year. The article seems to point out that these meetings are getting more granular than the larger-sized ones of years past and taking up more and more time. One CEO says he meets groups of 50 investors in batches, one after another, or in private 30 minute sessions.
The article provides a few interesting stats on the pressure on CEOs to make time for investors…
- C-suite executives in North America attended 70% of private investor meetings over the past 12 months, up from 64% one year earlier.
- CEOs and finance chiefs spent 14 days and 17 days, respectively, on these meetings.
The article provides many different reasons for why meeting the CEO is important but one that wrapped it all up for me was when a president of Fidelity Investments said that meeting the CEO provided “nuances” about the company that does not come through in an earnings call and helped him “put the entire mosaic together.” I thought that the “mosaic” idea was useful in understanding what role the CEO and his or her reputation does actually play. Although the CEO is just one part of the picture or mosaic in this case, the CEO’s leadership, transparency and credibility helps glue together the partial perceptions of a company we all have and fit them into a pattern that yields a reputation. Getting to meet the CEO and gauge his or her character through the whites of his/her eyes is a critical piece to the puzzle of reputation that adds to a valuation about a firm’s future performance. After all, isn’t that part of the CEO job description today — to balance the external and internal?