It’s no surprise that crises can have a dramatic and prolonged effect on organizational reputation and share value.
But new research now documents what we have known intuitively for a long time – that crises cost executives their jobs, and the stock market is brutally unforgiving of poor management performance.
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. This contrasts with an average boardroom attrition rate of just 8% among crisis-hit companies’ direct competitors listed on the same exchange but unaffected by a crisis of their own.
As researcher Chris Pugh commented: “There is a double incentive for directors at crisis-hit companies: the attrition rate among companies that achieve a recovery in their share prices within six months is even lower than unaffected companies. Those directors who can withstand the storm and guide their organizations to calmer waters are much more secure in their roles.”
Share price is not the only measure of crisis impact, but this new study reinforces the need for proactive crisis planning and positive action in the face of corporate disaster. 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.
For any executives who still think crisis preparedness is “not a priority” or can be delegated down into the organization, perhaps the most chilling statistics come from one of the largest crisis studies ever undertaken in Australia. The project at Melbourne University, published in 2004, examined high profile local crises over a ten year period and found that one in four cost over $100 million, and more than 25% of the organizations struck by a crisis DID NOT SURVIVE.
In the face of this reality, executives who fail to proper crisis planning in place have good reason to feel insecure.