How the media fan the flames of crisis

The media are increasingly moving from reporting the news to helping create it, and when a corporate crisis is involved the impact can be devastating.

Take the case of American company Lumber Liquidators, whose shares plunged more than 25% in a day after a 60 Minutes television programme alleged its laminated hardwood flooring from China contained dangerous levels of the cancer-causing chemical formaldehyde.

The company said 60 Minutes used an improper testing method, and pointed out that the programme chose to ignore material which demonstrated how their method differed from the validated testing programme used by government regulators.  Lumber Liquidators also stated that their products fully complied with California safety standards.

Most tellingly the company said the attack had been driven by short-selling investors determined to force down their stock price.  Extraordinarily, a hedge fund manager who had been shorting the stock for well over a year, admitted he fed the story to 60 Minutes and even appeared on the programme to further damage the stock.

Right on cue, 60 Minutes said they stood by their reporting, and equally predictably the usual law-suit vultures started to circle.  Meantime the stock value tanked, and after a week was 50% below where it had been when the company first advised investors that a negative TV programme was imminent.

Now it’s not illegal for investors to make money by betting that a company stock will fall.  But how is it OK for a TV programme to brazenly collude with a hedge fund to help drive a company’s shares down?  Two weeks after the broadcast, the shares in Lumber Liquidators continue to fall. Sadly, the media creating or fanning the flames of a crisis is nothing new.

When they wrote negative reviews of the newly-launched iPhone 4 back in 2010, Apple shares lost more than $US5 billion in a single day. Similarly, shares in camera company GoPro took a dive late last year after a French journalist alleged that the terrible brain injury suffered by Formula One champion Michael Schumacher when he hit his head in a skiing accident was caused not by the accident, but by the camera attached to his helmet.  Schumacher’s helmet shattered but the camera was undamaged. GoPro shares closed down almost 10% and fell as much as 14% throughout the session, which is a massive hit for a company valued at around $US10 billion.

And, as reported in the last issue of Managing Outcomes, heavy media coverage of the alleged link between frozen berries from China and Hepatitis A – even though not proven – helped hammer the value of Australian importer Patties Foods, and the share price is still stalled three weeks later.

Of course share price is not the only measure of crisis impact, but it’s a powerful one. Moreover, we know from research that for crisis-prepared companies, the share fall is less and the recovery is quicker.  You can’t do much about the media, but you can make sure your organisation is well prepared for a crisis.

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About managingoutcomes

Issue and crisis management expert
This entry was posted in Crisis management, Reputation risk and tagged , , , , , , . Bookmark the permalink.

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