Why crisis preparedness is a great investment

Any time someone questions how to justify the expense of crisis preparedness and executive training, just remember the dire financial impact of a real crisis.

Last month’s accident at Dreamworld was a terrible tragedy for the families of the four people killed. And the outpouring of anger and sorrow was entirely justified. At the same time it’s impossible to ignore the impact on the business itself. Shares in parent company Ardent Leisure fell by up to 22% next day – slashing about $200 million from corporate market value – and, despite a brief recovery, continue to stall as analysts speculate about the long term viability of the enterprise.

Facing months of investigation and litigation, the financial cost of the accident – to the company and its investors – may not be known for some considerable time. But it is a gloomy reminder that nothing destroys reputation faster than a crisis, and that the business impact goes straight to the bottom line.

Of course share price might not be everything when it comes to assessing reputation – yet for many organisations there is nothing but daylight back to whatever comes second. Take the case of BHP when the Brazilian Government announced a mega-lawsuit earlier this year arising from the collapse of the Samarco Dam. Shares in BHP fell more than 8% in a single day, wiping out over $8 billion of investor value.

Or consider the market response when Crown employees in China were arrested in October over alleged breaches of law relating to gambling. Crown Resorts’ shares fell $1.3 billion in a day, with about $630 million carved off the value of billionaire James Packer’s stake in the casino company.

And who could go past the fire-prone Galaxy Note 7 phone debacle. The crisis cut $14 billion off the market value of Samsung, and the company says the recall will cost it at least $5.3 billion.

Not every crisis produces such spectacular numbers, but the lesson is the same for every organisation – Crisis preparedness reduces losses and accelerates recovery. Anyone who doubts the importance of being properly prepared need only look at a famous study at Oxford University which related preparedness to the impact on market value. This well-respected study showed that companies with effective crisis plans in place suffered on average an initial 5% fall in share value, but after 12 months their share value on average had recovered to 7% above the pre-crisis level.

By contrast, companies with no effective crisis plan in place saw their shares initially fall by an average of 10%, and after 12 months their shares were 15% below the pre-crisis level. In other words, for companies without effective planning in place, the share price initially fell twice as far and recovered much slower. A year later their value was 22% behind the well-prepared companies.

A 22% penalty on long-term market value is surely powerful evidence that crisis preparedness is a great investment.

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About managingoutcomes

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

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