New study finds that 60% of companies handle crisis badly

Studied 105 crises in 80 companies; sentiment in 450 000 media & 85 000 social media posts

 By Patrick Gearing, CEO Meropa Communications

A new, empirical study on companies in crisis has shown that the way your respond – and the speed with which you do it – can dramatically impact on your share price, and even your future viability.

The Crisis Response Index (CRI) study by US company, Hot Paper Lantern, researched 80 companies who between them had experienced 105 significant crises. It analysed over 450 000 media articles and 85 000 social media mentions of those crises to gauge investor sentiment about the way they were handled.

Alarmingly, 59% of the companies were judged to have handled their crises ineffectively, with 6% simply ignoring a crisis altogether.

Interestingly, the resignation of a CEO during a crisis “has a positive impact in the short-term (stock prices up 1% one-month post-crisis) but a negative impact long-term (-12% one year after) indicating that while investors applaud the quick change, the bump is not long-lasting.”

Summarising its results Hot Paper Lantern said: “Shareholders take notice. The speed with which a company responds to a crisis combined with the quality of the response, as measured by stakeholder reaction, profoundly impacts stock price.

“In a perfect world, a swift and effective response is ideal; however, if a company needs to sacrifice one over the other, taking more time to respond intentionally and with purpose, outperforms a fast response lacking resonance.”

Ted Birkhahn, President of Hot Paper Lantern, said: “Since the data shows that shareholders have the most to lose, crisis readiness must be a board-level issue.”

He says that with “trillions of dollars on the line” institutional investors should be scrutinizing a company’s ability to respond swiftly and effectively to a corporate crisis.

“In an always-on, digital-first world, managing a company’s reputation is more challenging than ever. During a crisis, CEOs and their leadership teams face intense pressure to make quick decisions that would otherwise never be made in haste, while communicators face the daunting task of publicising those decisions with speed and accuracy.

“The stakes are high and our CRI proves that even small delays and missteps can wipe out billions of dollars in shareholder value. How and when a company responds to a crisis is directly linked to the performance of the stock price over the short- and long-term.”

To create the Crisis Response Index and monetise the value of crisis management, the firm researched 80 companies who had experienced 105 significant crises. They analysed over 450 000 media articles and 85 000 social media mentions about those crises according to two criteria — speed and effectiveness — asking:

• how quickly did these companies respond;
• how effective was the response, as measured by sentiment analysis;
• were companies being transparent, authentic, and empathetic in their responses; and
• how were these responses resonating with shareholders?

The Crisis Response Index is described as “industry-agnostic”, and covers all major sectors with a fairly even distribution.

Only 41% of the companies were found to have responded effectively to crisis. 24% responded to their crisis within hours, 50% in days, 20% in weeks – and 6% didn’t ever respond.

The study noted that “(Lack of) speed kills”, saying: “Hours vs. days vs. weeks matter; when companies are slow to respond, shareholder value takes a major hit while those who respond swiftly retain more value in their stock price.”

Companies that responded within days saw an average 10% decrease in their stock price compared to a decrease of only 4% when they responded within hours. Companies that waited weeks to respond saw a “sobering” 14% decrease.

However, the CRI recommended that companies choose quality over speed, saying: “Although speed is important, a poor or ineffective response will inflict far more damage on a company’s stock price. Never sacrifice the quality and effectiveness of your response for speed.

“It’s better to be late and good than quick. Companies that responded effectively – as measured through sentiment analysis of media coverage and social media content – actually saw no change in their stock price in the two years following the crisis regardless of how fast they responded.

“On the flip side, an ineffective response resulted in an average share price decrease of 14% over the same period.”

The CRI noted that crisis handling is “going to get worse before it gets better”, saying that “sweeping technology, societal and economic trends indicate that speed-of-response will continue to hamper a company’s ability to protect shareholder value during a crisis.”

We face a “precarious state of affairs” the report notes, with “no indication that companies have improved at responding over time. A majority of companies still put shareholders at risk by being unprepared to deliver a timely and effective response in a crisis.”

Birkhahn says: “Our findings raise a number of questions. Should investors demand that companies stress test their crisis response practices? Should regulators provide oversight of those stress tests? Do CEOs and Boards have an obligation to ensure that the company’s crisis communications function is built to succeed in the digital age?”

He adds: “The CRI data is affirmation for any communications professional struggling to prove the value of building and maintaining a crisis communications function that can deliver the goods when the going gets tough.”

Download the study here: https://hotpaperlantern.com/crisis-response-index/