Social Media Heightens Reputation Risk and Increases Shareholder Value Impact in Crises

Recent research by Dr Deborah Pretty, Director, Pentland Analytics, undertaken in collaboration with Aon supports the contention that the pervasive use of social media increases the impact for companies of risk events occurring and can have a material impact on shareholder value.

What is striking is that despite the advent of social media and a viral immediacy that takes company crises globally instantly, the latest research fully endorses earlier research undertaken in 1993 and 2000 by Dr Pretty about the impact of crises on shareholder value.

For me this is great news. In crisis management trainings and presentations for nearly two decades I’ve been citing the earlier research as empirical data of the impact crises can have on reputation risk. The new research demonstrates that Dr Pretty’s conclusions not only hold true today, but are even more relevant as, “the value impact of reputation crises has doubled since the advent of social media.”

Dr Pretty’s latest research focuses on 125 reputation crises occurring over the past decade and includes detailed case studies of the Samsung Galaxy Note 7 recall, the Volkswagen emissions software crisis, TalkTalk’s cyber attack and Home Depot’s cyber attack to examine what happened, the consequences, and the communication lessons learned.

What becomes clear is that as with the earlier studies there are companies that emerge as winners or losers following a crisis as measured by modelling of share price over time against the market index and risk adjusted with pre-crisis data. The impact of social media is to strengthen the winners and magnify the losers in terms of long-term shareholder value impact.

The earlier studies highlighted that there were five characteristics that helped companies emerge successfully from a crisis:

Preparation – advance planning helps mitigate against potential loss.
Leadership – the CEO and management team need to be able to inspire shareholder confidence.
Action – actions need to be rapid, decisive, and effective to demonstrate credibility.
Communication – this should be accurate, frequent, well-coordinated and based on the need to regain trust.
Compassion – an authentic, honest and compassionate response signals care and concern.

Dr Pretty’s latest study takes this even further into the realms of communication and public relations. Her latest research shows the impact on value is greatly influenced by three factors:

The ability to produce instant and global crisis communications – something where outside advisers are particularly adept in helping companies.

Perceptions of honesty and transparency – something all companies need to be successful these days; not just to be authentic, but with people believing in your authenticity.

A programme of active social responsibility that is associated directly with the crisis – this is a particularly pertinent finding in this age of corporate purpose and in terms of a value-creating response by companies that is uniquely tied into the demands of today’s consumers and stakeholders.

This study is a great read and immensely valuable as a retort to the invariable question companies still ask today with regard to crisis communications and training: Why do we need to do this?