Just a storm in a teacup! How often have I not heard CEO’s say this, only for the share price to be 20% down a day later!
Normally these are the visible signs, but a crisis poorly handled, have a wider impact than most managers anticipated. Look at the following model.
A single risk event is likely to have multiple impacts on a company‘s reputation. To understand this, imagine that XYZ Corporation has been fined by the Competition Commission for price fixing and allegedly engaging in unfair and predatory business practices.
News of the lawsuit is picked up by major media outlets, which run exposés on the company and how it has taken advantage of its customers.
The list below gives examples of how different stakeholders may react to this single lawsuit.
Current Customers – Possible Action: A number of customers believe they have been taken advantage of, and they refuse to do business with the company again. Other customers, who may not even be part of the lawsuit class, decide to cut back on their business or switch to new, aggressive competitors.
Potential customers – Decide not to do business with the company.
Suppliers and partners – Decide not to enter into an alliance or demand more favourable terms because of discomfort at being associated with the company.
Employees – Not wanting to be associated with a company that takes advantage of its customers, or believing that future opportunities at the company are limited, decide to take other jobs.
Financial markets and lenders – Believe the growth prospects of the firm are limited or even worse, that the business model is no longer valid. Discount the share price and demand more onerous lending terms
Government regulators – After a few politicians make speeches mentioning the fine, an aggressive regulatory agency puts a team of lawyers on the case to decide whether the company has broken the law and should face further fines or limitations on doing business
The downside of failing to meet stakeholder expectations can be enormous. In many cases, brand equity value is the single biggest component of a company‘s market value, even exceeding book assets.
Sixty-three percent of a company‘s market value is attributed to reputation (Weber Shandwick/KRC Research, Safeguarding Reputation, 2006).
The growth of the Internet-powered economy has dramatically raised the importance of reputation. Today, the velocity of information flow has increased to a level unthinkable in the years before the proliferation of websites, blogs, e-mail, instant messaging and other Internet-powered communications. In this environment, we say: Semel emissum volat irrevocabile verbum (Horace).
Loosely translated, this means that once the word is out, it has flown and cannot be brought back. In today‘s wired business environment, positive events may bring incremental benefits, while negative perceptions can spread like wildfire, with devastating results to a company‘s reputation and, ultimately, its shareholder value.
While a company‘s reputation can be harmed by a single major event, more frequently, reputations are harmed over time by “erosion” - slowly chipped away by one unsatisfactory stakeholder interaction after another. For example, dissatisfied customers are more likely to do less business with a company than they are to abandon it completely. Yet the cumulative impact of these decisions can be profound.
Question: Can you really afford to not manage your stakeholders? No wonder that, in the King 3 Code specific mention is made of the importance of stakeholder inclusivity (,i.e. that the legitimate interests and expectations of stakeholders are considered when deciding in the best interests of the company), stakeholder identification and determination of expectations and needs, the proactive management of stakeholder relationships, and that management should develop a strategy and formulate policies for the management of relationships with each stakeholder grouping.
To learn more about how to manage and engage stakeholders, you should consider attending the following event: