Ford Kuga: cost of response to crisis

Study finds a perception of management culpability and the absence of an apology usually hit shares harder

What price a company’s reputation? This is the question Business Day quite rightly asked in a recent editorial (Ford failed at every turn, January 18).

There is no doubt Ford’s brand in the local market has suffered reputational damage due to the flaming Kuga saga. The quantity of that damage will only become apparent in the months and perhaps years to come.

As a multinational with no local listing, and given SA’s relatively small market size to the overall Ford business, there has been no effect on the company’s share price or market valuation, as might be expected had this occurred in a bigger market. In fact, in the past three months, while the news of spontaneously combusting Kugas gripped the South African media, Ford’s share price in New York showed a marginal gain.

But how should Ford have responded? In this age of round-the-clock company scrutiny, we see almost as much focus given to how a company handles a crisis as the crisis itself.

With turbulence in our world growing and the always-on nature of news, the potential for crisis has become an almost daily consideration for business. Globalisation, investor activism, political and cyber risk and regulatory change are all contributing to increasing business vulnerability and the need for boards to consider their ability to respond effectively.

With this in mind, FTI Consulting researched the effects of 100 incidents that have made headlines. Our objective was to shine a light on those crises and assess how they played out, with a view to helping businesses successfully navigate future disruptive events of their own.

PATTERNS FROM CRISIS EVENTS

The crises we reviewed spanned the past 20 years and included oil spills, cyber hacks, plane crashes, cases of fraud, product recalls and many more. We were interested to see what patterns emerge from these events — patterns that might be instructive for boards and communicators when facing their own crises.

The effects of a crisis can be significant and long-lasting. So, we started by analysing just how significant that effect could be. The findings revealed that in 14 of the 100 cases, the crisis event had been so catastrophic that it resulted in the company ceasing to exist. In almost a third of the cases, a senior executive of the company ended up losing their job. The idea of a sacrificial lamb is nothing new, but such a high number suggests that boards’ tolerance for mistakes is low.

In terms of share price, we found that about $200bn of value was lost as a result of the crises we analysed. Also, about a quarter of the surviving public companies in the study (23%) have failed to recover their share price to precrisis levels.

Next, we wanted to analyse the typical course of a share price in the aftermath of a crisis. The typical pattern is to see a big drop in share price at the end of day one. This continues through the first week and only starts to plateau after a month or so. But we saw huge discrepancies in the way share prices behave following different types of crisis. For example, a month after a crisis event had become known, the average share price decline across cases of systemic financial mismanagement was 70%, whereas individual corruption cases showed a decline of just 5%.

In terms of recovery after a crisis, those same cases of financial mismanagement remained on average 63% lower than their origin after three months, whereas individual corruption cases recovered most of their value, on average sitting at 1.9% below their origin.

And what about media coverage? Instinctively, we know a crisis will increase the media’s interest in a company drastically, but even we were surprised to discover the magnitude. Our study found that in the month after a crisis, a company can expect to receive almost 35 times more coverage than the month before. In terms of social media, the postcrisis month saw on average 280 times more exposure than the previous month.

These are significant numbers. Indeed, the magnitude of traditional and social media interest in these events begins to shed light on another essential lesson from our study — the intangible effect of a crisis beyond clear and well understood value proxies such as market capitalisation. This goes to the heart of the unseen element of crisis preparedness and management that all boards need to consider. Are they geared up for this kind of onslaught? Are the relevant processes in place? How can they best respond and continue to protect the day-to-day operations of their business?

As we began to see variations in the way different crises behaved (when we cut our media analysis by crisis type, we discovered it showed a similar pattern to share price impact), we began to wonder whether companies are hit harder when external audiences perceive a culture of mismanagement.

In other words, were investors hitting the share price more heavily or do the media apply more scrutiny in events in which management is perceived to be to blame?

Clearly, the degree of culpability has a heavy degree of subjectivity from the outside looking in, but our analysis did show that in crises in which the management is deemed to be at fault, those instances are punished more heavily.

PUBLIC APOLOGIES

We finally turned to the all-important issue of “the apology”. Many CEOs instinctively feel it is right to apologise, but some are advised that they should not. The argument against an apology is that it is tantamount to an acceptance of guilt and then opens the door to potential litigation. Reputationally, however, the lack of apology can have a significant effect on the credibility of management and the reputation of the wider firm. So, do apologies work?

Interestingly, apologies were found to be relatively few and far between in our study. Indeed, we found evidence of a public apology in only 37 of our 100 crises.

We also found that most of those apologies arrived slowly — only 16 of the 37 apologies were issued within two weeks of the crisis incident becoming known to the public. We wanted to see whether there was some way of comparing the financial effect of an apology with the effect of not apologising.

The most effective way to do this was to compare the total cost of litigation and compensation for as many crises as we could against the relative value destruction in terms of market capitalisation for those companies. We considered the damage to the value of the owners’ shareholdings to be the best proxy for reputational effect under these circumstances (although it is fair to note that the cost of litigation will affect the share price itself).

We found 37 crises in which the cost of litigation was publicly reported. The total cost of the litigation and compensation relating to those crises was $66.73bn. This compares to a total destruction in market capitalisation for the same businesses of $138.36bn. By this measure, it could be argued that if you don’t apologise, the value destroyed could be double the costs of litigation.

When starting this project, we expected some of our intuitions to be confirmed. We expected share price to take a hit and the events we surveyed to be a lightning rod for media coverage. The research supports these views, but the depth, longevity and variety of the effects surpassed our expectations.

So, are companies ready? Are they taking these issues seriously enough? Prevention, as we all know, is always preferable to cure. But once in the eye of the storm, it is often difficult to remember these lessons.

In this instance, has Ford done enough? Only time is going to tell.