Reputation events, such as cyber attacks, have a direct impact on share price, according to the findings of a new report released today by Pentland Analytics with Aon.
The report found that since the introduction of social media, the impact of reputation events on stock prices have doubled. In the wake of a crisis, the size of a company and the strength of its reputation did little to protect against the loss of value.
At times of crisis, investors often use information about a company shared on social media to re-assess their expectations of future cash flow, which can positively or negatively impact a company’s share price. Report findings showed that companies could add 20% of value or lose up to 30% of value depending on their reputation risk preparedness and management behavior in the immediate aftermath of a crisis.
The study identified key drivers of successful recovery from a reputation event, including:
- Crisis communications must be instant and global
- Perceptions of honesty and transparency are essential
- Active, social responsibility is critical
The report added that risk implications of connected, ‘smart’ devices through the Internet of Things (IOT), and developments in quantum computing, robotics, artificial intelligence and bionics have yet to become clear, while the risk of cyberattack is visible already. Algorithmic bias in these new technologies threatens not only the effectiveness of their application, but also the reputations of the companies that design and supply them.
Personal technology has undergone an extraordinary transformation over the last twenty years. First, we didn’t have it. Then we had to plug it in. Then we had to carry it. Now we have to wear it. Tomorrow, perhaps we implant it or apply it as graphene transfers. All of these technological developments heighten reputation risk by making it easier, cheaper and faster for people to spread news.
“Although risk management awareness and tools have evolved, reputation risk continues to weigh on corporate executives as one of their leading concerns. For the past 10 years, reputation risk has occupied one of the top spots on Aon’s bi-annual Global Risk Management Survey,” said Randy Nornes, enterprise client leader, Aon. He added that companies that develop and use a robust risk management framework can better navigate reputation events and see a net gain in value post-event.
Road to recovery
To have any chance of recovering shareholder value and being a member of the winning portfolio, crisis communications has to be not just swift, but instant and global. This is demanding, especially when complete information at this stage of a crisis is a rarity, but social media is unforgiving.
Greater investment in preparation and rehearsal, and in risk monitoring, such that management is better informed, earlier, is no longer a luxury and will bring rewards when crisis strikes. Technology can help in both respects. Virtual reality simulations, for example, confront us in ways unachievable through more traditional means, and the use of industrial sensors and interconnected ‘smart’ devices increasingly will allow crucial data to be fed back to senior managers in real time.
The second new attribute to be associated with the winning portfolio is in recognition that cultural expectations are shifting. It is almost assumed now by all stakeholders, but particularly by customers, employees and the general public, that companies should atone for their mistakes and do so conspicuously. In some cases, the reparation demanded can be achieved only through a programme of active, social responsibility that is associated directly with the crisis.
"For executive management around the world, the lessons are clear. There is no hiding place from reputation risk or the advance of technology and, on the contrary, the opportunity exists to create significant value, even at times of crisis. Effective preparation lies in remaining vigilant, flexible and open-minded as to emerging technologies, while recognising their potential to disrupt well-laid plans," the report added.
The 2018 Reputation Risk in the Cyber Age study looked at 125 reputation events during the last decade, measuring the impact on shareholder value over the course of the following year.