We have been studying the effect of corporate crises on reputation and value for more than a decade and there are a number of generalisable insights. The empirical evidence suggests the following:
- Financial institutions are less likely to recover from reputation crises
- Financial institutions tend to lose more value than other firms amounting to as much as 10% more market value lost
- Management judgment appears to be the most critical factor affecting reputation rather than accounting scandals and reporting issues
- Open and honest dialogue even under difficult circumstances shows up as essential to building and protecting reputation equity
- A communications strategy is necessary, but is no substitute for decent growth prospects
- Most importantly, an ability to manage the process seems to be a common factor leading to timely recovery
The current crisis has shaken the confidence of all in financial institutions and the reputation of the industry is probably at an all time low. Certainly it has experienced the largest collective reduction in history.
The research suggests that this is no time for the CEOs of financial institutions and other corporations to hunker down. The markets expect leadership and honest dialogue, both of which, currently, are in short supply.
In order to restore confidence and rebuild reputation, we need to hear from the corporate leadership of banks and other leading corporations. The silence is deafening.
Our venerable financial institutions have taken a beating and confidence has plummeted.
However, if the leadership of enterprise loses confidence in itself, reputation will take a long time to rebuild. The banks are getting little support from politicians and, regardless of the attribution of blame and political rhetoric, the destruction of the reputation of banks is in nobody’s interest. The bank leadership must begin the rebuild and they deserve the support of elected officials.
As a measure of the extent of the collapse in value in the financial industry, consider the performance of $100 invested on January 1, 2008 in each of 9 banks that “volunteered” for TARP funds. Each of these investments would have had a value of less than $50 by the low in early March 2009. Citigroup10% of its original value. A slight recovery is evident in the last few weeks.
In order to illustrate the extent to which reputation equity has been impaired in these institutions, consider the value of their intangible assets as reflected in the premium of market to book value.
Only only two of the nine are trading above book value, The Bank of New York Mellonand State Street , both albeit on a reduced premium. The rest are all trading below book value, this means that all non-balance sheets assets are collectively valued negatively, including reputation. Citigroup by all measures has suffered the greatest damage to reputation.
It is interesting to note that the oldest banks fared better and the two banks that took the least TARP money suffered the least damage to reputation.
The fact that the crisis is industry- or even market-wide will offer no succour to a management that is passive in the recovery of reputation. Each company must face that it is in its own crisis and the fact that all is suffering a similar fate simultaneously will provide no protection or help in recovering individual corporate reputations. The research evidence is clear: the all-important element to reputation recovery is the behaviour of management during the crisis. Management is under a heightened scrutiny and a positive approach coupled with honest communication with the outside world is crucial for a successful and orderly recovery.
Research by Oxford Metrica has shown that some firms are able to reverse entirely the negative effects of a crisis by managing the process effectively even when there is bad news, on average adding 10% to value. Others who take a passive approach tend to experience the permanent impairment of value, on average up to -15% of market capitalization and take much longer to rebuild reputation anew.
The message is clear. In the midst of the current turmoil and uncertainty, CEOs of all corporations would be poorly advised to do nothing. Taking a positive approach to crisis management is essential to the recovery of reputation. Living in the denial that the eventual rising tide will lift all boats could be costly. Doing nothing is a highly risky strategy.
Since the US taxpayer now has a greater stake in the reputation of these banks, it would seem ill-advised for the politicians to destroy the little reputation that remains. Far better to assist the leadership of banks that take the initiative to reconstruct their reputation. _____________________________
By Dr. Rory Knight, Chairman of Oxford Metrica, an independent strategic adviser. The firm provides research-based intelligence on all aspects of financial performance. Research & Analytics provides the research engine, Press & Publications is the Oxford Metrica Press portal and Investment Management serves funds.
You can email him at firstname.lastname@example.org