January 12, 2017
FTI Consulting’s Corporate Issues Study focuses on six key corporate issues – M&A, Shareholder Activism, IPOs and Spin-Offs, CEO Transitions, Regulatory Changes, and Crises – as seen through the eyes of institutional investors. Part II of the series takes an in-depth look at the role investor confidence plays when it comes to evaluating a variety of corporate issues including CEO Transitions, Regulatory Changes, and Crises.
In this portion of Part II of our series, we take a closer look at how investors evaluate corporate crises – how frequently they are experienced within portfolios, how successful companies are at handling, and how to prioritize communications efforts during each type of crisis.
Crises are, for the most part, unexpected events that have significant potential to destroy enterprise value. Our study finds that investor consideration of each crisis varies by frequency and value at risk. Related to frequency, litigation and production issues were the most commonly experienced of the four crises, having impacted over half of all investor portfolios. Investors view effective crisis management as a critical tool in mitigating the damage to reputation and enterprise value.
During a crisis, investors wish to collect information directly from the source. More than three quarters of investors indicated they used internal press releases and/or company conference calls to stay informed on a crisis. They also relied heavily upon general media and sell-side coverage, particularly in the absence of an official company response. Although investors deprioritized social platforms, the most used of these channels in a crisis were industry blogs and Twitter. These outlets provide information quickly but are not necessarily viewed as reliable by the investment community.
Priorities During a Crisis
For a more granular view, our survey dissected a variety of events and provides communications priorities for the following corporate crises, including:
Unsurprisingly, few investors viewed even successful management of corporate crises as opportunities for value creation, indicating that a given company’s focus should be on mitigating the downside risk. In general, however, investors believe that companies are reasonably effective in crisis management: investors viewed the majority of companies in their portfolios as having successfully managed litigation, labor issues and production issues. Respondents perceived companies as particularly adept at managing production issues, with 80% indicating that companies successfully manage these types of corporate crises. Investors view major accidents as the most risky to enterprise value and coincidently the crisis that companies are the least successful in managing.
Across all scenarios we examined, a pattern became clear – a company’s ability to communicate the severity of a crisis in a timely manner is critical. In all cases, investors placed the highest importance on understanding the severity of the situation, indicating that companies must move swiftly to understand the nature of the crisis they are facing – and then communicate that clearly and honestly to their stakeholders. However, the order of stakeholder communication varies by crisis and is often correlated with immediacy of business impact. For example, 85% of respondents placed a high importance on customer engagement during production issues, reflecting that these particular crises carry significant reputational risk related to a company’s customer base.
Investors also prioritized a company’s ability to respond quickly to crises in most cases, placing a high importance on it during major accidents and production issues. This correlates with the immediate nature of these scenarios, while litigation and labor issues tend to have longer timelines. Production or accident scenarios have the potential to quickly impact stakeholders and grab headlines, and thus a slow response risks allowing outside parties to drive the narrative.
Companies experience a broad variety of events, transactions and issues throughout their lifecycle – all of which can dramatically impact enterprise value. Smartly managing these critical inflection points can be the difference between success and failure in the eyes of investors, customers, the media and the public at large. FTI Consulting Strategic Communications’ Corporate Issues Study was conducted among more than 300 institutional investors worldwide, and takes an in-depth look at these critical issues through the eyes of the investment community.
In our two-part online series, we take a closer look at key unifying themes that emerge from our Corporate Issues Study, which is based on survey responses regarding M&A, Shareholder Activism, IPOs and Spin offs, CEO Transitions, Crises, and Regulatory Changes.
Throughout the survey, we also investigated the role that investor confidence plays when it comes to evaluating the six issues above. As data from FTI Consulting’s proprietary 2014 Enterprise Value Study demonstrates, confidence is the key to influencing behavior among employees, customers, investors, governmental leaders and the public at large. In fact, our research demonstrates that confidence is the key to driving action among stakeholders – employees to join or stay at a company, customers to buy products and services, investors to purchase and hold stock in the company, and policymakers and citizens to advocate for the company in their communities. The overarching takeaway, which will be borne out in our series: when investors have confidence in a company, that company receives significant breathing room to operate, particularly when faced with a critical event, issue or transaction.
To determine the impact of confidence on the perceptions and behaviors of investors, FTI Consulting developed a split sample survey approach whereby participants were randomly selected for two groups. This was done for each confidence related question. The questions posed to each group were identical with one exception: one group was asked to answer the question about companies they were confident in, the other about companies they were not confident in. Results were then compared and the differences (delta) between the means of both groups were calculated. Statistical analysis was then performed on the data to ensure that the differences were statistically significant at the 95 percent confidence level.