Diversified Industrials

Don’t try to blame your bad news on COVID-19: transparency will be rewarded

The rapid and unprecedented spread of COVID-19 has impacted every sector of the economy – leaving governments and companies at the local, national, and global levels in a state of crisis. At its root, this is a human tragedy and public health crisis, with the full economic fallout yet to be quantified.
During times of uncertainty, companies may feel motivated to “bury” bad news, like poor business performance. They may want to shift blame to external and unrelated events or sources to avoid scaring employees or investors. While it is understandable that companies seek to preserve reputation, it is important to remember that transparency reigns supreme during any type of crisis.
Companies can take advantage of this period of uncertainty as an opportune time to honestly communicate with shareholders and stakeholders. Sharing the truth about why results are sub-optimal can benefit companies in the short and long term.

A far-reaching impact on the global economy

There is no doubt that COVID-19 will have a massive impact on industries and sectors across the global economy. Right now, the Brookings Institution predicts that the leisure & hospitality, employment services, travel arrangements, transportation, and energy industries are at the highest risk from the coronavirus pandemic in the U.S. The local economies of major tourist destinations, such as Las Vegas and Orlando, Fla., are left highly exposed to disruption as travel decreases. Major energy producers in oil-and-gas towns, such as Midland and Odessa in Texas, are also vulnerable to the virus’ impact on business as decreased energy demand runs concurrently with a period of oversupply from Saudi Arabia.

Moreover, volatility in financial markets across the globe indicates that investors are pricing in a broad recession and, in some industries, bankruptcy in the absence of rescue capital. Around the world, central banks and lawmakers are readying and implementing stimulus packages to help buoy corporations and workers alike.

Patience is key in assessing true impact

While the effects of COVID-19 may be far-reaching, it is simply too early to predict how – and to what extent – the virus will impact many industries. The SARS outbreak that rattled the world in 2003 provides an example of a large semiconductor company trying – and failing – to connect its poor operational results to the outbreak.

The semiconductor industry faced risks during SARS – many heavyweight companies relied on manufacturing plants based in China, where the illness is said to have originated.  One specific semiconductor company attempted to place blame on SARS for poor quarterly results at the beginning of 2003, after SARS had only been publicized a few weeks earlier. When analysts pressed for specifics, representatives from the semiconductor company struggled to provide details.

In contrast, a leading competitor released an earnings warning at the same time and did not include any mention of SARS impacting its sales, calling into question the illness’ impact on the industry.

In fact, towards the end of the outbreak in 2004, reports funded by the National Institutes of Health found that SARS had a “minimal impact” on global semiconductor production, even though almost 80 percent of production was located in Asia, primarily in China and Taiwan.

The lesson here is that claims without sufficient evidence can jeopardize the trust of shareholders and threaten a company’s public reputation. Flimsy claims can even expose a company to unnecessary criticism.

Transparent communications reigns supreme – especially in times of crisis

It’s no secret that consumers overwhelmingly prefer honest brands and are increasingly demanding more transparency from the companies they support. In fact, a 2018 Sprout Social study found that 81 percent of people “believe businesses have a responsibility to be transparent when posting on social media – that’s higher than the standards they set for politicians, friends/family or themselves.”

This is especially important to remember in times of global crisis, when there are many questions but few answers. Companies that are positioned to do so can be a stabilizing force by acting in line with their corporate values.

Transparency and authenticity are key factors in determining a company’s handling of a crisis – whether it is internal or global in scale. Retrofitting results in distressing times is likely to be ineffective at managing the situation, and it could also reflect poorly on a company’s culture.

A post-COVID-19 world will likely look and feel a bit different than what we’re used to. While the future is unpredictable, it is important for companies to rely on enduring core values like transparency and integrity to guide us through what’s to come.

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