A ‘crisis’ occurs when a corporation faces a development – usually unexpected – that threatens to undermine the normal functioning of the business and to wreak long-term havoc on the corporation and its valuation. Most crises should be viewed as a threat to the company’s brand. Crises that regularly make headlines include industrial accidents, strikes, product defects and government investigations. In virtually any corporate crisis, investor relations officers and their advisors play (or should play) an important role in the crisis management team, because investors are a critical stakeholder group and their concerns must be addressed promptly, and in a way that is consistent with overall efforts to manage the crisis.
Stitch in time
Indeed, some crises are primarily IR challenges, such as when there is an unanticipated question of executive succession, or when the company must announce unexpectedly poor financial performance. Regardless of whether the IRO is the lead crisis manager or playing a supporting role, he should prepare for the potential crisis that lies ahead, and be able to cope with crisis when it strikes.
Much of an IR practitioner’s crisis management work must be done long before a crisis situation develops. First and foremost, the IR officer or advisor must see to it that the company maintains a good rapport with the investor community, which means more than just meeting SEC and exchange requirements about disclosing material developments at certain intervals. In dealing with investors and the markets, credibility is all. That credibility must be established over time, through frequent, candid communications with the entire investor community.
When a corporation suddenly finds itself in troubled waters, it may need investors to give it the benefit of the doubt. That will only be given to a company that has established its integrity through a solid history of consistent, open communications with investors and the financial press. For instance, a company facing allegations about accounting improprieties will probably see its stock take a big hit unless it has developed a strong reputation for both stringent auditing and candid disclosure of all material information. At the end of the day, it’s more difficult to rebuild credibility than to rebuild a P&L.
A significant part of developing credibility over time involves having a disclosure committee that regularly determines what information should be disclosed and how. This committee should include the CFO and possibly other members of senior management, the IRO and legal counsel. Moreover, in addition to playing a formal role on the disclosure committee, investor relations should be ‘in the loop’ on all important developments that affect the corporation; an IRO cannot help identify and address problems if left in the dark about what is happening with the company.
Coping with crisis
When crisis rears its ugly head, above all else, tell the truth. Truth telling is not just a legal requirement – it is the only way to handle the current crisis effectively while avoiding an even larger crisis later. Obfuscation simply is not a viable approach to crisis management. Remember Watergate?
A crisis management team must immediately convene to assess the nature and scope of the problem, how to resolve it, and how to communicate this information to the various stakeholder groups, including investors and the capital markets. The make-up of the crisis management team will somewhat depend on the type of crisis, but it should always include senior management, legal counsel, and the IRO.
The role of IR will vary depending upon the type of crisis. For instance, if the crisis is a strike by employees or a release of hazardous chemicals, the IRO will not be asked to resolve the underlying problem, but will certainly be expected to develop a plan to communicate with investors about the crisis and how the company is handling it. On the other hand, if the crisis relates to sudden negative reporting about the company’s financial situation, the IR team will take the lead in dealing with it head-on by responding to the damaging coverage.
Delay danger
In any event, communication with the investor community should happen promptly, within hours if not minutes. A delayed response to a crisis event means that others will have the opportunity to tell the company’s story, and in this case ‘others’ will include disgruntled employees, the company’s competitors, and a press that thrives on sensationalism and conflict. Delay also leaves investors to rely on rumors and worst-case assumptions, rather than solid information furnished by the organization closest to the crisis: the company. Finally, reticence can be perceived as an indication of arrogance or guilt on the part of the corporation, which exacerbates the erosive effect on credibility and brand.
Communications with the investor community (and with all stakeholder groups) must have a clear, consistent message. It is best to have only one or two designated spokespersons, and senior management should make clear to the entire organization that no-one else is authorized to give public statements. Those managing the crisis should determine what information will be disclosed publicly and the form that those communications will take. In some cases, the corporate spokesperson should have a script that provides for communicating the necessary information while avoiding detours into inappropriate areas about which the company is not ready to comment.
The best spokesperson may be, but need not necessarily be, the company’s CEO; this is a decision that depends on the nature and magnitude of the crisis and the particular talents of the CEO. Whoever the spokesperson is, he or she should not speculate. Although prompt communication is desirable, this does not mean that corporation having to comment immediately on every possible aspect of the crisis, or that it should speculate about matters where the facts are not yet clear. Maintaining credibility requires both candid disclosure of known facts and candid acknowledgment when certain facts are not yet known. There is no upside to speculation. It cannot help; it can only hurt if it turns out to be incorrect.
There are several channels available for crisis communications. A genuine crisis brings a unique opportunity to exploit press coverage to reach all stakeholders, including investors. Depending upon the severity of the crisis and the levels of public interest and media coverage, it might be appropriate to hold a live press conference or to give interviews to selected media outlets. Of course, giving the press this kind of access to company officials during a pressure-cooker crisis brings its own risks and must be handled carefully. A company spokesman who comes across as indifferent, arrogant, unprepared or incredible will aggravate the crisis rather than help to resolve it.
The IRO should also consider holding conference calls with major investors, and these should be webcast and archived on the company’s web site for others to see. Press releases in print and on the web site are a quick and simple way to get the message out. When the stakes are particularly high, extraordinary steps may be taken, including print ads explaining the company’s position, television commercials, and a toll-free telephone number that investors and others can call for regular updates on the situation.
What to say
Investor relations advisors should keep in mind that crisis communications with investors and the markets consist of two basic themes. First of all, the corporation should carefully explain the nature of the crisis and then outline the prompt, effective steps that are being taken to address it. For example:
Unexpectedly high levels of usage caused our web site to go down for three hours. Our technical support personnel are working around the clock to determine exactly why this problem occurred, and we will spare no expense in adding hardware, improving software and taking whatever other steps are necessary to ensure that this sort of outage does not inconvenience our customers in the future.
Second, crisis communication should be used as an opportunity to reiterate the company’s fundamental strengths, remind investors why it is still a good bet, and explain that the business model is still valid and long-term prospects are bright. If the stock price has been depressed by the crisis, the situation might even be pitched as a buy opportunity.
Ultimately, a corporate crisis, to one degree or another, imperils the company’s brand. The seriousness of such a threat cannot be overstated. The corporation’s investors are the owners of that brand and are entitled to know how this most valuable asset is being cared for. The corporation must therefore carefully nurture the brand by establishing a foundation of credibility through regular, honest communications with the investor community. Then, if and when crisis occurs, management must respond quickly and effectively to the threat and keep investors informed about how the brand is being protected.
Thomas Beck is an attorney in the technology practice of Jones Day Reavis & Pogue in Washington, DC, but these are the personal views of the author and do not necessarily reflect those of Jones Day.
