Page 94 - Crisis Communication Practical PR Strategies

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The New Dynamics of Financial Crisis 75
why the image of a pile of trainers can spark widespread selling in a
hard-nosed, ROI-focused global investment marketplace when the
P&L impact seems marginal. The answer has to do with the interaction
of public equity and corporate reputation.
Many of us instinctively view stock performance as the quintessen-
tial financial measure, one that reflects almost exclusively either actual
or anticipated value on the income statement. Clearly, a major compo-
nent of any company’s valuation lies in financial fundamentals. But a
large and growing body of research has demonstrated the influence of
non-financial measures on market valuation. Ernst & Young’s classic
‘Measures That Matter’ study attributes 35 per cent of a company’s
value to non-financial intangibles. The American Institute of Certified
Public Accountants (AICPA) recently stated that ‘a number of intan-
gible drivers can give business leaders a better perspective on where
value is created, over and above what they would get looking at stan-
dard financial reporting metrics’.
Essentially, these ‘intangible drivers’ include the qualities that com-
munication executives ascribe to corporate reputation – things such as
the power of the brand, customer satisfaction, clarity of strategic direc-
tion, service quality and perceptions of management strength and
integrity. If you have trouble seeing how these kinds of intangibles
represent value, imagine if some sort of disaster destroyed all of Coca-
Cola’s physical assets, its bottling plants, distribution network and its
workforce. Bankers would stand in line to lend the company money,
with only one thing serving as collateral: reputation.
Given this, it is hardly surprising that stock acts as a proxy for corpo-
rate reputation. When a crisis negatively impacts reputation – be it a
calamity, fraud, product tampering or a highly visible consumer boycott
– reputation value is destroyed, and this resonates in the stock price.

The perils of declining stock price

We know instinctively that a declining stock price is undesirable. But it is
worth reviewing why a serious and steadily eroding stock price – what-
ever the cause – constitutes a crisis in its own right for a public company:

A declining valuation potentially constricts growth because it
increases a company’s cost of capital, which in turn makes many
strategic business options either more expensive or even prohibitive.
Loss of valuation opens a second front in the communication battle,
awakening concerns from a fresh group of powerful constituents –
investment analysts, institutional investors, the financial media,
individual shareholders and others.