How much does bad response communication cost? Is there a penalty for poor performance?
In “Getting a handle on a scandal” the Economist Magazine looked at eight different corporate crises since 2010, to determine if they actually damage shareholder value. The consensus from a review of large crises is that a crisis actually does:
“After their crises struck all these firms suffered an absolute drop in their share prices. At the lowest point the median share price was down by 33%, although it took anywhere from two weeks to two years for different firms to reach this nadir. In most cases the companies have clawed back the absolute losses they suffered. However, what matters is their relative performance compared with a basket of industry peers over the same time period. On this basis the median firm is worth 30% less today than it would have been had the scandals not happened. For the eight the total forfeited value is a chunky $300bn.”
The Economist also offered possible sources of this value loss: “Fines and legal costs explain only a small part of this. A big scandal distracts management, leads to other kinds of painful regulatory scrutiny and, if a firm has a stretched balance-sheet, forces it to shrink.”
One clear trend is that mishaps and mistakes cause loss. Some of the studied companies practiced effective stakeholder communication, some didn’t. In either case a cost was incurred.
So what’s the moral to the story? As one major firm once put it: “Don’t do anything wrong for the next decade.” But what if you do? What if less-than-stellar response communication is part of your mistake?
What if people just don’t trust you anymore?
Communicators talk about ‘license to operate’ and use it as a veiled threat to encourage more investment in effective communication. What does ‘license to operate’ entail? Ultimately, it entails grace, usually conditional grace. Conditional grace is accepting an individual or organization on the basis that you trust that they will do well, at least better than they have in the past. We all receive conditional grace in our manifold imperfect relationships.
What if we lose grace? What if we neglect to build trust? How does mistrust impact future operations? First, let’s accept that none of us is perfect. We all have made mistakes and have had to restore relationships. Since we have failed in the past, we will fail in the future.
If you don’t rebuild your relationship with stakeholders, what happens when you fail again?
Here’s an example: “FAA faces dilemma over 737 MAX wiring flaw that Boeing missed”, published by the Seattle Times on February 14, 2020.
Note that the subject of the article is the Federal Aviation Administration as much as it is Boeing. The issue seems simple; For the new 737 MAX aircraft, Boeing was required to modify previous 737 wiring placement for ‘safe wiring separation’ to prevent possible short circuits that could cause loss of control of the aircraft. Instead all 737 MAX aircraft were wired in keeping with all previous 737s.
What is the risk? “There are 205 million flight hours in the 737 fleet with this wiring type,” a Boeing official said. “There have been 16 failures in service, none of which were applicable to this scenario. We’ve had no hot shorts.”
Zero (0) ‘hot shorts’ in 205,000,000 flight hours (0/205,000,000 probability of failure). That’s pretty safe, demonstrably safe. So safe, that revising the wiring on the already produced aircraft may result in a greater risk than leaving it untouched.
Based on probabilities, it may be best to leave the wiring as-is. But that likely won’t be good enough. Because of a lack of grace caused by a loss of trust, it is extremely unlikely that the FAA can give Boeing a ‘pass’ on this one. Regardless of risk, regardless of safety, the FAA most likely will enforce the wiring change, as they will enforce any additional corrections in the future (remember, since we have failed in the past, we will fail in the future).
Loss of trust leads to loss of grace. Loss of grace leads to additional costs and complications in a myriad of ways. The Economist measured shareholder value, management and revenue impacts to determine the cost of a crisis. But the cost of loss of grace is higher, extending into the future for affected companies as an ever-growing, unnoticed cost.
Communicating poorly removes grace, and opportunity to recover can leave with it. If a 0/25,000,000 probability of failure isn’t enough to buy trust, what is? Effective communication may be our ONLY chance to recover.
If you want to talk about this more, contact me.
I can help you evaluate your current Communication Plan readiness, conduct a formal Plan review or offer strategy suggestions to awaken your leadership to the danger they’re in. Who knows, it might even save money, even a reputation or two!