The 2018 ‘Reputation Risk in the Cyber Age’ study by Pentland Analytics with Aon plc looked at 125 reputation events during the last decade, measuring the impact on shareholder value over the course of the following year. The study found that since the introduction of social media, the impact of reputation events on stock prices has doubled. In the wake of a crisis, the size of a company and the strength of its reputation did little to protect against the loss of value.
At times of crisis, investors often use information about a company shared on social media to re-assess their expectations of future cash flow, which can positively or negatively impact a company’s share price. Findings from the study showed that companies could add 20 percent of value or lose up to 30 percent of value depending on their reputation risk preparedness and management activities in the immediate aftermath of a crisis.
The study identified key drivers of successful recovery from a reputation event, including:
- Crisis communications must be instant and global;
- Perceptions of honesty and transparency are essential;
- Active social responsibility is critical.
The core research into the impact of crises on shareholder value was first conducted by Pretty in 1993 and again in 2000, before social media was an active influencer. The reports focused, respectively, on the contrasting abilities of firms to recover from crises as well as reputation impact in the absence of physical loss. In the 2018 version of the study, special attention was given to both the growth in social media and the value impact of cyber attacks.