Managing a Financial Crisis: Taking the drama out of a crisis

When facing a financial crisis, companies must move quickly to manage expectations and safeguard their stakeholders' interests.

When facing a financial crisis, companies must move quickly to manage expectations and safeguard their stakeholders' interests.

Any type of financial crisis, big or small, has the potential to paralyze a company. Investors, credit rating agencies, financial analysts, and customers all have the ability to set the agenda for a company facing financial uncertainty.

As with most crises, corporate communications teams need to be ready to react at a moment's notice at the first sign of financial peril because there will be no time to develop a comprehensive plan of action in the heat of a crisis.

"You will be in big trouble if you're not providing the information because rumor and speculation will edge out fact every time," says Michael Robinson, VP at Levick Strategic Communications in Washington, DC. "Once markets are open, markets take on a life of their own. The thing markets abhor is a vacuum. They adore information."

Financial dilemmas that require attention from PR professionals run the gamut from Wall Street speculation about why a new product is delayed to revelations about fraudulent employee conduct to manipulation of financial results leading to a "classic run on the bank," as was the case with Enron.

On the various stock exchanges, companies generally face about a 25% loss of share value following the disclosure of damaging information, notes Deborah Radman, who heads the New York office and the corporate practice group at Stanton Communications.

When Merck pulled its painkiller Vioxx off the market last fall, for example, the company's share price plunged from $45 to the mid-$30s range.

Merck was helped somewhat by doing a good job communicating its side of the story at the same pace that some of the more negative information was hitting the marketplace.

"[Merck] took a proactive approach, which shows me that it at least had something pre-planned in terms of how to go through the motions of handling something like this," Radman explains. "But I don't think it could have done anything to mitigate the fact that its shares were going to plunge."

Because of fewer regulatory requirements, privately held companies may be less compelled to develop relationships with their stakeholders or voluntarily disclose information when they find themselves in turbulent financial times. But private companies, especially the larger ones, often have reporting requirements to a board of directors, small investor groups, or a venture capital firm.

"They have an obligation that I think should be just as binding as the regulatory requirement to disclose, to be transparent, and to manage these situations with the highest integrity and ethical standards," Radman says.

For public companies, if the press uncovers an instance of seemingly wrongdoing or inappropriate behavior that is buried in a regulatory filing with the Securities and Exchange Commission or another regulatory agency, reporters likely will position the story as something of great importance to the public.

The smarter companies, particularly those in the financial services sector, will take pre- emptive action by disclosing the negative information to a trusted reporter, says Patricia Harden, senior director and GM in Peppercom's San Francisco office.

"That way they are on the offense," Harden says. "And they get points with the media and with investors because they are disclosing the problem, rather than letting it get pried loose."

While media coverage is always a concern in a crisis situation, communicators also need to develop strong relationships with third-party groups, such as credit rating agencies, before a financial crisis hits.

When Freddie Mac, the nation's second-largest mortgage finance lender, was forced to restate its earnings in 2003, the company faced a barrage of negative press coverage. But because the mortgage lender had forged strong relationships with Moody's Investors Service, Fitch Ratings, and Standard & Poor's, the accounting restatement debacle did not have a great impact on its credit ratings.

"Freddie Mac has tremendous respect on the Street and in global capital markets," Robinson says. "People on Wall Street would say, 'S&P isn't doing this, so we shouldn't be as worried.'"

Once a financial crisis hits, a company cannot stop in its tracks and become paralyzed. Financial analysts and other third parties will notice if a company has put its normal operations on hold. This could lead to an added erosion of trust in corporate management that would not have occurred if the company had let the crisis management initiative operate on a parallel track with its normal day-to-day communications plans.

During a product launch campaign, for example, communicators need to let reporters know that they are not there to discuss the financial crisis.

"If reporters want to talk about the accounting crisis, they need to call so and so in investor relations or legal," Radman says. "You can bounce it to another spokesperson who has the expertise in that crisis area."

Once a company has implemented a crisis communications plan and taken corrective action in the wake of the financial troubles, the next step is to move on.

"Most large companies at some point in their history are very likely to have a problem or issue with a regulatory authority or product," Harden says. "When such a scenario arises, what you want is for that to be a blip on the radar and not be the incident that defines the company."

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Technique tips

Do develop strong relationships with third parties, such as credit rating agencies and elected officials, before a financial crisis hits

Do take a pre-emptive approach on negative financial disclosures instead of allowing a steady stream of negative press stories

Do create a message that will stand the test of unfolding events. You must think beyond what's happening at the moment and evaluate how the company will be perceived going forward

Don't let your company's normal business operations get put on hold while the financial crisis unfolds

Don't let your PR team get shoved aside by other departments that want to stonewall stakeholders on the nature of the financial crisis

Don't hide under your desk as your company's share price falls like a rock

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